Aquilino v. United States/Dissent Harlan

Mr. Justice HARLAN, dissenting in Nos. 1 and 23.

I am unable to subscribe to the reasoning which underlies the Court's disposition of these cases. By holding that they both turn on whether the taxpayer had 'property' under state law to which the Government's lien could attach, the Court has sanctioned a result consistently prohibited by us in a line of cases dealing with the priority of federal tax liens.

In both cases, the delinquent taxpayer is a defaulting general contractor whose subcontractors remain unpaid. The Government's lien is asserted against the chose in action which the general contractor allegedly holds against the owner of the real estate on which the improvements were made, in respect of amounts due from the owner under the construction contract. If the subcontractors had sought to enforce their claims by imposing a lien on that chose in action, there is no question that the Government's lien would prevail. Under the decisions of this Court cited in note 1, supra, a federal tax lien asserted against a taxpayer's property under §§ 3670 and 3671 of the Internal Revenue Code of 1939, 26 U.S.C.A. §§ 3670, 3671 prevails over all other claims against such property except (1) those which attach and become 'choate' before the federal lien attaches, and (2) those specifically protected by § 3672(a), 26 U.S.C.A. § 3672(a). It is conceded that the interests of the subcontractors in the present cases are not protected by § 3672(a) and would not be considered choate under the applicable decisions. See United States v. Kings County Iron Works, 2 Cir., 1955, 224 F.2d 232.

The Court believes, however, that the present cases are different, because under state law, the general contractor in Aquilino held his claim against the owner in trust for the subcontractors to the extent of their claims, and because the subcontractors in Durham Lumber were given, to the extent of their claims, a direct right of action against the owner in respect of his debt to the general contractor, and that in these circumstances the rights of the subcontractors in the owner's debt are superior to those of the general contractor. It is said that, to the extent of the subcontractors' claims, the general contractor, under state law, thus had no 'property' interest in the amounts due him from the owner, and that under the principles enunciated in United States v. Bess, 357 U.S. 51, 78 S.Ct. 1054, 2 L.Ed.2d 1135, a federal tax lien can attach only to a property interest which exists under state law.

I cannot see how it makes any difference, for purposes of the federal tax-lien statute, whether state law purports to prefer subcontractors over the general contractor and parties claiming through him by giving the subcontractors a lien on the general contractor's right of action against the owner or by giving them a prior right to collect the debt itself. In both instances, the owner is under a contractual duty to pay the general contractor and the latter is under a contractual duty to pay the subcontractors. In both instances, the subcontractors are attempting to satisfy their claims against the general contractor. And in both instances, they are seeking to satisfy themselves by claiming precisely the same thing-a prior right in the proceeds of the debt which arises by virtue of the contractual relationship between the owner and the general contractor. In neither instance can the subcontractors collect more than that to which the subcontract entitles them, and in neither can the owner be required to pay more than that to which the main contract obligates him. If federal law requires that subordination of the general contractor's interest be ignored in the one instance, it does so equally in the other.

The Bess case does not require a contrary conclusion. That case held only that while a federal tax lien attached to the cash surrender value of a life insurance policy owned by the taxpayer, it did not attach to the proceeds paid on his death, because under state law he had no right to such proceeds during his life. There was no reason under those circumstances why state property concepts should not control. To read that case as standing for the proposition that such concepts must also be controlling in cases such as these defeats the rule that '(t)he relative priority of the lien of the United States for unpaid taxes is * *  * always a federal question to be determined finally by the federal courts.' United States v. Acri, 348 U.S. 211, 213, 75 S.Ct. 239, 241, 99 L.Ed. 264. It is one thing to say, as the Court did in Bess, that the federal interest in uniform application of federal tax liens does not require, as a general rule, that state property concepts be disregarded. It is quite another to permit such concepts to control the extent of a federal lien's application in situations indistinguishable from those where the Court has in fact, rightly or wrongly, enforced a uniform federal rule. Given federal supremacy in this field, it surely cannot be that the federal courts may not appraise for themselves the true impact of state-created rights upon the priority of federal tax liens within the criteria established by this Court. Cf. Carpenter v. Shaw, 280 U.S. 363, 367, 50 S.Ct. 121, 122, 74 L.Ed. 478; City of Detroit v. Murray Corporation, 355 U.S. 489, 492, 78 S.Ct. 458, 460, 2 L.Ed.2d 441. To recognize the substantial equivalence of the situations is not to create a new rule of federal property law but to require an evenhanded application of an already established one. It seems to me that Judge Fuld of the New York Court of Appeals was quite right in holding in the Aquilino case that New York could not, consistently with the past decisions of our Court, defeat the otherwise superior federal lien upon the owner's debt to the general contractor by converting the debt into a trust for the benefit of the subcontractor.

To read Bess as the Court does can only lead to confusion in the administration of the federal tax-lien statute. A taxpayer's property in a debt is surely diminished by the imposition of a lien on his interest, for he has no right to collect the liened portion nor to alienate it. Yet in precisely this situation, we have held that the federal tax lien is not affected by such diminution. United States v. Liverpool & London Globe Ins. Co., 348 U.S. 215. 75 S.Ct. 247, 99 L.Ed. 268. If this holding is to be preserved after today's decision, subsequent cases must turn on the elusive distinction between diminishing a greater property interest and initially conferring a lesser one. The very difficulty which this Court experiences in trying to determine whether under New York law the general contractor really holds only a bare legal title in trust for the subcontractors or has full ownership of the debt subject to a lien in favor of the subcontractors demonstrates the futility of attempting to draw such distinctions for federal purposes. I venture to suggest that on remand, the Court of Appeals can with equal facility label the subcontractors' interests 'property' or a 'lien,' the relevant incidents of the relationship being the same in either case. Why should not that court and the legislatures of other States readily respond in choosing the former alternative?

I would affirm the judgment in No. 1, and would reverse in No. 23 on the ground that North Carolina can under no circumstances accord subcontractors a right in the proceeds of the debt arising from the construction contract superior to the Government's lien without satisfying one of the two requirements laid down by federal law. If the federal standard of choateness is thought to be an undesirable restriction on the States' freedom to regulate property relationships, the cases establishing that standard should be expressly overruled and not emasculated by dubious distinctions.

Mr. Justice BLACK, while adhering to the dissenting views expressed by him in Commissioner of Internal Revenue v. Stern, 357 U.S. 39, 47, 78 S.Ct. 1047, 1052, 2 L.Ed.2d 1126, and United States v. Bess, 357 U.S. 51, 59, 78 S.Ct. 1054, 1059, 2 L.Ed.2d 1135, concurs in this opinion.