South Carolina v. Regan

Decision Date22 February 1984
Docket NumberNo. 94,O,94
Citation465 U.S. 367,104 S.Ct. 1107,79 L.Ed.2d 372
PartiesState of SOUTH CAROLINA, Plaintiff v. Donald T. REGAN, Secretary of the Treasury of the United States. rig
CourtU.S. Supreme Court
Syllabus

Section 103(a) of the Internal Revenue Code exempts from a taxpayer's gross income the interest earned on the obligations of any State. Section 103(a) was amended by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), § 310(b)(1) of which requires that "registration-required obligations" be issued in registered, rather than bearer, form to qualify for the § 103(a) exemption. If a registration-required obligation is issued in bearer, rather than registered, form, § 310(b)(1) provides that the interest is taxable. South Carolina asks leave to file a complaint against the Secretary of the Treasury, seeking injunctive and other relief on the ground that § 310(b)(1) is invalid as violative of the Tenth Amendment and the doctrine of intergovernmental tax immunity. The Secretary argues that the action is barred by the Anti-Injunction Act, which provides that "no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed."

Held: The motion for leave to file the complaint is granted.

Justice BRENNAN delivered the opinion of the Court with respect to Parts I and II, concluding that the Anti-Injunction Act does not bar the action. Pp. 373-381.

(a) The Act's purposes and the circumstances of its enactment indicate that the Act does not apply to actions brought by aggrieved parties, such as South Carolina, for whom Congress has not provided an alternative forum in which to litigate their claims. Here, if South Carolina issues bearer bonds, its bondholders, by virtue of § 310(b)(1) of TEFRA, will be liable for the tax on the interest earned on those bonds. South Carolina will incur no tax liability. Under these circumstances, the State will be unable to utilize any statutory procedure to contest the constitutionality of § 310(b)(1). Pp. 373-380.

(b) The indicia of congressional intent also demonstrate that Congress did not intend the Anti-Injunction Act to apply where an aggrieved party would be required to depend on the mere possibility of persuading a third party to assert his claims. The nature of the remedy proposed by the Secretary that the State may obtain judicial review of its claims by issuing bearer bonds and urging a purchaser of those bonds to bring a suit contesting the legality of § 310(b)(1), only buttresses the conclusion that the Act was not intended to apply to this kind of action. Reliance on such proposed remedy would create the risk that the Act would entirely deprive the State of any opportunity to obtain review of its claims. Pp. 380-381.

Justice BRENNAN, joined by Chief Justice BURGER, Justice WHITE, and Justice MARSHALL, concluded in Part III that since the manner in which a State may exercise its borrowing power is a question of vital importance to all States, it is appropriate for this Court to exercise its discretion in favor of hearing this case. But since the record is presently not sufficiently developed to permit the merits to be addressed, a Special Master will be appointed to develop the record. Pp. 381-382.

Justice BLACKMUN concluded that because the suit is not one "for the purpose of restraining the assessment or collection of any tax," the Anti-Injunction Act is no bar to South Carolina's ability to bring the suit in another court. Nevertheless, because the issue presented is substantial and of concern to a number of States, and because prompt resolution of the issue in this Court will benefit all concerned, the grant of leave to file is a proper exercise of the Court's discretion. P. 384.

Justice O'CONNOR, joined by Justice POWELL and Justice REHNQUIST, concluded that, although great deference is due the congressional policy against premature judicial interference with federal taxes, it is proper to exercise this Court's original jurisdiction where South Carolina has demonstrated injury of "serious magnitude" and that it has no adequate alternative forum in which to raise its unique claims. Pp. 400-402.

Huger Sinkler, Charleston, S.C., for plaintiff.

Susan Lee Voss, Austin, Tex., for state of Tex. et al. as amici curiae.

Louis F. Claiborne, Washingtom, D.C., for defendant.

[Amicus Curiae Information from page 369 intentionally omitted] Justice BRENNAN delivered the opinion of the Court.

South Carolina invokes the Court's original jurisdiction 1 and asks leave to file a complaint against Donald T. Regan, the Secretary of the Treasury of the United States. The state seeks an injunction and other relief, on the ground that § 310(b)(1) of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub.L. No. 97-248, 96 Stat. 596, is constitutionally invalid as violative of the Tenth Amendment and the doctrine of intergovernmental tax immunity.

