Massachusetts v. United States/Opinion of the Court

This case is for all practical purposes a renewal of the litigation recently here in State of Illinois ex rel. v. United States, 328 U.S. 8, 66 S.Ct. 841, and the companion case of People of State of Illinois ex rel. Gordon v. Campbell, 329 U.S. 362, 67 S.Ct. 340. The former unanimously held that the United States has priority, by virtue of Rev.Stat. § 3466, 31 U.S.C. § 191, 32 U.S.C.A. § 191, for payment from ani nsolvent debtor's estate of federal insurance contribution taxes under Title 8 and unemployment compensation taxes under Title 9 of the Social Security Act, 49 Stat. 620, 42 U.S.C.A. §§ 1001 et seq., 1101 et seq., as against a state's claim for unemployment compensation taxes imposed by its statute conforming to the federal act's requirements. The Campbell case, which was reargued on other issues, rested on this ruling for disposition of the common issue concerning the effect of § 3466.

The facts are substantially identical with those in Illinois v. United States, except in two respects. One is that the fund available here for distribution is more than sufficient to pay either the Title 8 or the Title 9 taxes, though inadequate to pay both, while in Illinois v. United States the fund was not large enough to satisfy either tax in full. Here too the debtor's assignee has paid to the commonwealth the full amount of its claim, while in the Illinois cases the fund remained in the assignee's hands for distribution.

The District Court sustained the federal priority for capital stock and Title 8 taxes in full, and for 10 per cent of the Title 9 claim. It therefore deferred payment of any part of the state's claim until those claims were fully paid. But the court held the United States not entitled to priority for the remaining 90 per cent of the Title 9 claim, on the ground that Title 9, § 902, gives the assignee 'the alternative right' to pay that amount to an approved state unemployment fund. Accordingly the judgment ordered Massachusetts to pay over to the United States, from the $803.72 received from the assignee, sufficient funds to satisfy in full the federal priorities sustained, and to retain the small balance remaining after making those payments to apply on its claim for 90 per cent of the Title 9 taxes. 65 F.Supp. 763. This action was taken in the view that, while our previous decisions had sustained the federal priority for the capital stock and Title 8 taxes, they had not determined the question for Title 9 claims.

However, on appeal by both parties, the Circuit Court of Appeals held the United States entitled, under the Illinois rulings, to priority for the full amount of all its claims, including the Title 9 taxes. That court therefore affirmed the District Court's judgment except insofar as it denied the Government's Title 9 claim. As to this it reversed the District Court's ruling. 160 F.2d 614.

Because of the obvious confusion concerning the effects of our prior decisions and the asserted differences betwen this case and the Illinois cases, certiorari was granted. 332 U.S. 754, 68 S.Ct. 66.

Massachusetts seeks to retain the entire $803.72 she has received, in priority to all the federal claims. She agrees with the district court that § 902 gives the taxpayer an 'optional right' of payment, but does not accept its allocation creating priorities for all federal claims except 90 per cent of the Title 9 taxes. To sustain this broad claim would require reversal of both of the Illinois decisions. In no other way, on the facts, could Massachusetts retain the whole amount she was paid.

Illinois as amicus curiae takes a narrower position, conceding that the Illinois cases stand as decisive adjudications of priority for Title 8 taxes but disputing that effect for Title 9 claims. This position seeks an allocation paying the state's claim after the Title 8 and other federal claims, including 10 per cent of the Title 9 taxes, but before or rather in 'satisfaction' of the remaining 90 per cent of them.

Notwithstanding their substantial differences, the two states rest their respective positions on the same basic arguments, which upon examination turn out to be identical with those vigorously presented by Illinois in the earlier cases, except for wording and detail. Much is made of the fact that here the debtor's assignee has paid to the commonwealth the full amount of its claim, while in Illinois v. United States, the fund remained in the assignee's hands. Both states urge that § 902 gives the taxpayer, and here his assignee, the 'optional right' of payment to the state. Moreover, with respect to the requirement of Rev.Stat. § 3466 that 'the debts due the United States shall be first satisfied,' it is said that payment to the state with resulting credit to the United States for 90 per cent of the Title 9 claim 'satisfies' the Government's debt as much as payment to it in cash.

