1. The water system of the City of New York was created and is
conducted in the exercise of the City's governmental functions, and
the salary of the Chief Engineer of the City's Bureau of Water
Supply is immune from federal taxation. Pp.
300 U. S. 360,
300 U. S.
366.
The Chief Engineer holds his office by statutory authority with
a fixed annual salary. He exercises supervision over the
engineering details connected with the supplying of water for
public purposes and for consumption by the inhabitants of the City;
supervises the protection of the water supply from pollution, and
generally exercises control over the operation of the water system,
its personnel, expenditure of money, and other matters relating
thereto. The opinion sketches the history of the system, developed
under legislative authority, and indicates its vital importance
from both public and private standpoints.
2. This activity may be deemed an essential governmental
function of the State. P.
300 U. S.
362.
3. The rule that forbids the United States to tax the
governmental instrumentalities of the States, and vice versa, is
necessarily implied in the Constitution as essential to the
preservation of our form of government; its application is a
question of national scope to be resolved by principles of general
application. P.
300 U. S.
364.
4. Local rulings attempting to separate governmental from
corporate activities in determining whether municipalities are
suable for the torts of their agents should be applied with caution
as a test in determining what municipal activities are subject to
federal taxation. P.
300 U. S.
363.
5. The conclusion that the acquisition and distribution of a
supply of water for the needs of New York City involve the exercise
of essential governmental functions is fortified by a consideration
of the public uses to which the water is put, and the dependency of
the health and comfort of the inhabitants upon an adequate supply
of pure water. P.
300 U. S.
370.
Page 300 U. S. 353
6. The fact that, in former times, the business of furnishing
water to urban communities, including New York, was left largely or
entirely to private enterprise is not a reason for holding that the
function, when performed by the City, is not governmental. P.
300 U. S.
371.
7. Governmental functions are not to be regarded as nonexistent
because they were held in abeyance and have but recently been
called into use. P.
300 U. S.
371.
8. The fact that the City makes a charge for water service to
private consumers does not stamp the function of supplying water as
a private one. P.
300 U. S.
372.
9.
South Carolina v. United States, 199 U.
S. 437,
199 U. S.
461-462, and
Flint v. Stone Tracy Co.,
220 U. S. 107,
220 U. S. 172,
distinguished. Dicta in an opinion by way of illustration do not
control in subsequent cases in which the precise point is presented
for decision. P.
300 U. S.
373.
85 F.2d 32 reversed.
Certiorari, 299 U.S. 56, to review a judgment affirming an order
of the Board of Tax Appeals which sustained a deficiency income tax
assessment on the salary of the petitioner in this case.
Page 300 U. S. 359
MR. JUSTICE SUTHERLAND delivered the opinion of the Court.
The question brought here for determination is whether the
salary of petitioner as chief engineer of the bureau of water
supply of the city of New York is a part of his taxable income for
the purposes of the federal income
Page 300 U. S. 360
tax law. The answer depends upon whether the water system of the
city was created and is conducted in the exercise of the city's
governmental functions. If so, its operations are immune from
federal taxation and, as a necessary corollary, "fixed salaries and
compensation paid to its officers and employees in their capacity
as such are likewise immune."
New York ex rel. Rogers v.
Graves, 299 U. S. 401.
Petitioners holds his office as chief engineer by statutory
authority, with a fixed annual salary of $14,000. He exercises
supervision over the engineering details connected with the
supplying of water for public purposes and for consumption by the
inhabitants of the city; supervises the protection of the water
supply from pollution, and generally exercises control over the
operation of the water system, its personnel, expenditure of money,
and other matters relating thereto.
In the early history of the city, water was furnished by private
companies; but, a century or more ago, the city itself began to
take over the development and distribution. In 1831, the board of
aldermen declared its dissatisfaction with the private control, and
resolved that the powers then vested in private hands should be
repealed by the Legislature and vested exclusively in the
Corporation of the City of New York. This, in effect, was initiated
in 1833 (Laws 1833, c. 36), and soon thereafter the city
constructed municipal waterworks and, with slight exceptions,
private control and operation ceased. The sources of water supply
furnished by such companies as remain is approaching exhaustion,
and the water furnished is of a quality inferior to that supplied
by the municipality. From 1833 to the present time, additions to
the water supply and system have been steadily made until the cost
has mounted to more than $500,000,000, and it is estimated that
additional expenditures of a quarter of a billion dollars will be
necessary.
