The compensation received (1) by a liquidator appointed by the
State Comptroller to wind up insolvent banks pursuant to Florida
statutes; (2) by legal counsel employed by the Insurance Department
of New York for services in liquidating insolvent insurance
companies taken over by the state Superintendent of Insurance,
pursuant to New York statutes; (3) by an attorney in the Department
of Justice of Pennsylvania assigned by the Attorney General for
legal work relating to winding up of insolvent banks taken over by
the state Secretary of Banking pursuant to Pennsylvania statutes,
(p. 303 U. S. 222
subject to income taxation by the Federal Government, it
1. That the compensation in each instance was paid from the
assets of the liquidating corporation, not from funds belonging to
2. That no one of the taxpayers was an officer of the State in
the strict sense of that term;
3. That the businesses about which they were employed were not
utilized by the States in the discharge of their essential
4. That the corporations were private enterprises, and their
funds private property.
88 F.2d 869 and id.
Page 303 U. S. 219
Certiorari to review decisions of Circuit Courts of Appeals in
four cases on appeals from decisions of the Board of Tax Appeals
sustaining income tax assessments. In Nos. 128, 129 and 597 (34
B.T.A. 956) the Board's ruling was reversed by the lower court; in
No. 287, the Board's ruling, 34 B.T.A. 963, was affirmed.
MR. JUSTICE McREYNOLDS delivered the opinion of the Court.
Has the federal government power to tax compensation paid to
attorneys and others out of corporate assets for necessary services
rendered about the liquidation of
Page 303 U. S. 220
an insolvent corporation by a state officer proceeding as
required by her statutes?
The opinions below state the essential facts, not in dispute,
make adequate references to the relevant statutory provisions, and
cite numerous authorities.
Under Florida statutes, when a bank becomes insolvent,
"The State Comptroller may . . . appoint a liquidator [subject
to dismissal] to take charge of the assets and affairs of such bank
. . . [who,] under the direction and supervision of the
Comptroller, shall take possession of the books, records and assets
of every description . . . and in his name shall sue for and
collect all debts, dues and claims belonging to it, and upon the
order of a court of competent jurisdiction may sell or compound all
bad or doubtful debts, and, on a like order, may sell all the real
and personal property . . . and . . . sue for and enforce the
individual liability of the stockholders."
"pay all money received by him to the State Treasurer to be held
as a special deposit . . . shall also make quarterly reports to or
when called upon, to the Comptroller."
The appointment must follow notice and be confirmed by the
Circuit Court. Liquidation expenses are payable out of the
corporate funds held by the Treasurer.
"The compensation of the liquidator shall be fixed by the
Comptroller, and shall be based upon the amount of work actually
necessary and performed, and shall in no case exceed five percent
of the cash collections."
Respondent Therrell, liquidator for several banks, devoted
substantially all his time to the work. He held no commission from
the Governor, took no oath of office, but was formally appointed by
the Comptroller and gave bond. His compensation, for 1931 and 1932,
paid from corporate assets, was assessed by the Commissioner for
federal income taxes. The Board of Tax Appeals approved, but the
Circuit Court of Appeals found immunity
Page 303 U. S. 221
under the Federal Constitution.
Respondent Tunnicliffe, liquidator of insolvent banks appointed
by the Comptroller of Florida, was assessed for federal income
taxes upon the sums received for services during 1931 and 1932. The
Board of Tax Appeals approved; the Circuit Court of Appeals, ruled
otherwise upon its opinion in No. 128. Both causes present the same
Petitioner McLoughlin was employed by the Insurance Department
of New York as legal counsel in the Liquidation Bureau, and
received for services during 1932 $5,125. This bureau is in charge
of a Deputy Superintendent of Insurance, a civil service employee
whose salary is paid by the state. It employs many persons --
superintendents, attorneys, bookkeepers, stenographers, adjusters,
Under the statutes, the superintendent may apply to the court
for an order to take over the assets of an insolvent insurance
company and liquidate its affairs. When this issues, the corporate
charter is dissolved and the superintendent must proceed to collect
assets, adjust claims, etc. He determined petitioner's compensation
and caused it to be paid from assets of the several companies in
liquidation according to the time devoted to each.
The Commissioner assessed this compensation for federal income
tax; the Board of Tax Appeals approved. The Circuit Court of
Appeals affirmed and definitely held it was not exempted by the
Federal Constitution. McLoughlin v. Commissioner of Internal
89 F.2d 699.
Freedman, employed as an attorney in Pennsylvania's Department
of Justice, received annual salary of
Page 303 U. S. 222
$3,000. The Attorney General has power to appoint attorneys to
represent any department, board or commission of the state and fix
their compensation. The Secretary of Banking has broad powers over
banks. When one becomes unsound, he may, after notice and hearing
and with the Attorney General's consent, take possession and wind
up its affairs. All necessary expenses, including compensation of
attorneys, special deputies, assistants, and others employed about
the proceedings, are paid from funds of the corporation.
During 1932, the respondent was assigned for legal work relating
to closed banks, and was paid by the Secretary of Banking out of
their funds. The Commissioner assessed the sum so received for
federal income tax. The Board of Tax Appeals approved; the Circuit
Court of Appeals, Freedman v. Comm'r of Internal Revenue, 92 F.2d
150, declared the salary exempt. Freedman v. Commissioner of
92 F.2d 150.
What limitations does the Federal Constitution impose upon the
United States in respect of taxing instrumentalities and agencies
employed by a state, and, conversely, how far does it inhibit the
states from taxing instrumentalities and agencies utilized by the
United States, are questions often considered here.
