State of California v. Anglim

• Decision Date: 06 March 1941
• Docket Number: No. 21433-W.,21433-W.
• Parties: STATE OF CALIFORNIA v. ANGLIM, Collector of Internal Revenue.
• Court: U.S. District Court — Northern District of California

37 F. Supp. 663

STATE OF CALIFORNIA v. ANGLIM, Collector of Internal Revenue.

No. 21433-W.

District Court, N. D. California, S. D.

March 6, 1941.

Earl Warren, Atty. Gen., of California, and L. E. Kilkenny, Deputy Atty. Gen., for plaintiff.

Frank J. Hennessy, U. S. Atty., and Esther B. Phillips, Asst. U. S. Atty., both of San Francisco, Cal., for defendant.

WELSH, District Judge.

The plaintiff, State of California, seeks to recover taxes collected by the defendant, as United States Collector of Internal Revenue for the First District of California, by virtue of the provisions of the Carrier's Taxing Act of 1937, c. 405, 50 Stat. 435, 45 U.S.C.A. §§ 261-273. The taxes sought to be recovered herein were collected from the State of California by reason of its ownership and operation of the State Belt Railroad, a terminal line adjoining the Port of San Francisco and operated under the management of the State Board of Harbor Commissioners for the Port of San Francisco.

The United States Supreme Court has determined the status of the State Belt Railroad to be that of an interstate common carrier railroad. United States v. State of California, 297 U.S. 175, 56 S.Ct. 421, 80 L.Ed. 567.

And under the terms of the Carrier's Taxing Act of 1937, interstate carriers by rail are subject to the payment of a federal excise tax based on specified percentages of the compensation paid to their employees. On a similar basis, the Act also imposes an income tax on such employees, which must be deducted from their compensation and remitted by the employer to the Collector of Internal Revenue.

It is the position of the State of California that the State Belt Railroad, although having the status of an interstate common carrier railroad, is performing an essentially governmental function; that, consequently, it is immune from the imposition of any federal excise tax under the Carrier's Taxing Act of 1937 by reason of the settled doctrine of implied immunity of state and federal government from the burden of taxation by either upon the government instrumentalities of the other. If this be true, admittedly the taxes were illegally assessed and plaintiff would be entitled to a return of the excise tax paid by it. Plaintiff would also be entitled to a return of the income tax paid by it on behalf of the Belt Railroad employees to the extent that the plaintiff has complied with all conditions precedent to recovery of the Employees' tax. On the other hand, if it be determined that the State of California is acting in a purely proprietary capacity in its operation of the railroad, defendant is entitled to judgment herein.

The State Belt Railroad, commonly known and hereinafter referred to as the Belt, is about five miles in length. Its tracks run along the waterfront of San Francisco. It is situated mostly on state owned land. Its properties consist of roadbeds, tracks, equipment, spurs, switches, roundhouses and yards. Its main line connects with the piers, wharves and freight car ferries along the city's waterfront, and with freight yards of the Belt and privately owned rail carriers. It also connects with about one hundred seventy-five industrial plants located at various points along the line. The function of the line is the transportation over its tracks by its own engines of loaded and empty freight cars between the points with which it connects, for various rail carriers, steamship companies and industries, for which it charges a flat rate per car. The Belt Railroad serves as a link in the through transportation of interstate freight shipped to or from points in San Francisco over connecting carriers. The Board of State Harbor Commissioners fixes the charges to be imposed for the services performed by the Belt Line. These charges are based upon the amount necessary to enable the Board to perform the duties required of it by law. Receipts obtained from the operation of the Belt Line are credited to the San Francisco Harbor Improvement Fund. With one exception, the Belt has a separate set of employees, numbering about one hundred thirty eight, who render no services other than in connection with the operation of the Belt Line. These employees are under civil service.

While most of the Belt is under the direct administration and supervision of the Board of Harbor Commissioners, a portion of its trackage is operated by privately owned rail carriers as agents of the State.

The Port of San Francisco, with which the Belt connects, and the harbor facilities there afforded, consisting of wharves, piers, landings and other improvements, is state owned, and operated under the management and control of the Board of State Harbor Commissioners. In its operation and maintenance of the Port, the Board performs many functions governmental in nature. It maintains harbor police, fireboats, thoroughfares, public dry docks, and aids to navigation; it cares for the removal of obstructions to commerce and navigation.

The establishment by government of ports and harbors, wherever conditions exist which render harbor development advantageous, is designed to afford a medium for the attraction and flow of commerce into and through the seaport area for the benefit and prosperity of the numerous persons necessarily affected by the resulting stimulation of industrial and trade activity in such area. In its scope and effect, port and harbor development, designed to facilitate the flow of commerce, cannot properly be classified as commerce itself, normally conducted by private industry. The importance to the general welfare, the public at large, of adequate ports and harbors for the stimulation of navigation and commerce; the fact that the development of ports and harbors has not occurred at the hands of private industry, but has remained in the reigns of government as a recognized sovereign right and duty, these considerations, in the opinion of this court, have rightfully marked the operation of ports and harbors a proper function of government. Denning v. State of California, 123 Cal. 316, 55 P. 1000; Commissioner of Internal Revenue v. Ten Eyck, 2 Cir., 76 F.2d 515.

Plaintiff now seeks the judicial inclusion of the Belt Line as one of the Port of San Francisco terminal facilities operated by the State of California in its exercise of a purely governmental function. Whether the State of California acts in a sovereign or private capacity in its operation of the Belt is, at this time, an open question. However, while we have no direct precedent to guide us on the subject, the trend of judicial opinion in regard thereto, seems to this court to have been sufficiently manifested in the decisions which have so far been recorded.

In State of South Carolina v. United States, 199 U.S. 437, 26 S.Ct. 110, 114, 50 L.Ed. 261, 4 Ann.Cas. 737, it was held that South Carolina, by taking over the sale of intoxicating liquor within its borders, became liable for the payment of a federal excise tax imposed on the sale of liquor, notwithstanding the fact that the action taken by the state was in the exercise of its police power. The Court conceded that the argment that the imposition by the federal government of a tax upon a business operated by the state in the interests of public welfare, interfered with the state's exercise of its police power, presented a serious question; but held, however, that were such argument to succeed, the state governments, under principles of regulation, could extend their operations over various business enterprises to the serious impairment, if not complete destruction, of the power of the...