Earl Warren: Number 4 on the docket, International Association of Machinists, et al, Appellants, versus S. B. Street et al. Mr. Schoene.
Lester P. Schoene: Mr. Chief Justice, may the Court please. In view of the extensive consideration that this case has already received at the last term, I will not burden the Court with any detail recital of its prior procedural history. Case is here on appeal from a final judgment of the Supreme Court of Georgia. The Court's opinion is found in the record at page 249 and the judgment it entered at page 270 of the record. That judgment affirmed the final judgment of the Superior Court of Bibb County, Georgia, which is found at page 101 of the record. The Superior Court found that Section 2, (eleventh) of the Railway Labor Act, that is the statute of 19 -- January, 1951, which authorized union shop agreements to be made or permitted union shop agreements to be made between railroad subject to that Act and labor unions subject to that Act. The Superior Court found that section of the law to be unconstitutional. It therefore enjoined the enforcement of two union shop agreements on the rail -- on the Southern Railroad, each embracing some eleven, twelve different organizations, enjoined their enforcement permanently. Those agreements are identical in terminology except for reference to parties with the union shop agreement that was before this Court in Railway Employes' Department against Hanson, 351 U.S. 225 in which this Court unanimously sustained the validity of Section 2, Eleventh of the Railway Labor Act and upheld the validity of the agreements made pursuant to them. And which, as I say, was identical to the agreements here involved. Now, I would like first to address myself in summary form to the facts that were developed in this very exhaustive and voluminous record. The evidence in the trial court shows, and these facts are stated a little more at length in our original brief at pages 11 to 15.
Felix Frankfurter: Have you got a new brief, Mr. Shcoene?
Lester P. Schoene: We filed a response to the Solicitor General's brief and a further replied to the brief on reargument filed by the appellees. The evidence in the case shows that these unions, who are defendants in the case, in addition, to their normal and predominant function on activities of negotiating rates of pay, rules, working conditions, collective bargaining agreements of various sorts, administering such agreements, policing them, handling grievances under them. In addition to that, they do engage in certain other activities through such institutions as the American Federation of Labor-CIO, the Railway Labor Executives Association, Railway Labor's Political League. They engage in various legislative and political activities, educational activities, and some of the individual unions support from time, legislative representatives at both state and national levels, whose function is to promote or oppose legislation pending before Congress or the state legislatures. Collectively, they participate in the publication of the newspaper labor which advocates various ideas and promotes various processes and publishes news selectively addressed to people interested in labor. The individual organizations also --
Potter Stewart: A daily newspaper?
Lester P. Schoene: I beg your pardon, sir.
Potter Stewart: Is that a daily newspaper?
Lester P. Schoene: No, it's a weekly.
Potter Stewart: Weekly newspaper.
Lester P. Schoene: And in addition, these organizations have their own individual magazine, generally published monthly. In those magazines, they publish news of interest to their membership and advocate various political and educational objectives. The funds that are used for these purposes, subscriptions to newspaper labor sometimes which were bought by the unions, derived from the general dues, initiation fees and -- of the unions. Insofar as assessments are concerned, although the union shop agreement and Section 2, Eleventh of the Railway Labor Act, both refer to membership being conditioned only upon the payment of the uniform, fees, dues, and assessments, regularly required as a condition of membership. There is no evidence in this case that any assessments have ever been levied by any of these unions for any purpose. Further, there is no evidence in this case that anybody -- that anybody's thinking, anybody's expression has been, in any way, controlled or coerced. There's no evidence that anybody has been required to attend any meetings. There's no captive audience involved. There's no evidence that anybody has been required to read anything or to listen to anything or to refrain in any way from expressing himself on any subject with complete freedom in writing or orally, or any place that he may want to express himself. There's no evidence that anyone has been required to conform to any of that similar idea. There's no evidence that anybody has been required to profess as his, the views expressed by the individual unions. Further, there is no claim that any of the expenditures made by the unions for any of these purposes are ultra vires the Constitution and bylaws of the union. Or that they are illegal under any state or federal law. In other words, there is no claim that the Corrupt Practices Act has been violated in any of the political activities. Insofar as contributions to candidates for federal office are concerned, those are made not from union funds as the record shows. They are made from funds voluntarily contributed by individual members. So, insofar as claims under the First Amendment are concerned --
Earl Warren: May I interrupt just a moment please?
Lester P. Schoene: Certainly, Mr. Chief Justice.
Earl Warren: Did I understand, you say there's no question of the use of money for candidacies for public office here? That's done by assessment. Did you say private --
Lester P. Schoene: No, not by assessment but by voluntary contributions, insofar as candidates for federal office is concerned --
Earl Warren: Federal office.
Lester P. Schoene: -- which is what is governed by the Federal Corrupt Practices Act. Union dues are used for – or union funds are used, occasionally at state and local levels where it's permissible under state and federal law to use the union funds for that purpose. But so far as the contributions to which the Federal Corrupt Practices Act is addressed, is concerned, that is handled entirely by a voluntary contribution of individuals.
Potter Stewart: Otherwise, there would be a violation of that Act.
Lester P. Schoene: That's right. Otherwise what they -- and the point I was making Mr. Justice Stewart is that there is no claim here –
Potter Stewart: -- of the violation of the Act.
Lester P. Schoene: -- of a violation of the Act or ultra vires expenditures. So, insofar as any claim of violation of First Amendment rights is concerned, necessarily the case comes down to the question of whether the mere expenditure of union funds. Legally expended for promoting ideas with which a contributor, under union shop agreement, disagrees, whether that violates his freedom of expression under the First Amendment.
Felix Frankfurter: Before you get to expend -- before you get to the expenditure Mr. Schoene, you have to -- you have acquisition of that which you propose to expend.
Lester P. Schoene: That is correct Mr. Justice Frankfurter and that is what you held was constitutional in the Hanson case. And I want now to address myself to the applicability of the Hanson case to the issues that are here before the Court now.
Felix Frankfurter: Well, argumentatively we may have decided this case, but expressly we did not decide this case, did we? I'm not saying argumentatively we haven't, all I'm saying is could you -- if so your -- all you agree, needed to do is to cite Hanson against whatever the other side of the case was.
Lester P. Schoene: I got it at some length last spring, Mr. Justice that the Hanson case did decide this case. The fact that the Court ordered reargument --
Felix Frankfurter: What I mean, by argumentatively, but you spent a (Inaudible).
Lester P. Schoene: Well, obvious -- obviously the fact that the Court set the case for reargument indicates that I was not wholly successful in persuading the Court to that effect last spring. But I do want to discuss the extent to which the Hanson case is applicable here. Now prior to the decision of the Hanson case, I argued in that case that union shop agreements notwithstanding Section 2, Eleventh of the Railway Labor Act are simply private agreements between private institutions, the railroad and the union. And that the Government is not involved in their execution, they have simply that permitted them. The Court didn't agree with me on that. And the Court held in the Hanson case that the union shop agreement has the imprimatur of federal law upon it, particularly because it overrides state law to the contrary, because the Section 2, Eleventh overrides state law to the contrary. Accordingly, we naturally must now proceed on the premise that the making of the union shop agreement and the requirement that dues and initiation fees be paid pursuant to such agreement involves governmental action upon which constitutional limitations must bear. Still, I think --
Felix Frankfurter: You don't have to argue -- you don't -- for me at least, you have to argue more than, I think, the word governmental action, and so well defined a concept or a phrase with complete and comprehensive and exclusive content that everybody would give at the same content, the same meaning and the same scope in the prima facie.
