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In re Akers


June 30, 1941


No. 7411: Appeal from the District Court of the United States for the Eastern District of Pennsylvania; Guy K. Bard, Judge. No. 7495: Appeal from the District Court of the United States for the Eastern District of Pennsylvania; George A. Welsh, Judge. No. 7622: Appeal from the District Court of the United States for the District of New Jersey; Thomas Glynn Walker, Judge.

Author: Clark

Before BIGGS, CLARK, and JONES, Circuit Judges.

CLARK, Circuit Judge.

These cases suffered from casual presentation in the courts below. The hopelessness of bankruptcy seems to paralyze the zeal and skill of litigants and counsel laike. The issue is an important one. It is the position of unemployment compensation payments in Federal bankruptcy.Although there are three cases and two jurisdictions, the question is by concession single. The Pennsylvania appeals are from the affirmance by two different judges of a referee's order denying priority under the Bankruptcy Act.*fn1 In New Jersey a referee had decided that property sold "subject to taxes and assessments" was sold subject to the unemployment compensation payments. His holding was reversed by the District Court.*fn2 Subsequently, the same learned district judge affirmed the same referee's compliance therewith in the proceedings to establish priority.

The principle underlying tax priority is ancient and well-established. It is one of the many illustrations of the maxim "salus populi suprema lex est".Mr. Justice Story gave it expression and effect over 100 years ago.

"The right of priority of payment of debts due to the government, is a prerogative of the crown well known to the common law. It is founded not so much upon any personal advantage to the sovereign, as upon motives of public policy, in order to secure an adequate revenue to sustain the public burdens, and discharge the public debts. The claim of the United States, however, does not stand upon any sovereign prerogative, but is exclusively founded upon the actual provisions of their own statutes. The same policy which governed in the case of the royal prerogative, may be clearly traced in these statutes; and as that policy has mainly a reference to the public good, there is no reason for giving to them a strict and narrow interpretation. Like all other statutes of this nature, they ought to receive a fair and reasonable interpretation, according to the just import of their terms." United States v. State Bank of North Carolina, 6 Pet. 29, 35, 8 L. Ed. 308.*fn3

This admonition has been followed in the overwhelming weight of authority.*fn4

The acts of both statute refer to the payment as a "contribution". The laws provide that delinquencies are to be collected in New Jersey by an "action at law"*fn5 and in Pennsylvania by a "civil action".*fn6 The New Jersey statute declares the contributions "shall be a personal debt"*fn7 and the Pennsylvania Act gives the contributions priority over other claims "except taxes".*fn8 The use of the generic term debt for an obligation to the state is frequent in bankruptcy and insolvency laws.*fn9 It occurs in the national bankruptcy act itself.*fn10 So, also, the method of collection of the particular debt due the sovereign has no significance.*fn11 The state can direct any constitutional method for the collection of its obligations.*fn12 The suggestion that a different result would follow from the inclusion of the word "other" before taxes as well as before claims in the phrase "priority over" etc. would indeed put a premium on the tag. The phrase as written effects not a distinction from but a similarity to.*fn13

There is more than a question of nomenclature involved in a determination of the character of the exaction of these unemployment compensation acts.*fn14 Their true nature had given the draftsmen some concern and for an obvious reason.Upon its resolvement might depend their ultimate constitutionality.*fn15 This because the taxing power has served as an excuse for greater judicial flexibility. The question is not answered by emphasis on compulsion. There are, at least, three other forms of governmental exaction which have been held not to be taxes. We refer to fees or assessments for special services or benefits, penalties for the determining of socially undesirable acts and finally the regulatory expropriation of money from one group to another.

Clearly the line here runs between tax and regulatory expropriation. As the Supreme Court has now spoken any extended discussion would be presumptuous. The distinction between regulation and revenue has given the courts some difficulty.*fn16 They have felt obliged to deal with such depressing niceties as "functional separability" and "concomitant purpose".*fn17 Some writers predicted the conductcoercing theory,*fn18 and others called attention to the 10% over the offset.*fn19 A writer in the Pennsylvania Law Review thirty years ago pointed out:

" * * * Any statute is to be classified as a taxing statute which directly requires the payment of money by a person as a contribution to a public benefit. Under such a classification, a statute which imputes liability to a person and thereby compels payment of money by him, either without reference to any wrongdoing on his part or by imputing wrongdoing where none in fact exists, is either void as a confiscation of property, or is an exercise of the power of taxation.If done without reference to any public benefit it is a confiscation; if done for the purpose of accomplishing a public benefit and if the public benefit is of sufficient consequence in proportion to the amount of money compelled to be paid, it is taxation." Snow, Social Insurance, 59 University of Pennsylvania Law Review 283, 286-287.

