1. The provision of the Revenue Acts of 1926, §§ 212(a), 213(a),
and 1928, §§ 21, 22(a), for taxing income derived "from
compensation for personal service . . . of whatever kind and in
whatever form paid," is broad enough to embrace the compensation of
state officers if not constitutionally immune. P.
293 U. S.
224.
2. A Treasury Regulation cannot limit this statutory provision
or define the boundaries of its constitutional application.
Id.
3. Constitutional immunity of the compensation of a state
officer from federal taxation is not a necessary result of his
being a state officer; it depends upon the nature of the political
activities assigned to him, and upon whether they come within the
fundamental reason for denying federal authority to tax --
viz., necessary protection of the independence of national
and state governments in their respective spheres in our
constitutional system. P.
293 U. S.
224.
4. One of the limitations of the principle of tax immunity as
between the state and national governments is that the State cannot
withdraw sources of revenue from the federal taxing power by
engaging in businesses which go beyond usual governmental functions
and to which, by reason of their nature, the federal taxing power
would normally extend. P.
293 U. S.
225.
5. The fact that the State has power to undertake such
enterprises, and that they are undertaken for what the State
conceives to be the public benefit, does not establish immunity.
Id.
6. In operating a street railway, whether permanently or for a
limited time, the State is undertaking a business enterprise of a
sort that is normally within the reach of the federal taxing power
and is distinct from the usual governmental functions that are
immune from federal taxation in order to safeguard the necessary
independence of the State. P.
293 U. S.
227.
7. If a business undertaken by a State is not immune from a
federal excise tax upon its operations, the compensation of those
who conduct it for the State is not exempt from a federal income
tax. P.
293 U. S.
227.
Page 293 U. S. 215
8. A street railway company and its properties, including a
reserve fund, are taken over by the State, to be publicly operated
and managed for a limited period of time, pursuant to a special Act
of the Legislature agreed to by the company. The operations during
that period are to be under the exclusive control of a board of
trustees, who are officers of the State specially appointed for the
purpose, and the management is to be such that the cost of the
venture, including operating expenditures, upkeep, and other
charges against income and surplus, with dividends agreed to be
paid on the company's stock, shall be met by the income; but if
there are deficits, these are to be paid by the State and assessed
against the towns and cities along the railway. At the end of the
period, the properties are to be restored to the company in good
condition and the fund undiminished. The salaries of the trustees,
fixed by the statute, are payable by the company -- part of the
costs of operation. As incidents of the main purpose, the trustees
have exclusive authority to regulate and fix the fares and to
ascertain any losses incurred, which are to be borne by the
State.
Held, that the salaries of the trustees are not
constitutionally immune from income tax under the Federal Revenue
Acts of 1926 and 1928.
68 F.2d 634 reversed.
Certiorari, 292 U.S. 620, to review a judgment reversing a
decision of the Board of Tax Appeals sustaining a deficiency
assessment of income tax.
Page 293 U. S. 220
MR. CHIEF JUSTICE HUGHES delivered the opinion of the Court.
The question presented is whether the compensation of the
members of the board of trustees of the Boston Elevated Railway
Company is constitutionally exempt from the imposition of a federal
income tax. Immunity is sought upon the ground that the trustees
are officers of the Commonwealth of Massachusetts and
instrumentalities of its government. The Circuit Court of Appeals,
reversing the decision of the Board of Tax Appeals, held in favor
of the exemption. 26 B.T.A. 1381; 68 F.2d 634. We granted a writ of
certiorari. 292 U.S. 620.
Chapter 159 of the Massachusetts Special Acts, 1918, provides
for the public operation of the Boston Elevated Railway Company.
The Act creates a board of five trustees, to be appointed by the
Governor, with the advice and consent of the Council, for the term
of ten years. The Act provides that the trustees shall be sworn
before entering upon their duties; they shall own no stock or other
securities of the company, and shall each receive from the company
$5,000 annually as compensation for his services. They are subject
to removal by the Governor with the advice and consent of the
Council.
