Helvering v. Gerhardt

304 U.S. 405

Case Year: 1938

Case Ruling: 5-2, Reversed

Opinion Justice: Stone

FACTS

In 1921, with congressional approval, the states of New York and New Jersey created by interstate compact the Port of New York Authority. The purpose of the authority was to build and operate transportation facilities in the port of New York, an area that included parts of both states. Among other activities, the authority built and operated tunnels and bridges and improved conditions for truck, bus, and rail traffic. Respondents Philip Gerhardt, Billings Wilson, and John Mulcahy worked for the authority. For the years 1932 and 1933 they earned between $8,000 and $15,000--earnings they did not report to the federal government. The Department of Internal Revenue found them to be deficient in their payment of federal taxes. The Board of Tax Appeals, however, ruled that Gerhardt and the others were engaged in a public function of the states of New Jersey and New York, and, as such, their income from these activities was constitutionally exempt from federal taxation. The court of appeals affirmed. On behalf of the federal government Guy Helvering, the commissioner of internal revenue, requested Supreme Court review.

 

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 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, 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. 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. 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. 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. But later cases have declared that federal instrumentalities are similarly immune from nondiscriminatory state taxation--from the taxation of obligations of the United States as an interference with the borrowing power, Weston v. Charleston; and from a tax on ‘offices’ levied upon the office of a captain of a revenue cutter, Dobbins v. Erie County.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, 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 implied 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....

... [T]he state immunity from the national taxing power, when recognized in Collector v. Day 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.’ There are cogent reasons why any constitutional restriction upon the taxing power granted to Congress, so far as it can be properly raised by implication, should be narrowly limited. One, as was pointed out by Chief Justice Marshall in McCulloch v. Maryland ... is that the people of all the states have created the national government and are represented in Congress. Through that representation they exercise the national taxing power. The very fact that when they are exercising it they are taxing themselves serves to guard against its abuse through the possibility of resort to the usual processes of political action which provides a readier and more adaptable means than any which courts can afford, for securing accommodation of the competing demands for national revenue, on the one hand, and or reasonable scope for the independence of state action, on the other.

... [A]ny 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 proceeds 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. 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 oneconomically 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. 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.

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 everexpanding encroachment upon the federal taxing power, this Court has refused to enlarge the immunity substantially beyond those limits marked out in Collector v. Day. 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....

But the Court has refused to extend the immunity to a state conducted liquor business, State of South Carolina v. United States, or to a street railway business taken over and operated by state officers as a means of effecting a local public policy. 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. 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. 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 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 state itself was taxed for the privilege of carrying on the liquor business in State of South Carolina v. United States, 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 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 burdenis 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.

With these controlling principles in mind we turn to their application in the circumstances of the present case. The challenged taxes laid under section 22, Revenue Act of 1932, are upon the net income of respondents, derived from their employment in common occupations not shown to be different in their methods or duties from those of similar employees in private industry. The taxpayers enjoy the benefits and protection of the laws of the United States. They are under a duty to support its government and are not beyond the reach of its taxing power. A nondiscriminatory tax laid on their net income, in common with that of all other members of the community, could by no reasonable probability be considered to preclude the performance of the function which New York and New Jersey have undertaken, or to obstruct it more than like private enterprises are obstructed by our taxing system. Even though, to some unascertainable extent, the tax deprives the states of the advantage of paying less than the standard rate for the services which they engage, it does not curtail any of those functions which have been thought hitherto to be essential to their continued existence as states. At most it may be said to increase somewhat the cost of the state governments because, inan interdependent economic society, the taxation of income tends to raise (to some extent which economists are not able to measure) the price of labor and materials. The effect of the immunity if allowed would be to relieve respondents of their duty of financial support to the national government, in order to secure to the state a theoretical advantage so speculative in its character and measurement as to be unsubstantial. A tax immunity devised for protection of the states as governmental entities cannot be pressed so far.

... 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. 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 in to ordinarily necessary to confer on the state a competitive advantage over private persons in carrying on the operations of its government. There isno such necessity here, and the resulting impairment of the federal power to tax argues against the advantage. The state and national governments must coexist. Each must be supported by taxation of those who are citizens of both. The mere fact that the economic burden of such taxes may be passed on to a state government and thus increase to some extent, here wholly conjectural, the expense of its operation, infringes no constitutional immunity. Such burdens are but normal incidents of the organization within the same territory of two governments, each possessed of the taxing power....

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 coexistence 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 federal government.

Reversed

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; the tax levied upon their incomes from the Authority is the same as that paid by other citizens receiving equal net incomes; and payment of this nondiscriminatory income tax by respondents cannot impair or defeat in whole or in part the governmental operations of the State of New York. A citizen who receives his income from a State owes the same obligation to the United States as other citizens who draw their salaries from private sources or the United States and pay Federal income taxes.

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 and later decisions applying that principle. This leads me to the conclusion that we should review and re-examine 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 Sixteenth Amendment authorizing Congress to levy a tax on incomes ‘from whatever source derived’; and, in that event, the decisions interpreting the Amendment would also be re-examined.

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 nonessential are held taxable, while incomes from activities thought to be essential are held nontaxable....

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.’...

There is not, and there cannot be, any unchanging line of demarcation between essential and nonessential governmental functions. Many governmental functions of today have at some time in the past been nongovernmental. 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 nontaxpaying 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 Sixteenth Amendment empowering Congress to ‘collect taxes on incomes, from whatever source derived’--given its most obvious meaning--is broad enough to accomplish this purpose.

MR. JUSTICE BUTLER, DISSENTING.

... The judgment of the Circuit Court of Appeals should therefore be affirmed on the principle applied in McCulloch v. Maryland, 1819, that under the Constitution States are without power to tax instrumentalities of the United States and in Collector v. Day, 1871, that the United States is without power to tax the salary of a state officer. That principle has been followed in a long line of decisions....

MR. JUSTICE MCREYNOLDS concurs in this opinion.