Page 300 U. S. 361
The cost of bringing water from the Catskills alone amounted to
approximately $200,000,000. The municipal outstanding bonded
indebtedness incurred for supplying the city with water amounts to
an enormous sum. More than half the entire population of the state
is found within the municipal boundaries. The action of the city
from the beginning has been taken under legislative authority.
The Commissioner of Internal Revenue having assessed a
deficiency tax against petitioner in respect of his salary,
petitioner sought a redetermination at the hands of the Board of
Tax Appeals. That board sustained the commissioner and decreed a
deficiency against petitioner of $256.27 for the year 1931. Upon
review, the court below affirmed the decree of the board. 85 F.2d
32. While the sum involved is small, we granted the writ of
certiorari because of the obvious importance of the question
involved.
The phrase "governmental functions," as it here is used, has
been qualified by this Court in a variety of ways. Thus, in
South Carolina v. United States, 199 U.
S. 437,
199 U. S. 461,
it was suggested that the exemption of state agencies and
instrumentalities from federal taxation was limited to those which
were of a strictly governmental character, and did not extend to
those used by the state in carrying on an ordinary private
business. In
Flint v. Stone Tracy Co., 220 U.
S. 107,
220 U. S. 172,
the immunity from taxation was related to the essential
governmental functions of the state. In
Helvering v.
Powers, 293 U. S. 214,
293 U. S. 225,
we said 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."
And immunity is not established because the state has the power
to engage
Page 300 U. S. 362
in the business for what the state conceives to be the public
benefit.
Id. In
United States v. California,
297 U. S. 175,
297 U. S. 185,
the suggested limit of the federal taxing power was in respect of
activities in which the states have traditionally engaged.
In the present case, upon the one side, stress is put upon the
adjective "essential," as used in the
Flint v. Stone Tracy
Co. case, while, on the other side, it is contended that this
qualifying adjective must be put aside in favor of what is thought
to be the greater reach of the word "usual," as employed in the
Powers case. But these differences in phraseology, and the
others just referred to, must not be too literally
contradistinguished. In neither of the cases cited was the
adjective used as an exclusive or rigid delimitation. For present
purposes, however, we shall inquire whether the activity here in
question constitutes an essential governmental function within the
proper meaning of that term, and in that view decide the case.
There probably is no topic of the law in respect of which the
decisions of the state courts are in greater conflict and confusion
than that which deals with the differentiation between the
governmental and corporate powers of municipal corporations. This
condition of conflict and confusion is confined in the main to
decisions relating to liability in tort for the negligence of
officers and agents of the municipality. In that field, no definite
rule can be extracted from the decisions. [
Footnote 1] It is true that
Page 300 U. S. 363
in most of the state courts, including those in the State of New
York, it is held that the operation of waterworks falls within the
category of corporate activities, and the city's liability is
affirmed in tort actions arising from negligence in such operation.
But the rule in respect of such cases, as we pointed out in
Trenton v. New Jersey, 262 U. S. 182,
262 U. S. 192, has
been
"applied to escape difficulties, in order that injustice may not
result from the recognition of technical defenses based upon the
governmental character of such corporations;"
and the rule is hopelessly indefinite, probably for that very
reason.
This is not, however, an action for personal injuries sounding
in tort, but a proceeding which seeks in effect to determine
whether immunity from federal taxation, in respect of the activity
in question, attaches in favor of a state-created municipality --
an objective so different in character from that sought in a tort
action as to suggest caution in applying as the guide to a decision
of the former a local rule of law judicially adopted in order to
avoid supposed injustices which would otherwise result in the
latter. We have held, for example, that the sale of motorcycles to
a municipal corporation for use in its police service is not
subject to federal taxation, because the maintenance of such a
service is a governmental function.
Indian Motocycle Co. v.
