Document: 485 U.S. 505 108 S.Ct. 1355 99 L.Ed.2d 592 State of SOUTH CAROLINA, Plaintiffv.James A. BAKER, III, Secretary the Treasury United States. No. 94, Orig. Argued Dec. 7, 1987. Decided April 20, 1988. Rehearing Denied June 13, See 486 1062, 2837. Syllabus Section 310(b)(1) Tax Equity and Fiscal Responsibility Act 1982 removes federal income tax exemption for interest earned on publicly offered long-term bonds (hereinafter referred to as bonds) issued by state local governments collectively States) unless those are in registered (as opposed bearer) form. South Carolina invoked this Court's original jurisdiction, contending that § is constitutionally invalid under Tenth Amendment doctrine intergovernmental immunity. A Special Master was appointed. After conducting hearings taking evidence, he concluded constitutional recommended entering judgment defendant. National Governors' Association (NGA), an intervenor, filed exceptions various factual findings his legal conclusions concerning their challenges. Held: 1. does not violate or principles federalism effectively compelling States issue Pp. 511-515. (a) The limits Congress' authority regulate activities structural, substantive—that is, must find protection from congressional regulation through national political process, judicially defined spheres unregulable activity. In case, has even alleged it deprived any right participate process singled out a way left politically isolated powerless. allegations make—that Congress uninformed chose ineffective remedy—do amount allegation operated defective manner. 512—513. (b) NGA's contention 310 because commandeers legislative administrative coercing into enacting legislation authorizing bond registration administering scheme finds no support claim open FERC v. Mississippi, 456 742, 102 2126, 72 532 (1982). regulates activities; not, did statute FERC, seek control influence manner which private parties. That wishing engage certain activity take sometimes action comply with standards regulating commonplace presents defect. Moreover, theory, could immunize its simply codifying engages activities. 513-515. 2. immunity taxing unregistered bonds. inconsistent holding Pollock Farmers' Loan & Trust Co., 157 429, 15 673, 39 L.Ed. 759 (1895), immune nondiscriminatory tax, but decision been overruled subsequent case law. Under jurisprudence prevailing at time, neither Federal nor Governments individual directly derived contract other government. This general rule based rationale party received government thus "on" burdened government's power enter contract. repudiated modern law, immunities have been, one one, overruled. owners entitlement pay taxes they earn bonds, paying lower rates than issuers. imposed collected bondholders, States, increased costs incurred implementing system "taxes" within meaning doctrine. provisions assure all form, whether governments, Government, corporations. 515—527. Exceptions Master's Report overruled, entered BRENNAN, J., delivered opinion Court, WHITE, MARSHALL, BLACKMUN, STEVENS, JJ., joined, SCALIA, joined except Part II. concurring opinion, post, p. ----. part judgment, REHNQUIST, C.J., O'CONNOR, dissenting KENNEDY, took consideration case. John P. Linton, Charleston, S.C., plaintiff. Lewis B. Kaden, New York City, Nat. Ass'n, plaintiff-in-intervention special leave Court. Sol. Gen. Charles Fried, Washington, D.C., Justice BRENNAN 1 (TEFRA), Pub.L. 97-248, 96 Stat. 596, 26 U.S.C. 103(j)(1), form.1 jurisdiction issues TEFRA either (1) violates form (2) 2 * Historically, bearer These two types differ mechanisms used transferring ownership making payments. Ownership recorded central list, transfer record requires change list.2 owner automatically receives payments check electronic funds issuer's agent. bond, contrast, presumed possession transferred physically handing over bond. bondowner obtains presenting coupons bank turn 3 1982, enacted TEFRA, contains variety provisions, including 310, designed reduce deficit promoting compliance laws. had become concerned about growing magnitude evasion; Internal Revenue Service (IRS) studies indicated unreported grown estimated range $31.1 billion $32.2 1973 $93.3 $97 1981. Compliance Gap: Hearing before Subcommittee