In the Illinois cases the foundation for the state's claim to be paid in preference to any of the federal claims lay in the credit provision of § 902, which is the identical provision for 'optional payment.' There was no question whatever that § 902 gave the taxpayer the 'alternae right.' But the precise issue in both cases was whether that right had been cut off by Rev.Stat. § 3466 when he became insolvent.

Obviously there could have been but little point or effect to our decisions if, despite them, the assignee could have turned around immediately and deprived the Government of the priorities established simply by exercising a right to make the optional payment to the state. Nor would the decisions have been much more sensible or effective, had they purported to sustain the federal priorities when the assignee has retained the fund, but to disallow them, if he has paid the state before the federal claims are filed. We made no such ineffective or capricious rulings. The decision was broadly that by intervention of the insolvency and the consequent bringing of Rev.Stat. § 3466 into play, the taxpayer's right to pay the state and take federal credit had been cut off.

Our decisions went to the merits of that right and not merely to rule that the state was not a proper party to enforce its exercise. The taxes due the United States were held to be debts; and by virtue of § 3466 the debtor's prior obligation attaching as of the date of his insolvency was to the Government, not to the state. It followed necessarily that the assignee could not 'satisfy' it by paying the state and giving the Government 'credit.' This was the very question at issue and the one adjudicated. The 'alternate right' contention and the one that 'satisfied' in § 3466 means 'credit' are only verbal redressings of the basic issue decided in the Illinois cases.

This is as true of the argument's bearing on Illinois' narrower position as it is for Massachusetts' broader one. But Illinois, apparently with Massachusetts' support, brings forward to sustain the less sweeping attack the additional contention that the Illinois decisions did not adjudicate Title 9 priority, although purporting to do so. Moreover, the facts present this narrower issue of distinguishing between Title 9 and other federal claims in sharper factual focus than did the Illinois cases. For if the capital stock and Title 8 claims are first paid in full, as the District Court required, a small balance of the fund will remain, to be applied either in part payment of the federal Title 9 claim or in some form of allocation between it and Massachusetts' claim. This was not true of Illinois v. United States, or indeed of Illinois v. Campbell, in the posture in which that case was brought here.

The principal argument is that the Title 9 taxes, though litigated in the Illinois courts, were not involved on the facts in the Illinois cases as they came to and were decided by this Court. Hence it is said we did not acquire jurisdiction over the Title 9 claims. The argument is correct concerning Illinois v. Campbell. But it is surprising as applied to Illinois v. United States, in view of the state supreme court's adverse decision on the Title 9 issue; Illinois' explicit application for certiorari on that issue and argument on the merits here to reverse the state court's decision; the necessity on the facts for the state to bring the question up and secure reversal in order to establish its claim; and finally our opinion's clear and explicit terms, indeed emphasis, in deciding the Title 9 issue, together with the Title 8 one, against Illinois.

The idea that the state court decided only the Title 8 issue completely misconceives its action, and serves only to confuse the judgment in that case with the one in Illinois v. Campbell. Indeed it seeks to infuse into the former the latter's denial of Title 9 priority. Not only is this wholly incompatible with Illinois' earlier position; it ignores the fact that the state court disposed of the Title 9 issue in both cases, but in opposite ways on entirely different facts and legal issues.