The trustees are charged with the duty of managing and operating
the company and its properties for the period, as stated or
extended, of public operation, and, to that end, are to have
"possession of said properties in behalf
Page 293 U. S. 221
of the Commonwealth." Except as otherwise stated, they are to
exercise all the powers of the company, being empowered in their
discretion to appoint and remove the president and other officers
of the company, except the directors. The trustees are authorized
"to regulate and fix fares" and to "determine the character and
extent of the service and facilities to be furnished." Their
authority for this purpose is made "exclusive," and is not "subject
to the approval, control or direction of any other state board or
commission." The act provides that the trustees and their employees
shall be deemed to be acting as agents of the company and not of
the Commonwealth, and that the company shall be liable for their
acts and negligence to the same extent as if they were in the
immediate employ of the company, but that the trustees shall not be
personally liable.
The company was required, on or before its acceptance of the
Act, to raise a stated amount by the issue of preferred stock in
order to provide for the improvement of the property of the company
and the establishment of a reserve fund. The trustees are to fix
such rates of fare as will reasonably insure sufficient income to
meet the cost of service, as defined, which, in addition to
operating expenditures, outlays for the required upkeep of the
properties, and other amounts chargeable against income and
surplus, includes fixed dividends on the preferred stock and
dividends on the common stock at specified rates. Surplus income is
to be transferred to the reserve fund and that fund is to be used
to meet deficiencies. If it is insufficient for that purpose, the
trustees are required to notify the treasurer and receiver general
of the Commonwealth, and the Commonwealth is to pay the amount of
the deficit ascertained according to the act. Amounts thus paid are
to be assessed upon the several cities and towns in which the
company operates. Provision is
Page 293 U. S. 222
made for reimbursement out of subsequent surplus income. The Act
contemplates the maintenance of the property in good operating
condition and the restoration of the reserve fund, if depleted, to
its original amount on the expiration of the period of public
management. At that time, the control of the property is to revert
to the company. It may then collect such reasonable fares as will
produce an income sufficient to pay the reasonable cost of the
service as defined in the Act, including specified dividends on the
common stock, and the company is then to be subject to public
regulation in such manner as may be determined by the general
court, but not so as to reduce the income below the cost of the
service as stated.
The tax in question was on the compensation received by the
trustees for the years 1926 to 1929. It appears that, in 1919, the
Commonwealth paid to the company nearly $4,000,000 as a deficiency
resulting from the public operation, and that, in subsequent years,
up to and including 1929, the income received was not sufficient
for full reimbursement.
The validity of the statute has been sustained as one enacted
for a public purpose and providing for the management of the
enterprise by the Commonwealth.
Boston v. Treasurer &
Receiver General, 237 Mass. 403, 413, 420, 130 N.E. 390, 392;
Boston v. Jackson, 260 U. S. 309,
260 U. S. 314,
260 U. S. 316. The
Supreme Judicial Court of Massachusetts has characterized the
"public operation" as "undertaken by the Commonwealth not as a
source of profit, but solely for the general welfare."
Boston
v. Treasurer and Receiver General, supra. The trustees are the
administrative agents of the Commonwealth in this enterprise, and
we may assume, as the Circuit Court of Appeals has held, that the
trustees come within the general category of "public officers" by
virtue of their appointment by the
Page 293 U. S. 223
Governor, with the advice and consent of the Council, and their
tenure and duties fixed by law.
* United
States v. Hartwell, 6 Wall. 385,
73 U. S. 393;
Metcalf & Eddy v. Mitchell, 269 U.
