North Carolina

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[4 USTC ¶1309]City of Winston-Salem v. Powell Paving Company of North Carolina, Incorporated; Forsyth County, North Carolina; A. J. Maxwell, Commissioner of Revenue for the State of North Carolina; United States of America: George C. Hiatt; W. Henry Liles; American Limestone Company; and The Maryland Casualty Company

District Court of the United States for the Middle District of North Carolina, No. 107, 7 FSupp 424, Decided June 15, 1934Lien of Government on North Carolina real estate attaching in 1930 for income taxes for 1926 to 1929 is subordinate to annual general taxes of City and County for 1929 to 1932, to City street assessments for 1924 and 1925, to State income taxes for 1928 and 1929, and to general judgment of County Court obtained in 1927, where the debtor was not insolvent.

Parrish & Deal, of Winston-Salem , N. C., for plaintiff. Dennis G. Brummitt, Atty. Gen., and A. F. Seawell and T. W. Bruton, Asst. Attys. Gen. for the State of North Carolina. J. R. McCrary, U. S. Atty., of Greensboro , N. C.

Opinion of the Court

HAYES, District Judge:

This is a civil action commenced in the State Court by the plaintiff against the Powell Paving Company and others for the sale of property to satisfy street assessment, taxes due the City, State and Federal Governments, and other lien holders, and to establish the order of priority in the distribution of the proceeds of the sale. The cause was removed to this court at the instance of the United States , and answers were filed by the State of North Carolina and by the United States of America .

The facts were set out in a written stipulation, from which it appears that the Powell Paving Company was a corporation owning three lots of land in the City of Winston Salem , the sale of which is asked in this suit. Against one of these lots are two street assessments: Hawthorne Road street assessment $454.26, date of lien, September 12, 1924; and an assessment on Angelo Street, $661.96, date of lien, October 9, 1925. The other tax liens are as follows:

Claimant                                           Claim           Amount               Time lien attached

City of 
Winston
 

Salem

 ....       Ad Valorem

City of 
Winston
 

Salem

 ....       1929 tax                           $472.99          
June 1, 1929
 all 3 lots

City of 
Winston
 

Salem

 ....       1930 tax                            614.27          
June 1, 1930
 all 3 lots

City of 
Winston
 

Salem

 ....       1931 tax                            211.31          
July 1, 1931
 all 3 lots

City of 
Winston
 

Salem

 ....       1932 tax                            157.34          
July 1, 1932
 all 3 lots

City of 
Winston
 

Salem

 ....       1933 tax                             94.08          
July 1, 1933
 all 3 lots

Forsyth
 
County

 ...........       1930 tax                            325.14          
June 1, 1930
 all 3 lots

Forsyth
 
County

 ...........       1931 tax                             86.47          
July 1, 1931
 all 3 lots

Forsyth
 
County

 ...........       1932 tax                             55.50          
July 1, 1932
 all 3 lots

Forsyth
 
County

 ...........       1933 tax                             29.40          
July 1, 1933
 all 3 lots

North Carolina
 
State

 .....       1928 Income Tax                     487.71         Mch. 15, 1929 all 3 lots

North Carolina
 
State

 .....       1929 Income Tax                     293.63         Mch. 15, 1930 all 3 lots

United States Gov't. .....       1926-27 add. Income Tax           5,431.22         
Apr. 29, 1933
 all 3 lots

United States Gov't. .....       1928-29 add. Inc. Tax               669.07          
May 27, 1930
 all 3 lots

 

It was agreed that the Powell Paving Company was not in bankruptcy or in the hands of a receiver; that George Hiatt has a judgment of record, duly docketed in the office of the Clerk of the Superior Court of Forsyth County on October 10, 1927 , for the sum of $200.00, plus $70.85 cost. The validity of the liens is conceded and the sole controversy is the order of priorities.

The tax lien of the United States is governed by the provisions of U. S. C. A. 26 Sec. 115, R. S. 3186. (See Margin No. 1) while liens of the State arose under North Carolina Code, Secs. 7880(147), (150) and (174). (See Margin No. 2) the ad valorem tax liens of the County and City arose under North Carolina Code, Sec. 7987, (See Margin No. 3), and the street assessment lien arose under North Carolina Code, Sec. 2713. (See Margin No. 4.)

