U.S. Supreme Court HELVERING v. GERHARDT, 304 U.S. 405 (1938)

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affirmed without opinion on the authority of Brush . Commissioner, 2 Cir., 85 F.2d 32, reversed 300 U.S. 352, 57 S.Ct. 495, 108 A.L.R. 1428; Commissioner v. Ten Eyck, 2 Cir., 76 F.2d 515, and New York ex rel. Rogers v. Graves, 299 U.S. 401, 57 S.Ct. 269. We granted certiorari because of the public importance of the question presented. 303 U.S. 630, 58 S.Ct. 649, 82 L.Ed. --.

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 1, 8 of the Constitution, U.S.C.A.Const. art. 1, 8. 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. [Footnote 1] Cf. Osborn v. Bank of the United States, 9 Wheat. 738, 865-868.

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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. [Footnote 2]

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economically and thus to burden the state government itself. But if every federal tax which is laid on some new form of state activity, or whose economic burden reaches in some measure the state or those who serve it, were to be set aside as an infringement of state sovereignty, it is evident that a restriction upon national power, devised only as a shield to protect the states from curtailment of the essential operations of government which they have exercised from the beginning, would become a ready means for striking down the taxing power of the nation. See State of South Carolina v. United States, 199 U.S. 437, 454, 455 S., 26 S.Ct. 110, 4 Ann.Cas. 737. Once impaired by the recognition of a state immunity found to be excessive, restoration of that power is not likely to be secured through the action of state legislatures; for they are without the inducements to act which have often persuaded Congress to waive immunities thought to be excessive. [Footnote 5]

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police force, Indian Motocycle Co. v. United States, 283 U.S. 570, 51 S.Ct. 601.

But the Court has refused to extend the immunity to a state conducted liquor business, State of South Carolina v. United States, supra; Ohio v. Helvering, 292 U.S. 360, 54 S.Ct. 725, or to a street railway business taken over and operated by state officers as a means of effecting a local public policy. Helvering v. Powers, 293 U.S. 214, 53 S. Ct. 171. 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, 31 S.Ct. 342, Ann.Cas.1912B, 1312. In each of these cases it was pointed out that the state function affected was one which could be carrie o n 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. [Footnote 6]

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mains uncertain until this Court passes upon the classification of his particular employment. The result is a confusion in the field of intergovernmental tax immunity which I believe could be clarified by complete review of the subject. Testing taxability by judicial determination that State governmental functions are essential or nonessential contributes much to the existing confusion. I believe the present case affords occasion for appropriate and necessary abandonment of such a test, particularly since recent decisions2 have already substantially advanced toward a re-examination of the doctrine of intergovernmental immunity.

The present controversy illustrates the necessity for further re- examination. 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.' [Footnote 3] On the other hand, the Federal government was denied-

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proposition that, although the federal tax may increase cost of state governments, it may be imposed if it does not curtail functions essential to their existence. Expressly or sub silentio, it overrules a century of precedents. Cf. James v. Dravo Contracting Co., December 6, 1937, 302 U.S. 134, 152, 161 S., 58 S.Ct. 208, 217, 221, 114 A.L.R. 318; Helvering v. Mountain Producers Corporation, March 7, 1938, , 58 S.Ct. 623, 628, 629. As they stood when the cases now before us were in the Circuit Court of Appeals, our decisions required it to hold that the salaries paid by the Port Authority to respondents are not subject to federal taxation. I would affirm its judgments.

Mr. Justice McREYNOLDS concurs in this opinion. Footnotes

[Footnote *] Rehearing denied 59 S.Ct. 57, 83 L.Ed. --.[ Helvering v. Gerhardt 304 U.S. 405 (1938) ]

Footnote 1 It follows that in considering the immunity of federal instrumentalities from state taxation two factors may be of importance which are lacking in the case of a claimed immunity of state instrumentalities from federal taxation. Since the acts of Congress within its constitutional power are supreme, the validity of state taxation of federal instrumentalities must depend (a) on the power of Congress to create the instrumentality and (b) its intent to protect it from state taxation. Congress may curtail an immunity which might otherwise be implied. Van Allen v. Assessors, 3 Wall. 573, or enlarge it beyond the point where, Congress being silent, the Court would set its limits. New York ex rel. Bank of New York v. Supervisors, 7 Wall. 26, 30, 31; see Thomson v. Union Pacific Railroad, 9 Wall. 579, 588, 590; Shaw v. Gibson-Zahniser Oil Corp., 276 U.S. 575, 581, 48 S.Ct. 333, 335, and cases cited; James v. Dravo Contracting Co., 302 U.S. 134, 161, 58 S.Ct. 208, 221, 114 A. L.R. 318.

The analysis is comparable where the question is whether federal corporate instrumentalities are immune from state judicial process. Federal Land Bank v. Priddy, 295 U.S. 229, 234, 235 S., 55 S.Ct. 705, 707, 708.

Footnote 2 'The people of all the States have created the general governen t, and have conferred upon it the general power of taxation. The people of all the States, and the States themselves, are represented in Congress, and, by their representatives, exercise this power. When they tax the chartered institutions of the States, they tax their constituents; and these taxes must be uniform. But, when a State taxes the operations of the government of the United States, it acts upon institutions created, not by their own constituents, but by people over whom they claim no control. It acts upon the measures of a government created by others as well as themselves, for the benefit of others in common with themselves. The difference is that which always exists, and always must exist, between the action of the whole on a part, and the action of a part on the whole- between the laws of a government declared to be supreme, and those of a government which, when in opposition to those laws, is not supreme.' Chief Justice Marshall in McCulloch v. Maryland, 4 Wheat. 316, 435, 436.