Lester P. Schoene: I do not have any such conception, Mr. Justice Frankfurter. I think it's one of the vaguest terms that has entered this kind of litigation. And that brings me to exactly the next point that I want to make. It's assuming as we must that there is this concept of governmental action involved. We set -- in appraising it, we certainly cannot assume that the compulsion is of the same character as a statutory mandate. The -- there is no law that says, you must belong to a union. There is no law that says, you must belong to a union if you want to work for the railroad. This is still a contract even though subject, as this Court has held, to certain constitutional limitations. Analytically, nevertheless, it is a condition of employment negotiated by a collective bargaining agent for the entire craft or class. Now, we have people who would prefer to work seven days a week at straight time or 10 or 12 hours a day at straight time. If they want to work for a railroad that has the 40-hour a week agreement, five-day a week agreement, they can't do that. One of the conditions of employment is that the basic day of eight hours applies. And according to this, they have to work at overtime after that. And if the carrier doesn't want to work them at overtime, they don't work. Same is true if they're working on their rest days.
Potter Stewart: On their what?
Lester P. Schoene: On their rest days. If they want to work on their rest day, the railroad has to pay him time and the half, and the chances are they won't work, although they might want to work. In this --
Felix Frankfurter: This -- the so called 8-hour a day, everybody who knows anything about this knows that that's a euphemistic term, didn't they? Well as much vagueness involved in it as much as ours -- I mean what's the new, wasn't just the flat 8-hour a day, you can't work any more than eight hours.
Lester P. Schoene: I'm not speaking of the result of Wilson against New, Mr. Justice Frankfurter; I'm speaking of a national agreement that was made among the nonoperating union and the railroads in 1949.
Felix Frankfurter: Yes, but I am talking about the law there had held back.
Lester P. Schoene: Well that's -- that's a different matter. The 8-hour a day I'm talking about is the result.
Felix Frankfurter: It is the agreement of eight hours?
Lester P. Schoene: That's right. Now similarly, if an individual wants to work for a railroad that has a union shop agreement, one of the conditions of his employment is that he joins the union within the time specified by the -- by the agreement. But that is the only compulsion. He has a choice not to work there if he doesn't want to. Just as he has a choice to work seven days a week, some place where they don't have a 5-day a week agreement. Further, I think we should keep in mind in appraising the effect of federal law in this situation that the Georgia Right to Work Law does not apply to railroads. So that the situation that existed in Nebraska where the possibility of applying the -- or making the union shop agreement was dependent upon overriding state law does not exist in Georgia. Now I make no particular point of that but I bring it to your attention for what it may be.
Hugo L. Black: What did the Supreme Court hold about it?
Lester P. Schoene: The Supreme Court held that it would be illegal in Georgia without the federal statute.
Hugo L. Black: We have to accept that, don't we?
Lester P. Schoene: I think you probably do, Mr. Justice Black, although, the statute is pretty plain on its face, and the Georgia's Court did not, as I recall, hold that the Georgia statute applied.
Hugo L. Black: But does that make any difference? Do we or not in your judgment have to accept the statement of the Supreme Court of Georgia with all the states, so long this is all they announced. This doesn't violate the federal --
Lester P. Schoene: Well, Mr. Justice Black I don't want to take the time to pursue it. We have an argument in our brief that holding by the Supreme Court of Georgia under these circumstances is a denial of equal protection. Now, the --
Hugo L. Black: Well I -- I didn't know you had that argument, then we will find out by your --
Lester P. Schoene: I don't say I -- we are on limited time and I don't want to pursue it. It's in the brief and -
Felix Frankfurter: What's the relevance of this question anyhow to our problem?
Lester P. Schoene: I mentioned it only because of the reliance in Hanson --
Felix Frankfurter: I don't mean -- I don't mean your view of what is controlling on us on what Georgia has decided, but assume we all agree that it has decided without qualifications and that your equal protection argument is in tenures for considerations, what's the relevance of that to our problem that if this statute -- if this nullify the right to work?
Lester P. Schoene: Well, I mentioned it Mr. Justice --
Felix Frankfurter: In other words, whether or not Georgia's illegalizing your -- nullifying Georgia's Law on that point matters as whether or not the Federal Government can pass any enactment which sidetracks or displaces that allowance by the State, does it?
Lester P. Schoene: I mentioned it only because in Hanson, the opinion does direct to the fact that the federal law overrides the laws of the various states. And therefore, the union shop agreement has the imprimatur of federal law upon it. Now, I don't think that was necessary to the --
Felix Frankfurter: Well, that thing --
Lester P. Schoene: -- to the holding, but in any event to that degree in my view, the Georgia, statute having excepted railroad, is different from the situation in Nebraska. Now, that's as far as I care to pursue it.
Felix Frankfurter: Did you -- has that any bearing on the First Amendment problem?
Lester P. Schoene: I don't think so.
Felix Frankfurter: I can't collectively see it.
Lester P. Schoene: Now, I want to come to a further aspect in the case. We have assumed that the making of the union shop agreement and the requirement that dues and initiation fees be paid is subject to constitutional limitations. But the Court certainly decided in Hanson, at least that that activity, that the requirement of membership in the organizations, payment of dues and initiation fees, was a valid activity. Now, does it follow that because that valid activity is subject to constitutional limitations, that the expenditure of the funds, after they have been acquired, after they have become the property of the union, that that too is subject to constitutional limitations? It does not seem to me to follow. The unions remain private institutions. The Government didn't create unions. These unions were in existence even long before there was a Railway Labor Act to protect them in certain respects against the employer interference and things of that sort. The Government doesn't authorize them to spend the money. To be sure, in certain respects such as the Corrupt Practices Act, the Government has limited the way they can spend their money. But so far as the basic authority to make expenditures is concerned, that derives from the constitution and bylaws which are controlled by the majority of the membership. The Government isn't the one who says for what they may spend their money except just the Government has seen fit to limit. So I would urge for your consideration that the mere expenditure of money, even though acquired as a result of the union shop agreement does not have the imprimatur of federal law upon it, and that the line should be drawn as between the making of the agreement which you've held to be valid, although subject to constitutional limitations, and the expenditures of funds which does not involved the --
Felix Frankfurter: Well this -- you are not suggesting or are you suggesting that because you can now have a collective agreement whereby you have a union shop, whereby John Doe, if he wants to work on that railroad, must he belong or join that union and pay assessments, union assessments, but since they're now authorized to make such an agreement, at least the Federal Government has removed the bar against making them, that the Congress of the United States has removed the bar against making them, it doesn't forbid it. Therefore any expenditure for any purpose, for any purpose is not challengeable by a member of the union? It's not properly within the purview of what fund could be expended? Can they therefore -- can they therefore make a contribution to some outlaw -- legally outlawed organization? And a member of the union can't come in and say this is -- to put in the most neutral terms, as you said, the ultra vires expenditure?
Lester P. Schoene: I'm suggesting nothing of this sort Mr. Justice Frankfurter, certainly.
Felix Frankfurter: Well, in the abstract way to which you put it, because the Government allowed them to make a contract, therefore, future expenditures are not subject to scrutiny.
Lester P. Schoene: All what I said was they are not subject to constitutional limitation as governmental action.
Felix Frankfurter: I don't know what that means.