Oversight Senate Committee Finance, 97th Cong., 2d Sess., 126 Unregistered apparently became focus attention paper trail facilitated evasion. Then Assistant Policy Chapoton testified House Ways Means requirement would help prevent evasion often represent untaxed that, without ownership, IRS difficulty reconstructing. Hearings H.R. 6300 Means, 35 He also expressed concern were being avoid estate gift medium exchange illegal sector. Ibid. reporting bill containing provision eventually Finance same concerns: 4 "The committee believes fair efficient information withholding cannot be achieved respect interest-bearing obligations long significant volume instruments issued. book-entry will preserve liquidity while requiring creation records can produce useful reports both payment sale prior maturity brokers. Furthermore, ability noncompliant taxpayers conceal property reach income, estate, taxes. Finally, may readily negotiable substitutes cash available persons engaged activities." S.Rep. 97-494, Vol. 1, 242 (1982), U.S.Code Cong. Admin.News pp. 781, 995. 5 meet these concerns providing powerful incentives 6 Because aims address posed generally covers only 310(a) more year form.3 With similar corporations, §§ 310(b)(2)-(6) impose series penalties nonregistration. Corporations declining covered lose deductions adjustments paid 310(b)(2) (3), excise principal, 310(b)(4). Holders corporate deduct capital losses capital-gain treatment gains sustained 310(b)(5) (6). completes statutory denying 7 We granted file instant complaint against Regan, 465 367, 104 1107, 79 372 (1984), appointed Honorable Samuel J. Roberts, 466 948, 2148, 80 535 (1984). (NGA) intervened.4 NGA II 8 first.5 contend, found, noting if competition nonexempt force increase 28-35%, though almost effective, since then 2, 23-24. argue purposes analysis, we treat banned altogether giving option dispute finding registration, see Brief Defendant 19 (urging Court adopt findings), preferring survives scrutiny blanket prohibition issuance apply violating Amendment. For then, regulated prohibiting outright bonds.6 9 set Garcia San Antonio Metropolitan Transit Authority, 469 528, 105 1005, 83 1016 (1985). holds substantive—i.e., Id., 537-554, S.Ct., 1010-1019. contends failed here concrete evidence quantifying attributable relied instead anecdotal concealed taxable using It argues remedy most sales handled brokers who regardless beneficial need necessarily recorded. 10 Although possibility some extraordinary defects might render Amendment, occasion identify define lead such invalidation. id., 556, 1020. Nor do attempt definitive articulation here. suffices observe Cf. Carolene Products 304 144, 152, n. 4, 58 778, 783, 82 1234 (1938). Rather, "imposed vote relying upon incomplete information." Plaintiff 101.7 But nothing authorizes courts second-guess substantive basis legislation. Minnesota Clover Leaf Creamery 449 456, 464, 101 715, 724, 66 659 (1981). Where, here, operate manner, implicated. B 11 scheme. They cite compel behalf interests, 761-764, 2138-2140. extent poses limitations independent discussed far clear. however, inapplicable 310. 12 required utility commissions following: adjudicate enforce standards, consider adopting cease public utilities, (3) follow procedures. first distinguished League Cities Usery, 426 833, 2465, 49 245 (1976), presented questions "the sovereignty shields applicable regulations," whereas "attempts use regulatory machinery advance goals." U.S., 759, 2137. whatever exist activity, require adjudicative bodies pre-emptible field suggested federally mandated 759-767, 2137-2142. 13 Because, hypothesis, prohibits issuing very situation commandeering machinery: "shields regulations." nonetheless commandeered many legislatures amend substantial number statutes order officials devote effort determine how best implement system. Such "commandeering" inevitable consequence Any demands compliance. Garcia, example, several municipalities alter employment practices raise necessary wage overtime Labor Standards Act.8 Indeed, pre-Garcia line cases recognized requirements amending statutes. EEOC Wyoming, 460 226, 253-254, 103 1054, 1069-1070, 75 18 (1983) (Burger, dissenting) (citing half upheld Court). moreover, short, theory nullity, restrict tightly restricted now cases. foreclosed precedent, uphold constitutionality III 14 banning entirely constitutional, unconstitutionally imposes agree held taxation. Master, suggest should explicitly overruling abolish rather requires. our view, suggestion implicitly rests mischievous proposition If, applied exclusively levied treasury, obligated allowed escape restructuring found liking. convert unconstitutional conditional. Whether condition direct irrelevant; employ means end. Pollock, considered unconstitutional. 