United States, 283 U. S. 570,
283 U. S. 579.
And, while it is true that the weight of authority in tort actions
accords with that view, there are state decisions which affirm the
liability of a municipality for personal injury resulting from the
negligence of its police officials under the circumstances
presented in the respective cases dealt with. [
Footnote 2] Nevertheless, our
Page 300 U. S. 364
decision in the
Indian Motocycle case did not rest in
the slightest degree upon a consideration of the state rule in
respect of tort actions, but upon a broad consideration of the
implied constitutional immunity arising from the dual character of
our national and state governments.
The rule in respect of municipal liability in tort is a local
matter, and whether it shall be strict or liberal or denied
altogether is for the state which created the municipality alone to
decide (
Detroit v. Osborne, 135 U.
S. 492,
135 U. S.
497-498) -- provided, of course, the Federal
Constitution be not infringed. But a federal tax in respect of the
activities of a state or a state agency is an imposition by one
government upon the activities of another, and must accord with the
implied federal requirement that state and local governmental
functions be not burdened thereby. So long as our present dual form
of government endures, the states, it must never be forgotten, "are
as independent of the general government as that government within
its sphere is independent of the States."
Collector
v. Day, 11 Wall. 113,
78 U. S. 124.
And, as it was said in
Texas v.
White, 7 Wall. 700,
74 U. S. 725,
and often has been repeated,
"the preservation of the States, and the maintenance of their
governments, are as much within the design and care of the
Constitutions as the preservation of the Union and the maintenance
of the National government."
The unimpaired existence of both governments is equally
essential. It is to that high end that this Court has recognized
the rule, which rests upon necessary implication, that neither may
tax the governmental means and instrumentalities of the other.
Collector v. Day, supra, p.
78 U. S. 127.
In the light of these considerations, it follows that the question
here presented is not controlled by local law, but is a question of
national scope to be resolved in harmony with implied
constitutional principles
Page 300 U. S. 365
of general application.
Compare Workman v. New York
City, 179 U. S. 552,
179 U. S. 557.
This indicated dissimilarity constitutes a distinction which is
fundamental, and we put aside the state decisions in tort actions
as inapposite.
Compare Atlantic Cleaners & Dyers v. United
States, 286 U. S. 427,
286 U. S. 433
et seq.
We thus come to a situation, which the courts have frequently
been called upon to meet, where the issue cannot be decided in
accordance with an established formula, but where points along the
line "are fixed by decisions that this or that concrete case falls
on the nearer or farther side."
Hudson County Water Co. v.
McCarter, 209 U. S. 349,
209 U. S. 355.
We are, of course, quite able to say that certain functions
exercised by a city are clearly governmental -- that is, lie upon
the nearer side of the line -- while others are just as clearly
private or corporate in character, and lie upon the farther side.
But between these two opposite classes there is a zone of debatable
ground within which the cases must be put upon one side or the
other of the line by what this Court has called the gradual process
of historical and judicial "inclusion and exclusion."
Continental Bank v. Chicago, R.I. & P. Ry. Co.,
294 U. S. 648,
294 U. S. 670,
and cases cited.
We think, therefore, that it will be wise to confine as strictly
as possible the present inquiry to the necessities of the immediate
issue here involved, and not, by an attempt to formulate any
general test, risk embarrassing the decision of cases in respect of
municipal activities of a different kind which may arise in the
future.
Cf. Euclid v. Ambler Realty Co., 272 U.
S. 365,
272 U. S. 397;
Metcalf & Eddy v. Mitchell, 269 U.
S. 514,
269 U. S. 523.
In the case last named, we had occasion to point out the
difficulty, albeit the necessity, as cases arise within the
doubtful zone, of drawing the line which separate those activities
which have some relation to government but are subject to taxation
from those which are immune. "Experience has shown,"
Page 300 U. S. 366
we said,
"that there is no formula by which that line may be plotted with
precision in advance. But recourse may be had to the reason upon
which the rule rests, and which must be the guiding principle to
control its operation. Its origin was due to the essential
requirement of our constitutional system that the federal
government must exercise its authority within the territorial
limits of the states, and it rests on the conviction that each
government, in order that it may administer its affairs within its
own sphere, must be left free from undue interference by the
other."