And more recently Orofessor Shulman of the Yale University School of Law said:

" * * * If the funds required under Title II were collected by means of some other general tax, a sales tax or the income tax, the charge could hardly be made. In a sense all taxes are exactions of money from one group for the benefit of another. No expenditure returns to the taxpayer direct benefits, or indirect benefits through the general welfare, exactly proportioned to his tax payments. Tax money expended for soldiers' benuses, for relief of the unemployed and the needy, and for pensions to Presidents' wodows and civil servants is in direct form money exacted from one group for the benefit of another. In substance the case is no less clear with respect to the protective tariff and the taxes paid by that class of the population who smoke tobacco and trink liquor. Yet that is hardly expropriation. The legislative determination that the taxes and expenditures are for the general welfare is a determination that they are for the benefit of the taxpayers as well as the direct recipients of the expenditures. There is, and can be, no requirement that taxes or expenditures benefit all taxpayers in precisely the same manner or in degrees exactly proportioned to their taxes. The charge of 'expropriation' raises no new issue even though it points to a psychological hazard." Shulman, The Case For The Constitutionality of The Social Security Act, 3 Law and Contemporary Problems 298, 309, 310.

As is known, the Social Security Act, 42 U.S.C.A. ยง 301 et seq., and its unemployment compensation provisions reached the Supreme Court in 1936. The decision of the New York Court of Appeals*fn20 in favor of constitutionality was upheld by an equally divided court.*fn21 Later two cases from Alabama*fn22 were argued and resulted in a five to four declaration of validity.*fn23 That declaratoin flowed from the adoption of the true tax theory. The Justice who wrote the majority opinion in the Carmichael case said:

" * * * While the particular name which a state court or legislature may give to a money payment commanded by its statute is not controlling here when its constitutionality is in question, cf. Educational Films Corp. v. Ward, 282 U.S. 379, 387, 51 S. Ct. 170, 171, 75 L. Ed. 400, 71 A.L.R. 1226; Storaasli v. Minnestoa, 283 U.S. 57, 62, 51 S. Ct. 354, 355, 75 L. Ed. 839; Wagner v. Covington, 251 U.S. 95, 102, 104, 40 S. Ct. 93, 94, 64 L. Ed. 157, 168; Standard Oil Co. v. Graves, 249 U.S. 389, 394, 39 S. Ct. 320, 63 L. Ed. 662, we see no reason to doubt that the present statute is an exertion of the taxing power of the state. Cf. Carley & Hamilton v. Snook, 281 U.S. 66, 71, 50 S. Ct. 204, 206, 74 L. Ed. 704, 68 A.L.R. 194.

"Taxes, which are but the means of distributing the burden of the cost of government, are commonly levied on property or its use, but they may likewise be laid on the exercise of personal rights and privileges. As has been pointed out by the opinion in the Chas. C. Steward Machine Co. case [Chas. C. Steward Mach. Co. v. Davis, 301 U.S. 548, 57 S. Ct. 883, 81 L. Ed. 1279, 109 A.L.R. 1293], such levies, including taxes on the exercise of the right to employ or to be employed, were known in England and the Colonies before the adoption of the Constitution, and must be taken to be embraced within the wide range of choice of subjects of taxation, which was an attribute of the sovereign power of the states at the time of the adoption of the Constitution, and which was reserved to them by that instrument. As the present levy has all the indicia of a tax, and is of a type traditional in the history of Anglo-American legislation, it is within state taxing power, and it is immaterial whether it is called an excise or by another name." Carmichael v. Southern Coal & Coke Co., 301 U.S. 495, 508, 509, 57 S. Ct. 868, 871, 81 L. Ed. 1245, 109 A.L.R. 1327.

Three years after these decisions, the issue of the character of the exaction came up in another form. The question was the familiar one of the "immunity of instrumentalities."*fn24 Before that question is even reached, a tax has to be found. Following its earlier ruling, the Supreme Court held the Arkansas Unemployment Compensation law to be a taxing act.*fn25 We have no doubt that they would equally so hold under the Bankruptcy Act.

The judgments of the District Court are reversed.

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