Saxe v. Anderson

• Decision Date: 26 March 1937
• Citation: 19 F. Supp. 21
• Parties: SAXE v. ANDERSON, Collector of Internal Revenue.
• Court: U.S. District Court — Southern District of New York

19 F. Supp. 21

SAXE v. ANDERSON, Collector of Internal Revenue.

District Court, S. D. New York.

March 26, 1937.

Williams & Saxe, of New York City (John Godfrey Saxe, of New York City, and Arthur H. Deibert, of Washington, D. C., of counsel), for plaintiff.

Lamar Hardy, U. S. Atty., of New York City (Edward J. Ennis, Asst. U. S. Atty., and David L. Marks, Sp. Asst. U. S. Atty., both of New York City, of counsel), for defendant.

KNOX, District Judge.

This is an action to recover certain items of federal income taxes which plaintiff paid to the federal government during the years 1924, 1925, and 1926. At various times during these years plaintiff was appointed by the Supreme Court of New York, and by the Surrogates' Court of New York County, to act as referee or special guardian in certain specific cases. He accepted such appointments, took the necessary oaths, performed the required services and received compensation for said services. Pursuant to the law of New York, such compensation was paid by the parties to the proceedings, or came out of funds under control of the court which utilized plaintiff's services. This compensation was included in the plaintiff's income tax returns as taxable income, and the tax thereon was duly paid. Within the appropriate statutory period, plaintiff filed claims for refund of the taxes so paid, and the same were rejected. Thereupon, this action was instituted.

The contention is now advanced that, in acting as referee and special guardian, under appointment of the aforesaid courts, plaintiff was an officer or instrumentality of the state, and, therefore, immune from federal taxation under the Revenue Act of 1926, § 1211 (44 Stat. 130); under Treasury Regulation 69, article 88, and by virtue of the implied immunity arising out of the Constitution of the United States. Revenue Act of 1926, § 1211 provided: "Any taxes imposed by the Revenue Act of 1924 or prior revenue Acts upon any individual in respect of amounts received by him as compensation for personal services as an officer or employee of any State or political subdivision thereof (except to the extent that such compensation is paid by the United States Government directly or indirectly), shall, subject to the statutory period of limitations properly applicable thereto, be abated, credited, or refunded."

The Treasury Regulation defining the term "officer" follows: "An officer is a person who occupies a position in the service of the State or political sub-division, the tenure of which is continuous and not temporary and the duties of which are established by law or regulations and not by agreement."

Plaintiff's tenure of office not being continuous, he does not come within the department's definition. There remain the questions of whether he was an "officer" within the statute, or within the implied immunity granted by the Constitution. Since the problems presented by the two questions are identical, an answer to one will suffice for both.

The exemption arising from the Constitution is difficult to define. The existence of concurrent sovereignties within the same territorial limits has created many complex problems in every phase of government activity. Recent cases, which need not be cited, reflect novel attempts to delineate the shadowy borders more definitely. A necessary precipitate of the existence of conflicting sovereignties has been the doctrine that the instrumentalities of one government must not be burdened by the activities of the other without express permission of the Constitution. This theory of absolute immunity was fostered by the attitude of hostility between the states and the federal government which prevailed at the inception of our government. The immunity of instrumentalities of the federal government dates back to McCullough v. Maryland, 4 Wheat. 316, 431, 4 L.Ed. 579, where Chief Justice Marshall said: "That the power to tax involves the power to destroy; that the power to destroy may defeat and render useless the power to create; that there is a plain repugnance in conferring on one government a power to control the constitutional measures of another, which other, with respect to those very measures, is declared to be supreme over that which exerts the control, are propositions not to be denied."

Similar propositions were expressed subsequently when the United States attempted to tax an officer of a state. In Collector v. Day, 11 Wall. 113, 127, 20 L.Ed. 122, Mr. Justice Nelson said: "It is admitted that there is no express provision in the Constitution that prohibits the general government from taxing the means and instrumentalities of the States, nor is there any prohibiting the States from taxing the means and instrumentalities of that government. In both cases the exemption rests upon necessary implication, and is upheld by the great law of self-preservation; as any government, whose means employed in conducting its operations, if subject to the control of another and distinct government, can exist only at the mercy of that government. * * * The means and instrumentalities employed for carrying on the operations of their governments, for preserving their existence, and fulfilling the high and responsible duties assigned to them in the Constitution, should be left free and unimpaired, should not be liable to be crippled, much less defeated by the taxing power of another government." The dissenting opinion of Mr. Justice Bradley in the case just cited was little less than prophetic as to the complications that would ensue from the doctrine proclaimed by the majority of his court. The cases to which attention will later be directed are quite illustrative of the difficulties that have ensued.