The public interest in the conservation and distribution of
water for a great variety of purposes -- ranging from ordinary
agricultural, domestic, and sanitary uses, to the preservation of
health and of life itself -- is obvious and well settled. For the
modern city, such conservation and distribution of water in
sufficient quantity and in a state of purity is as vital as air.
And this vital necessity becomes more and more apparent and
pressing as cities increase in population and density of
population. It has found, so far, its culminating point in the vast
and supreme needs of the City of New York.
One of the most striking illustrations of the public interest in
the use of water and the governmental power to deal with it is
shown in legislation and judicial pronouncement with respect to the
arid land states of the far West. In some of them, the state
constitution asserts public ownership of all unappropriated
nonnavigable waters. In Utah, while it was still a territory, a
statute conferred the right upon individual landowners to condemn
rights of way across the lands of others in order to convey water
to the former for irrigation purposes, and declared that such
condemnation was for a "public use." This Court upheld the statute.
Clark v. Nash, 198 U. S. 361. We
said that what is a public use may depend upon
Page 300 U. S. 367
the facts surrounding the subject; pointed out the vital need of
water for irrigation in the arid land states, a need which did not
exist in the states of the east and where, consequently, a
different rule obtained, and held that the court must recognize the
difference of climate and soil which rendered necessary differing
laws in the two groups of states.
Many years ago, Congress, recognizing this difference, passed
the Desert Land Act (chapter 107, 19 Stat. 377), by which, among
other things, the waters upon the public domain in the arid land
states and territories were dedicated to the use of the public for
irrigation and other purposes. Following this act, if not before,
all nonnavigable waters then on and belonging to that part of the
national domain became
publici juris, subject to the
plenary control of the arid land states and territories with the
right to determine to what extent the rule of appropriation or the
common law rule in respect of riparian rights should obtain.
California Oregon Power Co. v. Cement Co., 295 U.
S. 142,
295 U. S. 155
et seq. And in
Kansas v. Colorado, 206 U. S.
46,
206 U. S. 94,
this Court entertained and decided a controversy between two states
involving the right of private appropriators in Colorado to divert
waters for the irrigation of lands in that state from a river
naturally and customarily flowing into the state of Kansas. It was
held (p.
206 U. S. 99)
that such a controversy rises "above a mere question of local
private right, and involves a matter of state interest, and must be
considered from that standpoint."
Cf. Hudson County Water Co.
v. McCarter, 209 U. S. 349,
209 U. S. 355;
New Orleans Gas Light Co. v. Drainage Comm'n, 197 U.
S. 453,
197 U. S. 460;
Houck v. Little River Drainage District, 239 U.
S. 254,
239 U. S.
261.
In
New Orleans v. Morris, 105 U.
S. 600,
105 U. S. 602,
the city had conveyed its waterworks to a corporation formed for
the purpose of maintaining and enlarging them.
Page 300 U. S. 368
The city received as consideration shares of stock, which a
state statute declared should not be liable to seizure for the
debts of the city. It was held the statute did not impair the
obligation of any contract, since the shares represented the city's
ownership in the waterworks which had, before the enactment of the
statute, been exempted from seizure and sale. This ruling was put
upon the ground that the waterworks were of such public utility and
necessity that they were held in trust for the use of the citizens
the same as public parks and public buildings.
While these do not decide, they plainly suggest, that municipal
waterworks created and operated in order to supply the needs of a
city and its inhabitants are public works, and their operation
essentially governmental in character. Other decisions of this
Court, however, more directly support that conclusion.
We recently have held that the bankruptcy statutes could not be
extended to municipalities or other political subdivisions of a
state.
Ashton v. Cameron County Water District,
298 U. S. 513. The
respondent there was a water improvement district organized by law
to furnish water for irrigation and domestic uses. We said (pp.
298 U. S.
527-528) that respondent was a political subdivision of
the state
"created for the local exercise of her sovereign powers. . . .
Its fiscal affairs are those of the state, not subject to control
or interference by the national government unless the right so to
do is definitely accorded by the Federal Constitution."