Lester P. Schoene: And that's a different thing. Certainly there's a --
Hugo L. Black: Well, as I understand it, the Court -- the Supreme Court of Georgia said this, "We do not believe one in constitution, to be compelled to contribute money, to support ideas, politics and candidates, which he opposes." They then said, in (Inaudible) that the union while expending money for political candidates, politics, they are saying that the people have voted. They then said that, "But far this federal law, that couldn't be done because Georgia forbade it. That seems to me your issues is, which I think you will get to. Further, "It does violate the constitution to -- for the Government to pass a law which prevents a state protecting a man from joining some organization whereby they collect his money and use it for candidacies against it."
Lester P. Schoene: Mr. Justice Black, my Associate Mr. Kramer is going to discuss the issue on the assumption that constitutional limitations do apply to the expenditures. I have --
Felix Frankfurter: Why do we -- why do we have to think out and imagine all the conceivable constitutional -- when you say constitutional limitations, do I have to decide -- I only have to worry about my own views about this thing. Do I have to decide, yes or no that constitutional limitations do apply or they don't? Is that the question before us?
Lester P. Schoene: That is not, certainly not the question before you Mr. Justice.
Felix Frankfurter: Well is there any question before? I mean that I have to search all the possibilities within the Constitution to find out whether something maybe done under such an agreement, which may bring into play something which is -- which, when they conclude is not authorized or whatever it is, is not permitted for the union -- the railroad union, by virtue of the Labor Act. I don't know why you argue this all in this abstract way, I really don't.
Lester P. Schoene: Mr. Justice Frankfurter if you were to agree with me, which you quite obviously do not, that the --
Felix Frankfurter: You haven't any idea of what I think about this case from anything that I've said. You couldn't possibly --
Lester P. Schoene: Let me finish my sentence please. If you were to agree with me that the expenditure of money by unions in no way involves the Government. And therefore, constitutional limitations do not apply to the mere expenditure of money. Never mind now what rights the union member may have, he has plenty of them to challenge the most ultra vires. But as I said at the outset there's no ultra vires question in this case. But if you would agree with me that the constitutional limitations do not apply to the mere expenditure of money, that would be in and of itself a sufficient ground on which to reverse the judgment below.
Felix Frankfurter: But I'd never put -- I wouldn't agree with putting the question in this case in those terms.
Lester P. Schoene: What you had --
Felix Frankfurter: Therefore, I couldn't agree with you, and neither disagree, and since it's very important what question is put in order to decide what answers is there. I don't start up with that problem, to tell you frankly. In other words, you're making the argument --
Lester P. Schoene: That's right.
Felix Frankfurter: -- I'm just telling you my difficulty.
Lester P. Schoene: I will conclude my remarks at this time. Mr. Kramer will continue.
Earl Warren: Mr. Kramer.
Milton Kramer: Mr. Chief Justice, may it please the Court. I will not repeat the arguments we made at the first hearing on this case last spring. They are all contained in the briefs that were filed last year and in our reply brief. Before I begin with the argument I attended to make, I would like to answer further, the comment of Mr. Justice Black.
Hugo L. Black: I didn't say it was a comment. I thought it was a question, to see if I --
Milton Kramer: No, I --
Hugo L. Black: -- I can get the question that we have before us. That's what this is --
Milton Kramer: With respect to whether the Federal Government can pass a law saying that, state law shall no longer protect a citizen in a certain respect, that is being required to join the union. I argued that fully last year. It is discussed fully in our brief filed last year. I would like to say at this time just this. To me, it is incomprehensible that a statute becomes unconstitutional because Congress preempts a field in which it may legislate. Now, this discussed fully in our brief but that basically is it. If Congress may legislate, it can preempt. The preemption comes about, not by act of Congress, but by Article 6 of the Constitution to say that the statute is therefore becomes unconstitutional in a field where Congress may legislate because Congress has preempted. It's in effect to say that Article 6 was unconstitutional. It's the Constitution that preempts, not Congress. Congress merely indicates what it intends to do.
Hugo L. Black: I don't quite understand it, but to get this concrete, as it can be more concrete than the Supreme Court of Georgia made it. Suppose the unions after a man -- he had to join the union to get a job by reason of the law protecting it, by Congress, will decide to contribute, to have their fund to a particular change. What would you say?
Milton Kramer: I would say that that does not make the act of Congress unconstitutional, because the only thing that the government has done up to that point is supersede state law. And I don't see how superseding state law can ever be unconstitutional so long that is in a field where Congress may legislate.
Felix Frankfurter: But if it's unconstitutional on this abstract mode of the argument that seemed to (Inaudible), then it hasn't superseded because Congress has done something that's unconstitutional.
Milton Kramer: Oh! That's right. That's right. Now, I want to take up now the proposition that even if we assume that the expenditure of money by a union, although it does not derive the power to spend money from Congress. But even if we assume that somehow that has the imprimatur of Government, that nevertheless, such expenditures, the ones here involved, violate the First Amendment rights of no one. The contention here is basically almost exclusively that their First Amendment rights, freedom of speech, freedom of press and so on. First, nothing that the union publishes or espouses, or otherwise supports, prevents anybody from doing anything. Everybody, the plaintiffs, the appellees, here included, has just as much right to publish, to print, to speak or to do anything else that the First Amendment guarantees against Government impingements.
Potter Stewart: Well, it does do this much, doesn't it? If a union member is required to give $5.00 to the union, which $5.00 -- or make it easy, let's say $1.00, that is spent to support a certain candidate. That takes -- that prevents him from spending that dollar for the candidate's opponent.
Milton Kramer: Well, I am talking about the expenditure.
Potter Stewart: So am I.
Milton Kramer: Not the collecting of the money from the individual.
Potter Stewart: I'm talking about the expenditure by the union, of that member's dollar for Mr. Smith.
Milton Kramer: No.
Potter Stewart: That prevents that member for spending that dollar against Mr. Smith.
Milton Kramer: No, it does not because if the union did not spend it for Mr. Smith, the individual still could not spend it against him. It isn't his anymore.
Potter Stewart: Well, that's questionably --
Hugo L. Black: Would he have had to pay that dollar --
Potter Stewart: That presents the issue.
Hugo L. Black: Would he have had to pay that dollar to get a job but for federal law?
Milton Kramer: That we don't know. There's nothing in the record to indicate that these activities are of greater by reason of the union shop or less by reason of the union shop or what the union does with the extra money they are getting collected under the --
Hugo L. Black: You know, do you not to get -- maybe I'm wrong about the issue. You do know did you not that the reason -- that the union could make this closed shop agreement whereby this man, these people, could not get a job unless they pay dues, but because the federal government has passed an act?
Milton Kramer: That's the reason they could make the agreement, yes.
Hugo L. Black: That's the reason they could make the agreement and that's the reason, but for that, he would have been compelled by law, would he to pay dues to the union in order to get a job.
Milton Kramer: That's right, to hold the job, I guess.
Hugo L. Black: That seems to be the issue, isn't it?
Milton Kramer: No, I thought, Mr. Justice Stewart's question was with the expected -- the contribution of a dollar in favor of Mr. Smith, a candidate. I say that even if the union did not make that expenditure, the individual employee still couldn't get that dollar back.
Hugo L. Black: Well, maybe he couldn't get the dollar back but would you have to pay it out of his pocket?
Milton Kramer: That's what I said we don't know. There was nothing in the record to indicate what the union does with the additional income it gets by reason of the union-shop.
Potter Stewart: Well, it was simply addressed to the statements you were making to us at the time that there was nothing in this to prevent a member from supporting or failing to support or refusing to support somebody else.
