United States v. Spencer, Civil Action No. 3671.

• Decision Date: 02 May 1946
• Docket Number: Civil Action No. 3671.
• Parties: UNITED STATES v. SPENCER (COMMONWEALTH OF MASSACHUSETTS, DIVISION OF EMPLOYMENT SECURITY, Intervener).
• Court: U.S. District Court — District of Massachusetts

65 F. Supp. 763

UNITED STATES v. SPENCER (COMMONWEALTH OF MASSACHUSETTS, DIVISION OF EMPLOYMENT SECURITY, Intervener).

Civil Action No. 3671.

District Court, D. Massachusetts.

May 2, 1946.

Edmund J. Brandon, U. S. Atty., and George F. Garrity, Asst. U. S. Atty., both of Boston, Mass., Sewall Key, Acting Asst. Atty. Gen., and A. Barr Comstock and Andrew D. Sharpe, Sp. Assts. to Atty. Gen., for plaintiff.

Frank C. Hession, of Boston, Mass., Joseph J. Leonard, Designee of Atty. Gen., and John A. Brennan, Designee of Atty. Gen., for Massachusetts, Division of Employment Security, applicant for intervention, for defendant.

WYZANSKI, District Judge.

This case, tried upon an agreed statement of facts, raises one important question: When an insolvent has assets insufficient to pay his obligations both under Title IX of the Social Security Act, 42 U.S.C.A. § 1101 et seq., and under an approved state unemployment compensation act, how shall his assets be distributed? The case originally presented other questions, but they are easily solved in view of the recent ruling of the Supreme Court of the United States that in the distribution of insolvent estates the claim of the United States for taxes under Title VIII of the Social Security Act, 42 U.S. C.A. § 1001 et seq., has priority over the claim of a state for contributions under a state unemployment compensation act. People of State of Illinois ex rel. Gordon v. United States, 66 S.Ct. 841.

In the case at bar these are the facts: February 3, 1939, Somerville Sales & Service, Inc., being insolvent in the bankruptcy sense, made a common law assignment for the benefit of creditors to Spencer. The United States Commissioner of Internal Revenue thereafter assessed against the corporation $963.08 on account of the assignor's 1938 taxes under Title IX of the Social Security Act, $690.05 on account of the assignor's 1938 and 1939 taxes under Title VIII of the Social Security Act and $21 on account of the assignor's 1939 United States capital stock taxes. October 6, 1939, Spencer paid on account of the Title VIII 1938 taxes $331.39. Spencer used the remaining assets to pay $803.72 to the Commonwealth of Massachusetts on account of obligations of his assignor under the Massachusetts Unemployment Compensation Act, Mass. G.L. (Ter.Ed.) c. 151A. Of this $803.72 $775.34 represented 1938 contributions, and $28.38 represented 1939 contributions. The Commonwealth has agreed to pay over this $803.72 to the United States if the payment to the Commonwealth was in disregard of the priority of the United States under R.S. § 3466, 31 U.S.C.A. § 191. The United States has agreed that if it prevails, judgment in this case shall be limited to $803.72.

My view at the time of the argument in court was that (although the United States had not abandoned or impaired its right under R.S. § 3466 to have absolute priority with respect to the claim for $21 plus interest on account of capital stock taxes and also the claim for $690.05 plus interest less $331.39 on account of Title VIII Social Security taxes) the United States could not object to having 90 per cent of its claim to $963.08 for 1938 taxes on account of Title IX of the Social Security Act reduced by the assignee's prior payment to the Commonwealth of amounts due for the year 1938 under the Massachusetts Unemployment Compensation Act. In short I thought that the United States could recover in this case its capital stock taxes, its Title VIII taxes, and 10 per cent of its Title IX taxes, but could not recover 90 per cent of its Title IX taxes. The first part of my tentative conclusion was later supported by the authoritative ruling of the Supreme Court already cited; the second part, in my view, has not yet been settled.

At the argument of this case I inclined to regard Sec. 902 of the Social Security Act as giving taxpayers subject to Title IX a right to discharge (up to 90 per cent of the total amounts due) their obligations to the United States by seasonable payment to approved state unemployment compensation funds (provided, of course, that the taxes and contributions covered what Congress had treated as comparable periods of employment and that the state fund had been approved). It appeared to me as though in Section 902 of the Social Security Act the Congress of the United States had in effect said that a taxpayer under Title IX had with respect to 90 per cent of the taxes due under that title an option as to the government to which he made payment. It was as though the government had imposed an obligation to pay either the government or X, and the obligee chose to satisfy the obligation by paying X. Compare Williston, Contracts, 2d Ed., Sec. 781.

The question, nicely analyzed, seemed to me to be one not of priority but of alternative obligation.

The force of that analysis seemed to me the more persuasive when the true nature of Title IX of the Social Security Act as portrayed in Charles C. Steward Machine Co. v. Davis, 301 U.S. 548, 57 S.Ct. 883, 81 L.Ed. 1279, 109 A.L.R. 1293, was stressed. As to 90 per cent of the taxes under that title the objective of Congress was not to collect federal revenues but to stimulate the creation of and payment to state unemployment compensation funds. It would defeat obvious Congressional intent to lay down a rule which required that this 90 per cent should go to satisfy a Title IX tax claim instead of going to the direct benefit of claimants under state unemployment compensation plans.

The correctness of the foregoing reasoning seemed to me to be proved by a suppositious case. Suppose A, an insolvent, with $200 in assets, owed $100 to the United States for 1938 Title IX taxes, $90 to Massachusetts for 1938 unemployment compensation contributions and $200 to general creditors. Can it be supposed that a court that was sensitive to the principle of marshalling assets would distribute the assets so that the United States received the first $100, Massachusetts the second $90, and the general creditors $10? To do that would give the two governments more than Congress contemplated and restrict the general creditors to 5 cents on the dollar. Would not a court that was mindful of the strict legal rights of the two governments, of the policies declared in their legislation and of the rights of the general creditors to be subject to no greater priorities than those governmental rights and policies require, distribute $10 to the United States, $90 to Massachusetts, and $100 or 50 cents on the dollar to the general creditors? This would allow the two governments to receive all that they claimed from the insolvent before his insolvency and would follow the rules of priority established by R.S. § 3466.

I do not find any reason to change my views in the light of the subsequent opinion delivered by the Supreme Court of the United States ...