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Graves Vs New York Ex Rel O Keefe - Citation 96889 - Court Judgment | LegalCrystal
Save as PDF Add a Tag Add a Note Semantics Visualize Graves Vs. New York ex rel. O'Keefe - Court Judgment	LegalCrystal Citationlegalcrystal.com/96889CourtUS Supreme CourtDecided OnMar-27-1939Case Number306 U.S. 466AppellantGravesRespondentNew York ex rel. O'KeefeExcerpt:
graves v. new york ex rel. o'keefe - 306 u.s. 466 (1939)
1. the receipt of salary by a resident of new york as an examining attorney for the federal home owners' loan corporation, is constitutionally subject to nondiscriminatory taxation by a state. p.
306 u. s. 475
2. for the purposes of this case, it is assumed that the creation of the home owners' loan corporation was a constitutional exercise of the powers of the federal government, and that all activities of the government..... Judgment:
2. For the purposes of this case, it is assumed that the creation of the Home Owners' Loan Corporation was a constitutional exercise of the powers of the Federal Government, and that all activities of the Government constitutionally authorized by Congress are governmental, and stand on a parity with respect to immunity from state taxation. P.
3. Whether Congress, as an incident to the exercise of specifically granted powers, has power to grant tax exemptions extending beyond the constitutional immunity of federal agencies which courts may imply is a question not determined in this case. P.
4. No purpose of Congress either to grant or to withhold immunity from state taxation of salaries of employees of the Home Owners' Loan Corporation is expressed or implied in the Home Owners' Loan Act of 1933, 48 Stat. 128, or is to be inferred from the silence of Congress. P.
5. A tax on income is not legally or economically a tax on its source, and there is no basis for the assumption that the economic burden of a nondiscriminatory state income tax on the salary of an employee of the National Government or of a governmental agency is passed on so as to impose a burden on the National Government tantamount to an unconstitutional interference by the one government with the other in the performance of its functions. P.
6. Assuming that the Home Owners' Loan Corporation is clothed with the same constitutional immunity from state taxation as the Government itself, it cannot be said that the present tax on the income of its employees lays any unconstitutional burden upon it. P.
11 Wall. 113, and
, are overruled insofar as they recognize an implied constitutional immunity from nondiscriminating income taxation of the salaries of officers or employees of the national or state governments or their instrumentalities.
On review by certiorari, the Board's action was set aside by the Appellate Division of the Supreme Court of New York,
People ex rel. O'Keefe v. Graves,
253 App.Div. 91, 1 N.Y.S.2d 195, whose order was affirmed by the Court of Appeals. 278 N.Y. 691, 16 N.E.2d 404. Both courts held respondent's salary was free from tax on the authority of
, which sustained the claim that New York could not constitutionally tax the salary of an employee of the Panama Rail Road Company, a wholly owned corporate instrumentality of the United States. We granted certiorari, 305 U.S. 592, the constitutional question presented by the record being of public importance.
The Home Owners' Loan Corporation was created pursuant to § 4(a) of the Home Owners' Loan Act of 1933, 48 Stat. 128, 12 U.S.C. § 1461
which was enacted to provide emergency relief to home owners, particularly to assist them with respect to home mortgage indebtedness. The corporation, which is authorized to lend money to home owners on mortgages and to refinance home mortgage loans within the purview of the Act, is declared by § 4(a) to be an instrumentality of the United States. Its shares of stock are wholly government-owned. § 4(b). Its funds are deposited in the Treasury of the United States, and the compensation of its employees is paid by drafts upon the Treasury.
For the purposes of this case, we may assume that the creation of the Home Owners' Loan Corporation was a constitutional exercise of the powers of the federal government.
. As that government derives its authority wholly from powers delegated to it by the Constitution, its every action within its constitutional power is governmental action, and, since Congress is made the sole judge of what powers within the constitutional grant are to be exercised, all activities of government constitutionally authorized by Congress must stand on a parity with respect to their constitutional immunity from taxation.
199 U. S. 451
-415. And when the national government lawfully acts through a corporation which it owns and controls, those activities are governmental functions entitled to whatever tax immunity attaches to those functions when carried on by the government itself through its departments.
See McCulloch v. Maryland, supra,
activities of the other. That the two types of immunity may not in all respects stand on a parity has been recognized from the beginning,
, and possible differences in application, deriving from differences in the source, nature, and extent of the immunity of the governments and their agencies were pointed out and discussed by this Court in detail during the last term.