Milton Kramer: I think that nothing that the union said is understood as expressing the views of every single member of the union. Now, this view was stated very clearly by the Supreme Court of Wisconsin in the case that has to be argued immediately after this one, and I wouldn't take up your time by quoting them. We did quote it last year. I think the view is expressed most clearly by the Supreme Court of California in the celebrated DeMille case in which -- which was very similar to this one in which this Court denied certiorari some three or four years ago. But in DeMille case, the Supreme Court of California said with respect to the contention that the expenditure of money to espouse a view with which the individual disagreed was compelling him to espouse that view. They said similarly to the Supreme Court of Wisconsin, "Payment by the plaintiff of the assessment would not stamp his act as a personal endorsement of the declared view of the majority. Majority rule necessarily prevailed in all constitutional government. Else payment of a tax levied for a duly authorized and proper objective could be avoided by the mere assertion of beliefs and sentiments opposed to the accomplishment thereof. In a government based on democratic principles, the benefit as perceived by the majority prevails." Now, I think that is the approach here. This is just like in the case following this one. Nobody is compelled to say anything and the fact that an organization to which he is compelled to belong says something does not mean that he is saying it. I submit that what the -- what the appellees are arguing here in substance is that it is unconstitutional for unions to do what I think most of this Court has indicated. They not only made properly do but have a constitutional right to do. And I'm referring to the CIO and UAW cases, that is United States against CIO in 135 -- 335 U.S., and United States against United Automobile Workers in 352 U.S. The majority of the union has constitutional rights too. They have the right to speak and they have the right to speak collectively. In the first of those cases, four justices of this Court would have held it unconstitutional to prohibit a union from printing matters in their union publications that did not pertain to collective bargaining. In that case it was --
Hugo L. Black: Did those four members base that on a record which showed that the union -- and the raised a question that whether a union could constitutionally talk of using funds that it had gotten from people who compelled to join the union, even though they didn't want to?
Milton Kramer: Oh, there was no union shop issue in that case. No. But I submit with respect to that Mr. Justice Black, that there are other inducements than the union shop to get people -- to persuade people to join the union, for example, it is thoroughly established --
Hugo L. Black: Well you didn't' have any trouble with that so long as the government didn't have this law, did you?
Milton Kramer: Oh, you have the same kind of trouble, yes, with respect to a different aspect of the same law like Section 2, Eleventh. For example, the union is the exclusive bargaining representative. A man cannot make -- he cannot settle the terms of his employment, the union does it. I submit it maybe just as much of an inducement to join the union, to have a direct voice in determining what wage policies and hours policies and other conditions -- other objectives should be sought. That's quite an inducement to join the union too, because you're -- you want to get in on the exclusive collective bargaining representatives. And yet, there appears to be no question --
Hugo L. Black: Do you present here to say so? I am using Mr. Justice Frankfurter's statement on that abstract. I think that is abstract in this case, going this case raises the question to whether when a man has to join the union to get a job, and he has to join because the Federal Government has passed the law. Whether they can take the money that he has to pay in for dues and use it to support candidacies he is against? It's not a question that you put. Of course, there are many inducements to join unions, which most of us realize and appreciate and most of us perhaps believe they are good, but that's not the question here.
Milton Kramer: But in those two --
Hugo L. Black: I don't think.
Milton Kramer: No, that -- that is not the question, Your Honor. Just indicating there are other inducements which are perhaps too many people, more persuasive than the union thought. Those two cases did indicate that the activities under attack, that is espousing political objectives in the union publication. In the other case, the UAW case, it was buying TV time to espouse the virtues of a political candidate. That the unions were engaging in activities they had a constitutional right to engage in. The appellees must be saying here that it is unconstitutional, as to them, for the unions to engage in activities they have a constitutional right to engage in. I suggest also that if these expenditures violate the First Amendment rights of the appellees, then many heretofore unquestioned activities of the government would also violate the First Amendment rights of various groups of taxpayers. Now, I made this point in our brief last year. I made it in oral argument. Neither the Solicitor General nor the appellees have seen fit to try to answer it. I would like to make it again. The coercive power of taxation certainly is at least as great as the union shop. In the case of the union shop, the sanction is losing a particular job with the Southern Railway. In the case of taxation, you have to pay taxes wherever you earn money, and if you don't earn it, if you get it some place else, so long as it is income, or if you buy certain items, you pay. In some jurisdictions if you buy food, you have to pay taxes. Now what --
Earl Warren: We'll recess now Mr. Kramer.


Warren E. Burger: We'll hear arguments next in Memphis Bank & Trust Company against Riley C. Garner, et al.. Mr. Worthy, I think you may proceed whenever you're ready.
K. Martin Worthy: Mr. Chief Justice, and may it please the Court: The question before the Court is whether the Tennessee bank tax violates federal law to the extent that it includes interest on the obligations of the federal government and its instrumentalities in the tax base, while excluding interest from similar obligations issued by the state of Tennessee itself. The Tennessee Supreme Court, reversing the chancery court, said no. We think the answer is clearly yes. There is no dispute as to the essential facts. In 1977, the Tennesse legislature made inapplicable to banks the existing intangible personal property tax on financial institutions which made no distinction between state and federal obligations. And it created instead, in the words of the statute, a subclassification of intangible personal property designated as shares of banks and banking institutions to be taxed at 3 percent on net income of the previous year. Earnings are required for this purpose to be computed by including interest on obligations of the federal government and its instrumentalities, and also including interest on obligations of other states, but by excluding interest on obligations of the state of Tennessee itself. The tax in no event is to be less than an ad valorem tax of 60 percent on the value of the property of the bank. The tax is an obligation of the bank itself, and is not collectible by either the state or the bank itself from its stockholders.
Harry A. Blackmun: Mr. Worthy, do you pay another separate franchise tax in Tennessee?
K. Martin Worthy: Yes, sir. There is a... all banks and all other corporations are subject specifically to a Tennessee franchise tax which is imposed specifically on the... to quote from that statute... on the privilege of engaging in business in corporate form in the state. And every corporation is also required to pay an excise tax which is imposed specifically, to quote that statute, as compensation for the benefits it receives from doing business in Tennessee. There is no such language in the statute imposing the bank tax. Appellant, the Memphis Bank & Trust Company, a state bank, paid the tax as so imposed under protest for 1977 and '78, and brought suit in the chancery court for refund of the tax, contending that collection of the tax violated federal law to the extent that the tax applied to interest earned on obligations of the federal government and federal farm credit agencies, and thereby violated the prohibitions of state taxation contained in Section 742 of Title 31 of the United States Code, and Sections 2055, 2079 and 2134 of Title XII of the Code, relating to farm credit agencies. It was thereafter stipulated that if such interests were excluded, appellant would have no liability for tax for the years in issue. Codifying a long line of decisions of this Court, going back to M'Culloch versus Maryland, more than 160 years ago, Section 742 of Title 31 of the Code specifically prohibits every form of state taxation directly or indirectly on interest from federal obligations, except non-discriminatory franchise or other non-property taxes in lieu thereof. The Tennessee tax clearly violates the general prohibition of the statute. The state claims, however, that the tax fits within the exception for non-discriminatory franchise or other non-property taxes imposed in lieu thereof. Appellant submits that it does not. First of all, it's not a franchise tax or other non-property tax imposed in lieu thereof.
Sandra Day O'Connor: Mr. Worthy, is that question to be determined as a matter of federal law, do you think, whether it's a franchise tax within the meaning of Section 742?