In Illinois v. Campbell, the state court did not reach the basic question of the force of Rev.Stat. § 3466 to create priority for federal Title 9 claims; rather, it expressly avoided deciding that question. 391 Ill. 29, 32, 62 N.E.2d 537. This was because the insolvent's assets were in the hands of a court- appointed receiver, id. 391 Ill. at page 31, 62 N.E.2d at page 538, and in that situation § 602(b) of the Revenue Act of 1943, 58 Stat. 77, expressly allowed the receiver to pay the state and take credit up to 90 per cent of the Title 9 tax. The Illinois Supreme Court expressly so held, and on this ground alone denied the federal Title 9 claim. People v. Waste & Tx tile Co., 391 Ill. 29, 34, 62 N.E.2d 537, 539. The effect was to rule that § 602(b) created a legislative exception to § 3466, limited to payments by such receivers, within the times and for the tax periods specified, up to 90 per cent of the Title 9 taxes.

But § 602(b) did not apply in Illinois v. United States, because the insolvent's assets were held by a common-law assignee, not a court-appointed official. So holding, 391 Ill. at page 37, 62 N.E.2d at page 541, the Illinois court went on to rule that the federal claims for Title 8 and Title 9 taxes were debts within the meaning of § 3466 and were therefore entitled to priority over the state's claim. It not only rejected the argument that the credit provision of Title 9, § 902, made that claim 'in reality a claim of the Nation * *  * tantamount to a claim of the United States,' but also carefully guarded the wording of the opinion's dispositive paragraphs and the directions given the trial court for entering the judgments on remand so as to differentiate the two cases and to avoid any direction that the fund in Illinois v. United States apply on only one of the federal claims. The judgment thus left the United States free to apply it is partial satisfaction of either claim or both.

This was also the effect of our own decision and judgment. It generally and without distinction between the Title 8 and Title 9 claims adjudicated priority for both. As in the Illinois court's decision, no restriction was placed upon allocation of the fund, nor is any hint to be found in the opinion that such an allocation was intended. Indeed we were not asked to make one and to have done so would have disregarded the basic position of both parties, each of which sought a full and favorable disposition of the controversy including decision upon all the issues presented.

It is true that, as in the Illinois Supreme Court, the decision and judgment could have been made on the narrower basis that the Title 8 claim was more than sufficient to exhaust the fund, and therefore to sustain the priority for that claim alone would dispose of the case. But this would have been equally true of the Title 9 claim. Neither claim was either more or less essential to decision than the other, indeed decision upon both was necessary to a judgment favorable to Illinois. To have eliminated either would have required some indication of that purpose. Since none was given, it cannot be said that the judgment rested on the one ground or claim more than the other.

While therefore the case is one which might have been decided on either of two independent grounds favorably to the Government, it is neither one in which that course was followed nor one which could have been determined the opposite way in that manner. Instead, as we were asked to do and rightly could do on the record and the issues, we decided both issues, and the judgment rested as much upon the one determination as the other. In such a case the adjudication is effective for both. United States v. Title Insurance & Trust Co., 265 U.S. 472, 44 S.Ct. 621, 68 L.Ed. 1110; Union Pac. R. Co. v. Mason City & Ft. D.R. Co., 199 U.S. 160, 26 S.Ct. 19, 50 L.Ed. 134; see Richmond Screw Anchor Co. v. United States, 275 U.S. 331, 340, 48 S.Ct. 194, 195, 72 L.Ed. 303.

Finally, it is urged that in Illinois v. United States we had no occasion to consider and hence our opinion did not discuss whether in a case like this, where the fund is more than sufficient to pay all federal claims execept 100 per cent of the Title 9 claim, the balance remaining after paying those other claims must go first to pay the federal Title 9 claim in full, or may be allocated between that claim and the state claim to pay 10 per cent of the federal claim first and then to apply what remains on the state claim.

