Unemployment Compensation Commission of North Carolina v. Wachovia Bank & Trust Co.

• Decision Date: 03 May 1939
• Docket Number: 456.
• Parties: UNEMPLOYMENT COMPENSATION COMMISSION OF NORTH CAROLINA v. WACHOVIA BANK & TRUST CO.
• Court: North Carolina Supreme Court

2 S.E.2d 592

215 N.C. 491

UNEMPLOYMENT COMPENSATION COMMISSION OF NORTH CAROLINA v. WACHOVIA BANK & TRUST CO.

No. 456.

Supreme Court of North Carolina

May 3, 1939

[Copyrighted Material Omitted]

This is a civil action instituted against the defendant, an employer, to recover $19,421.84, alleged to be due for the years 1936 and 1937, under Ch. 1, Public Laws 1936, Extra Sess., as amended, known as the Unemployment Compensation Law.

The defendant is a member of the Federal Reserve Bank System and of the Federal Deposit Insurance Corporation. It admits that if it is liable under said act the amount due is as stated in the complaint, to-wit: $6,287.33, with interest, for 1936 and $13,134.51, with interest, for 1937. However, it pleads immunity under the provisions of Section 19(g) (7) (B), which provides that the term "employment" shall not include: "Services performed in the employ of *** the United States Government, or of an instrumentality *** of the United States," and denies liability by reason thereof.

A jury trial having been waived, the court below found the facts, made its conclusions of law, and rendered judgment for the plaintiff. The defendant excepted and appealed.

Manly Hendren & Womble and W. P. Sandridge, all of Winston-Salem, for appellant.

Adrian J. Newton, Ralph Moody, and J. C. B. Ehringhaus, Jr., all of Raleigh, for appellee.

BARNHILL Justice.

It is conceded, and the Court found as a fact, that the defendant is a private banking corporation, organized and doing business for profit under the laws of the State of North Carolina, and that it is a member of the Federal Reserve System and the Federal Deposit Insurance Corporation. Likewise, the defendant offered evidence tending to show, and the Court found as a fact, that the United States Treasury Department, through the Bureau of Internal Revenue, promulgated a ruling now in force that State banks which are members of the Federal Reserve System, and their employees, are exempt from the taxes imposed pursuant to Titles VIII and IX of the Social Security Act, 42 U.S.C.A. §§ 1001 et seq., 1101 et seq.

The ruling of the United States Treasury Department relates to the taxes levied by the Federal Government under the act of Congress known as the Social Security Act, 42 U.S.C.A. § 301 et seq. We are not concerned therewith except to the extent that the same may be persuasive in the determination of the question presented to us, which is: Is the defendant, a private banking institution organized under the law of North Carolina and operating for profit, an instrumentality of the Federal Government within the meaning of the provisions of the North Carolina Unemployment Compensation Law by reason of its membership in the Federal Reserve Bank system and the Federal Deposit Insurance Corporation?

