United States v. Vermont

Background

The dispute involved a Vermont employer, Cutting & Trimming, Inc., the State of Vermont, a local bank holding the employer’s funds, and the United States. Vermont assessed and demanded unpaid withheld state income taxes on October 21, 1958. The Internal Revenue Service made a federal assessment for unemployment taxes on February 9, 1959. Vermont sued to enforce its lien; the federal government later sued to foreclose its lien. Lower courts held that the earlier Vermont lien had priority, and the Supreme Court reviewed that question.

Reasoning

The central question was whether the earlier state tax lien was fully perfected, or “choate,” so that it would beat the later federal tax lien. The Court applied its prior decision in United States v. New Britain and concluded that the Vermont lien met the New Britain test: the lienor was identified, the property subject to the lien was established, and the amount was fixed. The opinion distinguished other cases that favored federal priority when a lien remained contingent or when insolvency rules apply. Because Vermont’s statute, modeled on the federal tax-lien rules, gave administrative enforcement power and the lien was complete when assessed, the state lien was sufficiently choate to have priority over the later federal lien.

Real world impact

The Court affirmed the lower courts and left in place the rule that an antecedent state tax assessment like Vermont’s can take priority over a later federal tax lien when it is fully perfected. This affects how states and the federal government collect taxes and how banks must apply funds they hold when competing tax claims exist.