585-586, 691. If still applies, threaten conform dictates. decline us embrace law controversial current validity ban interest, proceed overruled.9 16 unique limited merely represented application another government.10 Not Government she employee contract, Collector Day, Wall. 113, 20 122 (1871), lessee lands leased State, Burnet Coronado Oil, 285 393, 52 443, 76 815 (1932), proceeds vendor selling product agency, Indian Motocycle Co. 283 570, 51 601, 1277 (1931). Income kinds contracts likewise taxation Weston City Council Pet. 449, 481 (1829) (federal taxation); Dobbins Commissioners Erie County, 435, 1022 (1842) salary); Gillespie Oklahoma, 257 501, 42 171, 338 (1922) (income lease tax); Panhandle Oil Mississippi ex rel. Knox, 277 218, 48 451, 857 (1928) (vendor vendor's States). Cases freely cited established cases, vice versa. See, e.g., supra, 398, 444; Motocycle, 575-579, 602-604; 586, 575, 602 (immunity equal Metcalf Eddy Mitchell, 269 514, 521-522, 46 172, 173-174, 70 384 (1926); Wall., 127. 17 borrowed reasoning exempting taxation: " 'The extent, when made, borrow exercised, sensible depends distinct To however inconsiderable, burden operations . stock thought court [government's] money consequently repugnant Constitution.' 691, quoting Weston, Pet., 467, 468. Thus, although party, passed basic scope contracts.11 400-401, 444-445 ("Here instrumentality State. arising therefrom imposition itself"); 222, 452 ("It immaterial seller purchaser report make Sale purchase constitute transaction measured rests"); Gillespie, 505-506, 172-173 (" 'A leases them .' (quoting Territory Illuminating 240 522, 530, 36 453, 60 779 (1916))). commonality underlying highlighted reviewed status doctrine, observing exercise salary obtain employee's services. 576-578, 603-604. principle agency transaction. 579, 604. thoroughly caselaw. Graves O'Keefe, 306 466, 59 595, 927 (1939), announced: legally economically source, longer tenable." 480, 598. explained: 21 "So much non-discriminatory incomes employees government, national, effect price level labor materials, normal incident organization territory each possessing power. burden, so said affect indirect incidental way, Constitution presupposes. ." 487, 601. 22 James Dravo Contracting 302 134, 160, 208, 221, 155 (1937) (the fact contractor "may cost invalidate tax"); Helvering Gerhardt, 405, 424, 969, 977, 1427 thoroughness abandoned demonstrated emphatically financial on, cost-plus Government. Alabama King Boozer, 314 62 43, 86 (1941). stated: 23 rightly think, disclaims Constitution, unaided Congressional legislation, exacted contractors economically, terms otherwise, construction So enters materials sovereignties. asserted free spell added costs, furnish supplies different view prevailed, think 8-9, 45-46 (citations omitted). 24 Boozer completely entities pass burdens functions. Subsequent consistently reaffirmed parties contracting falls Washington 536, 540, 1344, 1347, 264 (1983); Mexico, 455 720, 734, 1373-1382, 71 580 (1982); County Fresno, 429 452, 460-462, 9, 97 699, 703-705, (1977); Detroit, 355 469, 78 474, 476, 424 (1958). 25 conferring dealing rejected, were, eliminated. Overruling (1922), net corporation Mountain Producers Corp., 303 376, 623, 907 Oklahoma Comm'n Texas 336 342, 69 561, 93 721 (1949) (upholding gross lease). Later, employee. supra.12 And course upholding contractor, (1928). James, supra Government). premodern avoided recipients governmental interest.13 yet overrule explicitly, explained distinction between contracts, historical always exempted statute, beginning statute. Oct. 3, 1913, ch. 16, II(B), 38 168. sum, never whom business, discriminate deals. 