Cases by Issue - Intergovernmental Tax Immunity

Nebraska Department Of Revenue v. Loewenstein - Oral Argument

Fri, 09 Jan 2009 14:49:56 +0000

Case:

Nebraska Department Of Revenue v. Loewenstein

Media File:

93-823_19941011-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of L. Jay Bartel

Chief Justice Rehnquist: We'll hear argument next in Number 93-823, Nebraska Department of Revenue v. John Loewenstein.

Mr. Bartel.

Is that the correct pronunciation of your name?

Mr. Bartel: Yes, Your... Mr. Chief Justice.

Chief Justice Rehnquist: Mr. Bartel.

Mr. Bartel: Mr. Chief Justice, and may it please the Court--

Section 3124, title 31 of the United States Code, prohibits State taxation of Federal obligations and the interest thereon.

This prohibition extends to every form of State taxation that considers in its computation Federal obligations or the interest on Federal obligations.

The question presented in this case is whether Nebraska's taxation of income received by a mutual fund shareholder derived from repurchase agreements involving Federal obligations violates section 3124, repurchase agreements which we believe, in essence, were transactions that in substance were loans between private parties secured by Federal obligations.

The Nebraska supreme court erred in holding that Nebraska's tax violated section 3124.

The computation of Nebraska's tax did not consider directly or indirectly either Federal obligations or interest on Federal obligations.

The repurchase agreements entered into by the mutual funds which distributed income to Respondent Loewenstein were in essence secured loans in which Federal obligations merely served as collateral.

Unknown Speaker: Could you describe in perhaps a little detail exactly what a typical agreement like this was, and why it was entered into?

Mr. Bartel: Repurchase agreements are called repos for short, and they're in essence contracts involving the simultaneous sale and future repurchase of an asset, usually Treasury securities.

Repos generally consist of what is a twopart transaction.

In step 1, the party that holds Federal securities, denominated as the seller, transfers the securities to another party, the buyer, in exchange for cash.

In this case the buyer would have been the mutual funds.

The second step consists of a contemporaneous agreement by the seller to repurchase the securities at the original sale price, plus an agreedupon amount of interest at a rate specified in the agreement.

Unknown Speaker: Not dependent on the rate that the security pays?

Mr. Bartel: That is correct, Mr. Chief Justice.

The interest paid by the seller is based on prevailing market rates on loans or financing transactions of similar maturity and risk.

In fact, it was stipulated below that the interest paid by the seller on repurchase is less than the interest rate accruing on the underlying obligations.

That was in the second stipulation, paragraph 19.

Unknown Speaker: But you could say the same thing about the normal sale of Treasury bonds, couldn't you?

If you sell a bond that has a certain maturity price, and if, in fact, rates for other obligations have gone up, the money you get won't depend upon the face interest on the Government obligation.

It will depend upon what the market is at the time, won't it?

Mr. Bartel: That is true.

Yes, that's correct, Your Honor.

Unknown Speaker: And yet that transaction, you acknowledge, is exempt from taxation, is it not?

Mr. Bartel: Yes.

The distinction here, Your Honor, is that the way the repurchase agreement is structured, that the funds in essence are never, the owner is entitled to the Federal exemption.

What they receive is interest at a rate agreed to between private parties that really doesn't bear a relation to the interest rate, and more importantly--

Unknown Speaker: Yes, but I'm... that factor is irrelevant, once you acknowledge that in just a straight sale of a Treasury bond, it... the amount you pay for it has nothing to do with the interest rate on the face of the bond.

It has to do with what the going market is, so I don't see how that's a point for you at all, the fact that the interest rate depends on market rate.

Mr. Bartel: --It is in purposes of the overall analyzation, I think, of the nature of the agreements, because what we are contending, again, is that the real substance, the true substance of the agreements is that the mutual funds were not the true owners or substantive owners of the underlying obligations.

Unknown Speaker: Well, what kind of unforeseen consequences would result from our characterization of this as a loan?

If there is a bankruptcy by the entity that is acquiring the bonds temporarily, then if it's the owner there would be one consequence, if it was a loan there would be another.

What about treating the thing as a loan for purposes of SEC regulation of the sales?

I mean, I'm concerned that calling it something here may have some unforeseen consequences.

Mr. Bartel: We are not asking the Court to adopt a secured loan characterization of all repos for all purposes.