K. Martin Worthy: Yes, Justice O'Connor, I think it is to be determined as a matter of federal law. I have, obviously,... I think this Court has held that it should look at the effect of the law to determine whether it's a franchise or a property tax. Obviously, the intent of the legislature and the authority under which the legislature acted are prime considerations in determining the nature of the tax. But it is a question to be resolved by this Court. Even if the tax is a franchise tax, we believe that it's clearly discriminatory. It is quite clear that in enacting the bank tax, the Tennessee legislature intended to impose a property tax and not a franchise or similar non-property tax. The preamble to the act imposing the tax states specifically that the legislature is acting under authority to tax intangible personal property of banks, and to divide intangible personal property into subclassifications. There is no mention of any authority or any statement of intent to impose a franchise or privilege tax.
Byron R. White: So what your argument now is that even if Tennessee obligations were included in the basis of the tax, the tax is not one permitted by the federal statute.
K. Martin Worthy: That's correct, Justice White. As I've indicated, the act creates a subclassification of intangible personal property designated as shares of banks to be taxed on the basis of 3 percent of net earnings, with the net tax in no event to be less than an ad valorem tax of 60 percent of the value of the property of the bank, with a credit for tax paid on its real and personal property. The tax is codified in the same chapter of the Tennessee Code as other property taxes, unlike those on franchises and excises. Payment and collection are at the local level, in contrast with the provisions for payment and collection at the state level of Tennessee franchise and privilege taxes. Futhermore, the tax is allocated to the municipalities and counties on the basis of their respective property tax rates. As I previously indicated, the bank is subject to both the regular general Tennessee franchise tax imposed by a different chapter of the Code and to the Tennessee excise tax imposed by a different chapter of the Code. The state nevertheless says that because the bank tax is measured by income, it should be treated as a franchise tax. This certainly does not follow. The nature of a tax is not determined by its method of calculation. This Court has many times held that a tax imposed as a franchise tax will be treated as a franchise tax even though it is measured by the value of the property. By the same token, a tax imposed as a property tax should be treated as a property tax even though the measure of the value of the property is income. It's long been settled in cases going back to 1829 by this Court that federal obligations may not be included in the measure of a state property tax, and this principle is now codified in Section 742 in prohibiting a state property tax in any form which directly or indirectly taxes federal obligations or the interest thereon. For this reason alone, the Tennessee statute should be declared invalid insofar as it requires interest from federal obligations to be included in the tax base. But even if the Tennessee tax were regarded as a franchise tax, it clearly violates federal law because it discriminates against federal obligations by requiring that interest therefrom be taxed while specifically exempting in interest from obligations of the state of Tennessee itself. There have been numerous cases in which this Court has stated that the proper test of whether there is discrimination is simply whether the tax is higher as a result of an investment being made in federal obligations than it would be if a similar investment were made in some other assets. This principle is specifically demonstrated in the Schuylkill case, the first Schuylkill case in 1935, in which Pennsylvania imposed a tax on trust companies on the value of shares represented by investments in government obligations, but exempted from tax such value represented by investments in Tennessee... excuse me, in Pennsylvania corporations and such other assets as Pennsylvania chose to exempt. This Court said it is impossible to avoid the conclusion that the law discriminates in favor of companies owning stocks already taxed or relieved from taxation by the state, and against those companies amongst whose assets there are United States bonds taxed by reason of ownership of such federal securities. Now, appellees in their brief vigorously criticize Schuylkill contending that it stands alone as authority in support of the bank's position in this case. Not so. The principle is well established in other cases. In National Life versus United States in 1928, this Court applied precisely the same principle to a federal attempt to impose a tax on state obligations, invalidating the tax, because it required petitioner to pay more upon its taxable income than could have been imposed had its income from state obligations been derived instead from other securities. And the test has been restated many times by the Court as a basis for finding lack of discrimination. For example, in the Home Insurance case in 1890 in upholding a New York tax, this Court emphasized that the tax sustained, and I quote, "would not be affected if the nature of the property in which the whole capital stock is invested were changed and put into real property or bonds of New York or of other states. " That is, of course, the reverse of the situation here in that the tax here would be reduced if the investment were shifted from federal to state bonds. And although dicta, the Court in the Bank of Commerce case cited the statute in Weston versus City of Charleston in which federal obligations and most other personal assets, but not state obligations, were taxed as a prime example of discrimination. The Supreme Court of Pennsylvania more recently, in the Curtis Publishing case in 1949 in which this Court denied certiorari, invalidated a tax strikingly similar to that of the Tennessee tax involved here. Pennsylvania, like Tennessee, had adopted the federal test of net income including interest on federal obligations but excluding interest on Pennsylvania obligations. It was held by the Supreme Court of Pennsylvania that the inclusion of federal interest while excluding state interest constituted unlawful discrimination against federal obligations, in violation of the Federal Constitution. And just a few months ago, the Supreme Court of Alaska, in the National Bank of Alaska case, held that it would be an unlawful discrimination for state privilege tax to include in its measure income from federal obligations while excluding income from Alaska state obligations. In a slightly different context but involving the same principle this Court, in fact, in 1960 in the Phillips Chemical case, invalidated a state tax imposed on a lessee of federal lands where an equivalent tax burden was applied to lessees of all lands in the state except state lands. The Court said, the state and the school district concede that Phillips would not be taxed at all if its lessor were the state or one of its political subdivisions instead of the federal government. It does not seem too much to require that the state treat those who deal with the government as well as it treats those with whom it deals itself. This language was repeated by the Court in invalidating a Washington state tax in the Moses Lake Homes case in 1961, and certainly applies here. As very simply put in Curtis, the state has no right to tax federal securities while leaving its own untaxed.
Sandra Day O'Connor: Mr. Worthy, do you think that Section 548 of Title 12 U.S. Code has any impact here?
K. Martin Worthy: Does it have any... I'm sorry, Justice O'Connor?
Sandra Day O'Connor: Any effect here on the result of the case?
K. Martin Worthy: No, I do not think so. Section 548 as now in effect and has been for several years and as in effect during the years in issue here, simply provides that the states may tax national banks to the same extent as they tax state banks, and that section obviously does not give the states any right to tax either state or national banks to any greater extent than they can tax any other corporation. Section 548 as it existed prior to its amendment provided, among other things, that a state could not impose a tax on a national bank measured by income to any greater extent than it imposed on manufacturing and mercantile corporations. Obviously, under the long line of cases of this Court and as codified now in Section 742 of Title 31, states cannot impose a tax on mercantile or manufacturing corporations which discriminate against federal obligations or the interest thereon. I don't think Section 548 really has any relevance whatever to the issue before the Court today.
Warren E. Burger: Did you cite a Pennsylvania Supreme Court case?
K. Martin Worthy: Yes, sir, I did. It's reported--
Warren E. Burger: That's not listed in your... at least I don't find it readily.
K. Martin Worthy: --Yes, sir. It's 69 Atlantic 2d 410, and I believe it is referred to... it's the Curtis Publishing case, and it is--
Warren E. Burger: I've got it.