In support of that holding, former decisions of this Court with
respect to the immunity of states and municipalities from federal
taxation were relied upon as apposite. The question whether the
district exercised governmental or merely corporate functions was
distinctly in issue. The petition in bankruptcy alleged that the
district was created with power to perform "the proprietary and/or
corporate function of furnishing
Page 300 U. S. 369
water for irrigation and domestic uses. . . ." The district
judge held that the district was created for the local exercise of
state sovereign powers; that it was exercising "a governmental
function;" that its property was public property; that it was not
carrying on private business, but public business. That court
having denied the petition for want of jurisdiction, the district
submitted a motion for a new trial in which it assigned, among
other things, that the court erred in holding that petitioner was
created for the purpose of performing governmental functions,
"for the reason that the courts of Texas, as well as the other
courts in the nation, have uniformly held that the furnishing of
water for irrigation was purely a proprietary function. . . ."
Substantially the same thing was repeated in other assignments
of error. In the petition for rehearing in this Court, the district
challenged our determination that respondent was a political
subdivision of the state "created for the local exercise of her
sovereign powers," and asserted to the contrary that the facts
would demonstrate that "respondent is a corporation organized for
essentially proprietary purposes." It is not open to dispute that
the statements quoted from our opinion in the
Ashton case
were made after due consideration, and the case itself decided and
the rehearing denied in the light of the issue thus definitely
presented.
Compare Binghmam v. United States, 296 U.
S. 211,
296 U. S.
218-219.
"No higher police duty rests upon municipal authority," this
Court said in
Columbus v. Mercantile Trust Co.,
218 U. S. 645,
218 U. S.
658,
"than that of furnishing an ample supply of pure and wholesome
water for public and domestic uses. The preservation of the health
of the community is best obtained by the discharge of this duty, to
say nothing of the preservation of property from fire, so constant
an attendant upon crowded conditions of municipal life. "
Page 300 U. S. 370
In
Dunbar v. New York City, 251 U.
S. 516, we sustained a charter provision giving a lien
for water charges upon a building in which the water had been used,
although the charges had been incurred by tenants and not by the
owner, saying,
"And, as a supply of water is necessary, it is only an ordinary
and legal exertion of government to provide means for its
compulsory compensation."
In
German Alliance Ins. Co. v. Homewater Supply Co.,
226 U. S. 220, the
City of Spartanburg had entered into a contract with the respondent
by which the latter was empowered to supply the city and its
inhabitants with water suitable for fire, sanitary, and domestic
purposes. The petitioner had issued a policy of fire insurance upon
certain property, which was destroyed by fire. It paid the amount
of the loss, and took an assignment from the insured of all claims
and demands against any person arising from or connected with the
loss. It brought suit against the respondent on the ground that the
fire could easily have been extinguished if respondent had complied
with its contract. This Court held that the action was not
maintainable for reasons which appear in the opinion. The city, it
was said, was under no legal obligation to furnish water, and it
did not subject itself to a new or greater liability because it
voluntarily undertook to do so (pp.
226 U. S.
227-228).
"It acted in a governmental capacity, and was no more
responsible for failure in that respect than it would have been for
failure to furnish adequate police protection."
We conclude that the acquisition and distribution of a supply of
water for the needs of the modern city involve the exercise of
essential governmental functions, and this conclusion is fortified
by a consideration of the public uses to which the water is put.
Without such a supply, public schools, public sewers so necessary
to preserve health, fire departments, street sprinkling and
cleaning, public buildings, parks, playgrounds, and public
baths
Page 300 U. S. 371
could not exist. And this is equivalent, in a very real sense,
to saying that the city itself would then disappear. More than
one-fourth of the water furnished by the City of New York, we are
told by the record, is utilized for these public purposes.
Certainly the maintenance of public schools, a fire department, a
system of sewers, parks, and public buildings, to say nothing of
other public facilities and uses, calls for the exercise of
governmental functions. And, so far as these are concerned, the
water supply is a necessary auxiliary, and therefore partakes of
their nature.