S. 514,
269 U. S. 520.
See Opinion of the Justices, 261 Mass., pp. 542, 543, 550,
159 N.E. 55.
While the undertaking is for the public benefit, it is still a
particular business enterprise -- the operation of a street railway
-- and the functions of the trustees are limited accordingly. The
property remains in private ownership. The Act, accepted by the
company, constitutes in substance an agreement between the company
and the Commonwealth that the latter shall temporarily take over
the management and operation and pay specified amounts by way of
compensation. While the Commonwealth may be called upon to bear
losses that may occur, if the fares as fixed prove to be
insufficient, the operation by the trustees is intended to be
self-sustaining. The transportation service is to be rendered, as
respondents' counsel say, "under such a flexible system of
ratemaking as would allow the fixing of fares equal, as nearly as
might be, to the cost of service." The compensation of the trustees
is undoubtedly a part of that cost. "The main design of the Act,"
as stated by the Supreme Judicial Court,
"is public operation of the railway company at such rates of
fare to be fixed by the trustees from time to time as shall afford
revenue sufficient to defray all charges and the dividends
established by the Act."
Boston v. Treasurer and Receiver General, supra. The
authority given to the trustees "to regulate and fix fares,"
and
Page 293 U. S. 224
the further authority to ascertain such losses as may be
incurred, which are to be borne by the Commonwealth, are both
incident to that main purpose.
The immunity sought by the trustees from payment of the federal
income tax has not been granted by the Congress. The definitions of
income in the federal income tax acts cover income derived from
"compensation for personal service . . . of whatever kind and in
whatever form paid." Revenue Act of 1926, §§ 212(a), 213(a);
Revenue Act 1928, §§ 21, 22(a). This language is certainly broad
enough to embrace the compensation of the trustees, and the
immunity, if it exists, must rest upon constitutional limitation.
The Treasury Regulations, manifestly in an effort to interpret and
apply that limitation, provide for exemption from taxation of
compensation paid by a state or political subdivision to its
officers and employees only in case their services are rendered "in
connection with the exercise of an essential governmental
function." Treas.Reg. No. 69, Art. 88; No. 74, Art. 643; No. 77,
Art. 643. But the Treasury Department could not, by its regulation,
either limit the provisions of the statute or define the boundaries
of their constitutional application.
We come, then, to the question whether the Congress has the
constitutional power to impose an income tax upon the compensation
of public officers of the character here involved. We do not regard
that question as answered by mere terminology. The roots of the
constitutional restriction strike deeper than that. The term
"public office" undoubtedly implies a definite assignment of public
activity, fixed by appointment, tenure, and duties. But whether
that field of activity, in relation to a state, carries immunity
from federal taxation is a question which compels consideration of
the nature of the Activity, apart from the mere creation of offices
for conducting it, and of the fundamental reason for denying
Page 293 U. S. 225
federal authority to tax. That reason, as we have frequently
said, is found in the necessary protection of the independence of
the national and state governments within their respective spheres
under our constitutional system.
Collector
v. Day, 11 Wall 113,
78 U. S.
125-127;
Ambrosini v. United States,
187 U. S. 1,
187 U. S. 7;
Indian Motocycle Co. v. United States, 283 U.
S. 570,
283 U. S. 575.
The principle of immunity thus has inherent limitations.
Metcalf & Eddy v. Mitchell, supra, pp.
269 U. S.
522-524;
Willcuts v. Bunn, 282 U.
S. 216,
282 U. S.
225-226;
Indian Motocycle Co. v. United States,
supra, p.
283 U. S. 576;
Fox Film Corp. v. Doyal, 286 U. S. 123,
286 U. S. 128;
Board of Trustees v. United States, 289 U. S.
48,
289 U. S. 59.
And one of these limitations is that the state cannot withdraw
sources of revenue from the federal taxing power by engaging in
businesses which constitute a departure from usual governmental
functions and to which, by reason of their nature, the federal
taxing power would normally extend. The fact that the state has
power to undertake such enterprises, and that they are undertaken
for what the state conceives to be the public benefit, does not
establish immunity.
South Carolina v. United States,
199 U. S. 437;
Flint v. Stone Tracy Co., 220 U.
S. 107,
220 U. S. 172;
Murray v. Wilson Distilling Co., 213 U.
S. 151,
213 U. S. 173;
Metcalf & Eddy v. Mitchell, supra; Indian Motocycle Co. v.
