Michigan v. Michigan Trust Co.

Background

The People of the State of Michigan asked a federal court to require a court-appointed manager to pay franchise or privilege taxes owed by the Worden Grocer Company. The corporation was placed in a receivership on February 9, 1926, with the Michigan Trust Company named receiver and given authority to keep the business running and pay taxes. The receiver operated the business until a sale confirmed on December 30, 1929; some cash and real estate remained in the receiver’s hands. In February 1930 the State sought about $10,988.36 for taxes from 1925–1929. The District Court ordered the receiver to pay; the Court of Appeals declined, and the case reached the high Court on review.

Reasoning

The Court addressed whether a Michigan corporation under a receiver still owes the statutory privilege fee and whether the receiver must pay it. The Court accepted the Michigan Supreme Court’s interpretation of the state statute that the tax is on the privilege to "do" business and covers operations carried on through a receiver. The appointment order expressly authorized the receiver to pay taxes and to give such payments priority. Because the taxes were necessary expenses of running the business, and nonpayment could lead to forfeiture of the franchise, the Court held the receiver must pay the accrued privilege fees and that those taxes take priority over general creditors’ claims.

Real world impact

States can collect annual franchise or privilege fees from corporations run by court-appointed receivers. Receivers who operate a corporation must treat such taxes as administrative expenses and pay them before general unsecured creditors. This decision enforces state tax claims in running receiverships.

Dissents or concurrances

Justice McReynolds disagreed and would have affirmed the Court of Appeals instead.