New York ex rel. Rogers v. Graves,
299 U. S. 401,
299 U. S. 406.
Moreover, the health and comfort of the city's population of
7,000,000 souls, and in some degree their very existence, are
dependent upon and adequate supply of pure and wholesome water. It
may be, as it is suggested, that private corporations would be able
and willing to undertake to provide a supply of water for all
purposes; but if the State and City of New York be of opinion, as
they evidently are, that the service should not be intrusted to
private hands, but should be rendered by the city itself as an
appropriate means of discharging its duty to protect the health,
safety, and lives of its inhabitants, we do not doubt that it may
do so in the exercise of its essential governmental functions.
We find nothing that detracts from this view in the fact that,
in former times, the business of furnishing water to urban
communities, including New York, in fact was left largely, or even
entirely, to private enterprise. The tendency for many years has
been in the opposite direction; until now, in nearly all the larger
cities of the country, the duty has been assumed by the municipal
authorities. Governmental functions are not to be regarded as
nonexistent because they are held in abeyance or because they lie
dormant for a time. If they be by their nature governmental, they
are none the less so because the use of them has had a recent
beginning.
Page 300 U. S. 372
The principle finds illustration in our decision in
Shoemaker v. United States, 147 U.
S. 282,
147 U. S. 297,
where it was held that land taken by an exercise of the power of
eminent domain for the establishment of Rock Creek Park in the
District of Columbia was taken for a public use, and that the
amount required to be paid was validly assessed upon lands in the
district specially benefited thereby. At the beginning of the
opinion in that case, this Court said:
"In the memory of men now living, a proposition to take private
property, without the consent of its owner, for a public park, and
to assess a proportionate part of the cost upon real estate
benefited thereby, would have been regarded as a novel exercise of
legislative power."
It was pointed out that Central Park in New York was the first
place provided for the inhabitants of any city or town in the
United States as a pleasure ground for rest and exercise in the
open air, but that in, 1892, when the opinion was written, there
was scarcely a city of any considerable size in the country that
did not have, or had not projected, such parks.
Respondent contends that the municipality, in supplying water to
its inhabitants, is engaged in selling water for profit, and seems
to think that this, if true, stamps the operation as private, and
not governmental, in character. We first pause to observe that the
overhead due to the enormous cost of the system, and the fact that
so large a proportion of the water is diverted for public use,
rather plainly suggests that no real profit is likely to result.
And to say that, because the city makes a charge for furnishing
water to private consumers, it follows that the operation of the
water works is corporate, and not governmental, is to beg the
question. What the city is engaged in doing in that respect is
rather rendering a service than selling a commodity. If that
service be governmental, it does not become private because a
charge is made for it, or a profit realized. A state, for
example,
Page 300 U. S. 373
constructs and operates a highway. It may, if it choose, exact
compensation for its use from those who travel over it (
see
Bingaman v. Golden Eagle Western Lines, 297 U.
S. 626,
297 U. S.
628); but this does not destroy the claim that the
maintenance of the highway is a public and governmental function.
The state or the city may exact a tuition charge for instruction in
the public schools; but thereby the maintenance of the public
schools does not cease to be a function of the government. The
state exacts a fee for issuing a license or granting a permit; for
recording a deed; for rendering a variety of services in the
judicial department. Do these various services thereby lose their
character as governmental functions? The federal Post Office
Department charges for its services, but no one would question the
fact that its operation calls into exercise a governmental
function.
The contention is made that our decisions in
South Carolina
v. United States, 199 U. S. 437,
199 U. S.
461-462, and
Flint v. Stone Tracy Co.,
220 U. S. 107,
220 U. S. 172,
are to the effect that the supplying of water is not a governmental
function; but in neither case was that question in issue, and what
was said by the Court was wholly unnecessary to the disposition of
the cases and merely by way of illustration. Expressions of that
kind may be respected, but do not control in a subsequent case when
the precise point is presented for decision.
Osaka Shosen
Kaisha Line v. United States, ante, p.
300 U. S. 98, and
authorities cited. The precise point is presented here, has been
fully considered, and is decided otherwise. Neither
Ohio v.
Helvering, 292 U. S. 360, nor
Helvering v. Powers, 293 U. S. 214,
relied upon by respondent, is in point. What has already been said
distinguishes those cases from the one now under consideration.
We have not failed to give careful consideration to
Blair v.