With respect to your concern regarding the treatment of the purchase agreements in bankruptcy, Congress has in large part, of course, dealt with that concern by an amendment to the Bankruptcy Code.

There may be purposes for securities law transactions to be viewed again as differently.

It's pointed out in the amicus briefs filed by the Investment Company Institute and the Federal Reserve Bank of New York that not all repos are identical to the precise transactions involved in this case.

Unknown Speaker: Are there other instances where something is characterized one way for bankruptcy purposes, yet another way for security purposes, yet another way for tax purposes?

Is that... is it extraordinary to have a different characterization for tax purposes than for other purposes?

Mr. Bartel: I would not think so, although I don't have any ready examples.

I think the mere fact that when you look at repos themselves and that there has been a division of the characterization and treatment, depending upon the purpose served, even the bankruptcy decisions, the Bevill case, that discuss the characterization of repos for tax purposes recognize that there may be different reasons why a rule or a principle of construction should be adopted for tax purposes that is different than the concerns in a bankruptcy context.

And that, in essence, is why we think that the economic substance principle, which has been recognized by Federal courts, construing the exemption of repurchase agreements involving cases construing section 103 of the Internal Revenue Code, which deals with the exemption of interest on State and local obligations, and State court cases that have also relied on the economic substance analysis to look at--

Unknown Speaker: In the respondent's brief, the red brief at about page... it's at page 26... he sets forth a hypothetical transaction where a 10,000 dollar Treasury bill is due in 360 days, and he has a series of hypotheticals, and the first one, of course, is if the taxpayer just holds it for 360 days, and he paid 9,500 dollars for it, he redeems it for 10,000 dollars, there's then 500 dollars worth of interest, and all of that is covered by the exemption.

Everybody agrees with that.

Do you agree with his second example... I take it you do... that if the bill is sold, just as an outright sale, no repo agreement, just an outright sale, 180 days down the road, that the exemption of 500 dollars is given 250 to each holder?

Mr. Bartel: --It appears in the hypothetical that what he's dealing with is a shortterm Treasury bill that may be an obligation issued with discount.

That, to the extent that I believe that is the nature of the hypothetical, that is correct, but we don't--

Unknown Speaker: So that it's correct that if I own a bill for 180 days, a 360-day bill, and I then transfer it to a second holder, we each split the exemption?

Mr. Bartel: --I believe under the OID rules under the Federal Income Tax Code there would be... if you are the actual holder and there is a transfer in substantive owner, then that holder who is a substantive owner is required to report that portion as income, that's correct.

Unknown Speaker: Well, and they each get the exemption under Nebraska law, don't they?

Mr. Bartel: Yes, that's correct.

Unknown Speaker: All right.

Now, when we get to the repo transaction, do you agree with the characterization he gives of how the repo transaction works?

Mr. Bartel: No, we do not, Your Honor, because we believe it, again as we explain in our brief, fails to take into account the fact that the funds do not receive exempt interest from the Federal Government.

Unknown Speaker: Under Nebraska law under your theory, if you prevail, will the full 500 dollars of exemption be accorded to someone in this transaction?

Mr. Bartel: We believe that it is accorded to someone in the transaction.

It is accorded to the sellerborrowerrepurchaser.

They are the substantive owner of the obligations, and they're the ones who maintain the entitlement to the exemption.

Now, what respondent seems to be saying is that the fact that most States have a statute which disallows deduction for interest expense incurred to carrier hold the Federal obligation.

Now, the sellerborrower may be required to make application of such a statute if it pays interest, to hold or acquire that Federal obligation.

Unknown Speaker: --Nebraska requires the addback?

Mr. Bartel: Yes, most States do, that's correct.

In fact, I think all States do according to amicus Investment Company Institute.

Unknown Speaker: Well, under Nebraska law in the repo transaction, would the original holder who is the sellerborrower receive under this hypothetical a 500 dollar exemption?

Mr. Bartel: Well, the effect of the addback provision could be to reduce the economic benefit.

They would still receive a 500 dollar exemption, but there may be a requirement to add back, but we don't believe that that is an impairment or a violation of section 3121.

Unknown Speaker: But it does bring up the question that if you're wrong about 3124 and what it requires, it may not follow that Loewenstein or the mutual fund is the person Nebraska would look at to make the cure?

What about just not allowing... not requiring the addback?

Mr. Bartel: That would be an application to the dealer.