K. Martin Worthy: --Yes, sir. I probably didn't refer to the plaintiff but to the defendant. Now, the state suggests in its brief that there's no discrimination if inclusion of interest on federal obligations is casual or incidental, and that the federal obligations must be singled out for tax for the rule of discrimination to apply. But I call to your attention that that was not the case in the Phillips, just cited, where this Court was careful to point out that the tax burden on private lands was exactly the same as on federal lands. Yet, exemption of state lands was sufficient for the matter to be treated as one of discrimination, invalidating the state tax. And in Miller versus Milwaukee, a case relied on very heavily by the State of Tennessee in its briefs, the record discloses that the tax there involved did not apply solely to income derived from federal obligations, but also applied to income from a variety of other sources such as wages, salaries, business profits, dividends from activities carried on in other states. And this Court held that the tax was invalid because of its discrimination in exempting income from other investments while including the income from federal obligations. The suggestion of appellees that the appellant has the burden of establishing that state obligations are in direct competition with the federal bonds, or the burden of establishing that the Tennessee tax inhibits the purchase of federal bonds simply has no support whatever. In valuing a debt obligation, a free market takes into account a great many factors. The risk, the term, the interest rate, the rate of return after all taxes, and obviously, after everything has been taken into account, the burden of the bank tax reduces the value of federal obligations below what they would be if no such tax was imposed. And the absence of such a tax on Tennessee obligations increases the value of those obligations above what they would be if such a tax was imposed. As the Curtis case said, when Pennsylvania exempts from taxation its own securities but taxes directly or indirectly the securities of the United States, the latter securities are handicapped in their competition with the securities of Pennsylvania among buyers in the marketplace. As far back as M'Culloch versus Maryland and Weston versus City of Charleston in the 1800s, this Court said that it would invalidate a discriminatory tax however inconsiderable the burden on the government. And in both Smith versus Davis in 1944 and the New Jersey Realty Title Insurance Company case in 1946, this Court reiterated the principle by ruling that the exemption statute is intended, and I quote, "to prevent taxes which diminish in the slightest degree the market value or investment attractiveness of obligations issued by the United States. " It can hardly be said that the burden here is even slight or inconsiderable, in light of the Solicitor General's calculation in the Amicus brief, which the Solicitor General has filed in behalf of the federal government in this case, that imposition of a tax by every state similar to that of the bank tax imposed by Tennessee would impose an additional burden on the borrowing power of the United States of over a quarter of a billion dollars a year. For all of these reasons, we submit that the Court should reverse the Tennessee Supreme Court and hold that the Tennessee bank tax violates federal law to the extent that it requires that there be included in the tax base obligations of the federal government and its instrumentalities and all the interest thereon, while excluding the interest from that of the state of Tennessee itself.
Warren E. Burger: Mr. Creecy?
Jimmy C. Creecy: Mr. Chief Justice, and Justices, may it please the Court: Because of the impact of this case upon state and local government, a motion was filed to divide the argument in this case and it was granted. In examining the Tennessee bank tax statute here, Section 742 sets up two standards. One, the nature of the tax imposed; and two, whether or not there is discrimination against federal securities within the meaning of Section 742. For the purposes of oral argument, I will address the nature of the tax involved, and Mr. Minor Tait, representing Shelby County in Memphis, Tennessee, will address the discrimination issue. Section 742 of Title 31 is a codification of many opinions of this Court dealing with the parameters within which a state may tax federal securities and the interest thereon, in accordance with the Supremacy Clause and the Borrowing Clause of the Federal Constitution. As early as 1819 in the similar case of M'Culloch v. Maryland the principle was established that the states cannot directly tax federal obligations or their interest. In 1829, the Court further noted in the case of Weston v. City Council of Charleston that a direct tax on U.S. obligations was prohibited and void. Section 742, which originated and was first codified in the 1860s, sets forth this basic exemption that a state cannot tax stocks, bonds, Treasury notes or other obligations of the United States government. It's expressly prohibited by the Supremacy Clause of the Federal Constitution and the Borrowing Clause. However, this Court has noticed and recognized that a tax upon the corporate franchise or corporate privilege is permissible within the parameters of the Constitution, even though these federal bonds and interest may be included within the tax base. This principle was first enunciated by this Court in 1867 in the case of Society for Savings v. Coite and was subsequently reaffirmed in a number of cases including Flint v. Stone Tracy Company in 1911, Educational Films Corporation of America v. Ward in 1931, and as recently as 1956 in Werner Machine Company v. Director of Taxation. Now, the first question the Court will face here in applying our bank tax to Section 742 is the type of tax that we have. If the Court should determine that this is a direct property tax, then the question of discrimination becomes moot and would be void. But it's our position that this is a franchise tax within the meaning of the second sentence of Section 742, which permits a non-discriminatory franchise tax.
Harry A. Blackmun: Then you have two franchise taxes on banks in Tennessee.
Jimmy C. Creecy: That's correct, Mr. Justice. This bank tax is imposed only against banks. We have a general corporate excise tax and a general corporate franchise tax. Now, the statute which imposes the bank tax specifically provides that this tax is in addition to any other excise tax or any other taxes that may be imposed against the bank.
Harry A. Blackmun: Of course, I suppose the labels don't mean anything.
Jimmy C. Creecy: Well, I think it's the effect of the tax primarily that's important. Whether we call this a property tax or a franchise tax, a gross receipt tax or whatever is, to some extent, immaterial. But I think the actual effect and operation of the tax is important.
Thurgood Marshall: Is there any way for us to rule with you without declaring that this is a "franchise" tax? Is there any other way we can rule with you?
Jimmy C. Creecy: Well, Mr. Justice, I think the term 742 is a generic term. It doesn't include just, for instance, a tax on corporate capital. As this Court has noted in several opinions, a franchise tax may include a tax on net income. I think the Court can quite easily rule that this is a franchise tax within the meaning of Section 742. Now, there is some language there that says "or a non-property tax in lieu thereof. " on corporations. Now, the Court, I suppose, could take that approach and say that it is a non-corporate... I mean, a non-property tax in lieu thereof imposed on corporations. But it's our position that this is a franchise tax that we're imposing. Of course, the nature of the tax, rather than the label attached to it, must be determined by its operation and effect. And, of course, this Court is not bound by the characterization of the tax which is placed on it by the state court. But this Court has noted in a number of cases that such interpretation is to be given weight by this Court in determining the nature of the tax. The Tennessee Supreme Court in this case below affirmatively held that this was an excise tax, and it has done so in other independent decisions before the court. The fact that the tax may be included within our Code section that deals with direct property taxes, or that it may be denominated a tax in lieu of property tax does not make it a property tax, as is suggested by the appellants in the case. This Court has noted in the case of Tradesmen's National Bank of Oklahoma v. Oklahoma Tax Commissioner in 1940 that in defining a franchise tax, that a franchise tax is a tax upon a corporation for the exercise of its corporate privilege and franchise within the state, and further, that this tax may be measured either by net income or by net assets. And that the two terms are used interchangeably. So when we attach the label 742. As I stated, the tax is not a property tax but in Tennessee it's a bank tax upon banks for the exercise of the banking privilege in the state of Tennessee. And for several reasons. Article II, Section 28 of our state constitution which was amended in 1973 permits our legislature to impose a tax upon banks and other financial institutions in lieu of the intangible personal property tax. Now, the Tennessee General Assembly has done this in 1977 by this bank tax within the meaning of the statute; it specifically identifies the tax as an excise tax, it makes the tax imposed in addition to any other excise taxes or any other type of tax that the bank may be required to pay the state of Tennessee.
Warren E. Burger: Does the state of Tennessee levy any kind of a tax on the Tennessee Valley Authority?
Jimmy C. Creecy: No, Your Honor, we do not. Under the provisions of our law they make, in lieu of tax, payments to the state of Tennessee based upon values as a fairly complicated formula. They do not pay property tax per se to the state.