Byers, 35 F.2d 326, and
Denman v. Comm'r Int.Rev., 73
F.2d 193, both of which take a view contrary
Page 300 U. S. 374
to that which we have expressed. To the extent of this conflict,
those cases are disapproved. Both rely on
South Carolina v.
United States and
Flint v. Stone Tracy Co., supra,
which we have already distinguished.
Reversed.
[
Footnote 1]
This is brought out in a careful and detailed review by
Professor Borchard in that portion of his general discussion of
"Government Liability in Tort" dealing with municipal corporations,
to be found in (1924-1925) 34 Yale L.J. 129-143, 229-258, in the
course of which he says (p. 129):
"Disagreement among the courts as to many customary municipal
acts and functions may almost be said to be more common than
agreement, and the elaboration of the varying justifications for
their classification is even less satisfying to any demand for
principle in the law. Indeed, so hopeless did the effort of the
courts to make an appropriate classification of functions appear to
the Supreme Court of South Carolina that they determined to abandon
the distinction between governmental and corporate acts."
[
Footnote 2]
See Herron v. Pittsburgh, 204 Pa. 509, 513, 54 A. 311;
Jones v. Sioux City, 185 Iowa, 1178, 1185, 170 N.W. 445;
Twist v. Rochester, 37 App.Div. 307; 55 N.Y.S. 850.
Compare Kunz v. Troy, 104 N.Y. 344, 348, 10 N.E. 442,
with Altvater v. Mayor of Baltimore, 31 Md. 462.
MR. JUSTICE STONE and MR. JUSTICE CARDOZO, concurring in the
result:
We concur in the result upon the ground that the petitioner has
brought himself within the terms of the exemption prescribed by
Treasury Regulation 74, Article 643, which, for the purposes of
this case, may be accepted as valid, its validity not being
challenged by counsel for the government.
In the absence of such a challenge, no opinion is expressed as
to the need for revision of the doctrine of implied immunities
declared in earlier decisions.
We leave that subject open.
MR. JUSTICE ROBERTS, dissenting.
I regret that I am unable to concur in the opinion of the Court.
I think that the judgment should be affirmed.
There is no occasion now to discuss the dual character of our
form of government, and the consequent dual allegiance of a citizen
of a state to his state and to the United States, to elaborate the
thesis that the integrity of each government is to be maintained
against invasions by the other, or to reiterate that the implied
immunity of the one from taxation by the other springs from the
necessity that neither shall, by the exercise of the power to tax,
burden, hinder, or destroy the operation or existence of the other.
There is universal recognition of the truth of these tenets, and of
their fundamental relation to the preservation of the
constitutional framework of the nation. Our difficulties arise not
in their statement as guiding principles, but, as in this instance,
in their application to specific cases.
Page 300 U. S. 375
The frank admissions of counsel at the bar concerning the
confusion and apparent inconsistency in administrative rulings as
to the taxability of compensation of municipal employees seem to
call for an equally candid statement that our decisions in the same
field have not furnished the executive a consistent rule of action.
The need of equitable and uniform administration of tax laws,
national and state, and the just demand of the citizen that the
rules governing the enforcement of those laws shall be
ascertainable require an attempt at rationalization and
restatement.
It seems to me that the reciprocal rights and immunities of the
national and a state government may be safeguarded by the
observance of two limitations upon their respective powers of
taxation. These are that the exactions of the one must not
discriminate against the means and instrumentalities of the other,
and must not directly burden the operations of that other. To state
these canons otherwise, an exaction by either government which hits
the means or instrumentalities of the other infringes the principle
of immunity if it discriminates against them and in favor of
private citizens or if the burden of the tax be palpable and
direct, rather than hypothetic and remote. Tested by these
criteria, the imposition of the challenged tax in the instant case
was lawful.