It would not be an application--

Unknown Speaker: Yes.

If the argument is that what 3124 requires is that every dollar of interest be fully reflected, I suppose Nebraska could do that two ways.

One way would be to say, Loewenstein gets the benefit.

Another way would be to say this person, whatever we call... the repoer, some briefs have called it, doesn't have to add back the expense of the financing.

Mr. Bartel: --It's our position, of course, that section 3124 doesn't require that result, and we would rely on the Court's decision on First National Bank of Atlanta v. Bartow County.

Unknown Speaker: But would you pick one or the... would you be... do you know which one Nebraska would pick if it were required to make that decision?

Mr. Bartel: No, I do not.

Unknown Speaker: That's the key question to me, I mean, these two questions that Justice Kennedy brought up and this.

I don't understand this statute, Nebraska 77-2716(e), which is the addback.

Now, in order to make this clear, I have to take a second, and I want to use a slightly more realistic example.

I mean, you've been arguing is it really a collateralized loan, or is it really a sale?

Well, it has some characteristics of each.

Is a nectarine really a plum?

Is it really a pear?

Is it really an... I mean, it's some of each, or whatever.

All right.

Suppose you start there and say, that doesn't solve it.

But what might solve it is that the Government, when it issues the bill at an original issue discount, it's easy to figure out what the interest of that is.

The IRS does it all the time, and then you allocate it daybyday, and just say the State can't tax that.

Is that right, and if that is right, how does this statute fit into it?

I mean, let me give you... suppose that the repoer has 1 million dollars worth of Treasuries, 90-day bills.

Let's say they pay 15,000 dollars of interest at 6 percent for 90 days, and suppose what he does is he repos it out to the Ford Motor Company for 1 day, which my calculation says is worth about 167 dollars in interest.

That Tbill interest goes right to the repoer.

Now, what the repoer has got is, he's got 1 million dollars in cash for a day, and he's had to pay, say, 150 dollars for it.

Does this Nebraska statute mean on his tax return he puts in 167 dollars of taxfree interest, and then reduces that by 150 dollars?

To me, that's an odd reading of the statute, because I would say the 150 is not an expense of this repo transaction.

Rather, it's an expense related to whatever transaction he will engage in with the 1 million dollars cash that he's got.

He might, for example, take in... I guess that's called a reverse.

He takes in 1 million dollars of Treasuries from Solomon Brothers, and what he hopes to do is charge them 152 dollars for that 1-day's use of the million, so he's got 152 dollars, subtracts the 150, and it's 2.

That's how I'd read that statute of Nebraska.

But they've said, your opponents, that isn't how it's read, the 150 dollars is allocated to the 167 dollars, and now I want to know from you, is it, or isn't it?

Have you followed... have you followed it all right?

I'm sorry to be so... but you see what I'm saying?

I'm saying that the payment to Ford, the payment to Ford from the repoer, is a payment for the 1 million dollars in cash that the repoer got.

It shouldn't be allocated to the 167 interest on those Treasury bills that are in the hands of Ford for the day.

It should be allocated to whatever income that million dollars is used in the hands of the repoer to generate.

Is that the right reading of the statute?

If it is, you are only taxing the... you're not... you're leaving the whole 10 percent, or whatever it is, free of tax.

If it isn't, you're taxing some of it.

If it's too complicated to follow, forget it.

I'm sorry.

I'll have to find out the answer.

The question is, I want to know how this particular statute works, (e).

Mr. Bartel: We attempted to respond in our brief with a response to their example.

I hope that's... that's adequate.

Unknown Speaker: Is part of your response that in respect to how you treat that deal, you treat it just the way the Feds treat municipal and State bonds with respect to the addback of the expense?

Mr. Bartel: In our view, the Nebraska statute is the counterpart to Internal Revenue Code section 265, which denies interest expense deduction incurred to carry State and local obligations, that's correct.

Unknown Speaker: I thought that that's what the system was.

It's exactly tracking what the Feds do.

But how do you treat State and municipal bonds, the same way?

Mr. Bartel: In repo transactions?

Unknown Speaker: Yes.

Mr. Bartel: The Nebraska statute only exempts from State taxation interest earned from ownership of Nebraskabased obligations.

It does not, on its face, exempt repo interest attributable to transactions involving Nebraskabased obligations, so it's our position in Nebraska, consistent with our taxation of repo income involving Federal obligations, that that, too, would be subject to Nebraska income tax.

