1. The construction, management and operation of the Panama
Canal are governmental functions, and within the constitutional
power of Congress to regulate commerce and to provide for the
national defense. P.
299 U. S.
406.
2. Such being the status of the Canal, it follows that all
auxiliaries primarily designed and used to aid in its management
and operation, and which have that effect, partake of its nature,
and constitute, with the Canal, a single great regulator of
national and international commerce. P.
299 U. S.
406.
3. The interrelation of its activities with the management and
operation of the Panama Canal is such as to constitute the Panama
Rail Road Company a governmental instrumentality of the United
States. P.
299 U. S.
406.
4. This conclusion is supported by the contemporaneous and
long-continued administrative practice, and the correctness of it
is recognized by relevant federal legislation. Pp.
299 U. S.
406-407.
5. The character of the Railroad Company as a governmental
instrumentality is not altered by the fact that its ships and
railroad are used to some extent to carry private freight and
passengers. The primary purpose of the enterprise being
legitimately governmental, its incidental use for private purposes
does not change its character. P.
299 U. S.
407.
6. Even if it be assumed that the dairy, hotels, and other
enterprises, built and maintained by the Company are not
governmental instrumentalities, this would not alter the fact that
the railroad itself, in connection with the Canal, is a
governmental instrumentality. P.
299 U. S.
408.
7. It is well settled that the federal government may employ a
corporation as a means to carry into effect the substantive powers
granted by the Constitution.
McCulloch v.
Maryland, 4 Wheat. 316. P.
299 U. S.
408.
8. The Railroad Company being immune from state taxation, it
necessarily results that fixed salaries and compensation paid to
its officers and employees in their capacities as such are likewise
immune. P.
299 U. S.
408.
9. The salary of the general counsel of the Panama Railroad
Company
held exempt from payment of a state income tax.
Pp.
299 U. S. 402,
299 U. S.
408.
Page 299 U. S. 402
10. The evidence in this case sufficiently negatives the
suggestion that the relator -- since 1906 the general counsel of
the Railroad Company at a fixed annual salary, and in the same
category in respect of the Company as the secretary and treasurer
-- may have been an independent contractor, and not an officer. P.
299 U.S. 409.
271 N.Y. 543 reversed.
Appeal from a judgment affirming a judgment sustaining a state
income tax. The taxpayer had claimed that the salary on which the
tax was imposed was exempt from state income tax.
MR. JUSTICE SUTHERLAND delivered the opinion of the Court.
The relator, Richard Reid Rogers, is general counsel for the
Panama Rail Road Company, a corporation created by an old statute
of the New York for the purpose of constructing and operating a
railroad across the Isthmus of Panama. In making his state income
tax return for the years 1927, 1928, and 1929, he reported the
receipt of salary from the corporation during those years, but,
upon the claim that the salary was exempt, paid no tax. The State
Tax Commission, however, sustained the tax, and it then was paid
under protest. The Appellate Division of the Supreme Court of New
York, to which the case was taken by certiorari, upheld the view of
the Tax Commission, 245 App.Div. 452, 283 N.Y.S. 538, 545, and the
decision was affirmed by the Court of Appeals without opinion. 271
N.Y. 543, 2 N.E.2d 686.
The ground upon which the relator claimed the exemption was that
the Panama Rail Road Company was a
Page 299 U. S. 403
wholly owned instrumentality of the United States, engaged in
maintaining, operating and protecting the Panama Canal; that, as
such, the railroad company was exempt from state taxation, and, in
consequence, the fixed salaries paid to its officers and employees
were also exempt. The Appellate Division held that the railroad
company was a government controlled corporate agency engaged in a
commercial proprietary function, and was not immune from state
taxation, since, it said, such taxation did not hinder or restrain
"functions which are unquestionably properly and usually
governmental in their character."
First. The corporation was privately owned and operated
for many years; but, in 1904, the United States acquired the entire
capital stock of the corporation, and ever since has been, and now
is, the sole owner thereof. The company operates a railroad across
the Isthmus, conducts a commissary establishment for the benefit of
the personnel of the Panama Canal, the railroad company, and the
armed forces of the United States upon the Isthmus, and operates a
dairy and two hotels in connection therewith. It also operates a
line of steamships between New York and the Canal Zone, which ships
afford the personnel of the canal and of the railroad company
transportation at a nominal rate, and carry freight for the
government of the United States to the Canal Zone at 25 percent
less than the customary tariff rates.
The acquisition by the United States of the Panama Rail Road
Company was coincident with its acquisition of the control of the
Panama Canal Zone and the right to construct and maintain a ship
canal across it. Since the acquisition of the railroad company by
the government, the directors, thirteen in number, have been
elected by the Secretary of War, as sole stockholder of record of
the corporate stock with the exception of thirteen qualifying
shares held by the directors.
