Evening star. [volume] (Washington, D.C.) 1854-1972, 1930-09-07
Supreme Court to Rule
On Taxes on Bond Profits
BY HARDEN CoLFAx.

Action of thousands Of investors and
the course Of the investment bankers of
the country are hanging on a decision
OF the Supreme Court of the United
States which probably will be handed
down next month. This decision will
determine whether profits from the
purchase and subsequent sale of State
or municipal bonds are subject to Fed
eral income taxes.
The question Of whether a state in
come tax can be imposed upon gains
from the sale of Federal bonds is not
directly involved in the case which the
Supreme Court will consider, but legal
authorities feel 1t is hardly possible for
the court to lay down q principle COW
ering one OF these questions which will
not decide both. AS a matter of fact,
the Commonwealth of Massachusetts
and the State Of New York have filed
briefs in the case. The Massachusetts,
brief says:
IF the doctrine, announced in its
particular application by the courts be-
low, is sustained, the States will be sub
jected to the converse of the doctrine
and will be foreclosed from taxing as
income profits received by their inhab-
itants from the sale of Federal securt-
ties"
AiAAG uany OtIlCt bGbb cases, blc
amount involved in the suit Is small.
It involves a tax Of 1854 with interest
in the sum of $1407. Just how much
the municipal, State and Federal Gov
ernments would lose If the case went
against them cannot be definitely de-
termined. The Government brief places
the amount OF State, county and munic-
ipal securities outstanding on January
/, 1922, at S6,142 100000 An estimate
n1~A 49, v-1a
anouslt now at more than $4,000, 000,-
600. 1t Is interesting to note that the
Government has offered the 1922 figure
as an argument that the tax in Ques-
ton has not curtailed the borrowing
power of the counties, States and
municipalities.
I'm spite OF this vast amount, the
cost to States, counties and cities of
borrowed money has remained prac-
tically constant in rising money mar
ket," the Government brief recites.
II y #
It has long been an established doc
trine that the Federal Government cam
not tax the income from State and
municipal securities. Chief Justice John
Marshall said over 100 years ago: THE
power to tax is the power to destroy.
1t was clearly not the intent OF the
Constitution to destroy the States, and
the courts have repeatedly held that the
means and inStrumentalities Of a State
government are exempt from taxation
by the United States"
The question, therefore, resolves it
self into whether the gain from the
sale of State or municipal bonds Is
exempt from taxation by the Federal
Government for the reason that the
income from such bonds is exempt.
The Federal District Court has held
that 1t Is, and that opinion has been
upheld by the Circuit Court OF APP
peals for the eighth circuit at st. Louis.
~ ~
The Circuit Court decision said: 1T
Is q necessary condition Of our dual
form of Government over the same
territory that neither the National nor
State governments should interfere
with the proper functioning of each
other. This principle has been APP
piled to taxation by either of securi-
ties issued by the other, since no Gov
eminent function is more important or
necessary than the raising OF reve-
nue. for its needs by borrowing.
Anything which would usually in
fiuence the public in buying or re-
framing from buying such securities
unquestionably is a burden upon such
loans and an impeachment to such bor-
rowing power
The Circuit Court observes that
municipal securities are almost always
issued for q long term of years. IF