There is no discrimination, contrary to the argument that respondent has made.

Unknown Speaker: So you're saying the treatment is the same.

Mr. Bartel: Yes.

Unknown Speaker: Mr. Bartel, I have a problem with your urging us to look at the economic reality of the transaction.

I mean, there are various levels of economic reality, I suppose.

Certainly one reality is that as a result of this transaction the buyer owns the Treasury bills for, you know, for the period, and that is real.

The buyer really owns them, right?

Is not the buyer the owner during that period?

Mr. Bartel: We would take the position that it's ownership only in the most nominal sense, bare legal title, if you will.

All the true indicia of ownership we don't believe go to the buyer.

If you look at the general repurchase agreement in this case--

Unknown Speaker: Yes, well, you're raising exactly my point.

We want to talk about this case.

We're going to have to examine these repo agreements one by one to determine what... you know, what the economic reality of this particular repurchase agreement is.

Why isn't it much simpler, for purposes of the administration of the Federal tax law, to say whoever owns them gets the deduction, period, work it out?

Mr. Bartel: --The Internal Revenue Code has by ruling adopted various criteria, or it looks at characteristics that can... are used to determine whether secured loan characterization is appropriate to repurchase agreements involving State and local obligations.

Those are referred to in our brief.

Economic substance is important, because we are dealing with a tax matter, and that is the general principle that's been long recognized.

In the context here, we think analyzing economic substance as a standard is appropriate.

Now, that may lead to different results if you have different characteristics in other repos, but we're dealing here with a specific type of repo engaged in by the mutual funds.

We think the Court can accept the economic substance principle, lay the ground rules, and that will allow parties to--

Unknown Speaker: Lay the ground rules such as what, such as whether the agreement, as in this case, does not give full indicia of ownership?

Mr. Bartel: --Yes.

Unknown Speaker: Each case is a different inquiry.

Mr. Bartel: But if parties outside--

Unknown Speaker: It's going to be a very narrow decision you're asking us to write, this just in the circumstances of this particular repo agreement.

Mr. Bartel: --Because of the fact that repos can differ so much in nature, I think we'd be hardpressed to ask for anything else.

Unknown Speaker: To what extent does Nebraska copy, or is it guided by, how the Federal authorities treat repo arrangements?

Do you look at these individual... these different deals on your own, or is there some attempt at conformity?

Mr. Bartel: The revenue ruling at issue simply spoke in terms of repos being deemed secured lendings.

It did not establish specific criteria for repos themselves.

What rule may be adopted as a result of a decision would obviously depend on that decision.

Unknown Speaker: Is there any interstate cooperation, since many States are your friends in this matter?

Mr. Bartel: In terms of the treatment, it seems that most States tax this income.

That's the general consensus you derive from looking at the brief of the amicus State and Local Legal Center, as well as Investment Company Institute.

As to how they do it, whether it's by judicial decision, whether they do it by administrative ruling, there is even some inconsistency with some States saying that they can tax all dividends from mutual fund shareholders.

We haven't attempted to do that.

We're only looking at that portion which is derived from repurchase agreements.

So I don't know that other States have adopted exactly the same test, but I think they're all urging the Court, the amicus States, to look at economic substance as the test to be applied.

Unknown Speaker: Very bravely I'm going to try this again, since I'm thinking that it seems quite important in my mind as to how the case comes out.

The repoer receives the interest on the Treasury bills while the bills are repoed, is that right?

Mr. Bartel: That is correct.

Unknown Speaker: The repoer pays some money to the holder of those bills.

That's right?

Mr. Bartel: That is correct.

Unknown Speaker: And you're saying the money he pays is his own payment of interest.

It's an expense.

Mr. Bartel: That is correct.

Unknown Speaker: When Nebraska then gets its tax return, you say... suppose it was 5,000 dollars in interest.

He would say 5,000 dollars in interest was taxfree.

That's what he'd put at the top.

Mr. Bartel: Yes.

Unknown Speaker: Then he has to... he then looks at the statue and says, but I paid 4,000.

I paid 4,000 to the holder of the bills when they were repoed.

Does he have to, in effect, subtract the 4,000 from the 5,000 so he only has 1,000, or does he not?

