This case presents the question of the priority of payment of debts due to the United States over those due to a state or its agencies against the same found for state taxes, under section 3466 of the Revised Statutes of the United States (31 USCA § 191).
In August, 1922, a receiver for the Culton-Moylan-Reilly Auto Company, an insolvent corporation, was appointed by the superior court of Spokane county, Washington. Under the order of the court the receiver sold the personal property of the corporation and reduced the same to cash, which he held for distribution. On March 1, 1921, and March 1, 1922, Spokane and Whitman counties, of the state of Washington, had assessed against the personal property of the company the total amounts of $6,195.38 and $410.36 respectively, but the taxes were not paid and the proceeds of the subsequent sale of assets by the receiver were deposited in court. On September 23, 1924, Spokane county assessed the money in the hands of the receiver for the years 1923 and 1924, and levied taxes thereupon in the total amount of $1,390.10. On December 20, 1926, Spokane county made a further assessment and levy on the moneys in the hands of the receiver for the years 1925 and 1926 in the total amount of $1,229.52.
The United States Commissioner of Internal Revenue, on February 28, 1923, and May 2, 1923, assessed federal income taxes and penalties for the years 1917, 1918, 1919, and 1920 in the total amount of $70,268.58. But none of these taxes or penalties were paid.
The funds in the hands of the receiver are insufficient to pay in full the claims of the United States, and Spokane and Whitman counties. By proper pleadings, issues were made presenting the question of the comparative priorities in distribution of the fund in his hands. The superior court held that the two counties were entitled to priority not only as to the county taxes levied against the corporation but for the county taxes for 1923-1926 assessed on the money in the receiver's hands. On an appeal to the Supreme Court of Washington, the judgment was reversed and priority awarded to the United States. Exchange Nat. Bank of Spokane v. U.S., 147 Wash. 176, 265 P. 722.
Section 3466 of the Revised Statutes provides in part that 'whenever any person indebted to the United States is insolvent, or whenever the estate of any deceased debtor, in the hands of the executors or administrators, is insufficient to pay all the debts due from the deceased, the debts due to the United States shall be first satisfied.'
The Constitution (article 1, § 8) provides that Congress shall have power to lay and collect taxes and to make all laws which shall be necessary and proper to carry this and its other powers into execution. Article 6 of the Constitution declares that the Constitution and the laws made in pursuance thereof shall be the supreme law of the land.
The constitutional validity of the priority of claims of the United States against insolvent debtors, declared in section 3466, was established by this court very early in the history of the government. United States v. Fisher, 2 Cranch, 358, 2 L. Ed. 304. But it was not established, as between debts owing to the states and debts owing to the United States, until after a critical controversy between those who looked to the maintenance of the supremacy of the national government and those who were anxious to sustain undiminished the power of the states.
Section 3466, R. S., was section 5 of an act entitled 'An act to provide more effectually for the settlement of accounts between the United States, and receivers of public money,' enacted in 1797 (chapter 20, 1 Stat. 515). It was amended by an act of 1799 (section 65, c. 22, 1 Stat. 676).
The language has been varied very little since these original enactments. The whole act of 1797 come up for consideration in United States v. Fisher. There seems to have been a division among the judges. Chief Justice Marshall delivered the opinion of the court, which upheld the priority of the United States as against the claims of the states, and held that the act extended not only to revenue officers and persons accountable for public money, but to debtors generally. The Chief Justice said (page 396):
'If the act has attempted to give the United States a preference in the case before the court, it remains to inquire whether the Constitution obstructs its operation. * *
*'The government is to pay the debt of the Union, and must be authorized to use the means which appear to itself most eligible to effect that object. It has consequently a right to make remittances by bills or otherwise, and to take those precautions which will render the transaction safe.