HELVERING, COMMISSIONER OF INTERNAL REVENUE, v. GERHARDT
No. 779
Supreme Court of the United States
May 23, 1938
304 U.S. 405
Mr. Julius Henry Cohen, with whom Mr. Austin J. Tobin was on the brief, for respondents.
Mr. Henry Epstein, Solicitor General of New York, argued the cause on behalf of that State and other States, as amici curiae by special leave of Court.*
By leave of Court, Mr. Markell C. Baer filed a brief as amicus curiae, on behalf of the American Association of Port Authorities, in support of respondents.
* These States, and the names of their respective Attorneys General appearing on an elaborate brief are: New York, by Mr. John J. Bennett, Jr.; Alabama, by Mr. Albert A. Carmichael; California, by Mr. U. S. Webb; Connecticut, by Mr. Charles J. McLaughlin; Delaware, by Mr. P. Warren Green; Indiana, by Mr.
MR. JUSTICE STONE delivered the opinion of the Court.
The question for decision is whether the imposition of a federal income tax for the calendar years 1932 and 1933 on salaries received by respondents, as employees of the Port of New York Authority, places an unconstitutional burden on the States of New York and New Jersey.
The Port Authority is a bi-state corporation, created by compact between New York and New Jersey, Laws of N. Y., 1921, c. 154; Laws of N. J., 1921, c. 151, approved by the Congress of the United States by Joint Resolution of August 23, 1921, c. 77, 42 Stat. 174. The compact authorized the Authority to acquire and operate “any terminal or transportation facility” within a specified district embracing the Port of New York and lying partially within each state. It directed the Authority to recommend a comprehensive plan for improving the port and facilitating its use, by the construction and operation of bridges, tunnels, terminals and other facilities. The Authority made such a recommendation in its report of December, 1921, adopted by the two states in 1922. Laws of N. Y., 1922, c. 43; Laws of N. J., 1922, c. 9.
In conformity to the plan, and pursuant to further legislation of the two states, the Authority has con-
The Port Authority collects tolls for the use of the bridges and tunnels, and derives income from the operation of the bus line and terminal building, but it has no stock and no stockholders, and is owned by no private persons or corporations. Its projects are all said to be operated in behalf of the two states and in the interests of the public, and none of its profits enure to the benefit of private persons. Its property and the bonds and other securities issued by it are exempt by statute from state taxation. The Joint Resolution of Congress consenting to the comprehensive plan of port improvement, Pub. Res. No. 66, 67th Cong., H. J. Resolution No. 337, July 1, 1922, declares that the activities of the Port Authority under the plan “will the better promote and facilitate commerce between the States and between the States and foreign nations and provide better and cheaper transportation of property and aid in providing better
The respondents, during the taxable years in question, were respectively a construction engineer and two assistant general managers, employed by the Authority at annual salaries ranging between $8,000 and $15,000. All took oaths of office, although neither the compact nor the related statutes appear to have created any office to which any of the respondents were appointed, or defined their duties or prescribed that they should take an oath. The several respondents having failed to return their respective salaries as incоme for the taxable years in question, the commissioner determined deficiencies against them. The Board of Tax Appeals found that the Port Authority was engaged in the performance of a public function for the States of New York and New Jersey, and ruled that the compensation received by the Authority‘s employees was exempt from federal income tax. The Court of Appeals for the Second Circuit, 92 F. 2d 999,
The Constitution contains no express limitation on the power of either a state or the national government to tax the other, or its instrumentalities. The doctrine that there is an implied limitation stems from McCulloch v. Maryland, 4 Wheat. 316, in which it was held that a state tax laid specifically upon the privilege of issuing bank notes, and in fact applicable alone to the notes of national banks, was invalid since it impeded the national government in the exercise of its power to establish and maintain a bank, implied as an incident to the borrowing, taxing, war and other powers specifically granted to the national government by Article I, § 8 of the Constitution. It was held that Congress, having power to establish a bank by laws which, when enacted under the Constitution, are supreme, also had power to protect the bank by striking down state action impeding its operations; and it was thought that the state tax in question was so inconsistent with Congress‘s constitutional action in establishing the bank as to compel the conclusion that Congress intended to forbid application of the tax to the federal bank notes.1 Cf. Osborn v. Bank of United States, 9 Wheat. 738, 865-868.
