A general contractor having defaulted both on the payment of
federal taxes and on the payment of amounts due to subcontractors
who had supplied labor and materials on a construction job in New
York State, and the subcontractors having sued to foreclose their
mechanics' liens, the owner of the real estate paid into court the
amount remaining due under the construction contract. Under §§ 3670
and 3671 of the Internal Revenue Code of 1939, the United States
claimed priority for its tax lien on the "property and rights to
property" of the defaulting general contractor. The subcontractors
claimed that, under § 36-a of the New York Lien Law, the amounts
due to the general contractor from the owner constituted "trust
funds" in the hands of the general contractor for the benefit of
subcontractors, laborers and materialmen, to the extent of their
unpaid claims, and that, therefore, the general contractor had no
"property" or "rights to property" in the fund to which the
Government's tax lien could attach. Without clearly determining
what property rights, if any, the general contractor had in the
fund under state law, the Court of Appeals of New York decided in
favor of the United States.
the judgment is vacated, and the case is remanded
to the Court of Appeals of New York so that it may ascertain the
property interests of the taxpayer under state law and then dispose
of the case in accordance with established federal law. Pp.
363 U. S.
3 N.Y.2d 511, 146 N.E.2d 774, judgment vacated and cause
Page 363 U. S. 510
MR. JUSTICE WARREN delivered the opinion of the Court.
In this case, we are asked to determine which of two competing
claimants -- the Federal Government, by virtue of its tax lien, or
certain petitioning subcontractors, by virtue of their rights under
Section 36-a of the New York Lien Law -- is entitled to a sum of
money owed under a general construction contract which was
performed by the taxpayer.
The taxpayer, Fleetwood Paving Corporation, is a general
contractor which, in July or August, 1952, agreed to remodel a
restaurant belonging to one Ada Bottone, herein referred to as the
owner. The petitioners in August and September of that year entered
into a subcontract with the taxpayer to supply labor and materials
for the remodeling job. Shortly thereafter, the petitioners
performed their obligations under the subcontract, but were not
fully compensated by the contractor-taxpayer. Therefore on November
3, 1952, and on November 10, 1952, they filed notices of their
mechanic's liens on the owner's realty in the office of the Clerk
of Westchester County. In June, 1953, they instituted actions in
the New York Supreme Court to foreclose those liens.
By order of court, the owner was permitted to deposit with the
Clerk of the court the $2,000 which she still owed under the
original construction contract, and she was thereafter dismissed as
a defendant in the action. The Government, having previously levied
upon the owner's alleged indebtedness to the taxpayer, was
permitted by the court to enter the case as a party defendant.
The Government asserted precedence over the claims of
petitioners because of the following facts: the Director of
Internal Revenue, in December, 1951, and March, 1952, received
assessment lists containing assessments against the taxpayer for
unpaid federal withholding and social security taxes. On October
31, 1952, the Director filed a
Page 363 U. S. 511
notice of federal tax liens in the office of the Clerk of the
City of Mount Vernon, New York, which is the city wherein the
taxpayer maintained its principal place of business. The Government
claimed priority for its tax lien under Sections 3670 and 3671 of
the Internal Revenue Code of 1939. [Footnote 1
] The petitioners contended that, since the
contractor-taxpayer owed them more than $2,200 for labor and
materials supplied to the job, under the New York Lien Law, Section
36-a, [Footnote 2
] he had no
property interest in
Page 363 U. S. 512
the $2,200 which the owner still owed under the original
The New York Supreme Court, Special Term, 140 N.Y.S.2d 355,
granted petitioners' motion for summary judgment. The ground for
the decision was that the Government's tax lien was ineffective,
since it had not been filed in the office designated by New York
law for the filing of liens against realty. On appeal, the
Appellate Division affirmed, but on the ground that there was no
debt due from the owner to the taxpayer to which the Government's
lien could attach, 2 A.D.2d 747, 153 N.Y.S.2d 268. The court
reasoned that the fund deposited by the owner was a substitute for
her realty to which the mechanic's liens had attached, and that,
since the Government had no lien on the owner's property, it could
have no lien on the fund substituted for that property. On appeal,
the New York Court of Appeals held that the tax lien had taken
effect prior to the petitioners' claims. It therefore reversed the
lower New York courts, and ruled that the motion of the United
States for summary judgment, rather than that of petitioners,
should have been granted by the Supreme Court, Special Term. 3
N.Y.2d 511, 169 N.Y.S.2d 9, 146 N.E.2d 774. We granted certiorari,
359 U.S. 904.
The threshold question in this case, as in all cases where the
Federal Government asserts its tax lien, is whether and to what
extent the taxpayer had "property" or "rights to property" to which
the tax lien could attach. In answering that question, both federal
and state courts
Page 363 U. S. 513
must look to state law, for it has long been the rule that,
"in the application of a federal revenue act, state law controls
in determining the nature of the legal interest which the taxpayer
had in the property . . . sought to be reached by the statute.