306 U. S. 412
-413,
306 U. S. 416
So far as now relevant, those differences have been thought to be traceable to the fact that the federal government is one of delegated powers in the exercise of which Congress is supreme, so that every agency which Congress can constitutionally create is a governmental agency. And since the power to create the agency includes the implied power to do whatever is needful or appropriate, if not expressly prohibited, to protect the agency, there has been attributed to Congress some scope, the limits of which it is not now necessary to define, for granting or withholding immunity of federal agencies from state taxation.
Bank of New York v. Supervisors,
7 Wall. 26,
74 U. S. 30
Oklahoma v. Barnsdall Refineries,
296 U. S. 521
296 U. S. 525
297 U. S. 211
British-American Co. v. Board of Equalization,
304 U. S. 411
-412,
304 U. S. 417
cf. United States v. Bekins,
304 U. S. 52
. Whether its power to grant tax exemptions as an incident to the exercise of powers specifically granted by the Constitution can ever, in any circumstances, extend beyond the constitutional
Congress has declared in § 4 of the Act that the Home Owners' Loan Corporation is an instrumentality of the United States, and that its bonds are exempt, as to principal and interest, from federal and state taxation except surtaxes, estate, inheritance, and gift taxes. The corporation itself, "including its franchise, its capital, reserves and surplus, and its loans and income," is likewise exempted from taxation; its real property is subject to tax to the same extent as other real property. But Congress has given no intimation of any purpose either to grant or withhold immunity from state taxation of the salary of the corporation's employees, and the Congressional intention is not to be gathered from the statute by implication.
Cf. Baltimore National Bank v. State Tax Comm'n, supra.
It is true that the silence of Congress, when it has authority to speak, may sometimes give rise to an implication as to the Congressional purpose. The nature and extent of that implication depend upon the nature of the Congressional power and the effect of its exercise. [
The present tax is a nondiscriminatory tax on income applied to salaries at a specified rate. It is not in form or substance a tax upon the Home Owners' Loan Corporation or its property or income, nor is it paid by the corporation or the government from their funds. It is measured by income which becomes the property of the taxpayer when received as compensation for his services, and the tax laid upon the privilege of receiving it is paid from his private funds, and not from the funds of the government, either directly or indirectly. The theory, which once won a qualified approval, that a tax on income is legally or economically a tax on its source, is no longer tenable,
300 U. S. 313
302 U. S. 108
v. Gerhardt, supra; cf. Metcalf & Eddy v. Mitchell,
, and the only possible basis for implying a constitutional immunity from state income tax of the salary of an employee of the national government or of a governmental agency is that the economic burden of the tax is in some way passed on so as to impose a burden on the national government tantamount to an interference by one government with the other in the performance of its functions.
In the four cases in which this Court has held that the salary of an officer or employee of one government or its instrumentality was immune from taxation by the other, it was assumed, without discussion, that the immunity of a government or its instrumentality extends to the salaries of its officers and employees. [
] This assumption, made with respect to the salary of a governmental officer
16 Pet. 435, and in
11 Wall. 113, was later extended to confer immunity on income derived by a lessee from lands leased to him by a government in the performance of a governmental function,
, and cases cited, although the claim of a like exemption from tax on the income of a contractor engaged in carrying out a government project was rejected both in the case of a contractor with a state,
and of a contractor with the national government,
James v. Dravo Contracting Co., supra.
The ultimate repudiation, in
Helvering v. Mountain Producers Corp., supra,
of the doctrine that a tax on the income of a lessee derived from a lease of government owned or controlled lands is a forbidden interference with the activities of the government concerned led to the reexamination by this Court, in the
case, of the theory underlying the asserted immunity from taxation by one government of salaries of employees of the other. It was there pointed out that the implied immunity of one government and its agencies from taxation by the other should, as a principle of constitutional construction, be narrowly restricted. For the expansion of the immunity of the one government correspondingly curtails the sovereign power of the other to tax, and, where that immunity is invoked by the private citizen, it tends to operate for his benefit at the expense of the taxing government and without corresponding benefit to the government in whose name the immunity is claimed.