In sustaining the immunity from state taxation, the opinion of the Court, by Chief Justice Marshall, recognized a clear distinction between the extent of the power of a state to tax national banks and that of the national government to tax state instrumentalities. He was careful to point out not only that the taxing power of the national government is supreme, by reason of the constitutional grant, but that in laying a federal tax on state instrumentalities the people of the states, acting through their representatives, are laying a tax on their own institutions and consequently are subject to political restraints which can be counted on to prevent abuse. State taxation of national instrumentalities is subject to no such restraint, for the people outside the state have no representatives who participate in the legislation; and in a real sense, as to them, the taxation is without representation. The exercise of the national taxing power is thus subject to a safeguard which does not operate when a state undertakes to tax a national instrumentality.2
It was perhaps enough to have supported the conclusion that the tax was invalid, that it was aimed specifically at national banks and thus operated to discriminate against the exercise by the Congress of a national power. Such discrimination was later recognized to be in itself a sufficient ground for holding invalid any form of state taxation adversely affecting the use or enjoyment of federal instrumentalities. Miller v. Milwaukee, 272 U. S. 713; cf. Pacific Co., Ltd. v. Johnson, 285 U. S. 480, 493. But later cases have declared that federal instrumentalities are similarly immune from non-discriminatory state taxation—from the taxation of obligations of the United States as an interference with the borrowing pоwer, Weston v. Charleston, 2 Pet. 449; and from a tax on “offices” levied upon the office of a captain of a revenue cutter. Dobbins v. Erie County, 16 Pet. 435.3
That the taxing power of the federal government is nevertheless subject to an implied restriction when applied to state instrumentalities was first decided in Collector v. Day, 11 Wall. 113; where the salary of a state officer, a probate judge, was held to be immune from federal income tax. The question there presented to the Court was not one of interference with a granted power in a field in which the federal government is supreme, but a limitation by implication upon the granted federal power to tax. In recognizing that implication for the first time, the Court was concerned with the continued existence of the states as governmental entities, and their preservation from destruction by the national taxing power. The immunity which it imрlied was sustained only because it was one deemed necessary to protect the states from destruction by the federal taxation of those governmental functions which they were exercising when the Constitution was adopted and which were essential to their continued existence.
The Court pointed out that the states were in existence as such entities when the Constitution was adopted; that the Constitution guaranteed to them a republican form of government and undertook to protect them from invasion and domestic violence; that it presupposes the continued existence of the states4 and their continued
We need not stop to inquire how far, as indicated in McCulloch v. Maryland, supra, the immunity of federal instrumentalities from state taxation rests on a different basis from that of state instrumentalities; or whether or to what degree it is more extensive. As to those questions, other considerations may be controlling which are not pertinent here. It is enough for present purposes that the state immunity from the national taxing power, when recognized in Collector v. Day, supra, was narrowly limited to a state judicial officer engaged in the performance of a function which pertained to state governments at the time the Constitution was adopted, without which no state “could long preserve its existence.”
Another reason rests upon the fact that any allowance of a tax immunity for the protection of state sovereignty is at the expense of the sovereign power of the nation to tax. Enlargement of the one involves diminution of the other. When enlargement рroceeds beyond the necessity of protecting the state, the burden of the immunity is thrown upon the national government with benefit only to a privileged class of taxpayers. See Metcalf & Eddy v. Mitchell, 269 U. S. 514; cf. Thomson v. Pacific Railroad, 9 Wall. 579, 588, 590. With the steady expansion of the activity of state governments into new fields they have undertaken the performance of functions not known to the states when the Constitution was adopted, and have taken over the management of business enterprises once conducted exclusively by private individuals subject to the national taxing power. In a complex economic society tax burdens laid upon those who directly or indirectly have dealings with the states, tend, to some extent not capable of precise measurement, to be passed on
In tacit recognition of the limitation which the very nature of our federal system imposes on state immunity from taxation in order to avoid an ever expanding encroachment upon the federal taxing power, this Court has refused to enlarge the immunity substantially beyond those limits marked out in Collector v. Day, supra. It has been sustained where, as in Collector v. Day, the function involved was one thought to be essential to the maintenance of a state government: as where the attempt was to tax income received from the investments of a municipal subdivision of a state, United States v. Railroad Co., 17 Wall. 322; to tax income received by a private investor from state bonds, and thus threaten impairment of the borrowing power of the state, Pollock v. Farmers’ Loan & Trust Co., 157 U. S. 429; cf. Weston v. Charleston, supra, 465-466; or to tax the manufacture and sale to a municipal corporation of equipment for its