Morgan v. Commissioner, 309 U. S.
, 309 U. S. 82
Thus, as we held only two Terms ago, Section 3670 "creates no
property rights but merely attaches consequences, federally
defined, to rights created under state law. . . ." United
States v. Bess, 357 U. S. 51
357 U. S. 55
] However, once the
tax lien has attached to the
Page 363 U. S. 514
taxpayer's state-created interests, we enter the province of
federal law, which we have consistently held determines the
priority of competing liens asserted against the taxpayer's
"property" or "rights to property." [Footnote 5
] United States v. Vorreiter,
355 U. S. 15
134 Colo. 543, 307 P.2d 475
United States v. White Bear Brewing Co., 350 U.
227 F.2d 359; United
States v. Colotta,
350 U.S. 808, reversing
33, 79 So. 2d
, 86 So. 2d 19; United States v. Scovil,
348 U. S. 218
United States v. Liverpool & London & Globe Ins.
Co., 348 U. S. 215
United States v. Acri, 348 U. S. 211
United States v. City of New Britain, 347 U. S.
; United States v. Gilbert Associates,
345 U. S. 361
United States v. Security Trust & Sav. Bank,
340 U. S. 47
Illinois v. Campbell, 329 U. S. 362
United States v. Waddill, Holland & Flinn, Inc.,
323 U. S. 353
application of state law in ascertaining the taxpayer's property
rights and of federal law in reconciling the claims of competing
lienors is based both upon logic and sound legal principles. This
approach strikes a proper balance between the legitimate and
traditional interest which the State has in creating and defining
the property interest of its citizens and the necessity for a
uniform administration of the federal revenue statutes.
Petitioners contend that the New York Court of Appeals did not
make its determination in the light of these settled principles.
Relying upon the express language
Page 363 U. S. 515
of Section 36-a of the Lien Law and upon a number of lower New
York court decisions interpreting that statute, petitioners
conclude that the money actually received by the
contractor-taxpayer and his right to collect amounts still due
under the construction contract constitute a direct trust for the
benefit of subcontractors, and that the only property rights which
the contractor-taxpayer has in the trust are bare legal title to
any money actually received and a beneficial interest in so must of
the trust proceeds as remain after the claims of subcontractors
have been settled. The Government, on the other hand, claims that
Section 36-a merely gives the subcontractors an ordinary lien, and
that the contractor-taxpayer's property rights encompass the entire
indebtedness of the owner under the construction contract.
This conflict should not be resolved by this Court, but by the
highest court of the State of New York. We cannot say from the
opinion of the Court of Appeals that it has been satisfactorily
resolved. [Footnote 6
] We find
no discussion in the court's opinion to indicate the nature of the
property rights possessed by the taxpayer under state law. Nor is
the application to be made of federal law clearly defined. We
believe that it is in the interests of all concerned to have these
questions decided by the state courts of New York. We therefore
vacate the judgment
Page 363 U. S. 516
of the Court of Appeals and remand the case to that court so
that it may ascertain the property interests of the taxpayer under
state law and then dispose of the case according to established
principles of law.
Vacated and remanded.
"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 and rights to property, whether
real or personal, belonging to such person."
"Unless another date is specifically fixed by law, the lien
shall arise at the time the 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."
These provisions also appear in the 1954 Code. Int.Rev.Code of
1954, §§ 6321, 6322.
