Federal Taxation

Federal Taxation of State Interests

In 1903 a succession tax upon a bequest to a municipality for public purposes was upheld on the ground that the tax was payable out of the estate before distribution to the legatee. Looking to form and not to substance, in disregard of the mandate of Brown v. Maryland,1 a closely divided Court declined to “regard it as a tax upon the municipality, though it might operate incidentally to reduce the bequest by the amount of the tax.” 2 When South Carolina embarked upon the business of dispensing alcoholic beverages, its agents were held to be subject to the national internal revenue tax, the ground of the holding being that in 1787 such a business was not regarded as one of the ordinary functions of government.3

More about Federal Taxation of State Interests

Another decision marking a clear departure from the logic of Collector v. Day was Flint v. Stone Tracy Co.,4 in which the Court sustained an act of Congress taxing the privilege of doing business as a corporation, the tax being measured by the income. The argument that the tax imposed an unconstitutional burden on the exercise by a state of its reserved power to create corporate franchises was rejected, partly because of the principle of national supremacy, and partly on the ground that the corporate franchises were private property. This case also qualified Pollock v. Farmers' Loan & Trust Co. to the extent that it allowed interest on state bonds to be included in measuring the tax on the corporation.

Federal Taxation of State Interests: Developments

Subsequent cases have sustained an estate tax on the net estate of a decedent, including state bonds,5 excise taxes on the transportation of merchandise in performance of a contract to sell and deliver it to a county,6 on the importation of scientific apparatus by a state university,7 on admissions to athletic contests sponsored by a state institution, the net proceeds of which were used to further its educational program,8 and on admissions to recreational facilities operated on a nonprofit basis by a municipal corporation. 9 Income derived by independent engineering contractors from the performance of state functions,10 the compensation of trustees appointed to manage a street railway taken over and operated by a state,11 profits derived from the sale of state bonds,12 or from oil produced by lessees of state lands,13 have all been held to be subject to federal taxation despite a possible economic burden on the state.

Other Aspects

In finally overruling Pollock, the Court stated that Pollock had “merely represented one application of the more general rule that neither the federal nor the state governments could tax income an individual directly derived from any contract with another government.” 14 That rule, the Court observed, had already been rejected in numerous decisions involving intergovernmental immunity. “We see no constitutional reason for treating persons who receive interest on government bonds differently than persons who receive income from other types of contracts with the government, and no tenable rationale for distinguishing the costs imposed on States by a tax on state bond interest from the costs imposed by a tax on the income from any other state contract.” 15

Resources

References

This text about Federal Taxation is based on “The Constitution of the United States of America: Analysis and Interpretation”, published by the U.S. Government Printing Office.

[Footnote 1] 25 U.S. (12 Wheat.) 419, 444 (1827).

[Footnote 2] Snyder v. Bettman, 190 U.S. 249, 254 (1903).

[Footnote 3] South Carolina v. United States, 199 U.S. 437 (1905). See also Ohio v. Helvering, 292 U.S. 360 (1934).

[Footnote 4] 220 U.S. 107 (1911).

[Footnote 5] Greiner v. Lewellyn, 258 U.S. 384 (1922).

[Footnote 6] Wheeler Lumber Co. v. United States, 281 U.S. 572 (1930).

[Footnote 7] Board of Trustees v. United States, 289 U.S. 48 (1933).

[Footnote 8] Allen v. Regents, 304 U.S. 439 (1938).

[Footnote 9] Wilmette Park Dist. v. Campbell, 338 U.S. 411 (1949).

[Footnote 10] Metcalf & Eddy v. Mitchell, 269 U.S. 514 (1926).

[Footnote 11] Helvering v. Powers, 293 U.S. 214 (1934).

[Footnote 12] Willcuts v. Bunn, 282 U.S. 216 (1931).

[Footnote 13] Helvering v. Producers Corp., 303 U.S. 376 (1938), overruling Burnet v. Coronado Oil & Gas Co., 285 U.S. 393 (1932).

[Footnote 14] South Carolina v. Baker, 485 U.S. 505, 517 (1988).

[Footnote 15] 485 U.S. at 524-25.