302 U. S. 156
-158. It was further pointed out that, as applied to the taxation of salaries of the employees of one government, the purpose of the immunity was not to confer benefits on the employees by relieving them from contributing their share of the financial support of the other government, whose benefits they enjoy, or to give an advantage to that government by enabling it to engage employees at salaries lower than those paid for like services by other employers, public or private, [
] but to
In applying these controlling principles in the
case, the Court held that the salaries of employees of the New York Port Authority, a state instrumentality created by New York and New Jersey, were not immune from federal income tax even though the Authority be regarded as not subject to federal taxation. It was said that the taxpayers enjoyed the benefit and protection of the laws of the United States, and were under a duty, common to all citizens, to contribute financial support to the government; that the tax laid on their salaries and paid by them could be said to affect or burden their employer, the Port Authority, or the states creating it, only so far as the burden of the tax was economically passed on to the employer; that a nondiscriminatory tax laid on the income of all members of the community could not be assumed to obstruct the function which New York and New Jersey had undertaken no perform, or to cast an economic burden upon them, more than does the general taxation of property and income which, to some extent incapable of measurement by economists, may tend to raise the price level of labor and materials. [
] The Court concluded
The conclusion reached in the
case that, in terms of constitutional tax immunity, a federal income tax on the salary of an employee is not a prohibited burden on the employer makes it imperative that we should consider anew the immunity here claimed for the salary of an employee of a federal instrumentality. As already indicated, such differences as there may be between the implied tax immunity of a state and the corresponding immunity of the national government and its instrumentalities may be traced to the fact that the national government is one of delegated powers, in the exercise of which it is supreme. Whatever scope this may give to the national government to claim immunity from state taxation of all instrumentalities which it may constitutionally create, and whatever authority Congress may possess as incidental to the exercise of its delegated powers to grant or withhold immunity from state taxation, Congress has not sought in this case to exercise such power. Hence, these distinctions between the two types of immunity cannot affect the question with which we are now concerned. The burden on government of a nondiscriminatory income tax applied to the salary of the employee of a government or its instrumentality is the same whether a state or national government is concerned. The determination in the
case that the federal income tax imposed on the employees of the Port Authority was not a burden on the Port Authority made it unnecessary to consider whether the Authority itself was immune from federal taxation; the claimed immunity failed because, even if the Port Authority were
Assuming, as we do, that the Home Owners' Loan Corporation is clothed with the same immunity from state taxation as the government itself, we cannot say that the present tax on the income of its employees lays any unconstitutional burden upon it. All the reasons for refusing to imply a constitutional prohibition of federal income taxation of salaries of state employees, stated at length in the
case, are of equal force when immunity is claimed from state income tax on salaries paid by the national government or its agencies. In this respect, we perceive no basis for a difference in result whether the taxed income be salary or some other form of compensation, or whether the taxpayer be an employee or an officer of either a state or the national government, or of its instrumentalities. In no case is there basis for the assumption that any such tangible or certain economic burden is imposed on the government concerned as would justify a court's declaring that the taxpayer is clothed with the implied constitutional tax immunity of the government by which he is employed. That assumption, made in
New York ex rel. Rogers v. Graves, supra,
is contrary to the reasoning and to the conclusions reached in the
Metcalf & Eddy v. Mitchell, supra; Group No. 1 Oil Corp. v. Bass,
James v. Dravo Contracting Co., supra; Helvering v. Mountain Producers Corp., supra; McLoughlin v. Commissioner,
303 U. S. 218
. In their light, the assumption can no longer be made.
are overruled so far as they recognize an implied constitutional immunity from income taxation of the salaries of officers or employees of the national or a state government or their instrumentalities.
The failure of Congress to regulate interstate commerce has generally been taken to signify a Congressional purpose to leave undisturbed the authority of the states to make regulations affecting the commerce in matters of peculiarly local concern, but to withhold from them authority to make regulations affecting those phases of it which, because of the need of a national uniformity, demand that their regulation, if any, be prescribed by a single authority.
South Carolina State Highway Dept. v. Barnwell Brothers,
Milk Control Board v. Eisenberg Farm Products, ante,
. As to the implications from Congressional silence in the field of state taxation of interstate commerce and its instrumentalities,
16 Pet. 435, a Pennsylvania tax, nominally laid upon the office of the captain of a federal revenue cutter, but roughly measured by the salary paid to the officer, was held invalid. The Court seems to have rested its decision in part on the ground that a tax on the emoluments of his office was the equivalent of a tax upon an activity of the national government, and in part on the ground that it was an infringement of the implied superior power of Congress to fix the compensation of government employees without diminution by state taxation.