1347; 460-463, 703-705; 473, 478; Comm'n, 359-364, 570-573. "when levy itself, closely connected realistically viewed separate entities." 735, 1383. essentially same, see, Graves, 485, 600; 386-387, 627-628, least parallel Government.14 11, supra. confirm tax. reason treating receive differently tenable distinguishing stated "as salaries purpose confer benefits relieving contributing share whose enjoy, give advantage enabling like services employers, private. 483, 600. Likewise, issuers.15 27 acknowledged holder taxed Memphis Bank Garner, 459 392, 692, 74 562 (1983), involved interest. interpretation 31 premised observation "[o]ur decisions treated 742 principally restatement rule." 397, 695. "Where, economic incidence holders deals." (emphasis added). 28 clearly 421 599, 606, 95 1872, 1877, 44 404 (1975) (describing enforced contribution provide government). Accordingly, itself switch issuers enjoy sanctions comparably severe. ibid. Removing create discrimination already subject IV 29 310(b)(1),16 Report, approve recommendation 30 ordered. KENNEDY 32 concurring. 33 properly (1985), outcome equally clear well decided. 403-419, 1127-1136, (1984) (STEVENS, part). emphasized, today, what I written past, expresses wisdom governments. 34 judgment. join latter because, observed THE CHIEF JUSTICE, 529—530, unnecessarily casts doubt misdescribes read adopting—in disclaiming—the attributed today's ante, 512—513, "national process" States' protection, demonstration "some defects" operation justify judicial relief. Garcia: "These affirmative structure affecting Commerce Clause. Coyle 221 559 [31 688, 55 853] (1911)." 1020 prohibit done Chief 37 Today reaches results regarding believe analytically distinct. First, Second, majority concludes contravene immunity; doing so, overrules (1895). While threatened my protective 310(b)(1). made determinations impact Most notably, abilities debt capital, processes decide debt, choose dedicate tax-exempt borrowing. exhaustive investigation, summarized: "TEFRA changed borrow, obviously important aspect borrowing process." 118. well-supported conclusion de minimis end, begin, inquiry. Even expansive conception espoused "operate[s] displace freedom integral areas traditional functions," runs afoul Congress. 852, 2474. determined displacement occurred implementation requirements; go further, does, discuss spawned hypothesize voiced survived Those issues, intriguing be, moment present unaddressed until presented. 40 dissenting. 41 today precedent honored nearly 100 years willingness cancel traditionally shielded Henceforth finance depend voluntarily abstains tapping permissible source additional revenue. autonomy factor reviewing Government's enumerated powers. 581, 1033, (1985) (O'CONNOR, Powell dissenting). dissent sovereign threatening deprive immunity, dependence provides prohibited Ante, 511-513. commerce power, accomplish end means. 515-516. inherent municipal arguable protected incursions virtue Guarantee Clause Art. IV, 4. Merritt, Autonomy: Federalism Third Century, 88 Colum.L.Rev. 70-78 (1988) (arguing enforcement proper). 43 expressly considers Constitution. Instead, characterizes describes century. rise fall particular doctrines. continuing responsibility "to oversee duty legitimate interests States." 1033 shirks fails inquire adverse effects Long-term essential funding 1974, approximately $23 new bonds; 1984, $102 20. rely heavily education, road construction, among purposes. As recognizes, 28-35% 511. Governmental hindered severely rises one-third. strike heart 45 pivotal close practical decisions. after substantially operations. Thus revenue "neither destroy curtail powers." 523-524, 174-175, (1926). When extended noted "does interfere performance functions." 161, (1937). lease, decided mere theoretical interference functions "[r]egard substance effects." 386, 627, (1938), employee, there "[no] speculative uncertain affording corresponding tangible government." 419-420, 974-975. differs critically quoted above taxed, substantially. certainly seriously unconcerned difference satisfied formal test distilled later test, 523. 