The Supreme Court of North Carolina, in construing the statute creating the assessment lien, holds that a lien amounts to a statutory mortgage, having preference over any and all liens and encumbrances, existent or otherwise, and to be enforced by a decree of sale of the property. Kinston v. Railroad, 183 N. C., 14, 24. It is an encumbrance within the meaning of the warranty clause against encumbrances. Coble v. Dick, 194 N. C., 732. It is a lien superior to all other liens and encumbrances continuing until paid, against the title of successive owners. Merchants Bank, et al. v. Watson, 187 N. C., 107. It is a lien against the land and not a debt against the owner, and cannot be proved against his estate. Carravan v. Barnett, 197 N. C., 511.

When street improvement is made the city, in effect, lends the property owner the money necessary to pay his part of the improvement, while the city, in turn, sells its credit to obtain the fund for the improvement. It was the manifest purpose of the legislature to give these claims for street improvement priority over all liens, and the Supreme Court of the State has been liberal in the construction of the statute to the end that the intended priority shall be given its proper force and effect. While there are decisions from other states to the contrary, the law in this State is well settled that such a claim is entitled to priority over subsequent liens. North Carolina Code 7987, quoted in the margin, gives a lien to the state and county for ad valorem taxes against all real estate of the taxpayer within the county, and the same is preferred to any other liens upon the real estate of the taxpayer within the county, "whether the same shall have attached prior or subsequent to the first day of June." It is from these taxes that the municipality and the county must depend for the expense of maintaining their governments. Persons who hold liens of any character against real estate, hold them subject to a lien of the city and county for ad valorem taxes. The fact that a lien may exist against the property should not, and does not, operate to remove such property from an ad valorem tax levied annually for the purpose of obtaining revenue to operate the city and county governments. Governments cannot exist or be maintained without revenue.

The legislative policy in this State manifested an intention on the part of the State to abandon ad valorem taxes, in order that the counties and municipalities may have the revenue for the purpose of operating these governments.

The Court has been unable to find any decision in North Carolina which has passed on the question of priority of a tax for street assessment over a lien of ad valorem taxes due to the municipality or county. A comparison of North Carolina Code, Sec. 7987, and North Carolina Code, Sec. 2713, indicates the intention of the legislature to give ad valorem tax liens preference over any other liens, whether the same shall have attached prior or subsequent to the first day of June of the taxable year. The lien for street assessment, while superior to all other liens, whether existent or otherwise, does not defeat the right of the municipality or county to collect the annual ad valorem general taxes accruing on the same property. Both sections should be construed in such way as to effectuate the intention of the legislature. It is manifestly the intention of the legislature that the general ad valorem tax shall accrue annually, and shall constitute a prior lien to any other lien, whether the same attaches prior or subsequent to the first day of June in each year. The legislature recognizing that annual ad valorem taxes constitute the principal source of revenue for the operation of municipal and county governments, decided that a lien for this purpose should take priority over any other lien, which, of course, in its proper interpretation, means preference over a special tax, such as street assessment. The lien for street assessment is superior to all other liens except the annual general property tax. This construction gives force and effect to both statutes in accordance with the rule of statutory construction enunciated by the Supreme Court of North Carolina in Propst v. Railroad, 139, page 397 at 401.

There is no state annual ad valorem tax involved in this suit. The state taxes which are involved are state income taxes. Therefore, the general taxes of the city and county from 1929 to 1932 inclusive, are entitled to priority over all other liens, and the street assessment for 1924 and 1925 have priority over any of the other liens except the general taxes. The State and Federal tax liens attach in the order of their priority as set forth in the stipulated facts, to-wit, state income tax for 1928 attached March 15, 1929; for 1929, March 15, 1930; the income tax due the United States 1926-27, attached April 29, 1930, for 1928-29, on May 27, 1930. Both the State and Federal Statutes fail to make income tax liens prior to other tax liens. They become general liens against all real estate of the taxpayer according to the terms and limitations of the statutes, but the language used does not warrant the inference that the legislature or congress intended to make such a lien prior to general tax liens.

The Federal Government contends that taxes due it have priority over a claim for taxes due the state, county, or city, relying, in part, on the authority of New York against Maclay, 288 U. S. 290 [3 USTC ¶1044]. Spokane County v. United States, 279 U. S. 8 [1 USTC ¶387]. These decisions come clearly within the provisions of U. S. C. A. 31, Sec. 191, R. S. 3466. It confers priority to debts due the United States by one who is insolvent or where the debtor makes an assignment. The decisions were based on the statute above mentioned. Since the facts in the instant case do not bring it within the provisions of this statute, the above authorities are inapplicable here.