11 Wall. 113, this Court held that the salary of a state probate judge was constitutionally immune from federal income tax on the grounds that the salary of an officer of a state is exempt from federal taxation if the function he performs as an officer is exempt, citing
Dobbins v. Commissioner of Erie County, supra,
and that there was an implied constitutional restriction upon the power of the national government to tax a state in the exercise of those functions which were essential to the maintenance of state governments as they were organized at the time when the Constitution was adopted. The possibility that a nondiscriminatory tax upon the income of a state officer did not involve any substantial interference with the functioning of the state government was not discussed either in this or the
, the question was whether the salary of the general counsel of the Panama Rail Road Company was exempt from state income tax because the railroad company was an instrumentality of the federal government. The sole question raised by the taxing state was whether the railroad company was a government instrumentality. The Court, having found that the railroad company was such an instrumentality, disposed of the matter of tax exemption of the salary of its employees by declaring:
299 U. S. 408
, the applicable treasury regulation upon which the government relied exempted from federal income tax the compensation of "state officers and employees" for "services rendered in connection with the exercise of an essential governmental function of the State." The Court held that the maintenance of the public water system of New York City was an essential governmental function, and, in determining whether the salary of the engineer in charge of that project was subject to federal income tax, the Court declared, citing
"The answer depends upon whether the water system of the city was created and is conducted in the exercise of the city's governmental functions. If so, its operations are immune from federal taxation, and, as a necessary corollary, 'fixed salaries and compensation paid to its officers and employees in their capacity as such are likewise immune.'
Brush v. Commissioner, supra,
300 U. S. 360
The fact that the expenses of the one government might be lessened if all those who deal with it were exempt from taxation by the other was thought not to be an adequate basis for tax immunity in
That the economic burden of a tax on salaries is passed on to the employer or that employees will accept a lower government salary because of its tax immunity are formulas which have not won acceptance by economists and cannot be judicially assumed. As to the "passing on" of the economic burden of the tax,
Seligman, Income Tax, VII Encyclopedia of Social Sciences, 626-638; Plehn, Public Finance (5th Ed.), p. 320; Buchler, Public Finance, p. 240; Lutz, Public Finance (2d Ed.), p. 336,
and see Indian Motorcycle Co. v. United States,
283 U. S. 581
, footnote 1. As to preference for government employment because the salary is tax exempt,
Dickinson, Compensating Industrial Effort (1937), pp. 7-8; Douglas, The Reality of Non-Commercial Incentives in Industrial Life, c. V of The Trend of Economics (1924); Vol. I, Fetter, Economic Principles (1915), p. 203.
I join in the Court's opinion, but deem it appropriate to add a few remarks. The volume of the Court's business has long since made impossible the early healthy practice whereby the Justices gave expression to individual opinions. [
] But the old tradition still has relevance when an important shift in constitutional doctrine is announced after a reconstruction in the membership of the Court. Such shifts of opinion should not derive from mere private judgment. They must be duly mindful of the necessary demands of continuity in civilized society.
For one hundred and twenty years, this Court has been concerned with claims of immunity from taxes imposed by one authority in our dual system of government because of the taxpayer's relation to the other. The basis for the Court's intervention in this field has not been any explicit provision of the Constitution. The States, after they formed the Union, continued to have the same range of taxing power which they had before, barring only duties affecting exports, imports, and on tonnage. [
] Congress, on the other hand, to lay taxes in order "to pay the Debts and provide for the common Defence and general Welfare of the United States," Art. 1, § 8, can reach every person and every dollar in the land with due regard to Constitutional limitations as to the method of laying taxes. But, as is true of other great activities of the state and national governments, the fact that we are a federalism raises problems regarding these vital powers of taxation. Since two governments have authority within the same territory, neither through its power to tax can be allowed to cripple the operations of the other. Therefore, state and federal governments must avoid exactions which discriminate against each other or obviously interfere with one another's operations. These were the determining considerations that led the great Chief Justice to strike down the Maryland statute as an unambiguous measure of discrimination against the use by the United States of the Bank of the United States as one of its instruments of government.
The arguments upon which
4 Wheat. 316, rested had their roots in actuality. But they have been distorted by sterile refinements unrelated
to affairs. These refinements derived authority from an unfortunate remark in the opinion in
Partly as a flourish of rhetoric, and partly because the intellectual fashion of the times indulged a free use of absolutes, Chief Justice Marshall gave currency to the phrase that "the power to tax involves the power to destroy."