Closely related to this, though not involved on the facts in Illinois v. United States or here, is the Government's apparent concession that if all the federal claims are paid in full, including 100 per cent of the Title 9 claim, and any balance then remains in the fund, the insolvent taxpayer is nevertheless given the right by § 902 to pay that balance to the state and receive credit on his federal Title 9 tax. In such a case, it is said, the Government would be overpaid on Title 9 taxes and obligated to refund the excess. Then the taxpayer could apply the amount received in further payment of the state claim, with corresponding federal credit, overpayment and refund, only to start the cycle again and repeat it until he had paid the state its claim in full and received the entire 90 per cent credit. Hence in this situation, it is said, short-cut distribution might well be made to the state in the first place, to eliminate the cycle.

The effect of the concession, if it is valid, goes for toward cutting the ground from beneath the Government's basic position. That effect is heightened by the further surprising statement in its brief that in a case like this, not covered by the concession, compliance with the credit conditions of § 902 becomes impossible 'not because Section 3466 operates to exclude Section 902 or to nullify it, but because the terms of Section 902 itself deny it (credit) where no payment can be made.' The statement would be understandable, if it had been that § 3466 and § 902 both work to deny the credit in this situation. But to say that § 3466 has no effect to cut off the right to credit either in the present situation or in the different hypothetical one stated is to take away the basic grounding of all federal priority as against the state's claim.

The concessions cannot be accepted. In the first place, the effect of § 3466 depends on the fact of insolvency, not on the degree of it as the first concession seems to contemplate. And it is only by force of § 3466 that the Government has any priority at all. Section 902 may work to deny credit, if its conditions for credit are not fulfilled. But it does not give federal priority over valid state claims. Moreover, both concessions are altogether inconsistent with the basic decisions in the Illinois cases and the grounds on which they rested. The matter requires brief restatement. It is one which goes fundamentally to the effect of Rev.Stat. § 3466, as distinguished from, though not unrelated to, § 902 of the Social Security Act. These of course are entirely distinct statutes, with different functions.

Section 3466 gives priority explicitly for 'debts due to the United States' and the priority given is in terms absolute, not conditional. Once attaching, it is final and conclusive. A ln g line of decisions has held that taxes due the Government are 'debts' within the meaning of the section. In the Illinois cases we applied this ruling to Title 8 and Title 9 taxes as against the state's claim for 'contributions.' Prior decisions also have held that the priority attaches as of the time of the insolvency, a ruling also applied in the Illinois cases.

But if credit can be taken after § 3466 attaches, i.e., after insolvency, effective to set aside the federal priority up to 90 per cent of the Title 9 claim, the priority to that extent becomes conditional, not absolute. Its effectiveness then becomes contingent upon the happening of subsequent events, namely, the concurrence of the conditions of § 902 for paying the state and taking the credit together with the taxpayer's election to do this. In short, § 3466 never conclusively attached and § 902 works retroactively on occurrence of those contingencies to upset the priority.

A further effect might be to make the statute applicable beyond the scope of the term 'debts due to the United States.' For if the taxpayer's subsequent election can destroy the priority retroactively, not only the priority but the 'debt' itself becomes contingent. And it is at least doubtful on the statute's wording that obligations wholly contingent for ultimate maturity and obligation upon the happening of events after insolvency can be said to fall within the reach of 'debts due' as of the time of insolvency.

However this may be, we know of no previous application of § 3466 creating such a conditional priority. Nor do we see how one could be made consistently with the section's terms or purposes. The only such consistent application would seem to be one giving the Government the prior and indefeasible right to take the fund available, up to the amount necessary to pay its claim as of the date the priority attaches, not as it may be affected by later contingencies other than payment. In enacting § 3466 Congress gave no indication whatever of intent to create defeasible priorities.

The defeasance conceded possible by the Government, therefore, together wih the further conceded ineffectiveness of § 3466 (though not of § 902) in circumstances like these to deny the right to credit, destroys the fundamental character of the priority created by § 3466 and thereby removes the foundation from the Government's basic position, which is that § 3466 applies as of the time of insolvency to create the priority it contemplates. Through these concessions the section is made, by virtue of the effect of § 902, to create only a defeasible federal priority as against claims for credit. This actually is but another way of making § 902 effective as an exception to Rev.Stat. § 3466, like § 602(a) and(b) of the Revenue Act of 1943, noted above in Part II.