United States, supra; Ohio v. Helvering, 292 U.
S. 360,
292 U. S.
368-369. The necessary protection of the independence of
the state government is not deemed to go so far.
In
South Carolina v. United States, supra, the state
undertook to establish a monopoly of the sale of intoxicating
liquors and prohibited the sale except to dispensaries to be
operated by the state. The dispensers had no interest in the sales,
and received no profit from them. The question was whether the
dispensers were relieved from liability for the internal revenue
tax prescribed by the Congress for dealers in intoxicating liquors
because the
Page 293 U. S. 226
dispensers were agents of the state, which, in the exercise of
its sovereign power, had taken charge of the business. While the
court recognized the power of the state to undertake the
enterprise, the exemption was denied, as the state could not, by
engaging in a business of that sort, withdraw it from the taxing
power which the Constitution vested in the national government.
Murray v. Wilson Distilling Company, supra.
The Court reached a similar conclusion in the recent case of
Ohio v. Helvering, supra, where the state had established
a department of liquor control and sought an injunction to restrain
the enforcement of federal statutes imposing taxes upon dealers in
intoxicating liquors. The state sought to distinguish the case of
South Carolina because, in Ohio, "the state-owned stores" were
operated by civil service employees of the state government, and
hence the question was said to concern the taxation of the state
itself. The argument was unavailing, and the Court rested its
ruling upon the broad ground that, when the state becomes a dealer
in intoxicating liquors, it falls within the reach of the tax as
one validly imposed by the federal statute.
The method which the state may adopt in organizing such an
activity cannot be regarded as determinative. If the dealers in
South Carolina, or those employed to operate the state stores in
Ohio, had been denominated public officers, and, as such, had been
assigned definite tenure and duties, the same result would have
been reached, as the principle involved would be equally
applicable. Nor, in such a case, would the fact that the officers
were intrusted with the authority to fix prices for the sales under
their charge in a manner appropriately to secure the revenue needed
for the enterprise, or were charged with the duty of ascertaining
the losses which, if they occurred, were to be borne by general
taxation, establish a material distinction.
Page 293 U. S. 227
The nature of the enterprise, and not the particular incidents
of its management, would control.
We see no reason for putting the operation of a street railway
in a different category from the sale of liquors. In each case, the
state, with its own conception of public advantage, is undertaking
a business enterprise of a sort that is normally within the reach
of the federal taxing power and is distinct from the usual
governmental functions that are immune from federal taxation in
order to safeguard the necessary independence of the state. If, in
the instant case, the Commonwealth had acquired the property of the
company and had organized management of it in perpetuity by the
state government, instead of temporarily, or had taken over all the
street railways in all its cities for direct operation by the
Commonwealth, there would appear to be no ground, under the
principles established by the decisions we have cited, for holding
that this would effect the withdrawal of the enterprise from the
federal taxing power. And the fact that the state has here
undertaken public management and operation for a limited time, and
under the particular restrictions of the agreement with the
company, cannot be said to furnish a ground for immunity.
If the business itself, by reason of its character, is not
immune, although undertaken by the state, from a federal excise tax
upon its operations, upon what ground can it be said that the
compensation of those who conduct the enterprise for the state is
exempt from a federal income tax? Their compensation, whether paid
out of the returns from the business or otherwise, can have no
quality, so far as the federal taxing power is concerned, superior
to that of the enterprise in which the compensated service is
rendered.
We conclude that the Congress had the constitutional authority
to lay the tax.
Decree reversed.
* The provision of § 1 of chapter 159 of the Massachusetts
Special Acts of 1918 that the trustees shall not be considered
public officers within the meaning of § 25 of chapter 514 of the
Acts of 1909, and that § 1 of chapter 7 of the Revised Laws shall
not apply to the trustees, creates special limitations of such a
nature as not to derogate from their general status.
See
Opinion of the Justices, 261 Mass., p. 543, 159 N.E. 55.