The Secretary objects to the motion on the ground that the Anti-Injunction Act, 26 U.S.C. § 7421(a), bars this action 2 and, alternatively, that the Court should exercise its discretion to deny leave to file. We are not persuaded that either is a ground for denying the motion, and therefore grant the motion for leave to file the complaint.

I

Section 103(a) of the Internal Revenue Code (I.R.C.) exempts from a taxpayer's gross income the interest earned on the obligations of any State.3 In 1982, however, as part of

Part III of the opinion is joined only by THE CHIEF JUSTICE, Justice WHITE, and Justice MARSHALL. TEFRA, Congress amended § 103 to restrict the types of bonds that qualify for the tax exemption granted by that section. Specifically, § 310(b)(1) of TEFRA requires that certain obligations, termed "registration-required obligations," be issued in registered,4 rather than bearer, form to qualify for the § 103(a) exemption.5 For purposes of § 310(b)(1), registration-required obligations are defined broadly to include most publicly-issued obligations with maturities greater than one year.6 If an obligation that is registration-required is issued in bearer, rather than registered, form, then § 310(b)(1) provides that the interest on that obligation is taxable.

Because the imposition of a tax on bearer bonds would require a State to pay its bondholders a higher rate of interest on such bonds, South Carolina argues that the practical effect of § 310(b)(1) is to require it to issue its obligations in registered form. For that reason, South Carolina argues that the section destroys its freedom to issue obligations in the form that it chooses. Viewing its borrowing power as essential to the maintenance of its separate and independent existence, South Carolina contends that the condition imposed by § 310(b)(1) on the exercise of that power violates the Tenth Amendment. In addition, relying on Pollock v. Farmer's Loan & Trust Company, 157 U.S. 429, 15 S.Ct. 673, 39 L.Ed. 759 (1895), South Carolina argues that Congress may not tax the interest earned on the obligations of a state. Because § 310(b)(1) imposes a tax on the interest earned on state obligations issued in bearer form, the State argues that the section is unconstitutional. Accordingly, South Carolina asks that its motion to file the complaint be granted and that this Court award declaratory, injunctive, and other appropriate relief.7

The Secretary does not address the merits of the State's constitutional claims. Rather, he argues that we may not grant the motion to file because this action is barred by the Anti-Injunction Act (Act). The Act provides, in pertinent part, that "no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed." 8 Characterizing this action as a suit to "restrain[ ] the assessment or collection of" a tax, the Secretary contends that this suit is barred by the statute. The Secretary argues that Enochs v. Williams Packing & Navigation Co., 370 U.S. 1, 82 S.Ct. 1125, 8 L.Ed.2d 292 (1962) establishes the single judicially-created exception to the Act and that this action does not fall within that exception. We need not address whether this case falls within the Williams Packing exception for we hold that the Act was not intended to bar an action where, as here, Congress has not provided the plaintiff with an alternative legal way to challenge the validity of a tax.9

II

When enacted in 1867, the forerunner of the current Anti-Injunction Act provided that "no suit for the purpose of restraining the assessment or collection of tax shall be maintained in any court." Act of Mar. 2, 1867, § 10, 14 Stat. 475.10 Although the Act apparently has no recorded legislative history, Bob Jones University v. Simon, 416 U.S. 725, 736, 94 S.Ct. 2038, 2045, 40 L.Ed.2d 496 (1974), the circumstances of its enactment strongly suggest that Congress intended the Act to bar a suit only in situations in which Congress had provided the aggrieved party with an alternative legal avenue by which to contest the legality of a particular tax.

The Act originated as an amendment to a statute that provided that

"No suit shall be maintained in any court for the recovery of any tax alleged to have been erroneously or illegally assessed or collected, until appeal shall have been duly made to the commissioner of internal revenue . . . and a decision of said commissioner shall be had thereon, unless such suit shall be brought within six months from the time of said decision . . ." Internal Revenue Act of July 13th, 1866, § 19, 14 Stat. 152.

The Anti-Injunction Act amended this statute by adding the prohibition against injunctions. Act of Mar. 2, 1867, § 10, 14 Stat. 475. The Act, therefore, prohibited injunctions in the context of a statutory scheme that provided an alternative remedy. As...

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