This of course was Illinois' earlier position, rejected by this Court. If that position is not to be accepted, we do not see how § 3466 can be regarded as applying to Title 9 taxes or, indeed, how the effect of treating § 902 as an exception can be limited to Title 9 taxes. For if § 902 works as an exception to § 3466, then Illinois was right in the first place, and the exception would seem to apply to all federal taxes, not just the one.

Accordingly, the Government's concessions cannot be accepted as consistent either with our prior decisions or with its own basic position in the Illinois cases and this one. That position, apart from the concessions, rests ultimately on § 3466 and its applicability to these claims. This necessarily denies that § 902 creates an exception to § 3466 or a qualification inconsistent with its terms. The qualifications now conceded are not consistent with those terms, for they do not contemplate the tenuous, destrc tible sort of 'priority' the concessions involve.

Moreover, the fact that in Illinois v. United States we did not discuss expressly the 10-90 per cent distribution of Title 9 taxes now suggested does not mean that our decision did not encompass that possibility. It extended generally to all cases where credit is sought after insolvency. It was federal priority attaching as of the time of insolvency that we adjudicated, no something less. As we have indicated, in making the adjudication we neither were nor could have been ignorant of § 902's allowance of the taxpayer's election. Our decision held that right cut off by the incidence of § 3466 at the time of insolvency. Any other would have been wholly inconsistent with the ruling that § 3466 applies as against the state's claim for 'contributions' or the taxpayer's right to make them after the incidence of his insolvency.

We have taken pains to state the effect of our previous decisions, because of the confusion concerning them and the fact that two states have earnestly presented the questions. Ordinarily this would end the matter. But, again for those reasons, we turn briefly to the merits and to the question whether the Illinois decisions should now be reversed.

Apart from the arguments already discussed, two stand out as reasons for the change sought. Both reiterate contentions rejected in the Illinois cases. The primary one is that the objects of the legislation will be defeated unless the change is made, namely, the encouragement of the state systems and correspondingly of taxpayers to make 'contributions' to state funds, thereby insuring that the moneys so paid in will go out for unemployment benefits rather than into the Treasury as revenue. The second is a heightened emphasis on the subsequent amendments to § 902 as showing Congress' intent to waive, in progressively broadening scope though still only in specified situations, the original limitations of § 902 upon securing credit.

From the second contention is drawn the conclusion that Congress, by its carefully, even meticulously drawn relaxations, meant credit to be given not only in the circumstances so carefully prescribed but also in other situations not within those prescriptions. This conclusion when added to the first argument amounts in sum to reiterating that the state exaction is 'tantamount to a claim of the United States', and that not to disregard the tax and credit structure in which Congress molded the Act would be to 'observe the form and ignore the substance of the legislation.'

We shall not repeat the answers made in Illinois v. United States, except to say that 'while the state and federal governments were to cooperate, the underlying philosophy of the Federal Act was to keep the state and federal systems separately administered.' 328 U.S. at page 11, 66 S.Ct. at page 843. To the considerations there stated, however, we now add the following ones, not expressly mentioned in the earlier opinion, prefaced however, with the observation that the grounding of each plea for reversal affords basis for conclusion against that action as well as in its favor.

Thus the many relaxations which Congress has made respecting the conditions permitted for taking credit, by force of their very number and careful limitation, show that Congress was not offering a broadside exemption to be applied in situations, such as this case, other than those specifically defined. Rather the intention disclosed is to limit the credit to the precise situations specified for allowing it. That view accords with Congress' deliberate choice of the tax and conditional credit devices for framing the Act's structure. These are well-known techniques, adopted apparently in this instance for constt utional as well as administrative rasons. But those very motivations warn us to be wary of disregarding the form which Congress has chosen advisedly, in order to substitute a substance we can only be doubtful it may have intended.