Warren E. Burger: Then I'll put it another way. Could the state of Tennessee levy a tax absent that arrangement, on the Tennessee Valley Authority.
Jimmy C. Creecy: Because the Tennessee Valley Authority is an instrumentality of the federal government, it's very doubtful that we could, Mr. Justice.
Sandra Day O'Connor: Counsel, a minor point, if I may, while you're interrupted. The parties stipulated that no tax is due if the federal obligations can't be included in net earnings. Now, does that stipulation mean that no minimum tax would be owing, regardless of what we held under the Tennessee tax provisions?
Jimmy C. Creecy: Under the facts and the situation of this case, Madame Justice, the minimum tax does not come into play because under the minimum tax computation it is based upon the book value... 60 percent of the book value of the bank less the appraised value of real or intangible personal property. In this case, apparently the real or intangible personal property more than wiped out any minimum tax that would have been owed. So that's not a question.
Sandra Day O'Connor: But in effect, you've stipulated that there would be none owing on the minimum tax.
Jimmy C. Creecy: That's correct.
Sandra Day O'Connor: Thank you.
Jimmy C. Creecy: The tax is imposed at the rate of 3 percent of net earnings. The amount of property held by the bank is totally irrelevant. The value of this property is irrelevant. What better way to measure the exercise of a corporate franchise than the benefits that inures to the corporation from this franchise; that is, the net earnings. Although below, as the appellants have contended, there was a stipulation in the trial court with regard to the amount of the tax and the source of the interest that the tax was characterized as an intangible personal property tax, unfortunately, but the Supreme Court of Tennessee quite correctly held that this was an excise tax. And that point was raised below and argued before the Tennessee Supreme Court. I believe that's all I have, Mr. Chief Justice, unless there's some questions. Thank you.
Warren E. Burger: Very well, Mr. Creecy. Mr. Tait?
J. Minor Tait, Jr.: Mr. Chief Justice, and may it please the Court: As Mr. Creecy stated, we have more or less divided our arguments, since the Court did grant us permission to make divided argument. I'm primarily going to address the question of discrimination. I think that this case turns on two simple points. Number one, what type of tax is involved; and number two, is the tax discriminatory. Now, it's clear that no state can tax an obligation of the United States unless Congress has given its permission. I don't think this point is even in issue. At the time that we tried this case at the trial level, Congress had given the states permission to tax federal obligations in two areas. Number one was 12-548 which was the right to tax national banks and national banks' shares. 31-742 gave the states the right to tax any obligation as long as it was a non-discriminatory franchise tax. Now, at the trial level we raised both 548 and 742, but the Tennessee Supreme Court ruled that this was a 742 tax, which was a non-discriminatory franchise tax. So I only briefly addressed that in my brief. Now, to be a franchise tax, as Mr. Creecy has pointed out, it determines on whether or not the tax is on the business of a corporation... and I think it's important to realize that when you talk about non-discriminatory, you've got to determine are we talking about a franchise tax, are we talking about a property tax, are we talking about an income tax. Now, I submit that the appellants in their brief have lumped together all type of taxes that this court has heretofore ruled on. They have lumped together property taxes, they have lumped together income taxes, they have lumped together franchise taxes. Now, what we're talking about in this case is a non-discriminatory franchise tax, and that's all. We're not talking about a property tax or an income tax. Now, it's been held by this Court on many occasions that a state has wide discretion in enacting franchise taxes. That if a corporation comes into a state and gets the privileges to operate as a corporation, they must pay a tax to do that. And it's our position that a state has much wider discretion and authority in the area of a franchise tax than it does in the area of property taxes or income taxes. Now, when we look at whether or not this is a discriminatory act... and I'm not going to address whether or not it's a franchise tax or property tax because Mr. Creecy has done that. But when we look in the area of whether or not this is a discriminatory tax, then we have to look to the decisions of this honorable Court, and we have to look to the intention of Congress. Now, it is our position that discriminatory does not mean what the appellants would have this Court believe it means. If you adopt the appellant's definition of discrimination, as I understand their argument they are saying that if a state exempts anything from a tax base, then they have to exempt federal obligations or else it's discriminatory. Now, I take that to mean that if a state exempted charities or hospitals or religious institutions, then by the same token, they would have to exempt government securities or government obligations.
William H. Rehnquist: I thought the cases Mr. Worthy was quoting from indicated only that you can't treat state bonds better than you can treat federal bonds.
J. Minor Tait, Jr.: That was what he was arguing to the Court, but it's our position that these cases do not hold that; that there's a common thread throughout the holdings of this Court that when you talk about discrimination in the context of a franchise tax, what you're talking about is a direct effort by the state to single out the federal obligations for taxation.
William H. Rehnquist: Why should intent make any difference in this area? What if the Tennessee legislature simply passes a tax and decides that A, B, and C should be exempt and C, D and E should be used as the base of the tax, and it turns out that they come out with a product which, in effect, discriminates against the federal government in Mr. Worthy's context because it taxes the revenue from federal securities but doesn't tax the revenue from state securities? Why would it make any difference whether the state of Tennessee intended to single out the federal government?
J. Minor Tait, Jr.: Well, the main reason, Justice Rehnquist, is because that is what the decisions, in my judgment, of this Court have held for over 100 years. Now, that is the definition that the appellants are urging on the Court; that a tax is discriminatory if the taxpayer has to pay a higher tax because of the fact that he owns federal obligations than if he did not own federal obligations. That's the entire thrust of their argument. They're saying that that's the test that you look at. That if he has to pay a higher tax because of federal obligations, then that's a discriminatory tax.
Byron R. White: Well, isn't this explicitly discriminatory, though? It's an explicit discriminatory classification. It says that it includes income from federal bonds.
J. Minor Tait, Jr.: Justice White, we say that it is not. We say that based upon the prior holdings of this Court,--
Byron R. White: Or, it explicitly excludes the... which does it? Does it explicitly exclude the income from state bonds?
J. Minor Tait, Jr.: --The bank tax simply uses taxable federal income as the base for the tax. And the bank tax of Tennessee does not define or allow any adjustments; it simply says you must go to the excise tax of Tennessee and use that formula to determine the final basis of the federal taxable income and the tax base; that when you go to the excise statute of Tennessee, the excise statute says you take the federal base of taxable income and you make certain adjustments and deductions. Now, the problem is that the federal government allows taxation on federal obligations, the income from federal obligations, so when you get the federal taxable income base, you've already got built into that all federal obligations. Now, it does not allow the taxation of Tennessee obligations. So here again, when you--
Byron R. White: So there is an explicit classification there.
J. Minor Tait, Jr.: --Well, that's not done by the state of Tennessee, though, it's done by the federal government in their federal tax structure.
Byron R. White: I know, but the state of Tennessee picks it up.
J. Minor Tait, Jr.: They do.
Byron R. White: Picks it up, and it says we'll take this base that includes the income from federal bonds but which excludes the state bond income.
J. Minor Tait, Jr.: The state bonds are excluded under the federal taxable income.
Harry A. Blackmun: One could almost say it was accidental. The alleged discrimination.
J. Minor Tait, Jr.: It's not done by the state of Tennessee legislature. We're simply adopting what the federal government uses on its taxable income basis. But it's my point--
Harry A. Blackmun: My remark was merely directed to these comments about intent. Maybe there was no intent, but it came out with Tennessee bonds being excluded.