Mr. Bartel: Again, based on my understanding of the statute, that that would be the application, assuming it was a Nebraska--

Unknown Speaker: So the answer to my question is yes, he does have to subtract the 4,000 from the 5,000, as you read the Nebraska statute.

Mr. Bartel: --Yes.

Unknown Speaker: And we should assume that's so for purposes of deciding this case?

Mr. Bartel: I don't know that I can say that, I guess, but I'm... my understanding--

Unknown Speaker: Well, it's important because if the answer is yes, which is the answer you've given, that diminishes the exemption, doesn't it?

Mr. Bartel: --No more so than does any State statute which has an addback like Nebraska's if this were a direct borrowing to obtain the obligation.

In other words, that would require a reading of section 3124 that we think is well beyond what is... is required by First National Bank of Atlanta.

The pro rata deduction--

Unknown Speaker: The question is not whether it's legal to diminish it.

The question is, does it diminish it, and the answer is--

Mr. Bartel: --Only in an economic sense, is my answer to that, and it's not constitutionally required, and the statute doesn't require that the exemption be handled any differently.

Unknown Speaker: --What you are saying is you are essentially treating this like a secured loan?

The parties are concerned that you're treating this as though it were a borrowing to finance the purchase of these bills.

Mr. Bartel: Yes.

That is in substance what it is.

That's how it's--

Unknown Speaker: It would seem to me that the economic sense of it is that if the person who has the cash derived from the collateralized loan, if that's what you want to call it, uses that cash to earn money from, say, a General Motors instrument, or something like that, that that is outside nonexempt income, and that the cost of that is outside expenses that are offset against the outside income, but it doesn't seem to me that your statute does that.

Mr. Bartel: --Well--

Unknown Speaker: And if that is so, then it seems to me that the respondents may have a point.

Mr. Bartel: --The key, though, is I think if you look at the exemption statute itself, what is a State precluded from doing?

It may not tax... impose a tax on a Federal obligation, or interest on a Federal obligation, that considers that in its computation.

Our--

Unknown Speaker: Yes, but you're asking us to recharacterize the transaction that the parties have... have engaged in here in an economic sense, so we are simply asking you in an economic sense whether or not the full exemption is being accorded to one or both of the parties under your accounting system, and it seems to me that you're saying well, maybe not.

Mr. Bartel: --In an economic--

Unknown Speaker: And that, it seems to me, bears upon the wisdom or the prudence of our allowing you to recharacterize the transaction in the way that you seek to do.

Mr. Bartel: --Even if the transaction were characterized as a sale and repurchase, if the funds were the actual owner, then that raises another question.

Then is not, if they are the owner and they are reselling the obligation, wouldn't that in essence be gain on sale, which the States have, I think, the authority to tax a gain on sale of a Federal obligation.

So if they are... it's clear from the agreements that what they're bargaining for is not the interest from the Federal Government, and if it is a real sale, then in actuality what they are getting is gain on sale of that Federal obligation.

If there are no further questions, I would like to reserve any remaining time for rebuttal.

Unknown Speaker: Very well, Mr. Bartel.

Mr. Wittler, we'll hear from you.

Argument of Terry R. Wittler

Mr. Wittler: Mr. Chief Justice, may it please the Court--

Since 1862, Federal obligations have been, by statute, exempt from taxation by the States.

Nebraska statutes begin by recognizing this exemption by providing a deduction from a Federal adjusted gross income.

However, the Nebraska Department of Revenue has adopted an administrative ruling that essentially takes away that exemption in the case of repurchase agreements.

That revenue ruling violates the applicable Federal statute and the Supremacy Clause, and the Nebraska supreme court reached the correct ruling when it invalidated that revenue ruling.

The results... to reach that result, the Revenue Department says that you should disregard the way in which the parties structured their transaction and restructure it to fit their interpretation.

The Revenue Department's ruling does not comply with this Court's decision in Frank Lyons, which sets out basically a threepart test for determining whether or not the structure the parties have chosen should be respected.

First of all, that case requires that it be a genuine multiparty transaction with economic substance, secondly, the form of the transaction must be based on business and economic realities, and thirdly, it must be based on taxindependent considerations.

It may not have been structured that way solely to avoid tax.

The transactions in this situation, these repurchase agreements, meet each of those three tests under Frank Lyons, and accordingly the Government should be required to respect the form in which the parties have chosen to structure their transaction.