. This dictum was treated as though it were a constitutional mandate. But not without protest. One of the most trenchant minds on the Marshall court, Justice William Johnson, early analyzed the dangerous inroads upon the political freedom of the States and the Union within their respective orbits resulting from a doctrinaire application of the generalities uttered in the course of the opinion in
] The seductive cliche that the power to tax involves the power to destroy was fused with another assumption, likewise not to be found in the Constitution itself -- namely, the doctrine that the immunities are correlative -- because the existence of the national government implies immunities from state taxation, the existence of state governments implies equivalent immunities from federal taxation. When this doctrine was first applied, Mr. Justice Bradley registered a powerful dissent, [
] the force of which gathered, rather than lost, strength with time.
78 U. S. 128
All these doctrines of intergovernmental immunity have, until recently, been moving in the realm of what Lincoln called "pernicious abstractions." The web of unreality spun from Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmes' pen: "The power to tax is not the power to destroy while this Court sits."
(dissent). Failure to exempt public functionaries from the universal duties of citizenship to pay for the costs of government was hypothetically transmuted into hostile action of one government against the other. A succession of decisions thereby withdrew from the taxing power of the States and Nation a very considerable range of wealth without regard to the actual workings of our federalism, [
] and this too when the financial needs of all governments began steadily to mount. These decisions have encountered increasing dissent. [
] In view of the powerful pull of our decisions upon the courts charged with maintaining the constitutional equilibrium of the two other great English federalisms, the Canadian and the Australian courts were at first inclined to follow the earlier doctrines of this Court regarding intergovernmental immunity. [
Both the Supreme Court of Canada and the High Court of Australia, on fuller consideration -- and, for present purposes, the British North America Act, 30 & 31 Vict., c. 3, and the Australia Constitution Act, 63 & 64 Vict., c. 12, raise the same legal issues as does our Constitution [
] -- have completely rejected the doctrine of intergovernmental immunity. [
] In this Court, dissents have gradually become majority opinions, and, even before the present decision, the rationale of the doctrine had been undermined. [
have said about it. [
16 Pet. 435, and its offspring, nor
and its, can stand appeal to the Constitution and its historic purposes. Since both are the starting points of an interdependent doctrine, both should be, as I assume them to be, overruled this day. Whether Congress may, by express legislation, relieve its functionaries from their civic obligations to pay for the benefits of the State governments under which they live is matter for another day.
The state of the docket of the High Court of Australia and that of the Supreme Court of Canada still permits them to continue the classic practice of
27 U. S. 472
Wall. 113,
E.g., Gillespie v. Oklahoma,
271 U. S. 615
; Justice Holmes, dissenting in
277 U. S. 222
; Mr. Justice Stone, dissenting in
; Mr. Justice Roberts, dissenting, in
300 U. S. 374
Mr. Justice Black, concurring in
304 U. S. 424
Bank of Toronto v. Lambe,
12 App.Cas. 575;
1 C.L.R. 91.
Especially is this true of the Australian Constitution. One of its framers, who afterwards became one of the most distinguished of Australian judges, Mr. Justice Higgins, characterized it as having followed our Constitution with "pedantic imitation."
Australasian Temperance and General Mutual Life Assurance Co., Ltd. v. Howe,
31 C.L.R. 290, 330.
Abbott v. City of St. John,
40 Can.Sup.Ct. 597;
Caron v. The King,
(1924) A.C. 999;
Amalgamated Society of Engineers v. Adelaide Steamship Co., Ltd.,
28 C.L.R. 129;
West v. Commissioner of Taxation,
56 C.L.R. 657.
E.g., James v. Dravo Contracting Co.,
MR. JUSTICE McREYNOLDS and I are of opinion that the Home Owners' Loan Corporation, being an instrumentality of the United States heretofore deemed immune from state taxation, "it necessarily results," as held in
, "that fixed salaries and compensation paid to its officers and employees in their capacity as such are likewise immune," and that the judgment of the state court, unquestionably required by that decision, should be affirmed.
From the decision just announced, it is clear that the Court has overruled
. Thus, now it appears that the United States has always had power to tax salaries of state officers and employees, and that
similarly free have been the States to tax salaries of officers and employees of the United States. The compensation for past, as well as for future, service to be taxed and the rates prescribed in the exertion of the newly disclosed power depend on legislative discretion not subject to judicial revision. Futile indeed are the vague intimations that this Court may protect against excessive or destructive taxation. Where the power to tax exists, legislatures may exert it to destroy, to discourage, to protect, or exclusively for the purpose of raising revenue.
et seq.; Magnano Co. v. Hamilton,
et seq.; Cincinnati Soap Co. v. United States,