But the Court has refused to extend the immunity to a state conducted liquor business, South Carolina v. United States, supra; Ohio v. Helvering, 292 U. S. 360, or to a street railway business takеn over and operated by state officers as a means of effecting a local public policy. Helvering v. Powers, 293 U. S. 214. It has sustained the imposition of a federal excise tax laid on the privilege of exercising corporate franchises granted by a state to public service companies. Flint v. Stone Tracy Co., 220 U. S. 107, 157. In each of these cases it was pointed out that the state function affected was one which could be carried on by private enterprise, and that therefore it was not one without which a state could not continue to exist as a governmental entity. The immunity has been still more narrowly restricted in those cases where some part of the burden of a tax collected not from a state treasury but from individual taxpayers, is said to be passed on to the state. In these cases the function has been either held or assumed to be of such a character that its performance by the state is immune from direct federal interference; yet the individuals who personally derived profit or compensation from their employment in carrying out the function were deemed to be subject to federal income tax.6
In a period marked by a constant expansion of government activities and the steady multiplication of the complexities of taxing systems, it is perhaps too much to expect that the judicial pronouncements marking the boundaries of state immunity should present a completely logical pattern. But they disclose no purposeful departure from, and indeed definitely establish, two guiding principles of limitation for holding the tax immunity of state instrumentalities to its proper function. The one, dependent upon thе nature of the function being performed by the state or in its behalf, excludes from the immunity activities thought not to be essential to the preservation of state governments even though the tax be collected from the state treasury. The state itself was taxed for the privilege of carrying on the liquor business in South Carolina v. United States, supra, and in Ohio v. Helvering, supra; and a tax on the income of a state officer engaged in the management of a state-owned corporation operating a street railroad was sustained in Helvering v. Powers, supra, because it was thought that the functions discouraged by these taxes were not indispensable to the maintenance of a state government. The other principle, exemplified by those cases where the tax laid upon individuals affects the state only as the burden
With these controlling principles in mind we turn to their application in the circumstances of the present case. The challenged taxes laid under
The fact that the expenses of the state government might be lessened if all those who deal with it were tax exempt was not thought to be an adequate basis for tax immunity in Metcalf & Eddy v. Mitchell, supra, in Group No. 1 Oil Corp. v. Bass, supra, in Burnet v. Jergins Trust, supra; or in Helvering v. Mountain Producers Corp., supra.7 When immunity is claimed from a tax laid on private persons, it must clearly appear that the burden upon the state function is actual and substantial, not conjectural. Willcuts v. Bunn, supra, 231. The extent to which salaries in business or professions whose standards of compensation are otherwise fixed by competitive conditions may be affected by the immunity of state employees from income tax is to a high degree conjectural.
The basis upon which constitutional tax immunity of a state has been supported is the protection which it affords to the continued existence of the state. To attain that end it is not ordinarily necessary to confer on the state a competitive advantage over private persons in carrying on the operations of its government. There is
During the present term we have held that the compensation of a state employee paid from the state treasury for his service in liquidating an insolvent corporation, where the state was reimbursed from the corporate assets, was subject to income tax. McLoughlin v. Commissioner, 303 U. S. 218. But thе Court has never ruled expressly on the precise question whether the Constitution grants immunity from federal income tax to the salaries of state employees performing, at the expense of the state, services of the character ordinarily carried on by private citizens. The
The pertinent provisions of the regulation applicable in the Brush case were continued in
The reasoning upon which the decision in Indian Motocycle Co. v. United States, supra, was rested is not controlling here. Taxation of the sale to a state, which was thought sufficient to support the immunity there, is not now involved. Whether the actual effect upon the performance of the state function differed from that of the present tax we do not now inquire. Compare Wheeler Lumber Bridge & Supply Co. v. United States, supra, 572.
Expressing no opinion whether a federal tax may be imposed upon the Port Authority itself with respect to its receipt of income or its other activities, we decide only that the present tax neither precludes nor threatens unreasonably to obstruct any function essential to the continued existence of the state government. So much of the burden of the tax laid upon respondents’ income as may reach the state is but a necessary incident to the co-existence within the same organized government of the two taxing sovereigns, and hence is a burden the existence of which the Constitution presupposes. The immunity, if allowed, would impose to an inadmissible extent a restriction upon the taxing power which the Constitution has granted to the federаl government.
Reversed.
MR. JUSTICE CARDOZO and MR. JUSTICE REED took no part in the consideration or decision of this case.
MR. JUSTICE BLACK, concurring.
