United States v. Washington Toll Bridge Authority

• Decision Date: 26 September 1962
• Docket Number: No. 17379.,17379.
• Citation: 307 F.2d 330
• Parties: UNITED STATES of America, Appellant, v. WASHINGTON TOLL BRIDGE AUTHORITY, d/b/a Washington State Ferries, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

307 F.2d 330 (1962)

UNITED STATES of America, Appellant, v. WASHINGTON TOLL BRIDGE AUTHORITY, d/b/a Washington State Ferries, Appellee.

No. 17379.

United States Court of Appeals Ninth Circuit.

July 31, 1962.

Rehearing Denied September 26, 1962.

Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Melva M. Graney, and Joseph Kovner, Attys., Tax Division, Dept. of Justice, Washington, D. C., Brockman Adams, U. S. Atty., Seattle, Wash., and C. W. Billinghurst, Asst. U. S. Atty., Tacoma, Wash., for appellant.

John J. O'Connell, Atty. Gen., for State of Washington, and John W. Riley, Deputy Atty. Gen., for State of Washington, Olympia, Wash., for appellee.

George N. Hayes, Atty. Gen., for State of Alaska, and Michael M. Holmes, Asst. Atty. Gen., State of Alaska, Juneau, Alaska, and appearing for State of Alaska as amicus curiae.

Before CHAMBERS, BARNES, HAMLEY, HAMLIN, JERTBERG, MERRILL, KOELSCH, BROWNING and DUNIWAY, Circuit Judges.

JERTBERG, Circuit Judge.

This case draws in issue the constitutional and statutory application of the federal transportation excise taxes to the fares paid for the transportation of persons and property on vessels operated by appellee, Washington Toll Bridge Authority, d/b/a Washington State Ferries.

Specifically, appellant, the United States, instituted an action in the court below to recover unpaid federal transportation excise taxes assessed against the appellee for the first three quarters of 1957. The District Court denied recovery. Its opinion is reported at 190 F. Supp. 95. The jurisdiction of the District Court is founded on § 7402(a) of the Internal Revenue Code of 1954. The jurisdiction of this Court rests on Title 28 U.S.C.A. §§ 1291-4.

The Washington Toll Bridge Authority was established, and its powers and duties prescribed, by the laws of 1937, Chapt. 173, p. 654.¹ It is an instrumentality of the State of Washington and exists, for the most part, as a self-supporting entity with all of the rights and liabilities of a common carrier. Since 1951, it has operated an extensive ferry system on the Puget Sound and its tributaries between local and international points. This system is perhaps the largest of its kind in the United States. Its necessity is dictated by the geography of the area and it provides a vital link in the State's highway system, carrying passengers and property over various bodies of water to connect the State highways and thereby avoiding circuitous land travel. The ferry system operated by the Authority is an expansion of services formerly provided, in part, by King County, State of Washington, a municipal corporation, and its successor, King County Ferry District No. 1, and, in greater part, by the Puget Sound Navigation Company, a private corporation.

Since the commencement of the Authority's ferry operations, the United States has pursued it for taxes imposed by §§ 4261, 4271 and 4291, Title 26 U.S. C.A. of the Internal Revenue Code of 1954.² These provisions are comprehensive in application. They impose a tax upon the "amount paid" for the transportation of persons or property "by water" and other means. The tax is made payable by the person paying for the transportation and the person receiving the payment is obligated to collect the tax. From June 1951 until April 1, 1952, the Authority collected and paid similar taxes under protest. Thereafter, it entered into extended negotiations with the Commissioner of Internal Revenue which culminated in an agreement whereby past claims were compromised. In order to adjudicate the question the Authority agreed to raise its fares in an amount equal to the tax and to place the amount in escrow and, in turn, the Commissioner agreed to promptly initiate litigation. Pursuant to this agreement an amount equal to the tax was collected by the Authority for the first three quarters of 1957 and placed in escrow. The United States made its assessment and filed suit.

The findings of fact by the District Court are based upon a stipulation with exhibits and the testimony of Darrell Hedges, executive secretary of the Authority. These findings are not strenuously disputed and are substantially, though more detailed, the same as heretofore recited. The District Court, following a previous decision of this Court, infra, reached the conclusion that the operation of the ferry system by the Authority was a governmental function and, as such, was immune from federal taxation. In addition, the District Court held that these tax provisions were not intended by Congress to apply to state-operated ferry systems. The correctness of these conclusions of law are the primary concern of this appeal.