Insolvency within the meaning of Section 3466 must exist before this statute applies. United States v. Oklahoma , 261 U. S. , 253. In this case it is stated: "The claim of the United States to the asserted priority rests exclusively upon the statute. No lien is created by it * * * It establishes priority which is limited to the particular state of things specified." United States v. Oklahoma, supra; Beaston v. Farmers Bank, 12 Peters, 102, 132.

The priority is not an attribute of sovereignty but depends on the acts of Congress. United States v. State Bank of North Carolina, 6 Peters, 29, 30; 8 L. E. 308; United States v. Middle States Oil Company (C. C. A. Okla.), 18 F. (2d) 231 [1 USTC ¶222].

The lien established by section 3186 is a general lien upon all property of tax payer and resembles, in many respects, a mortgage. While it is a lien it is not necessarily to be preferred over any other lien. The government had not fastened a lien on any specific property, nor does it appear that there is no other property out of which the tax can be paid. If the government had sold the property for taxes in 1930, the date of its lien, the State tax which attached first, the county and municipal tax 1929, and the street assessments, and the judgment would have been paid before the Federal tax, or the property would have been sold subject to them. The land would have been taxed for general taxes in favor of the city and county for 1930, 1931 and 1932. Are these local groups to be deprived of the tax thus subsequently accruing if the government did not sell the property in 1930? It does not appear reasonable that Congress intended such a result. Since the lien is general and not specific, and expressly exempts the lien "as against any mortgagee, purchaser, judgment creditor until notice has been filed by the collector," it would appear that the lien, from the time of notice, operates as a mortgage or judgment lien, subject to enforcement by the government if it elects to enforce it. Congress could have provided here, as it did in Section 3466, that the lien is to be paid first, but it does not do so.

Having made the provision in the one and refrained from it in the other, the inference is that no such priority was intended.

The property in this suit should be sold and the proceeds applied in accordance with the rights of the claimants when the proceeding was instituted, for neither party could act after that, except on the orders of the Court. Applying this rule, the proceeds will be applied, first, to the annual general taxes of the city and county for the years 1929 to 1932 inclusive; second, the street assessment; third, the judgment; fourth, the state taxes; fifth, the government taxes.

Margin No. 1.--Sec. 3186(115): "(a) If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, penalty, additional amount, or addition to such tax, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property whether real or personal, belonging to such person. Unless another date is specifically fixed by law, the lien shall arise at the time an assessment list was received by the collector, and shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time.

"(b) Such lien shall not be valid as against any mortgagee, purchaser, or judgment creditor until notice thereof has been filed by the collector."

Margin No. 2.--Sec. 7880(147): "Consolidated Statutes of North Carolina provide that the return (income tax) shall be filed with the Commissioner of Revenue on or before the 15th day of March of each year.

Sec. 7880(150): "Provides that the full amount of the tax payable as appears on the face of the return, shall be paid to the Commissioner of Revenue at the time fixed by law for filing of the return.

Sec. 7880(174) "Provides that the taxes herein designated and levied shall be payable in the existing national currency. State County and Municipal taxes levied for any and all purposes pursuant to this act shall be for the fiscal year in which they become due, except as otherwise provided, and the lien of such taxes shall attach to all real estate of the taxpayer within the state, which shall attach annually on the date that such taxes are due and payable, and shall continue until such taxes, with interest, penalty and costs which shall accrue thereon, shall be paid."

Margin No. 3.--Sec. 7987: "The lien of the State, County and Municipal taxes levied for any and all purposes in each year shall attach to all real estate of the taxpayer situated within the county or other municipality in which the tax list is made and placed in the hands of the duly authorized officer for collection, which lien shall attach on the first day of June, annually, and shall continue until such taxes, with any and all penalties and cost which shall accrue thereon, shall be paid, and which lien shall be preferred to any other lien upon the real estate of the taxpayer within the county, whether the same shall have attached prior or subsequent to the said first day of June; and which said lien shall be preferred to the inchoate right of dower of the wife of the taxpayer or to the curtesy initiate of the husband of the taxpayer."

