Brush v. Commissioner of Internal Revenue

• Decision Date: 13 July 1936
• Docket Number: No. 246.,246.
• Citation: 85 F.2d 32
• Parties: BRUSH v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

85 F.2d 32 (1936)

BRUSH v. COMMISSIONER OF INTERNAL REVENUE.^*

No. 246.

Circuit Court of Appeals, Second Circuit.

July 13, 1936.

Cotton, Franklin, Wright & Gordon, of New York City (Boykin C. Wright and Charles C. Parlin, both of New York City, of counsel), for petitioner.

Frank J. Wideman and Robert H. Jackson, Asst. Attys. Gen., and Sewall Key and Joseph M. Jones, Sp. Assts. to Atty. Gen., for respondent.

John J. Bennett, Jr., Atty. Gen., of State of New York, Henry Epstein, Sol. Gen., of State of New York, of Albany, N. Y., and Paul Windels, Corp. Counsel, of New York City (Julius Henry Cohen and Austin J. Tobin, both of New York City, on the brief), filed a brief as amici curiæ.

Before MANTON, L. HAND, and CHASE, Circuit Judges.

CHASE, Circuit Judge.

The deficiency in controversy was created by including in the 1931 taxable income of the petitioner the salary he received in that year from the city of New York as compensation for his services as the chief engineer of its Bureau of Water Supply. It was taxed in supposed compliance with the provisions of section 22 of the Revenue Act of 1928 (45 Stat. 791 26 U.S.C.A. § 22 and note), defining "gross income" to include "gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid," and T.R. 74 Art. 643, which recognizes the immunity from federal taxation of the compensation "paid to its officers and employees by a State or political subdivision thereof for services rendered in connection with the exercise of an essential governmental function of the State or political subdivision * * *."

During 1931, the petitioner was regularly employed, as he had been previously for many years, by the city of New York as the engineer in charge of its Bureau of Water Supply. This was a statutory office for which he had duly qualified. He was paid a fixed salary and was charged in general with the responsibility for supervising the maintenance of an adequate supply of pure and wholesome water for the city of New York and its inhabitants. The water for public and private use in that city for the most part, though not wholly, comes from an enormous system owned by the city which has cost about half a billion dollars and which must be still further enlarged to meet the ever growing demands upon it. Petitioner's duties require him to make surveys, plans, and reports relative to improvements and enlargements of the system as well as to maintain in good condition the reservoirs, mains, and equipment already possessed.

The carrying charges are paid from the general funds of the city into which goes all revenue received from the sale of water to private consumers for household, commercial, or other use. Large annual deficits in operation have been incurred which have been, or are to be, paid out of the general funds of the city. About 25 per cent. of the expenses of operation are properly allocated to the furnishing of water for public service, i. e. fire protection; street cleaning and the like; and the remainder to supplying private consumers with water for which compensation is received and carried into the city's general funds.

The issue presented is whether the supplying of water by the city of New York in kind and quantity sufficient to meet the needs of its inhabitants and itself is such a governmental function that it comes within the implied constitutional immunity from federal taxation which is enjoyed by every state and its political subdivisions.

It is said with much force in support of the petitioner's claim that his salary may not be taxed by the federal government that the problem of water supply in the city of New York can only be met by the city in the exercise of its governmental power and the use of public money; that the very magnitude of the task makes it essential that the city perform it; and that being so, it has become and is an essential governmental function. It has been shown that the supplying of water in the city was in early times partly done at the expense of the municipality and that the city government has increasingly taken over the work until now only a comparatively negligible amount of the total is privately furnished; but it is not equally clear that private enterprise adequately encouraged could not do it as well. To say that it could not in the light of common knowledge as to modern private achievement in business on a vast scale would seem to deny probability. In any event such an assertion is not adequately supported by evidence in this record.

As recognized in Metcalf & Eddy v. Mitchell, 269 U.S. 514, 46 S.Ct. 172, 70 L. Ed. 384, there is no way to state in terms of general application just what instrumentalities either of a state or of the nation are exempt from taxation by the other. In a federation like ours where two governments, each supreme in its own sphere, exercise sovereign powers in the same territory, there must be some measure of accommodation to permit each to exist so supreme. Both must raise revenue by taxation, and each must itself be free from taxation by the other. That neither may tax the other was established as long ago as McCulloch v. Maryland, 4 Wheat. 316, 4 L.Ed. 579. And that is still a fundamental principle. Helvering v. Powers, 293 U.S. 214, 55 S.Ct. 171, 79 L.Ed. 291. See, United States v. State of California, 297 U.S. 175, 56 S.Ct. 421, 80 L.Ed. 567. Nor where the principle is applicable does it matter that the amount of the proposed tax and the resulting interference with the taxed government is great or small for the immunity is absolute whenever it does exist. Johnson v. Maryland, 254 U.S. 51, 41 S.Ct. 16...