Subs Lose Case to IRS

Kegler Brown Construction Newsletter

In a case of great importance to subcontractors nationwide, the United States Court of Appeals for the Seventh Circuit has held in the case of Capital Indemnity v. U.S.A. that an IRS tax lien takes priority over subcontractor's claims to progress payments due by an owner to an insolvent general contractor. The Court refused to find that there was a "trust fund" established with the money owed by the owner to the general contractor for the subcontractors' work. Therefore, it allowed the IRS to swoop in with its federal tax lien against the contractor and seize the contract funds that otherwise would have been available to pay subcontractors on the job.

This decision makes "trust fund" legislation increasingly important for subcontractors in states like Ohio, as well as the fundamental decision about the financial stability of any contractors that a subcontractor is considering bidding to.