Margin No. 4.--Sec. 2713: "Whenever the governing body shall confirm an assessment for local improvement, the clerk of the municipality shall enter on the minutes of the governing body the date, hour and minute of such confirmation, and from the time of such confirmation the assessments embraced in the assessment roll shall be a lien on the real property against which the same are assessed, superior to all other liens and encumbrances."

 

 

[60-2 USTC ¶9539] United States of America , Petitioner v. Durham Lumber Company, and George H. Carter, Jr.

Supreme Court of the United States, No. 23, 363 US 522, 80 SCt 1282, 6/20/60, Affirming CA-4, 58-2 USTC ¶9736, 257 F. 2d 570

On Writ of Certiorari to the United States Court of Appeals for the Fourth Circuit.

[1954 Code Secs. 6321-6323]

Lien for taxes: Priority of subcontractors' liens: Construction of state law.--The Court of Appeals' construction of state law (North Carolina) as giving a general contractor a property right in amounts owed by the owner of real estate for whom construction work has been performed only to the extent that the amounts exceed sums owed to subcontractors was not clearly erroneous or unreasonable. Therefore, subcontractors' liens against sums owed by the property owner were entitled to priority over the Government's liens for taxes owed by the general contractor.

J. Lee Rankin, Solicitor General, Charles K. Rice, Assistant Attorney General, Daniel M. Friedman, Assistant to the Solicitor General, A. F. Prescott, and Myron C. Baum, Department of Justice, Washington 25, D. C., for petitioner. C. V. Jones, Arthur Vann, and Daniel M. Williams, Jr., Durham , North Carolina , for respondents.

MR. CHIEF JUSTICE WARREN delivered the opinion of the Court:

This case involves the competing claims of the Federal Government and certain subcontractors to a sum of money owed to the taxpayers under a general construction contract.

The taxpayers, Michael & Embree, were general contractors doing business at Durham , North Carolina . Early in 1954, they agreed to construct certain buildings for persons herein referred to as the "owners." This work was completed on July 15, 1954 , but because the owners disputed the amount due under the contract, payment to the taxpayers was delayed.

In completing the construction work, the taxpayers had utilized the services and materials of numerous subcontractors, most of whom had not been compensated. The respondents are two such subcontractors, who in January and February 1955, gave the owners notice of their respective claims against the taxpayers.

On January 18, 1955 , the taxpayers were adjudicated bankrupts. At that time, there was an unpaid balance of $5,250 due from the owners under the construction contract. After extensive negotiations between the owners, the trustee in bankruptcy, and the subcontractors, it was agreed that the owners would absolve themselves from further liability by paying the $5,250 to the trustee, and that the subcontractors could thereafter assert the same rights against the trustee as they could have asserted against the owners. This arrangement was approved by both the Superior Court for Durham County , North Carolina , and the federal bankruptcy court.

Another claimant of the money deposited with the trustee was the Federal Government, which on August 13, 1954 , and November 22, 1954 , had assessed the taxpayers for uncollected withholding and unemployment insurance taxes. By virtue of Sections 6321 ¹ and 6322 ² of the Internal Revenue Code of 1954, a federal tax lien attached to all "property and rights to property" belonging to the taxpayers at the time the assessments were made. The Government contended that the money owing under the construction contract was property of the taxpayers to which the tax lien attached.

The referee in bankruptcy, attempting to resolve the competing claims against the fund as if the parties were before a state court, decided that the rights of the Federal Government under its tax lien were superior to those of the respondents. The District Court for the Middle District of North Carolina disagreed, and held that the respondents were entitled to payment of their claims before the Government could satisfy its tax lien. On appeal, the Court of Appeals for the Fourth Circuit affirmed, 257 F. 2d 570 [58-2 USTC ¶9736]. We granted certiorari. 359 U. S. 905.