In United States v. King County, 281 F. 686 (9th Cir.1922), this Court held that the ferry system operated by King County was immune from a federal tax of the type here involved because it was "an interference with and a burden upon the governmental functions of the state."³

Contrary to the assertion of appellant that the Washington Toll Bridge authority exists as a "separate entity," specially created by the State of Washington rather than as an "agency" of the State in the full sense of that term, we shall consider the questions involved in this appeal on the basis of the District Court's conclusion that the Authority is an instrumentality of the State of Washington authorized to operate the ferry system as an integral part of the highway system of the States.

It was recognized at the time of the decision in King County, as it is now, that the control over, and the operation of, ferries is historically a governmental function. It was thought at the time of such decision and for some years thereafter, in order to preserve the independence of the State, that the federal government could not constitutionally impose a tax on State activities determined to be governmental in character as opposed to activities determined to be proprietary. In more recent years, however, this distinction has been recognized as an unsatisfactory and inconclusive guide for determining the immunity of a State activity from the federal taxing power. In Helvering v. Gerhardt, 304 U.S. 405, 58 S.Ct. 969, 82 L.Ed. 1427 (1938), the question for decision was whether the imposition of a federal income tax on salaries received by employees of the Port of New York Authority placed an unconstitutional burden on the States of New York and New Jersey. The Port Authority is a bi-state corporation created by compact between New York and New Jersey and approved by the Congress of the United States. The Authority constructed vehicular bridges over waters of New York Harbor or adjacent to it, and vehicular tunnels under the Hudson River. The Authority collected tolls from the users of such facilities. It is obvious that the bridges and tunnels formed a part of the highway systems of the two States and that the construction and operation of the same was a governmental function. It was contended that the imposition of a federal income tax on the salaries paid to employees of the Authority constituted an interference with and a burden upon the States in the performance of a governmental function. This contention was rejected by the Supreme Court in sustaining the imposition of the tax. In the course of its opinion, the Court stated (at pp. 419-420, 58 S. Ct. at p. 975) that prior judicial pronouncements of that Court establish

"two guiding principles of limitation for holding the tax immunity of state instrumentalities to its proper function. The one, dependent upon the nature of the function being performed by the state or in its behalf, excludes from the immunity activities thought not to be essential to the preservation of state governments even though the tax be collected from the state treasury. * * * The other principle, exemplified by those cases where the tax laid upon individuals affects the state only as the burden is passed on to it by the taxpayer, forbids recognition of the immunity when the burden on the state is so speculative and uncertain that if allowed it would restrict the federal taxing power without affording any corresponding tangible protection to the state government; even though the function be thought important enough to demand immunity from a tax upon the state itself, it is not necessarily protected from a tax which well may be substantially or entirely absorbed by private persons."

Further, in the course of its opinion, the Court stated, at p. 422, 58 S.Ct. at p. 976:

"* * * The state and national governments must co-exist. Each must be supported by taxation of those who are citizens of both. The mere fact that the economic burden of such taxes may be passed on to a state government and thus increase to some extent, here wholly conjectural, the expense of its operation, infringes no constitutional immunity. Such burdens are but normal incidents of the organization within the same territory of two governments, each possessed of the taxing power."

In New York v. United States, 326 U.S 572, 66 S.Ct. 310, 90 L.Ed. 326 (1946), the Supreme Court held that the State of New York was not immune from the tax imposed by § 615 of the Revenue Act of 1932 on the sale of mineral waters taken from Saratoga Springs owned and operated by the State. The State of New York contended that it was immune from the tax because it was engaged in the disposition of its natural resources and that such activity was governmental in character. While it can be reasonably asserted that in the sale of mineral waters the State was engaging in a proprietary instead of a governmental function, the Court took occasion to state (at p. 580, 66 S.Ct. at p. 313), as follows:

"* * * To rest the federal taxing power on what is `normally\' conducted by private enterprise in contradiction to the `usual\' governmental functions is too shifting a basis for determining constitutional power and too entangled in expediency to serve as a dependable legal criterion. The essential nature

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