I agree that this cause should be reversed for the reasons expressed in that part of the opinion just read pointing out that: respondents, though employees of the New York Port Authority, are citizens of the United States;
While I believe these reasons, without more, are adequate to support the tax, I find it difficult to reconcile this result with the principle announced in Collector v. Day, 11 Wall. 113, and later decisions applying that principle. This leads me to the conclusion that we should review and reëxamine the rule based upon Collector v. Day. That course would logically require the entire subject of intergovernmental tax immunity to be reviewed in the light of the effect of the
From time to time, this Court has relied upon a doctrine evolved from Collector v. Day, under which incomes received from State activities thought by the Court to be non-essential are held taxable, while incomes from activities thought to be essential are held non-tаxable. The opinion of the Court in this case refers to that doctrine. Application of this test has created “a zone of debatable ground within which the cases must be put upon one side or the other of the line by what this court has called the gradual process of historical and judicial ‘inclusion and exclusion.‘” Brush v. Commissioner, 300 U. S. 352, 365. Under this rule the tax status of every state employee re-
The present controversy illustrates the necessity for further reëxamination. New York created the Port Authority with power to engage in activities which that State believed to be essential. Yet, under this test, New York‘s determination is not final until reviewed in a tax litigation between the government and a single citizen.
Conceptions of “essential governmental functions” vary with individual philosophies. Some believe that “essential governmental functions” include ownership and operation of water plants, power and transportation systems, etc. Others deny that such ownership and operation could ever be “essential governmental functions” on the ground that such functions “could be carried on by private enterprise.” A federal income tax levied against the manager of the state-operated elevated railway company of Boston was sustained even though this manager was a public officer appointed by the Governor of Massachusetts “with the advice and consent of the council.”3 On the other hand, the federal government was denied—
There is not, and therе cannot be, any unchanging line of demarcation between essential and non-essential governmental functions. Many governmental functions of today have at some time in the past been non-governmental. The genius of our government provides that, within the sphere of constitutional action, the people—acting not through the courts but through their elected legislative representatives—have the power to determine as conditions demand, what services and functions the public welfare requires.
Surely, the Constitution contains no imperative mandate that public employees—or others—drawing equal salaries (income) should be divided into taxpaying and non-taxpaying groups. Ordinarily such a result is discrimination. Uniform taxation upon those equally able to bear their fair shares of the burdens of government is the objective of every just government. The language of the
MR. JUSTICE BUTLER, dissenting.
So far as concerns liability for federal income tax, the salaries paid by the Port Authority to its officers and employees are not distinguishable from salaries paid by
“It is an established principle of our constitutional system of dual government that the instrumentalities, means and operations whereby the United States exercises its governmental powers are exempt from taxation by the States, and that the instrumentalities, means and operations whereby the States exert the governmental powers belonging to them are equally exempt from taxation by the United States. This principle is implied from the independence of the national and state governments within their respective spheres and from the provisions of the Constitution which look to the maintenance of the dual system. Collector v. Day, 11 Wall. 113, 125, 127; Willcuts v. Bunn, 282 U. S. 216, 224-225. Where the principle applies it is not аffected by the amount of the particular tax or the extent of the resulting interference, but is absolute. McCulloch v. Maryland, 4 Wheat. 316, 430; United States v. Railroad Co., 17 Wall. 322, 327; Johnson v. Maryland, 254 U. S. 51, 55-56; Gillespie v. Oklahoma, 257 U. S. 501, 505; Crandall v. Nevada, 6 Wall. 35, 44-46.”
Following that case, we recently applied the principle in N. Y. ex rel. Rogers v. Graves (January 4, 1937) 299
“Among the inferences which derive necessarily from the Constitution are these: No State may tax appropriate means which the United States may employ for exercising their delegated powers; the United States may not tax instrumentalities which a State may employ in the discharge of her essential governmental duties—that is those duties which the framers intended each member of the Union would assume in order adequately to function under the form of government guaranteed by the Constitution.”
The Court seemingly admitting that it would be futile to attempt to distinguish the cases now before us from the Brush case, overrules it by declaring that it must be limited by what is now decided. The Solicitor General did not in any manner raise the point on which the Court puts this decision. He sought reversal on the grounds that the Port Authority‘s activities are proprietary in nature; that it is not an agency created by the States alone; that it operates in interstate commerce subject to the paramount power of Congress. Indeed, he exрressly disclaimed intention to ask re-examination of the doctrine of immunity on which the Brush case rests. In substance, as well as in the language used, the decision just announced substitutes for that doctrine the
MR. JUSTICE MCREYNOLDS concurs in this opinion.