4 Wheat. 316; Weston v.
Charleston, 2 Pet. 449; 41 U.
Commissioners of Erie County, 16 Pet. 435;
Lane County v. Oregon, 7 Wall.
71; 75 U. S.
8 Wall. 533, 75 U. S. 556
South Carolina v. United States, 199 U.
, 199 U. S. 457
Metcalf & Eddy v. Mitchell, 269 U.
; Indian Motocycle Co. v. United States,
283 U. S. 570
Burnet v. Jergins Trust, 288 U. S. 508
288 U. S. 516
Ohio v. Helvering, 292 U. S. 360
292 U. S. 368
Helvering v. Powers, 293 U. S. 214
Rogers v. Graves, 299 U. S. 401
Brush v. Commissioner, 300 U. S. 352
Page 303 U. S. 223
The Constitution contemplates a national government free to use
its delegated powers; also state governments capable of exercising
their essential reserved powers; both operate within the same
territorial limits; consequently the Constitution itself, either by
word or necessary inference, makes adequate provision for
preventing conflict between them.
Among the inferences which derive necessarily from the
Constitution are these: no state may tax appropriate means which
the United States may employ for exercising their delegated powers;
the United States may not tax instrumentalities which a state may
employ in the discharge of her essential governmental duties --
that is, those duties which the framers intended each member of the
Union would assume in order adequately to function under the form
of government guaranteed by the Constitution.
By definition precisely to delimit "delegated powers" or
"essential governmental duties" is not possible. Controversies
involving these terms must be decided as they arise, upon
consideration of all the relevant circumstances. Notwithstanding
discordant views which have sometimes arisen because of varying
emphasis given to one or another of such circumstances, it is now
settled doctrine that the inferred exemption from federal taxation
does not extend to every instrumentality which a state may see fit
to employ. Exemption depends upon the nature of the undertaking; it
is cabined by the reason which underlies the inference.
Veazie Bank v. Fenno, supra,
sustained a tax laid by
the federal government upon notes issued by state banks,
notwithstanding the view entertained by two Justices that it
"taxation of the powers and faculties of the State governments,
which are essential to their sovereignty, and to the efficient and
Page 303 U. S. 224
management and administration of their internal affairs."
South Carolina v. United States, supra,
for much consideration of the federal government's power to tax
instrumentalities utilized by a state. It ruled, against a stout
dissent, that, although South Carolina had the right to control the
sale of liquors through the dispensary system, nevertheless
Congress could tax the dispensers, who acted as agents of the state
in making sales.
"Looking therefore at the Constitution in the light of the
conditions surrounding at the time of its adoption, it is obvious
that the framers, in granting full power over license taxes to the
national government, meant that that power should be complete, and
never thought that the states, by extending their functions, could
practically destroy it."
Burnet v. Jergins Trust, supra,
upheld a federal tax
upon the receipts by the lessee of oil lands which belonged to the
city of Long Beach, Cal.
"The subject of the tax is so remote from any governmental
function as to render the effect of the exaction inconsiderable as
respects the activities of the city."
In Ohio v. Helvering, supra,
we held that the agencies
and operations of the State of Ohio in the conduct of its
Department of Liquor Control were subject to excise taxes
prescribed by Congress.
"Whenever a state engages in a business of a private nature, its
exercises nongovernmental functions, and the business, though
conducted by the state, is not immune from the exercise of the
power of taxation which the Constitution vests in the
Helvering v. Powers, supra,
ruled that the compensation
of members of the Board of Trustees of the Boston Elevated Railway
Company was subject to the federal income tax notwithstanding they
were appointed by the
Page 303 U. S. 225
Governor of the state, confirmed by the council, and endowed
with large powers to regulate and fix fares, etc.
"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
The cases last referred to strikingly illustrate the outcome of
efforts here to apply the recognized doctrine in respect of taxing
state agencies. According to them and others of like nature due
weight, we are unable to conclude that the Commissioner erred in
making any one of the assessments involved in the four cases
presently before us. He gave proper application to the rule which
we must recognize as established. The compensation of the taxpayers
was paid from corporate assets, not from funds belonging to the
state. No one of them was an officer of the state in the strict
sense of that term. The business about which they were employed was
not one utilized by the state in the discharge of her essential
governmental duties. The corporations in liquidation were private
enterprises; their funds were the property of private
It follows that the judgments in Nos. 128, 129, and 597 must be
reversed; the judgment in No. 287 must be affirmed.
MR. JUSTICE CARDOZO and MR. JUSTICE REED took no part in the
consideration or decision of this case.
* Together with No. 129, Helvering, Commissioner of Internal
Revenue v. Tunnicliffe,
on certiorari to the Circuit Court of
Appeals for the Fifth Circuit; No. 287, McLoughlin v.
Commissioner of Internal Revenue,
on certiorari to the Circuit
Court of Appeals for the Second Circuit, and No. 597,
Helvering, Commissioner of Internal Revenue v. Freedman,
on certiorari to the Circuit Court of Appeals for the Third