Page 299 U. S. 404
During the construction of the canal, the railroad was almost
exclusively employed as an adjunct of such construction, although
it was incidentally used also for commercial transportation across
the Isthmus. In
United States ex rel. Skinner & Eddy Corp.
v. McCarl, 275 U. S. 1,
275 U. S. 6, we
said: "For many years before the War, the government had employed
the Panama Railroad Company as its instrumentality in connection
with the Canal." In a footnote following that statement, we pointed
out that the stock in the railroad company was acquired in order
that the railroad might be used in the manner most helpful to the
government in constructing the canal, and cited public documents
which sustained that view.
In order to reach a correct determination of the question
whether the railroad company is exercising functions of a
governmental character, the railroad and ships are to be considered
not as things apart, but in their relation to the Panama Canal, and
it is clear that the railroad and ships, after the completion of
the canal, continued to be used chiefly as adjuncts to its
management and operation. The question therefore to be answered is
whether the canal is such an instrumentality of the federal
government as to be immune from state taxation, and, if so, are the
operations of the railroad company so connected with the canal as
to confer upon the company a like immunity?
The authority for the construction of the canal and the
acquisition of rights in connection therewith is found in the Act
of Congress of June 28, 1902, c. 1302, 32 Stat. 481. By that act,
the President was authorized to acquire for the United States all
the rights and property of the New Panama Canal Company, of France,
on the Isthmus of Panama, including the capital stock of the Panama
Rail Road Company "owned by or held for the use of said canal
company;" to acquire from the Republic of Colombia perpetual
control of the Panama Canal Zone, a strip of land six miles in
width and extending across the Isthmus,
Page 299 U. S. 405
and to construct and perpetually maintain, operate, and protect
thereon a ship canal, including "the right to perpetually maintain
and operate the Panama Railroad." The acquisition was to include
jurisdiction over the Zone and the ports at the ends thereof, and
the power to make police and sanitary rules and regulations
necessary to preserve order and preserve the public health thereon,
and to establish judicial tribunals necessary to enforce such rules
and regulations.
Section 7 of the act created a commission to carry out the
purposes of the act, and authorized the employment of engineers
necessary for the prosecution of the work. The commission was to be
subject to the direction and control of the President, and was to
make full reports of their doings, to be transmitted to Congress by
the President. Section 8 authorized the Secretary of the Treasury
to borrow, on the credit of the United States, such sums as might
be required to defray expenditures authorized by the act, not to
exceed $130,000,000, and to issue bonds of the United States as
security therefor.
The Act of August 24, 1912, c. 390, § 4, 37 Stat. 560, 561, 48
U.S.C. § 1305, authorized the President to govern and operate the
Panama Canal and the Canal Zone through a Governor of the "Panama
Canal" and other persons. The Governor was to be appointed by and
with the advice and consent of the Senate, commissioned for a term
of four years, with an annual salary of $10,000. The Governor was
to have control and jurisdiction over the Zone, which was to be
held, treated, and governed as an adjunct of the canal. 37 Stat.
564, § 7, 48 U.S.C. § 1307. Later legislation authorizes the
President to make rules and regulations in matters of health, etc.,
and imposes penalties for their violation. 48 U.S.C. § 1310. The
President is also given broad powers of police within the zone. 48
U.S.C. §§ 1312, 1313, 1314. We need not particularize further.
Chapter 6, Title 48 U.S.C., discloses
Page 299 U. S. 406
a large body of laws passed by Congress for the government and
control of the canal, and of both the Canal Zone and the railroad
company as necessary adjuncts of the canal.
That, under these laws, the creation, management, and operation
of the canal are all governmental functions and the laws well
within the constitutional power of Congress to provide for the
national defense and to regulate commerce under the commerce clause
of the Constitution does not admit of doubt.
California v.
Central Pacific Railroad Co., 127 U. S.
1,
127 U. S. 39;
Luxton v. North River Bridge Co., 153 U.
S. 525.
The building and operation of a bridge or a road or a canal is
not commerce in the substantive sense, but is the creation and use
of a physical thing as a medium by and through which commerce is
regulated, since such creation and use condition and facilitate
transportation.
Luxton v. North River Bridge Co., supra,
pp.
153 U. S.
533-534;
Pensacola Tel. Co. v. Western Union Tel.
Co., 96 U. S. 1,
96 U. S. 9-10;
cf. Carter v. Carter Coal Co., 298 U.
S. 238,
298 U. S. 297.
In recognition of the principle established by these and other
decisions, this Court, in
Wilson v. Shaw, 204 U. S.
24,
204 U. S. 33,
sustained the acquisition, construction, and maintenance of the
canal as within the commerce power of the federal government.
Such being the status of the canal, it requires no argument to
demonstrate that all auxiliaries primarily designed and used to aid
in its management and operation, and which have that effect,
partake of its nature and are themselves cooperating regulators --
or, perhaps more accurately speaking, constitute, with the canal, a
single great regulator -- of national and international commerce.