47 bipartite adequately accommodates raised prospect applying devastating innovation taken relatively less burdensome step subjecting taxation, erosion likely occur time. "If danger, lies tyranny small decisions—in nibble away sovereignty, bit bit, someday gutted shell." L. Tribe, American Constitutional Law 381 (2d ed. 1988). inherently threat sovereignty. Marshall ago, involves destroy." McCulloch Maryland, Wheat. 316, 431, 579 (1819). Holmes qualified principle, "[t]he sits." 223, (Holmes, Brandeis Stone, sole protector crushing sit initiatives. lived up role safeguards self-sufficiency Clause, implicit respectfully dissent. simplicity, refer "States" "bonds." differ, owner, sellers list. provided subsections corporations Governments, relevant grant motion intervene hereby adopted. Amendment" encompass implied limitation activities, grounded Given infra, ----, effect, subsidy, subsidize judged Spending Dakota Dole, 483 203, 210-211, 107 2793, 2797-2798, 171 (1987) (stating "a perceived affairs concomitantly limit conditions legitimately placed grants," point inducement coercive" unconstitutional). chosen attack defend unlitigated analysis applies import little capital. exceptions, exception failure rate differential S. 1570 Human Resources, 99th 1st Sess. (1985); Impact Supreme Decision Upon Their Political Subdivisions: Economic Goals Intergovernmental Joint Committee, ground ever actually imposed. reason, why bring facial challenge as-applied challenge. indirectly differently. Willcuts Bunn, 282 216, 227-230, 125, 127-129, (1931) (constitutional gain contract); Greiner Lewellyn, 258 384, 324, 676 included determining value estate). sources are, course, different: arises protecting Supremacy differed somewhat doctrinal contours. Many opinions interpreted greater people 412, 971, (1938); 435-436, (1819); 326 572, 577, 312, 90 (1946) (opinion Frankfurter, J.). fact, possesses enact immunizing deals otherwise 478, 597, (1939). lack Also, enjoyed methodology, 523, 14. some, further any, currently enough shared identical methodology identity persisted shifted era. Prior confined Day facts projects. Officers amicus curiae history Sixteenth "collect incomes, derived, apportionment," manifests intent freeze existed 1913. disagree. shows words "from derived" affirmatively intended authorize remove apportionment whichever taxable. Cong.Rec. 2245-2246 (1910); 2539; Brushaber Union Pacific R. 17-18, 236, 241-242, 493 (1916). frozen invalid. All 477, governmental, proprietary, Powers, 293 214, 227, 174, 291 (1934); 199 437, 454-463, 110, 113-117, 50 261 (1905), subsequently untenable eight Justices participating (1946). 579-581, 583, 313-314, 315 Rutledge, J.); 316 (Stone, concurring, Reed, Murphy Burton, JJ.); 591, 318 (Douglas, dissenting, Black, Two reasoned 582-584, 314-315 (Frankfurter, Four declined hold every "there which, laid nevertheless impair quite Mayo 319 441, 447-448, 63 1137, 1140-1141, 87 1504 (1943). regarded discriminatory taxpayer, non-discriminatory, infringing sovereignty." 587, Murphy, JJ.) added) discussion stressed levying deals); 588, 317 ("Only unduly interferes State's government"). four recognizing "accomplish withdrawal nation nature beginning." ourselves purposes, reaffirms arise seeks collect distinguishes arguing bondholders maintenance employees. strikes counterintuitive fact. More importantly, essential/nonessential invokes exactly type unworkable 542-547, 1013-1016 (rejecting rules turning function "essential," "governmental" versus "proprietary," "traditional," "uniquely governmental," "necessary," "integral"). 'There unchanging demarcation non-essential time past non-governmental. genius sphere action, people—acting elected representatives—have demand, welfare requires.' 546, 1015, 427, 978 (Black, concurring). Similarly, O'CONNOR judge imposing "substantial" Post, 531-533. fail substantiality employees' salaries. disagree O'CONNOR'S apparent assumption undertake open-ended administratively daunting inquiry her mercy via excessive 533-534. nondiscrimination unprotected taxation—it recognizes safeguard (and manageable) fashion. where judges term "excessive" second-guessing themselves, destroying realized willing constituents. regulation, reject Carolina's argument impermissible 310(b) purely alone Minor 396 87, 98, 284, 289, (1969).

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