Tables of Contents

• Federal Taxation and other Topics in the Contents – Article 1 of the U.S. Constitution
• U.S. Constitutional Law Category
• List of amendments to the U.S. Constitution
• Federal Taxation and other Topics in the Constitution Contents
• Interpretation of the U.S. Constitution (Table of Contents)
• Clauses of the Constitution (Table of Contents)

Scope of State Immunity from Federal Taxation

Although there have been sharp differences of opinion among members of the Supreme Court in cases dealing with the tax immunity of state functions and instrumentalities, the Court has stated that “all agree that not all of the former immunity is gone.” 16 Twice, the Court has made an effort to express its new point of view in a statement of general principles by which the right to such immunity shall be determined. However, the failure to muster a majority to concur with any single opinion in the latter case leaves the question very much in doubt. In Helvering v. Gerhardt,17 where, without overruling Collector v. Day, it narrowed the immunity of salaries of state officers from federal income taxation, the Court announced “two guiding principles of limitation for holding the tax immunity of state instrumentalities to its proper function. The one, dependent upon the 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 other principle, exemplified by those cases where the tax laid upon individuals affects the state only as the burden is passed on to it by the taxpayer, forbids recognition of the immunity when the burden on the state is so speculative and uncertain that if allowed it would restrict the federal taxing power without affording any corresponding tangible protection to the state government; even though the function be thought important enough to demand immunity from a tax upon the state itself, it is not necessarily protected from a tax which well may be substantially or entirely absorbed by private persons.” 18

More about Scope of State Immunity from Federal Taxation

The second attempt to formulate a general doctrine was made in New York v. United States,19 where, on review of a judgment affirming the right of the United States to tax the sale of mineral waters taken from property owned and operated by the State of New York, the Court reconsidered the right of Congress to tax business enterprises carried on by the states. Justice Frankfurter, speaking for himself and Justice Rutledge, made the question of discrimination vel non against state activities the test of the validity of such a tax. They found “no restriction upon Congress to include the States in levying a tax exacted equally from private persons upon the same subject matter.” 20 In a concurring opinion in which Justices Reed, Murphy, and Burton joined, Chief Justice Stone rejected the criterion of discrimination. He repeated what he had said in an earlier case to the effect that “the limitation upon the taxing power of each, so far as it affects the other, must receive a practical construction which permits both to function with the minimum of interference each with the other; and that limitation cannot be so varied or extended as seriously to impair either the taxing power of the government imposing the tax . . . or the appropriate exercise of the functions of the government affected by it.” 21 Justices Douglas and Black dissented in an opinion written by the former on the ground that the decision disregarded the Tenth Amendment, placed “the sovereign States on the same plane as private citizens,” and made them “pay the Federal Government for the privilege of exercising powers of sovereignty guaranteed them by the Constitution.” 22 In a later case dealing with state immunity the Court sustained the tax on the second ground mentioned in Helvering v. Gerhardt&emdash;that the burden of the tax was borne by private persons&emdash;and did not consider whether the function was one which the Federal Government might have taxed if the municipality had borne the burden of the exaction.23

Scope of State Immunity from Federal Taxation: Developments

Articulation of the current approach may be found in South Carolina v. Baker.24 The rules are “essentially the same” for federal immunity from state taxation and for state immunity from federal taxation, except that some state activities may be subject to direct federal taxation, while states may “never” tax the United States directly. Either government may tax private parties doing business with the other government, “even though the financial burden falls on the [other government], as long as the tax does not discriminate against the [other government] or those with which it deals.” 25 Thus, “the issue whether a nondiscriminatory federal tax might nonetheless violate state tax immunity does not even arise unless the Federal Government seeks to collect the tax directly from a State.” 26

Resources

References

This text about Federal Taxation is based on “The Constitution of the United States of America: Analysis and Interpretation”, published by the U.S. Government Printing Office.

[Footnote 16] New York v. United States, 326 U.S. 572, 584 (1946) (concurring opinion of Justice Rutledge).

[Footnote 17] 304 U.S. 405 (1938).

[Footnote 18] 304 U.S. at 419-20.

[Footnote 19] 326 U.S. 572 (1946).

[Footnote 20] 326 U.S. at 584.

[Footnote 21] 326 U.S. at 589-90.

[Footnote 22] 326 U.S. at 596.

[Footnote 23] Wilmette Park Dist. v. Campbell, 338 U.S. 411 (1949). Cf. Massachusetts v. United States, 435 U.S. 444 (1978).

[Footnote 24] 485 U.S. 505 (1988).

[Footnote 25] 485 U.S. at 523.

[Footnote 26] 485 U.S. at 524 n.14.

Tables of Contents

• Federal Taxation and other Topics in the Contents – Article 1 of the U.S. Constitution
• U.S. Constitutional Law Category
• List of amendments to the U.S. Constitution
• Federal Taxation and other Topics in the Constitution Contents
• Interpretation of the U.S. Constitution (Table of Contents)
• Clauses of the Constitution (Table of Contents)