And this, we think, is the effect of the interrelation of the
railroad company's activities with the management and operation of
the canal.
If support for this view were thought necessary, it could be
found in the contemporaneous and long
Page 299 U. S. 407
continued administrative practice. On April 27, 1928, the
Secretary of War, in a letter to the President, said:
"The [steamship] Line is an integral part of the Panama Canal,
and indispensable in its discharge of its normal responsibilities.
The successful operation of this great enterprise, which is of
vital importance to the United States, demands absolute security as
to its line of supply to this country."
Section 500 of the War Revenue Act of 1917 (40 Stat. 314) levied
a tax upon sums paid for transportation by rail and water, but
exempted (§ 502) therefrom payments received for services rendered
to the United States, etc. The Commissioner of Internal Revenue
held that transportation services performed for the Panama Rail
Road Company fell within the exemption, on the ground that they
were, "in substance, payments for services rendered the United
States."
Article 96, Department Regulations No. 49, revision of June,
1921, declares that transportation services rendered to agencies of
the United States are exempt from the tax, and enumerates as among
such agencies the Panama Rail Road Company. The commissioner had
likewise held that the railroad company was not subject to the
capital stock tax imposed by the Revenue Act of 1918 (40 Stat.
1126), because the company was a government agency. Again, on
September 20, 1926, the Commissioner of Internal Revenue advised
the company that, inasmuch as it was a governmental agency, it was
not required to file federal income tax returns or to pay federal
income taxes. No act of Congress suggests any different view, but
all such legislation, so far as it deals with the subject,
recognizes its correctness.
We attach no importance to the fact that the railroad company
has utilized both its ships and railroad to carry private freight
and passengers. The record shows that this is done to a limited
extent compared with the government business, and that it is only
incidental to the
Page 299 U. S. 408
governmental operations. The primary purpose of the enterprise
being legitimately governmental, its incidental use for private
purposes affords no ground for objection.
United States v.
Chandler-Dunbar Co., 229 U. S. 53,
229 U. S. 73;
Ashwander v. Tennessee Valley Authority, 297 U.
S. 288,
297 U. S. 333.
The first of these two cases dealt with the disposition of excess
water power developed by a project to improve navigation, and the
second with the disposition of surplus electric energy developed by
a like project. But the principle is equally applicable to the
situation here.
It is suggested that the dairy, hotels, and other enterprises
built and maintained by the company are not governmental
instrumentalities. Even if we accept that conclusion -- which, in
view of their use for the personnel of the railroad and canal, we
are far from doing -- it would not alter the fact that the railroad
itself, in connection with the canal, is a federal
instrumentality.
Second. The power of the federal government to use a
corporation as a means to carry into effect the substantive powers
granted by the Constitution has never been doubted since
McCulloch v.
Maryland, 4 Wheat. 316. The Panama Rail Road
Company was acquired, and has been utilized, in virtue of that
power. The railroad company being immune from state taxation, it
necessarily results that fixed salaries and compensation paid to
its officers and employees in their capacity as such are likewise
immune.
In
Dobbins v. Commissioners of
Erie County, 16 Pet. 435,
41 U. S.
448-449, this Court held that a state was without
authority to tax the instruments or compensation of persons which
the United States may use and employ as necessary and proper means
to execute its sovereign power. The rule is well established, and
the reasons upon which it is based and the authorities sustaining
it have been so recently reviewed by this Court,
Indian
Page 299 U. S. 409
Motocycle Co. v. United States, 283 U.
S. 570,
283 U. S. 575,
et seq., that further discussion is unnecessary.
The rule itself is not denied, but it was suggested in the court
below by counsel for the state, and the suggestion was repeated
here, albeit faintly, that the record does not establish whether
relator was an officer or employee of the railroad company or an
independent contractor. The point was not made or suggested either
before the State Tax Commission or in the Appellate Division of the
Supreme Court. The whole question there was whether the company was
subject to taxation, and it quite evidently was taken for granted
that a negative answer to that question would carry with it an
exemption of relator's salary. It is conceded that the point was
raised by counsel for the state for the first time in the Court of
Appeals, and that, in reply to a question from that bench whether
he wished the case decided upon that point, counsel answered in the
negative and declared that the state wanted a decision upon the
merits.
Under these circumstances, it is not surprising that the
obligation of the relator to prove his case in this regard was
somewhat perfunctorily discharged. The record, however, does show
that relator was, and had been ever since the year 1906, general
counsel for the railroad company with a fixed annual salary, in the
same category in respect of the railroad company as the secretary
and treasurer. We think this evidence sufficiently negatives the
belated suggestion that relator may have been an independent
contractor, and not an officer, within the rule stated and
discussed in
Metcalf & Eddy v. Mitchell, 269 U.
S. 514,
269 U. S.
524-526.
Reversed and remanded for further proceedings not
inconsistent with this opinion.
MR. JUSTICE STONE took no part in the consideration or decision
of this case.