[Construction of State Law]

In affirming the judgment of the District Court, the Court of Appeals stated that the nature and extent of the general contractors' property rights, to which the tax lien attached, must be ascertained under state law. The court then undertook an extensive analysis of the relevant North Carolina statutes ³ and cases. It found that the North Carolina law provides as follows: Subcontractors who have not been paid by the general contractor have a direct, independent cause of action against the owner to the extent of any amount due under the general construction contract, and any money owed by the owner under the construction contract must first be used to satisfy subcontractors' claims of which the owner has notice. Moreover, to insure that the owner will receive notice of outstanding subcontractors' claims, the North Carolina statute, N. C. Gen. Stat., 1950, §44-8, requires the general contractor, before receiving any payment, to furnish the owner with a statement of all sums due subcontractors, and if the general contractor fails to supply the required statement, he is guilty of a misdemeanor. N. C. Gen. Stat., 1950, §44-12. Finally, the court found further evidence of the direct and independent nature of the subcontractors' claims against the owner in N. C. Gen. Stat., 1950, §44-9, which provides that should the owner pay the general contractor after receiving notice of a subcontractor's claim, he will nevertheless be liable to the subcontractor to the extent of the amount which was due under the construction contract at the time notice was received.

Based upon these considerations, the Court of Appeals held that, under North Carolina law, the general contractor did not have a property interest in the face amount, as such, of the general construction contract. Specifically, the court said that "except to the extent the claim of the general contractor exceeds the aggregate of the claims of the subcontractors, the general contractor has no right which is subject to seizure under the tax lien." Id. , at 574. Therefore, concluded the court, since under North Carolina law the taxpayers possessed merely a right to the residue of the fund, and since the Government's tax lien attached to the property interests of the taxpayers as defined by state law, the Government can recover only "so much of the construction price as will remain unpaid after the owners have deducted a sum sufficient to pay the subcontractors." Id. , at 575.

The Court of Appeals was correct in asserting that the Government's tax lien attached to the taxpayers' property interests in the fund as defined by North Carolina law. Aquilino v. United States, ante, pp. --, --; [60-2 USTC ¶9538]; ⁴ United States v. Bess. 357 U. S. 51, 55 [58-2 USTC ¶9595]; cf. Morgan v. Commissioner, 309 U. S. 78, 82 [40-1 USTC ¶9210]. It is suggested that the courts of North Carolina have never specifically described the nature of the property rights created by the North Carolina statutes involved in this case, and that the Court of Appeals' interpretation of those statutes is probably incorrect. However, where "[T]he precise issue of state law involved . . . is one which has not been decided by the . . . [state] courts," this Court has said that, "[I]n dealing with issues of state law that enter into judgments of federal courts, we are hesitant to overrule decisions by federal courts skilled in the law of particular states unless their conclusions are shown to be unreasonable." Propper v. Clark, 337 U. S. 472, 486-487. Since the Court of Appeals is much closer to North Carolina law than we are, and since we cannot say that the court's characterization of the taxpayers' property interests under that law is clearly erroneous or unreasonable, ⁵ the judgment is

Affirmed.

¹ Section 6321. Lien for taxes:

"If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person."

² Section 6322. Period of lien:

"Unless another date is specifically fixed by law, the lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed is satisfied or becomes unenforceable by reason of lapse of time."

³ N. C. Gen. Stat., 1950, §§ 44-6 to 44-12.

⁴ This case points up the distinction we drew in Aquilino. The facts here show how it simply begs the question to suggest that the principle of the lien-priority cases is somehow subverted or evaded by recognizing that what constitutes the taxpayer's property in the first place is a question of state law. The facts show, too, that it does not promote clarity to substitute, for the property interests created by state law, a rule of federal property law, the main feature of which seems to be an inquiry into what the consequences would be if state law were different from what it in fact is. It is said that we should regard the subcontractor's interest as equivalent to a lien on the general contractor's claim against the owner, overlooking the fact that the law of North Carolina , as interpreted by the Court of Appeals, indicates that there is no such claim. If we are to equate the subcontractor's interest with something it is not, it would be much more appropriate, in terms of similarity, to equate it with the usual mechanic's lien of a subcontractor on the owner's property being improved--which of course is not the general contractor's property, and which could not be taken by the United States under a lien against the general contractor. This only points up the lack of precision and content in the proposed federal definition of property. See also Fidelity & Deposit Co. of Md. v. New York City Housing Auth., 241 F. 2d 142 (C. A. 2d Cir.) [57-1 USTC ¶9410], cited with approval in United States v. Bess, 357 U. S. 51, 55 [58-2 USTC ¶9595].

⁵ See Sims v. United States, 359 U. S. 108, 114 [59-1 USTC ¶9338]; Ragan v. Merchants Transfer & Warehouse Co., 337 U. S. 530, 534; Estate of Spiegel v. Commissioner, 335 U. S. 701, 707-708 [49-1 USTC ¶10,703].