Unknown Speaker: Well, do you think the Frank Lyon opinion, Mr. Wittler, was intended as the beall and endall for what anybody might do with respect to restructuring a tax transaction to show the economic reality of it?

Mr. Wittler: No, Mr. Chief Justice, I do not think that Frank Lyon was the beall and endall.

I think, though, that any... the form that you choose is not determinative in this case.

The way in which you read Frank Lyon, or the way in which you might adjust the holding of Frank Lyon is really not determinative, because the State's position is, we don't look at any of those aspects.

We look solely at the socalled economic substance, and that's the only test we apply, and we apply it as we see fit, and we reach the result that we choose.

Unknown Speaker: Well, do you agree that the estimation of the economic substance in this case is a correct one?

Mr. Wittler: Yes, Your Honor, but I think that begs the question, and let me explain why.

Economics strives to be valuefree.

It tries to be valueneutral.

The law, on the other hand, is valuedriven, it's valueladen, and let me give you some examples of why I think that begs the question.

If I have a widget factory, and I hire 12-year-old children, or I hire adults, to an economist, he or she would say, the economic substance of those two transactions is the same.

But the law says no, a very different result comes about.

If I hire a salesperson to sell my widgets, and I pay him or her a commission, the law says it's deductible.

If I pay a bribe to someone to purchase my widgets, the law says that's unlawful.

An economist says those two payments are exactly the same for economic substance.

The law says, we don't care, we treat them dramatically different.

If I borrow 100,000 dollars for a vacation home, my interest is taxdeductible.

If I borrow 100,000, buy an RV to go to exactly the same place for a vacation, it's not taxdeductible.

That's why... that's the basic fallacy of the State's approach, is to look solely at economic substance.

Unknown Speaker: Well, I'm not sure it is, because if one or the other theories, and I'm not sure which one it is, operates to deprive securities of their economicexempt status, then the purpose of the statute... then the purpose of the statute is contravened, and we interpret the law according to the purpose of the statute.

So we do begin by asking what is the economic effect on the market for Federal securities, on the grant or the denial of the full exemption to which the securities are entitled, and we're asking that, and it seems to me the structure of the transaction has a great deal to do with that.

Mr. Wittler: It does, Your Honor, but that... and that structure is chosen by the parties for reasons independent of the tax considerations, and I think we mentioned in our brief that a significant part of this market, participants in this market, are municipalities, school districts, agencies that pay no tax.

They enter into repurchase agreements not for tax reasons, but because of business and regulatory concerns that they have to meet.

And I want to go back just one moment to what I feel is the basic fallacy of the economic analysis.

If I loan 10,000 dollars to General Motors, and I loan 10,000 dollars to the United States Treasury, the economic substance of those two transactions is identical.

But Congress has said the 500 dollars that I earn on one is fully taxable, and the 500 dollars on the other is not taxable by the State, and that's what we're here to talk about.

Unknown Speaker: How do you distinguish the situation of the municipal bond and the Federal taxation?

Municipal bonds are also exempt, but if we were talking about municipal bonds and the taxing authority is the Federal Government, then I believe the position of the Government is that the interest... that the interest to the reserver would be taxable.

But you say... so explain... the same kinds of transactions, but on the one hand Tbills and the State taxing authority, and the other hand, municipal bonds and the Federal taxing authority.

Mr. Wittler: Justice--

Unknown Speaker: Why can't Nebraska say, we want to do the same thing that the Feds are doing?

Mr. Wittler: --Because Nebraska doesn't have a Supremacy Clause, and the U.S. Congress does, and in the recent case involving South Carolina v. Baker, this Court held that the exemption of municipal bonds interest is statutorily based.

It's granted by Congress.

It has no constitutional features.

Unknown Speaker: Oh, so you're resting not just... it's not just what 3124 means, but you're saying the Constitution requires that, so even if Congress was explicit in 3124, and says, and we don't mean that the interest paid to the reverser is not income, that would be unconstitutional?

Mr. Wittler: That's not what I mean to say, Your Honor.

If Congress... if 3124 was repealed tomorrow, we'd still have a problem with the Nebraska approach, because it singles out Federal obligations and doesn't mention State obligations, so it discriminates.

But no, our basic position is it's based on the statute.

Unknown Speaker: So you're rejecting what we were just told, that... we were just told that Nebraska treats State, its obligations the same way, and you're saying it doesn't?