McKinney's N.Y. Laws, Lien Law (1958 Supp.), § 36-a, provides as
"The funds received by a contractor from an owner for the
improvement of real property are hereby declared to constitute
trust funds in the hands of such contractor to be applied first to
the payment of claims of subcontractors, architects, engineers,
surveyors, laborers and materialmen arising out of the improvement,
and to the payment of premiums on surety bond or bonds filed and
premiums on insurance accruing during the making of the improvement
and any contractor and any officer, director or agent of any
contractor who applies or consents to the application of such funds
for any other purpose and fails to pay the claims hereinbefore
mentioned is guilty of larceny and punishable as provided in
section thirteen hundred and two of the penal law. Such trust may
be enforced by civil action maintained as provided in article
three-a of this chapter by any person entitled to share in the
fund, whether or not he shall have filed, or had the right to file,
a notice of lien or shall have recovered a judgment for a claim
arising out of the improvement. For the purpose of a civil action
only, the trust funds shall include the right of action upon an
obligation for moneys due or to become due to a contractor, as well
as moneys actually received by him."
Section 36-a was repealed on September 1, 1959. N.Y.Laws 1959,
c. 696, § 14. The subject matter covered by § 36-a is now included
in McKinney's N.Y.Consol. Laws, Lien Law (1959 Supp.), c. 33, §§
It is suggested that the definition of the taxpayer's property
interests should be governed by federal law, although supplying the
content of this nebulous body of federal law would apparently be
left for future decisions. We think that this approach is unsound,
because it ignores the long established role that the States have
played in creating property interests and places upon the courts
the task of attempting to ascertain a taxpayer's property rights
under an undefined rule of federal law. It would indeed be
anomalous to say that the taxpayer's "property and rights to
property" included property in which, under the relevant state law,
he had no property interest at all.
It is said that, because of the unique circumstances which
existed in Bess,
that case does not control here. However,
aside from the fact that Bess
involved proceeds payable
under an insurance policy, whereas this case involves proceeds
payable under a construction contract, it is apparent that the
relevant circumstances of the two cases are essentially identical.
In both cases, the Government was attempting to assert its tax lien
against what it thought to be the "property and rights to property"
of the taxpayer. In both cases, an adverse party claimed the right
to the property in question on the theory that the taxpayer had
never acquired a state-created property interest to which the
Government's tax lien could attach. Finally, in both cases, the
Government attempted to characterize the problem as one involving a
conflict between competing claimants to be settled solely by the
application of federal law.
held that state law determines the property
interests of a taxpayer in the cash surrender value of an insurance
policy, as well as in the proceeds payable upon death. The same
considerations which led to our conclusion in Bess
that we look to state law in determining the general contractor's
property interests in this case.
It is suggested that the rule announced by Bess
applied in this case is inconsistent with the mandate that federal
law governs the relative priority of federal tax liens and
state-created liens. However, we fail to perceive wherein lies the
inconsistency. It is one thing to say that a taxpayer's property
rights have been and should be created by state law. It is quite
another thing to declare that, in the interest of efficient tax
administration, one must look to federal law to resolve the
conflict between competing claimants of the taxpayer's
state-created property interests.
Subsequent to the Court of Appeals' decision in the instant
case, and after this Court's decision in United States v.
Bess, 357 U. S. 51
New York Court of Appeals decided the case of In re City of New
, 184 N.Y.S.2d 585, 157 N.E.2d 587, on petition for a
writ of certiorari sub nom. United States v. Coblentz,
U.S. 841. The Coblentz
case is not authority for the
disposition of the instant case. The latter involves a
determination of property rights under § 36-a of the New York Lien
Law, whereas the Coblentz
case was concerned with the
taxpayer's property interests under an assignment contract, § 475
of the New York Judiciary Law, McKinney's Consol.Laws, c. 30 and §
B15-37.0 of the New York City Administrative Code.
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. [Footnote 2/1
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 363
fn2/1|>note 1, supra,
a federal tax lien
Page 363 U. S. 517
against a taxpayer's property under §§ 3670 and 3671 of the
Internal Revenue Code of 1939, [Footnote 2/2
] 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). [Footnote
] 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,
224 F.2d 232 (C.A. 2d Cir.
The Court believes, however, that the present cases are
different because, under state law, the general contractor in
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.
, a federal tax lien can attach only to a property
interest which exists under state law.
Page 363 U. S. 518
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. [Footnote 2/4
] 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.
Page 363 U. S. 519
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.
, 348 U. S. 213
It is one thing to say, as the Court did in Bess,
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
280 U. S. 367
City of Detroit v. Murray Corporation, 355 U.
, 355 U. S. 492
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
Page 363 U. S. 520
contractor by converting the debt into a trust for the benefit
of the subcontractor. [Footnote
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
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
Page 363 U. S. 521
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
* [No. 23 is United States v. Durham Lumber Co. et al.,
p. 363 U. S.