Nevertheless, the immunity of state instrumentalities has survived even the Sixteenth Amendment. Bowers v. Kerbaugh-Empire Company, 271 U.S. 170, 46 S.Ct. 449, 70 L.Ed. 886. See, also, Evans v. Gore, 253 U.S. 245, 248, 40 S.Ct. 550, 551, 64 L.Ed. 887, 11 A.L.R. 519.

Although the principle of immunity must be accepted, the last decade has witnessed some notable developments in its application. A point of departure was Metcalf & Eddy v. Mitchell, 269 U.S. 514, 46 S.Ct. 172, 174, 70 L.Ed. 384, where Mr. Justice Stone said:

"In a broad sense, the taxing power of either government, even when exercised in a manner admittedly necessary and proper, unavoidably has some effect upon the other. The burden of federal taxation necessarily sets an economic limit to the practical operation of the taxing power of the states, and vice versa. Taxation by either the state or the federal government affects in some measure the cost of operation of the other.

"But neither government may destroy the other nor curtail in any substantial manner the exercise of its powers. Hence the limitation upon the taxing power of each, so far as it affects the other, must receive a practical construction which permits both to function with the minimum of interference each with the other; and that limitation cannot be so varied or extended as seriously to impair either the taxing power of the government imposing the tax (South Carolina v. United States, 199 U.S. 437, 461, 26 S.Ct. 110, 50 L.Ed. 261, 4 Ann.Cas. 737; Flint v. Stone Tracy Co., supra, at page 172 of 220 U.S. 31 S.Ct. 342 55 L.Ed. 389, Ann.Cas.1912B, 1312) or the appropriate exercise of the functions of the government affected by it. Railroad Co. v. Peniston, supra 18 Wall. 5, 31 21 L.Ed. 787."

Hence, questions of degree, avoided by Chief Justice Marshall as "so unfit for the judicial department," are now common judicial questions, see Willcuts v. Bunn, 282 U.S. 216, 51 S.Ct. 125, 75 L.Ed. 304, 71 A. L.R. 1260, as are inquiries into the true intent of a tax statute apart from its avowed purpose of raising revenue. See United States v. Butler, 297 U.S. 1, 56 S.Ct. 312, 80 L.Ed. 477, 102 A.L.R. 914; Bailey v. Drexel Furniture Co., 259 U.S. 20, 42 S.Ct. 449, 66 L.Ed. 817, 21 A.L.R. 1432.

Since Metcalf & Eddy v. Mitchell, supra, the tendency has been to narrow the bases of immunity. The tax is invalidly levied only if it be imposed on a government instrumentality, either directly or in such manner as to place a direct burden upon an essential governmental function. The mere statement of the proposition, however, lends no aid towards the solution of a specific problem. Its application to a particular state of facts requires the immediate interpretation of such words as "directly," "substantial," "essential," "governmental," "burden," and "remote." This is seldom easy, and hardly ever completely satisfactory or convincing.

Many cases deny exemption on the ground that "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 particular governmental unit." Burnet v. A. T. Jergins Trust, 288 U.S. 508, 516, 53 S. Ct. 439, 441, 77 L.Ed. 925. See, also, Willcutts v. Bunn, supra; Group No. 1 Oil Corp. v. Bass, 283 U.S. 279, 51 S.Ct. 432, 75 L.Ed. 1032; U. S. Trust Co. v. Anderson (C.C. A.) 65 F.(2d) 575, 89 A.L.R. 994; Metropolitan Bldg. Co. v. United States (Ct.Cl.) 12 F.Supp. 537; Marland v. United States (Ct.Cl.) 3 F.Supp. 611; Fullilove v. United States (C.C.A.) 71 F.(2d) 852; Buckley v. Commissioner (C.C.A.) 66 F.(2d) 394; Big Lake Oil Co. v. Heiner (D.C.) 2 F.Supp. 41; Wiltsie v. United States (Ct.Cl.) 3 F.Supp. 743; Compare Burnet v. Coronado Oil & Gas Co., 285 U.S. 393, 52 S.Ct. 443, 76 L.Ed. 815; Indian Motorcycle Company v. United States, 283 U.S. 570, 51 S.Ct. 601, 75 L. Ed. 1277.

Another ground for denying exemption is that the subject of the tax constitutes "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."...