Mr. Wittler: I disagree with that, Your Honor.

There is nothing in the record, number 1, to answer that question.

I don't know for a fact how they treat them.

What I know is that the Department of Revenue apparently thought it necessary to adopt this regulation to reach Federal repo income, and it has not seen fit to adopt a similar regulation to allow it to meet State of Nebraska repo income, so all I know is that there's a ruling that addresses Federal, none that addresses State, and I believe under those circumstances it discriminates.

Unknown Speaker: There has been, so far as I know, no voice from the U.S. side, the Treasury side, in all of this, and you are not exactly in the position of McCulloch in this case.

With all the friends that are appearing, is there any reason why we have not had any position for the United States?

If the idea is that 3124 means that you can't have this addback for the... why have we heard nothing but silence from the Federal Government?

Mr. Wittler: I can give you a theory, Your Honor.

The United States may have an interest on the one hand in seeing that the exemption is preserved, because that reduces costs, borrowing costs to the Treasury, in which case they would side with us, and there may be persons within the United States who are concerned about maintaining the validity of union planners in that line of cases and going after revenue arising from municipal bonds who would be, their interest being with the Nebraska, State of Nebraska.

Unknown Speaker: Could a third possibility be that under either theory the full exemption is allowed and therefore the market is unaffected?

Mr. Wittler: I don't believe so, Your Honor.

I think that the way Nebraska has structured its approach, which is a very curious way to do it, it starts with the Federal... your Federal adjusted gross income, which includes revenue from the United States, because it's taxable at the Federal level.

And then it says, okay, now you can back out your interest on Federal obligations, unless you borrowed some money to help hold those obligations.

If you borrowed some money from General Motors or from anybody else, you don't get to back it all out, you just get to back out the part that is offset by a deduction, and that's where we lose the parity with the Federal approach, because the Federal approach--

Unknown Speaker: But that seems to me quite a plausible theory if they deprive you of any of the exemption, because then it works out, and that's the problem I have with your footnote at page 29.

It seems to me that you're comparing apples and oranges, or nectarines and peaches, whatever we're using here today.

[Laughter]

Mr. Wittler: --No, Your Honor, I don't believe I am, because the statute says, their position is, even though I've loaned... I've sold these to somebody else, I really own them.

If I really own them, I must... but yet I'm paying interest to somebody, I must be paying that interest to carry the obligations.

In other words, I own the obligations.

I'm carrying them, even though I've loaned them out, and that is what 2716(1)(e) says.

If you've paid that interest to carry those obligations, we're going to take away your Federal exemption, we're going to narrow it down, chew it down, and that's where the loss comes in.

Unknown Speaker: Well, if you disregard Nebraska's addback to the borrower's interest expense deduction, does the borrower otherwise get the full benefit?

Mr. Wittler: Yes.

If you disregard the statute that says you don't get the full benefit, you do get the full benefit, that's absolutely true, and the reasons go back to an earlier question--

Unknown Speaker: Then why should Loewenstein or the mutual funds prevail in any event?

Why isn't the flaw, if there be a flaw, that the addback... if... your theory about what 3124 requires doesn't mean that Loewenstein has to be the one to get the tax benefit.

It could be the repoer by not charging him with the addback.

Mr. Wittler: --I agree that at a Federal level, in terms of the statutory scheme, you're right, as long as somebody gets it, the statute's complied with.

The problem, and the reason why you have to be careful how you draft a statute to achieve that result, goes back to this Court's holding in Denman v. Slayton way back in 1930.

If you allow people to simply pass the obligation back and forth by borrowing to buy exempt obligations, then you face a situation where I've got 10,000 dollars in salary income, and I decide I'm going to go out to my local bond dealer, borrow 10,000 dollars worth of securities, or borrow 100,000 dollars worth of securities, pay them 10,000 dollars in interest, receive 10,000 from the Government, offset the two, bingo, I pay no tax.

Not only do I not pay tax on the interestfree income, but I've got a nice deduction for interest that I can offset against my salary, and I wash my hands.

I pay no interest.

That's why the scheme of 265 was developed, and that's why you've got to have an offset one place and add back another.

It makes a difference from a tax equity point of view.

Unknown Speaker: You know, Mr. Wittler, it seems to me that we dealt with an aspect of this argument in the Bartow County Board of Tax Assessors case, where the Court said that the tax exemption required by the Constitution and section 3124 is not a tax shelter, and Federal obligations may be acquired in part by liabilities, and when they are, a pro rata method of allocating a fair share to the liabilities doesn't infringe on the immunity.

