Source: http://www.losthorizons.com/tax/Misunderstandings/TheFedIsNotPrivate.htm
Timestamp: 2019-04-25 20:12:55+00:00

Document:
I CAME ACROSS A REFERENCE TO THE SOURCE of a persistent "tax honesty movement" myth concerning the Federal Reserve the other day, just by good luck. This myth is the one that prompts the wry declaration, "The Federal Reserve is neither..." meaning the institution is neither federal, nor possessed of any reserves. Well, the latter may well be true (and it might not be-- I don't know how much gold the Fed has squirreled away, and I'm betting you don't, either). But the former certainly is not.
The source of the confusion here (or at least one source) proves to be a 1982 ruling by the Ninth Circuit Court of Appeals in the case of Lewis v. United States, 680 F.2d 1239. The case concerns a man named John Lewis who was struck and injured by a Federal Reserve truck in 1979.
Lewis sued under the Federal Tort Claims Act (the Act), 28 U.S.C. § 1346(b), but his suit was dismissed in district court on the government's motion based on the argument that the Federal Reserve Bank is not a federal agency within the meaning of the Act and that the court therefore lacked subject matter jurisdiction. The circuit court agreed and affirmed.
Given just that, it is understandable why this ruling has been taken as evidence that the Federal Reserve is a private operation. Of course, taking just that, and coming to that conclusion, requires forgetting the "Federal Reserve Act"-- 21 dense pages of legislation... This can be forgiven, of course, because not everyone is familiar with this legislation (but you can find it on your CtC Companion CD).
On the other hand, one can only mistake the Lewis v. United States rulings as establishing that the Federal Reserve is not a government institution if one doesn't actually bother reading the whole ruling-- something that is always a bad practice, and much less forgivable.
Those who DO read the whole ruling quickly discover that the courts' actual positions are not that the Fed is not an agency of the federal government generally, but only for purposes of the Federal Tort Claims Act, a piece of legislation which, like so many others, is of limited application and incorporates statutory definitions identifying government organs that fall within its ambit. Those that do not are still government organs; they simply are not the variety covered by the Federal Tort Claims Act.
Examining the organization and function of the Federal Reserve Banks, and applying the relevant factors, we conclude that the Reserve Banks are not federal instrumentalities for purposes of the FTCA, but are independent, privately owned and locally controlled corporations.
The fact that the Federal Reserve Board regulates the Reserve Banks does not make them federal agencies under the Act. In United States v. Orleans, 425 U.S. 807, 96 S.Ct. 1971, 48 L.Ed.2d 390 (1976), the Supreme Court held that a community action agency was not a federal agency or instrumentality for purposes of the Act, even though the agency was organized under federal regulations and heavily funded by the federal government. Because the agency's day to day operation was not supervised by the federal government, but by local officials, the Court refused to extend federal tort liability for the negligence of the agency's employees. Similarly, the Federal Reserve Banks, though heavily regulated, are locally controlled by their member banks. Unlike typical federal agencies, each bank is empowered to hire and fire employees at will. Bank employees do not participate in the Civil Service Retirement System. They are covered by worker's compensation insurance, purchased by the Bank, rather than the Federal Employees Compensation Act. Employees traveling on Bank business are not subject to federal travel regulations and do not receive government employee discounts on lodging and services.
The Reserve Banks are deemed to be federal instrumentalities for purposes of immunity from state taxation. Federal Reserve Bank of Boston v. Commissioner of Corporations & Taxation, 499 F.2d 60 (1st Cir. 1974), after remand, 520 F.2d 221 (1st Cir. 1975); Federal Reserve Bank of Minneapolis v. Register of Deeds, 288 Mich. 120, 284 N.W. 667 (1939). The test for determining whether an entity is a federal instrumentality for purposes of protection from state or local action or taxation, however, is very broad: whether the entity performs an important governmental function. Federal Land Bank v. Bismarck Lumber Co., 314 U.S. 95, 102, 62 S.Ct. 1, 5, 86 L.Ed. 65 (1941); Rust v. Johnson, 597 F.2d 174, 178 (9th Cir. 1979), cert. denied, 444 U.S. 964, 100 S.Ct. 450, 62 L.Ed.2d 376 (1979). The Reserve Banks, which further the nation's fiscal policy, clearly perform an important governmental function.
Performance of an important governmental function, however, is but a single factor and not determinative in tort claims actions. Federal Reserve Bank of St. Louis v. Metrocentre Improvement District, 657 F.2d 183, 185 n.2 (8th Cir. 1981), Cf. Pearl v. United States, 230 F.2d 243 (10th Cir. 1956). State taxation has traditionally been viewed as a greater obstacle to an entity's ability to perform federal functions than exposure to judicial process; therefore tax immunity is liberally applied. Federal Land Bank v. Priddy, 294 U.S. 229, 235, 55 S.Ct. 705, 708, 79 L.Ed. 1408 (1955). Federal tort liability, however, is based on traditional agency principles and thus depends upon the principal's ability to control the actions of his agent, and not simply upon whether the entity performs an important governmental function. See United States v. Orleans, 425 U.S. 807, 815, 96 S.Ct. 1971, 1976, 48 L.Ed.2d 390 (1976), United States v. Logue, 412 U.S. 521, 527-28, 93 S.Ct. 2215, 2219, 37 L.Ed.2d 121 (1973).
Brinks Inc. v. Board of Governors of the Federal Reserve System, 466 F.Supp. 116 (D.D.C.1979), held that a Federal Reserve Bank is a federal instrumentality for purposes of the Service Contract Act, 41 U.S.C. § 351. Citing Federal Reserve Bank of Boston and Federal Reserve Bank of Minneapolis, the court applied the "important governmental function" test and concluded that the term "Federal Government" in the Service Contract Act must be "liberally construed to effectuate the Act's humanitarian purposes of providing minimum wage and fringe benefit protection to individuals performing contracts with the federal government." Id. 288 Mich. at 120, 284 N.W.2d 667.
BOTTOM LINE: You've got to read the whole case, if you're going to rely on the pronouncements of any court (and even then prudence dictates independent verification of the court's citations and their aptness). By the way, this mistake about the nature of the Federal Reserve due to taking a excerpt out of context closely parallels another that has plagued the "tax honesty" community for many years, by which it is supposed that the IRS is not an agency of the federal government. See a discussion of that misunderstanding here.

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