Royal Indemnity Co. v. United States

Background

A company had guaranteed payment of a taxpayer’s 1917 income tax by filing a surety bond with a local tax collector while the taxpayer sought an abatement. The Commissioner later rejected part of the abatement and found unpaid tax plus interest. The surety paid only the principal; the collector accepted payment, returned the bond, and said the bond was fully satisfied. The Government then sued the surety for the interest amount the bond promised to cover.

Reasoning

The Court asked two simple questions: could the local collector lawfully release the bond, and could the Government recover interest from the surety? The Court answered that collectors have only ministerial tax-collection duties and no statutory power to release or compromise tax obligations. The bond therefore remained enforceable. Because the bond was a contract to pay the tax with interest, the United States could recover interest as damages for delayed payment. In the absence of a federal rate, the Court adopted a suitable rate prevailing where the obligation was made and performed.

Real world impact

Local tax collectors cannot unilaterally cancel federal tax guarantees; surety companies remain liable for interest that accrued under the bond. The ruling lets the Government collect interest on unpaid taxes from a bond guarantor, measured by the state’s usual interest rate in the place of performance.

Dissents or concurrances

Justice Black agreed that the collector lacked power but dissented on interest, warning that the Court should not judicially impose interest rates and that national uniformity would be preferable.