J. Minor Tait, Jr.: --I think it's clear from this record that the Tennessee legislature itself did nothing to tax federal obligations. And I think that's a key and important point because throughout the cases on this subject there's a thread that says that it has to be a direct intentional act to single out the federal obligations for taxation.
John Paul Stevens: Mr. Tait, am I mistaken or do I recall correctly that your tax law does impose a tax on the income from other state bonds; not Tennessee but, say, West Virginia?
J. Minor Tait, Jr.: On the basis from federal taxable income, the state act adds in the obligations from other states.
John Paul Stevens: Now, that's not in the... even though the federal government doesn't tax those.
J. Minor Tait, Jr.: That's correct, Your Honor.
John Paul Stevens: So what they did, in effect, is they added into the federal base all state income except from Tennessee bonds.
J. Minor Tait, Jr.: Except Tennessee. And under Tennessee law, Tennessee obligations are excluded. So Tennessee could not add in Tennessee obligations. An interesting comment of this Court was in Miller versus Milwaukee... and this is a case, or one of the cases that we're relying upon on our position that it has to be more than just a discrimination or a difference in the tax base. And I quote from Miller, "A tax may very well be upheld as against any casual effect it may have upon the bonds of the United States when passed with a different intent and not aimed at them. " "But it becomes a more serious attack on their immunity when they are its obvious aim. " Now, it's our position that that shows that what they're talking about in the context of a franchise tax... and I keep coming back to that because the appellants are lumping in all type of taxes. They're even talking about... and Mr. Worthy mentioned... cases involved doing business with the United States government, and they've cited in their brief property taxes and income taxes. But a franchise tax, based upon prior holdings of this court, is a peculiar tax. And this Court has ruled time and time again that the states have a wide discretion in assessing a franchise tax. They can include some property, exclude other property. They can set one basis for one property, or set a different basis for another property. Now, this same theme--
John Paul Stevens: May I ask this question? Supposing it were not a franchise tax, for a moment, but were an income tax, at say a 10 percent rate. So it would be another non-property tax. Would you agree it would be discriminatory for that kind of tax?
J. Minor Tait, Jr.: --I think if it's not a 742 non-discriminatory franchise tax, or it's not a 548 tax under the national bank shares, then the state of Tennessee could not tax federal obligations. And I still--
John Paul Stevens: But could they include it in the... oh, all right. But you would agree that would be discriminatory in that case.
J. Minor Tait, Jr.: --Not... well, it depends on what you're saying--
John Paul Stevens: Well, you're saying you really don't reach the discriminatory issue in that situation.
J. Minor Tait, Jr.: --There's a difference in taxing the property itself, and there's a difference in using the property as the measure of the tax. Now, if they're only using the income as the measure of the tax, then I see nothing wrong with that. But the cases make a distinction in that regard.
John Paul Stevens: But would you say they could even go up... increase the rate to 10 or 15 percent and base it on income and say we'll call this thing a franchise tax, and it would be all right?
J. Minor Tait, Jr.: I don't think that it's what they called it. I think that the act speaks for itself. And if you are taxing property as compared to the privilege or the franchise to do business, then it's not a franchise tax, it's a property tax. And I don't think they can do that in the context of a property tax. But where you are taxing the right of a corporation to do business... and that's all the bank tax is. In Tennessee, banks enjoy special privileges and rights and immunities. Now, as a consideration of that right to do business, then they pay a franchise tax. And that's all that Tennessee is doing in this case. If they didn't operate as a bank, then they would not--
Thurgood Marshall: How many franchise taxes could you put on a bank?
J. Minor Tait, Jr.: --As I understand the--
Thurgood Marshall: It's unlimited, isn't it? In your theory.
J. Minor Tait, Jr.: --I don't think there's any limit to the amount of franchise or privilege taxes the state can assess as long as they're not arbitrary and unreasonable. Now, I'd like to point out that the banks do pay the same excise franchise tax as other corporations. Now, they are excluded from a business tax in Tennessee, which is another privilege tax that banks do not pay. But this bank tax only applies to banks, to no one else.
Sandra Day O'Connor: Mr. Tait, would you agree that the Tennessee bonds and securities are in substantial competition with the federal securities here?
J. Minor Tait, Jr.: Justice O'Connor, we raised that in our brief, and that is a question of fact. And I want to point out that the appellants have been taking that position throughout this lengthy litigation. They're saying that these Tennessee bonds are in substantial competition. I'd like to point out... you asked a question of Mr. Worthy a moment ago, if 548 had any application. If you will look at 548, one of the definitions of Congress is that the money capital has to be in substantial competition with the federal obligation. And that is specifically set out in 548, which shows to me that the intent of Congress is that these other obligations have to be in substantial competition. There's no proof in this record; it's just silent as a tomb, as they say, about whether or not there's any direct competition. And I think that's a very important point and we raised that in our brief, that that was incumbent upon the appellants to prove that, if that is their position. Now, if they cite out... and they take great joy in citing the amicus brief of the Attorney General that some $250 million in obligations are involved. That's assuming that all of these banks would abandon U.S. obligations and buy Tennessee obligations, of which there's no proof at all in this record.
John Paul Stevens: Can I ask you one question before you sit down. As I correct in assuming there really is no difference in the legal position of your client and of the state's position?
J. Minor Tait, Jr.: The positions are identical.
John Paul Stevens: I wonder why you filed separate briefs and had separate arguments?
J. Minor Tait, Jr.: Well, the money goes to the county and city; it does not go to the state... the state has an interest in the constitutionality of the statute in question, and I might point out that this is of utmost concern to the state of Tennessee because the formula that we use in the bank tax is the same formula that we use in our excise tax.
John Paul Stevens: I'm not questioning your right, either of you. I'm just curious to know as a matter... because it's sometimes a less effective method of presentation to divide arguments.
J. Minor Tait, Jr.: Well, I was going to argue and the state wanted to be heard because of the constitutionality, and that's basically what happened. I felt like that we should split it because there's more involved than just the interest of Memphis and Shelby County, Tennessee in this lawsuit; it has statewide application, and I just felt like it should be split and agreed to. I thank you.
Warren E. Burger: Mr. Worthy?
K. Martin Worthy: Mr. Chief Justice, may it please the Court: Mr. Creecy cited a number of cases in which this Court has held that a franchise tax may properly be imposed on the interest on federal obligations or on federal obligations themselves. He failed to note, however, that several of those cases, the Educational Foundation case, the Werner Machine case, the Tradesman's Bank case and many others, all note that the states can impose such a tax, provided it is not discriminatory. For example, in the Werner Machine Company case, it validated the tax, held it was lawful, since the tax measures... since the tax is the same whatever the character of the assets may be. Now, interestingly enough, when Mr. Tait talks about discrimination, he hasn't really told us what discrimination is except to say that all of the theories of discrimination which this Court has announced in numerous cases, are inapplicable. All he says is that there is no discrimination if federal obligations are not singled out. As I pointed out in my original argument, in both the Phillips Chemical case and the Miller versus Milwaukee case, there was no singling out of federal obligations, yet the tax was found to be invalid. And insofar as the intent of the legislature in imposing the tax is concerned, I do call to your attention that the Tennessee legislature was specifically aware, when it adopted the formula for the measurement of income, as shown by the report of the legislative committee which is referred to on page 10 of our Reply Brief, that it knew that it was taxing interest on federal obligations, knew that it was not taxing interest on obligations of the state of Tennessee, knew that it was taxing interest on obligations of other states. So it deliberately chose the course which it followed. Thank you.
Warren E. Burger: Thank you gentlemen, the case is submitted.