In determining whether any given corporation, association or individual is an instrumentality of government a somewhat different rule applies as between instrumentalities of a State Government and instrumentalities of the Federal Government. The State Legislature may exercise any power of legislation which is not expressly or by necessary inference prohibited by the constitution, unless such legislation invades the prerogatives of one of the other coordinate branches of government. It may, therefore, authorize the State or one of its subdivisions to engage in an enterprise which is not essentially governmental in nature. Therefore, in applying the constitutional immunity of instrumentalities of a State Government from Federal taxation the United States Supreme Court has consistently held that when the instrumentality of the State is engaged in performing functions which are not essentially governmental in nature the immunity does not apply. The right of the State to maintain instrumentalities of government free of inhibition by the national taxing power of "the high and responsible duties assigned to them in the Constitution. *** And, more especially, those means and instrumentalities which are the creation of their sovereign and reserved rights," relates to functions thought to be essential to the maintenance of a State Government. Thus, where the attempt was to tax: Income received from the investments of a municipal subdivision of a state, U.S. v. Baltimore & O. R. Co., 17 Wall. 322, 21 L.Ed. 597; income received by a private investor from state bonds, and thus to threaten impairment of the borrowing power of the State, Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429, 15 S.Ct. 673, 39 L.Ed. 759; railroad of U.S. held in name of corporation, Clallam County v. U. S., 263 U.S. 341, 44 S.Ct. 121, 68 L.Ed. 328; or the manufacture and sale to a municipal corporation of equipment for its police force, Indian Motocycle Co. v. U. S., 283 U.S. 570, 51 S.Ct. 601, 75 L.Ed. 1277, it was held that the doctrine of constitutional immunity applied. On the other hand, a state conducted liquor business, South Carolina v. U. S., 199 U.S. 437, 26 S.Ct. 110, 50 L.Ed. 261, 4 Ann.Cas. 737; a street railway business taken over and operated by state officers as a means of effecting a local public policy, Helvering v. Powers, 293 U.S. 214, 55 S.Ct. 171, 79 L.Ed. 291; the privilege of exercising corporate franchises granted by a state to public service companies, Flint v. Stone Tracy Co., 220 U.S. 107, 157, 31 S.Ct. 342, 55 L.Ed. 389, Ann.Cas.1912B, 1312; income or profits derived by independent engineering contractors from a contract with the state under which they performed certain state functions, Metcalf & Eddy v. Mitchell, 269 U.S. 514, 517, 46 S.Ct. 172, 70 L.Ed. 384; profits from the resale of state bonds, Willcuts v. Bunn, 282 U.S. 216, 51 S.Ct. 125, 75 L.Ed. 304, 71 A.L.R. 1260; lessees of state property engaged in producing oil from state lands, the royalties from which, payable to the state, are devoted to public purposes, Group No. 1 Oil Corp. v. Bass, 283 U.S. 279, 51 S.Ct. 432, 75 L.Ed. 1032, are not exempt from taxation under the immunity doctrine. These are only a few of the cases in which the Supreme Court of the United States has refused to extend the doctrine. See also Unemployment Compensation Commission v. Insurance Co., 215 N.C. 479, 2 S.E.2d 584, for an able discussion of the subject. 1 Selected Essays on Constitutional Law, p. 641, "State Taxation and The New Federal Instrumentalities."

As to the Federal Government, it derives its authority wholly from the powers delegated to it by the Constitution. Since every action within its constitutional power is governmental action, and since Congress is made the sole judge of what powers within the constitutional grant are to be exercised, all activities of government constitutionally authorized by Congress are governmental in nature. And when the National Government lawfully acts through a corporation which it owns and controls, those activities are governmental functions entitled to whatever tax immunity attaches to those functions when carried on by the government itself through its departments. Graves v. New York ex rel. O'Keefe, 59 S.Ct. 595, 83 L.Ed. --, filed March 27, 1939. The Federal Government is one of delegated powers, in the exercise of which Congress is supreme; so that every agency which Congress can constitutionally create is a governmental instrumentality. If, therefore, the defendant can be classed as such an agency engaged in the exercise of functions of the Federal Government it is immune from taxation by the State.

Perhaps it is impossible to formulate a satisfactory definition of the term "instrumentalities of government" which would be applicable in all cases. At least it is unwise to undertake to do so. Each case must be determined as it arises. Generally speaking, however, it may be said that any commission, bureau, corporation or other organization, public in nature, created and wholly owned by the government for the convenient prosecution of its governmental functions, existing at the will of its creator, is an instrumentality of government; and that any state created corporation or association, privately owned, and organized and doing business primarily for profit, which is granted certain incidental duties or privileges by the Federal Government is not. The enjoyment of a privilege conferred by either a national or a state government upon an individual, association or corporation operating primarily for profit in a private enterprise, even though to promote some governmental policy, does not convert such individual, partnership or corporation into an instrumentality of government. Unemployment Compensation Commission v. Insurance Co., 215 N.C. 479, 2 S.E.2d 584. Speaking to this subject in Thomson v. Union Pacific Railroad Co., 9 Wall. 579, 19 L.Ed. 792, 796, the Supreme Court, in respect to a Kansas Corporation which had received large grants of land and engaged large subsidies from the Federal Government on the security of a second mortgage on the condition of paying at maturity the bonds advanced by way of subsidy and of rendering certain services to the government in the transmission of messages and in the transportation of mails, troops, munitions and other property at reasonable rates of compensation, said that: "The Corporation, however, remained a State Corporation, though entitled to certain benefits and subject to certain duties under the legislation of Congress. *** We do not think ourselves warranted, therefore, in extending the exemption established by the case of McCulloch v. Maryland, beyond its terms. We cannot apply it to the case of a corporation deriving its existence from state law, exercising its franchise under state law, and holding its property within state jurisdiction and under state protection."

In the border line cases in which it does not clearly appear that...