The petitioner is a citizen of New York. By virtue of that
status, he is also a citizen of the United States. He owes
allegiance to each government. He derives income from the exercise
of his profession. His obligation as a citizen is to contribute to
the support of the governments under whose joint protection he
lives and pursues his calling. His liability to fulfill that
obligation to the national government by payment of income tax upon
his salary would be unquestioned were it not for the character of
his employer. If the water works of New York
Page 300 U. S. 376
City were operated by a private corporation under a public
franchise, and if the petitioner held a like position with the
corporation, there could be no question that the imposition of a
federal income tax, measured by his compensation, would be
justified. If petitioner, instead of holding a so-called official
position under the municipal government of New York City, were
consulted from time to time with respect to its water problems, his
compensation would be subject to income tax.
Metcalf & Eddy
v. Mitchell, 269 U. S. 514. He
is put into an untaxable class upon the theory that, as an official
of the municipality, which in turn is an arm of the state, he is an
"instrumentality" of the state, and to tax him upon his salary is
to lay a burden upon the state government which, however trifling,
is forbidden by the implied immunity of the state from burdens
imposed by the United States. The petitioner seeks to show the
reality of the supposed burden by the suggestion that, if his
salary and the compensation of others employed by the city is
subject to federal income tax, the municipality will be compelled
to pay higher salaries in order to obtain the services of such
persons, and the consequent aggregate increase in outlay will
entail a heavy financial load. We know, however, that professional
services are offered in the industrial and business field, and
that, while there is no hard and fast standard of compensation, and
men bargain for their rewards, salaries do bear some relation to
experience and ability. There is a market in which a professional
man offers his services and municipalities are bidders in that
market. We know further that those in private employment holding
positions comparable to that of the petitioner pay a tax equal to
that levied upon him. It is clear that any consideration of the
petitioner's immunity from federal income tax would be altogether
remote, impalpable, and unascertainable in influencing
Page 300 U. S. 377
him to accept a position under the municipality, rather than
under a private employer.
In reason and logic, it is difficult to differentiate the
present case from that of a private citizen who furnishes goods,
performs work, or renders service to a state or a municipality
under a contract or an officer or employee of a corporation which
does the same. Income tax on the compensation paid or the profit
realized is a necessary cost incident to the performance of the
contract, and, as such, must be taken into account in fixing the
consideration demanded of the city government. In quite as real a
sense as in this case, the taxation of income of such persons and,
as well, the taxation of the corporation itself, lays a burden upon
the funds of the state or its agency. Nevertheless, the courts have
repeatedly declared that the doctrine of immunity will not serve to
exempt such persons or corporations from the exaction.
The importance of the case arises out of the fact that the
claimed exemption may well extend to millions of persons (whose
work nowise differs from that of their fellows in private
enterprise) who are employed by municipal subdivisions and
districts throughout the nation, and that, on the other hand, the
powers of the states to tax may be inhibited in the case of
hundreds of thousands of similar employees of federal agencies of
one sort or another. Such exemptions from taxation ought to be
strictly limited. They are essentially unfair. They are unsound
because federal or state business ought to bear its proportionate
share of taxation in order that comparison may be made between the
cost of conducting public and private business.
We are here concerned only with the question of the taxation of
salaries or compensation received by those rendering to a
municipality services of the same kind as are rendered to private
employers, and need not go beyond
Page 300 U. S. 378
the precise issue here presented. We have no concern with the
exaction of a sales tax by the federal government on sales to a
state government or one of its subdivisions, or the reverse; we are
not called upon to define the power to levy taxes upon real
property owned by a state or by the national government. We have no
occasion to discuss the power of either government to impose excise
taxes upon transactions of the other, or upon the evidence of such
transactions. Nor are we called upon here to determine the validity
of a nondiscriminatory tax upon the salary of a governmental
officer whose duties and functions have no analogue in the conduct
of a business or the pursuit of a profession, but are both peculiar
to and essential to the operation of government. The sole question
here is whether one performing work or rendering service of a type
commonly done or rendered in ordinary commercial life for gain is
exempt form the normal burden of a tax on that gain for the support
of the national government because his compensation is paid by a
state agency instead of a private employer. I think the imposition
of a tax upon such gain where, as here, the tax falls equally upon
all employed in like occupation, and where the supposed burden of
the tax upon state government is indirect, remote, and
imponderable, is not inconsistent with the principle of immunity
inherent in the constitutional relation of state and nation.
MR. JUSTICE BRANDEIS joins in this opinion.