Massachusetts v. United States

Background

A Massachusetts unpaid-tax claim arose from the assets of an insolvent employer whose assignee sold the business and paid $803.72 to the State for unemployment contributions. The United States filed claims for federal Social Security taxes (Title 8 and Title 9) and other federal taxes. Lower courts split on whether the assignee’s option to pay the state and take federal credit under Title 9 survived the debtor’s insolvency.

Reasoning

The central question was whether the federal priority law (Rev. Stat. § 3466) cuts off the taxpayer’s or assignee’s later right under Title 9 to pay a state fund and receive federal credit after insolvency. Relying on prior decisions in two Illinois cases, the Court held that § 3466 creates an absolute federal priority that attaches at insolvency and prevents the assignee’s exercise of the Title 9 payment-and-credit option to defeat federal claims. The Court therefore affirmed that federal Title 8 and Title 9 tax claims take precedence over the state unemployment claim.

Real world impact

As a result, when an employer is insolvent, funds in the hands of an assignee must be applied first to federal tax debts, limiting a state’s ability to keep payments made to its unemployment fund from an insolvent estate. The Court noted existing federal loan and guaranty provisions and said it did not expect state unemployment programs to be destroyed by this rule.

Dissents or concurrances

A dissent argued the ruling is harsh: it gives the federal Treasury a windfall, deprives states of intended funds, and prevents equitable marshaling that would let a taxpayer obtain the 90% Title 9 credit.