But it is said that if payment to the state is not allowed and the right to receive credit is cut off, the money will not be paid out in unemployment benefits but will go into the Treasury as general revenue; the states will be compelled to make payments to the insolvent's employees; and thus the primary purposes of the Act will be defeated. There are several answers.

One is that Congress has guaranteed the solvency of the state funds and, if need be, the revenues thus paid into the Treasury will be available for that purpose. Moreover, but especially in view of this guaranty, it may be more likely that the funds, if paid into the Treasury rather than to the state, will be saved for application to the Act's purposes. For there is no assurance, if the state's prior right to them is once established, that they will go for the payment of unemployment benefits.

It must be remembered that we are dealing with an insolvent's assets. And the states have statutes by which such assets are distributed according to local priorities whenever § 3466 is not operative. Only a few of them place unemployment benefits at the top. Depending therefore upon the number and the amounts of claims standing ahead of the unemployment benefit claims in the particular state would be the certainty or probability of payment of the latter. In short, reversing our decisions and conceding the validity of the state's position, either as to Title 9 taxes alone or as to all federal taxes, would give no definite and certain assurance that the funds thus acquired by the states would go to satisfy the Act's purposes. In many cases payment to the state would be the means of diverting them to wholly extraneous objects. Especially would this be true when smaller employers within the Ac' § terms are involved, as they seem to be much more often than others. In the absence of any explicit or clearly implied direction we do not believe that Congress intended to require that the state's claim for unemployment contributions take precedence over all other debts of the insolvent or to authorize us to make this a condition of allowing payment to the state to be made from his estate. There was no evident purpose thus broadly to upset state schemes of priority.

These examples are enough to show that the premises of the states' contentions are capable of supporting other conclusions than they draw from them. Other examples might be stated. But in each instance the inferences drawn by the states are counterbalanced with opposing ones quite or nearly as tenable. In some they are of greater weight.

It follows that Massachusetts and Illinois have not shown the clear inconsistency between the Act's explicit terms and our previous decisions, on the one hand, and achieving the Act's purposes, on the other, which is necessary to make out a case for reversal and thus for negating the force of Rev.Stat. § 3466 as creating federal priorities for Title 9 or other federal tax claims. The Illinois decisions were advisedly made, after full deliberation. There was no dissent on the basic question of priority, even though the issue seemed close. No substantially new argument or consideration of policy has been put forward. The case for reversal is no more clear or convincing than Illinois' position on the merits in the earlier litigation.

Nor are we persuaded that our former decisions were erroneous. For the strict policy of § 3466 had permitted few exceptions and, as we repeated in Illinois v. United States, quoting United States v. Emory, 314 U.S. 423, 433, 62 S.Ct. 317, 322, 86 L.Ed. 315, 'only the plainest inconsistency would warrant our finding an implied exception to the operation of so clear a command as that of § 3466.' 328 U.S. 8, 12, 66 S.Ct. 841, 843. See also United States v. Remund, 330 U.S. 539, 544, 67 S.Ct. 891, 893. There is no such inconsistency here.

Until the federal claims for taxes, whether under Title 8, Title 9 or other taxing provision are paid in full, the states are not entitled either to collect or to retain any part of the insolvent's debtor's assets. We do not anticipate that any of the state unemployment insurance programs will fail or be seriously impaired by reason of this decision, or their consequent failure to secure the small sums characteristically at stake in this extended litigation and, apparently, in other cases most likely to produce similar controversy. Nor would the Federal Treasury have been rendered bankrupt by a contrary result.

The judgment of the Circuit Court of Appeals is affirmed.

Affirmed.

Mr. Justice JACKSON, with whom Mr. Justice FRANKFURTER, Mr. Justice DOUGLAS and Mr. Justice BURTON join, dissenting.