Federal Taxation of State Interests.

In 1903 a succession tax upon a bequest to a municipality for public purposes was upheld on the ground that the tax was payable out of the estate before distribution to the legatee. Looking to form and not to substance, in disregard of the mandate of Brown v. Maryland,546 a closely divided Court declined to “regard it as a tax upon the municipality, though it might operate incidentally to reduce the bequest by the amount of the tax.”547 When South Carolina embarked upon the business of dispensing alcoholic beverages, its agents were held to be subject to the national internal revenue tax, the ground of the holding being that in 1787 such a business was not regarded as one of the ordinary functions of government.548

Another decision marking a clear departure from the logic of Collector v. Day was Flint v. Stone Tracy Co.,549 in which the Court sustained an act of Congress taxing the privilege of doing business as a corporation, the tax being measured by the income. The argument that the tax imposed an unconstitutional burden on the exercise by a state of its reserved power to create corporate franchises was rejected, partly because of the principle of national supremacy, and partly on the ground that the corporate franchises were private property. This case also qualified Pollock v. Farmers’ Loan & Trust Co. to the extent that it allowed interest on state bonds to be included in measuring the tax on the corporation.

Subsequent cases have sustained an estate tax on the net estate of a decedent, including state bonds,550 excise taxes on the transportation of merchandise in performance of a contract to sell and deliver it to a county,551 on the importation of scientific apparatus by a state university,552 on admissions to athletic contests sponsored by a state institution, the net proceeds of which were used to further its educational program,553 and on admissions to recreational facilities operated on a nonprofit basis by a municipal corporation.554 Income derived by independent engineering contractors from the performance of state functions,555 the compensation of trustees appointed to manage a street railway taken over and operated by a state,556 profits derived from the sale of state bonds,557 or from oil produced by lessees of state lands,558 have all been held to be subject to federal taxation despite a possible economic burden on the state.

In finally overruling Pollock, the Court stated that Pollock had “merely represented one application of the more general rule that neither the federal nor the state governments could tax income an individual directly derived from any contract with another government.”559 That rule, the Court observed, had already been rejected in numerous decisions involving intergovernmental immunity. “We see no constitutional reason for treating persons who receive interest on government bonds differently than persons who receive income from other types of contracts with the government, and no tenable rationale for distinguishing the costs imposed on States by a tax on state bond interest from the costs imposed by a tax on the income from any other state contract.”560

Footnotes

546
25 U.S. (12 Wheat.) 419, 444 (1827). [Back to text]
547
Snyder v. Bettman, 190 U.S. 249, 254 (1903). [Back to text]
548
South Carolina v. United States, 199 U.S. 437 (1905). See also Ohio v. Helvering, 292 U.S. 360 (1934). [Back to text]
549
220 U.S. 107 (1911). [Back to text]
550
Greiner v. Lewellyn, 258 U.S. 384 (1922). [Back to text]
551
Wheeler Lumber Co. v. United States, 281 U.S. 572 (1930). [Back to text]
552
Board of Trustees v. United States, 289 U.S. 48 (1933). [Back to text]
553
Allen v. Regents, 304 U.S. 439 (1938). [Back to text]
554
Wilmette Park Dist. v. Campbell, 338 U.S. 411 (1949). [Back to text]
555
Metcalf & Eddy v. Mitchell, 269 U.S. 514 (1926). [Back to text]
556
Helvering v. Powers, 293 U.S. 214 (1934). [Back to text]
557
Willcuts v. Bunn, 282 U.S. 216 (1931). [Back to text]
558
Helvering v. Producers Corp., 303 U.S. 376 (1938), overruling Burnet v. Coronado Oil & Gas Co., 285 U.S. 393 (1932). [Back to text]
559
South Carolina v. Baker, 485 U.S. 505, 517 (1988). [Back to text]
560
485 U.S. at 524–25. [Back to text]