Footnote 3 In these cases, and particularly in Weston v. Charleston, 2 Pet. 449, as in McCulloch v. Maryland, emphasis was laid on the fact that by state action an impediment was laid upon the exercise of a power with respect to which the national government was supreme. In Weston v. Charleston, supra, Chief Justice Marshall said (pages 465, 466):'Can anything be more dangerous, or more injurious, than the admission of a principle, which authorizes every state and every corporation in the Union which possesses the right of taxation, to burden the exercise of this power (the borrowing power), at their discretion?'If the right to impose the tax exists, it is a right which in its nature acknowledges no limits. It may be carried to any extent, within the jurisdiction of the state or corporation which imposes it, which the will of each state and corporation may prescribe. A power which is given by the whole American people, for their common good, which is to be exercised, at the most critical periods, for the most important purposes, on the free exercise of which the interests, certainly, perhaps, the liberty of the whole, may depend; may be burdened, impeded, if not arrested, by any of the organized parts of the confederacy.' Compare Holmes, J., in Panhandle Oil Co. v. Mississippi ex rel. Knox, 277 U.S. 218, 223, 48 S.Ct. 451, 453, 56 A.L.R. 583.

Footnote 4 In 1871, when Collector v. Day was decided, the Court had not yet been called on to determine how far the Civil War Amendments had broadened the federal power at the expense of the states. The Slaughterhouse Cases, 16 Wall. 36, had not yet been decided, although they had already been once before the Court on motion for supersedeas, 10 Wall. 273. The fact that the taxing power had recently been used with destructive effect upon a state instrumentality, Veazie Bank v. Fenno, 8 Wall. 533, had suggested the possibility of similar attacks upon the existence of states themselves. Compare Lane County v. Oregon, 7 Wall. 71, 76, 77; Slaughterhouse Cases, 16 Wall. 36, 82.

Footnote 5 Compare notes 1 and 2, supra.

Footnote 6 The following classes of taxpayers have been held subject to federal income tax notwithstanding its possible economic burden on the state: Those who derive income or profits from their performance of state functions as independent engineering contractors, Metcalf & Eddy v. Mitchell, , 46 S.Ct. 172, or from the resale of state bonds, Willcuts v. Bunn, 282 U.S. 216, 51 S.Ct. 125, 71 A.L.R. 1260; those engaged as lessees of the state in producing oil from state lands, the royalties from which, payable to the state, are devoted to public purposes, Group No. 1 Oil Corporation v. Bass, 283 U.S. 279, 51 S.Ct. 432; Burnet v. A. T. Jergins Trust, 288 U.S. 508, 53 S.Ct. 439; Bankline Oil Co. v. Commissioner, 303 U.S. 362, 58 S.Ct. 616, and Helvering v. Mountain Producers Corp., 303 U.S. 376, 58 S.Ct. 623, both decided March 7, 1938, overruling Burnet v. Coronado Oil & Gas Co., 285 U.S. 393, 52 S.Ct. 443. Similarly federal taxation of property transferred at death to a state or one of its municipalities was upheld in Snyder v. Bettman, 190 U.S. 249, 23 S.Ct. 803, cf. Greiner v. Lewellyn, 258 U.S. 384, 42 S.Ct. 324; and a federal tax on the transportation of merchandise in performance of a contract to sell and deliver it to a county was sustained in Wheeler Lumber Bridge & Supply Co. v. United States, 281 U.S. 572, 50 S.Ct. 419; cf. Indian Motocycle Co. v. United States, 283 U.S. 570, 51 S.Ct. 601. A federal excise tax on corporations, measured by income, including interest received from state bonds, was upheld in Flint v. Stone Tracy Co., 220 U.S. 107, 162, 31 S.Ct. 342, Ann.Cas.1912B, 1312, et seq .; see National Life Insurance Co. v. United States, 277 U.S. 508, 527, 48 S.Ct. 591, 595; compare the discussion in Educational Films Corp. v. Ward, 282 U.S. 379, 389, 51 S.Ct. 170, 172, 71 A.L. R. 1226, and in Pacific Co., Ltd., v. Johnson, 285 U.S. 480, 490, 52 S.Ct. 424, 426.

Footnote 7 Upon full consideration, the same principle was recently applied in James v. Dravo Contracting Co., , 58 S.Ct. 208, 114 A.L.R. 318, although the limitation there was upon the immunity of the federal government.

[Footnote 1] See Brushaber v. Union Pacific R.R. Co., 240 U.S. 1, 36 S.Ct. 236, L.R.A.1917D, 414, Ann.Cas.1917B, 713; Peck & Co.v. Lowe, 247 U.S. 165, 172, 38 S.Ct. 432; Eisner v. Macomber, , 40 S.Ct. 189, 9 A.L.R. 1570; Evans v. Gore, 253 U.S. 245, 40 S.Ct. 550, 11 A.L.R. 519.

[Footnote 2] See, James v. Dravo Contracting Co., 302 U.S. 134, 58 S.Ct. 208, 114 A.L.R. 318; Helvering v. Bankline Oil Co., 303 U.S. 362, 58 S.Ct. 616; Helvering v. Mountain Producers Corp., 303 U.S. 376, 58 S.Ct. 623 (overruling Gillespie v. Oklahoma, 257 U.S. 501, 42 S.Ct. 171 and Burnet v. Coronado Oil & Gas Co., 285 U.S. 393, 52 S.Ct. 443).

[Footnote 3] Helvering v. Powers, 293 U.S. 214, 222, 223 S., 55 S.Ct. 171, 172.

[Footnote 4] Brush v. Commissioner, , 57 S.Ct. 495, 108 A.L.R. 1428; cf., Metcalf & Eddy v. Mitchell, 269 U.S. 514, 46 S.Ct. 172.