United States v. Security Trust & Savings Bank,
340 U. S. 47
(1950); United States v. City of New Britain, 347 U. S.
(1954); United States v. Acri, 348 U.
(1955); United States v. Liverpool &
London Globe Ins. Co., Ltd., 348 U. S. 215
(1955); United States v. Scovil, 348 U.
(1955); United States v. Colotta,
U.S. 808 (1955); United States v. White Bear Brewing Co.,
350 U. S. 1010
(1956); United States v. Vorreiter, 355 U. S.
(1957); United States v. R. F. Ball Construction
Co., Inc., 355 U. S. 587
(1958); United States v. Hulley, 358 U. S.
The text of these sections, applicable in the Aquilino
case, are set forth in note 1 of
the Court's opinion in No
p. 363 U. S. 511
The comparable provisions of the Internal Revenue Code of 1954, §§
6321 and 6322, applicable in the Durham Lumber
printed in notes 1 and 2 of the Court's opinion in No. 23,
p. 363 U. S.
That section, as amended, provides:
"Such lien shall not be valid as against any mortgagee, pledgee,
purchaser, or judgment creditor until notice thereof has been filed
by the collector. . . ."
53 Stat. 882. The comparable provision of the Internal Revenue
Code of 1954 is § 6323(a).
It is noteworthy that the North Carolina law involved in the
case requires the general contractor to
furnish the owner with a statement of subcontractors' claims
"before receiving any part of the contract price, as it may
" and that it is thereafter the duty of the owner
to retain an appropriate amount "from the money then due the
" N.C.Gen.Stat.1950, § 44-8. (Emphasis added.)
Although this section indicates that the general contractor has no
right to collect the proceeds of the main contract until the
statutory conditions are satisfied, it obviously recognizes the
owner's contractual obligation as the real basis of the transaction
and the source of the subcontractors' rights. The subcontractors'
claims are thus not akin to liens on the owner's real estate, as
this Court suggests, but are asserted solely in respect of the
monetary claim held by the general contractor against the
"It is, by now, exceedingly well settled that no state-created
rule may defeat the paramount right of the United States to levy
and collect taxes uniformly throughout the land. See United
States v. Vorreiter, 355 U. S. 15
Colo. 543, 307 P.2d 475
United States v. White Bear Brewing Co., 350 U. S.
227 F.2d 359; United States v.
350 U.S. 808, revg.
224 Miss. 33,
79 So. 2d
; United States v. Scovil, supra, 348 U. S.
, 348 U. S. 220
United States v. City of New Britain, supra, 347 U. S.
, 347 U. S. 84
States v. Kings County Iron Works, supra,
224 F.2d 232, 237.
That being so, it follows that the provision in this state's Lien
Law, to which respondents point -- that funds received by a
contractor from the owner for the improvement of real property
shall be deemed 'trust funds' for the payment of subcontractors (§
36-a; § 13, subd. (7)) -- may not be construed to affect the rights
of the government or the priority of its tax lien."
3 N.Y.2d at 516, 169 N.Y.S.2d at 14, 146 N.E.2d at 777-778.
It will not do to distinguish the present type of case from the
lien priority cases on the ground that, in the latter cases, the
taxpayer remains the owner in a very real sense, and can continue
to enjoy the property if he discharges the debt it secures. In both
instances, the taxpayer is temporarily deprived of certain
incidents of ownership as a device for securing the payment of a
debt, and is restored to the full enjoyment of the property only
when the debt is discharged. And it is illusory to say that
ownership of a debt which can be neither collected nor alienated is
any more "real" than the ownership of no debt at all. Whether the
diminution of the taxpayer's interest is sufficiently definite and
complete to conclude the federal lien is precisely the question on
which this Court has held federal law must control. It is admitted
that, if the federal standard of "choateness" developed by this
Court in the lien priority cases is applied, the incidents of
ownership retained by the taxpayers here must in fact be deemed
greater than those retained by taxpayers in cases where
state-created liens imposed on their interests have prevailed over
the Government's lien.
MR. JUSTICE BLACK, while adhering to the dissenting views
expressed by him in Commissioner v. Stern, 357 U. S.
, 357 U. S. 47
and United States v. Bess, 357 U. S.
, 357 U. S. 59
concurs in this opinion.