And it seems to me your argument runs somewhat counter to what the Court said in Bartow--

Mr. Wittler: Justice--

Unknown Speaker: --that you don't have to have out there somewhere the full exemption, that if there... if you borrow money, and you have to offset the cost of that to engage in the purchase of the Federal obligations, you lose some of the exemption.

I thought that's what this Court said.

Mr. Wittler: --Bartow County dealt with a net worth tax, and a net worth, the net worth is an abstraction.

It's not a tax of your assets.

It's not a tax against your liabilities.

What the taxpayer wanted to do in Bartow County was say, I've got these nontaxable assets, I've got these liabilities, they cancel each other out, and what I have left is tax exempt.

What the taxing authority wanted to do was just reverse it and say, no, we're going to offset your liabilities against your exempt obligations, and everything you've got that's left is fully taxable, and the compromise was, realistically, was to say no, we have to offset them.

We have to have them be pro rata, and the tax exempt can bear their fair share of the burden.

Here, the State is saying no, not only are you not going to get a double benefit, you're not going to get any benefit.

We're going to treat you just like if you'd gone out and bought a fully taxable obligation for General Motors or anybody else.

That's realistically the only reason that the State Department of Revenue adopts a ruling like this, is to earn some money for the State, and if you run through the arithmetic, they will increase their revenues by exactly the amount of repurchase revenue they recapture, and to take my example of the total of 500 dollars in interest that the Federal Treasury writes a check for, it slowly disappears, the more and more people down the road who have repurchase obligations, and that's why it's basically a violation of the statutes.

Unknown Speaker: That's... I want to go back, if I can, to Justice Kennedy's... it's the same question I think many of us have.

It starts with your footnote, and it... I'm thinking of the 1 million dollars in Treasury bills.

Say they issue for 985,000 dollars, as there's 15,000 dollars you might call an original issue discount.

That's the interest.

And suppose you start with the proposition that that 15,000 dollars is the amount the State shouldn't tax--

Mr. Wittler: Right.

Unknown Speaker: --forgetting how you characterize it.

They can have any kind of system they want, within limits, as long as they don't get at that 15,000.

Now, you've continuously said, and you do that in your footnote, that it's that statute we've been talking about that requires an addback of some kind.

You know what I'm thinking.

Mr. Wittler: Yes, I do.

Unknown Speaker: But as I read that statute, it doesn't.

As I read that statute, it only requires an add back of costs incurred to carry the bonds.

Mr. Wittler: That's right.

Unknown Speaker: Well, you're not carrying the bonds when you've repoed them out to General Motors.

General Motors is carrying the bonds.

Rather, you've got 1 million dollars--

Mr. Wittler: I agree--

Unknown Speaker: --and you're going to use... you've got 1 million dollars because they have your bonds for a day and you have their million for the day, and so the money that you're paying to General Motors for the 1-day's loan of the Treasury bills, so you get the million, is not a cost of the Treasury's bills.

It's a cost of whatever income you use that million in your hands to get.

So that's why I read the statute, as I read it according to its language, as not infringing on the 15,000, but I have to admit you've told me it infringes on the 15,000, and they seem to concede the point, and there doesn't seem to be a finding by the Nebraska supreme court on the matter, and therefore I don't know what to do.

That's my question.

[Laughter]

Mr. Wittler: --Well, you can affirm the Nebraska supreme court.

But--

Unknown Speaker: Thank you.

[Laughter]

Mr. Wittler: --Your Honor, if you adopt their position that we--

Unknown Speaker: No, I'm... what I'm interested in is that narrow statute that talks about adding back the expenses of carrying the Treasury bills.

If I take it literally... I don't want to just repeat myself, but if I take it literally, you wouldn't add it back, because it isn't a cost of carrying the Treasury bills, which during the repo are in the hands of the person to whom you have repoed them.

Rather, it is a cost of whatever income you use the money you "borrowed" to earn.

Mr. Wittler: --But Your Honor, this language--

Unknown Speaker: So you wouldn't add it back.

Mr. Wittler: --tracks section 265, and there is extensive litigation history about how you decide whether you add it back in or not, and the cases consistently take the position that with repos you add it back in.

Unknown Speaker: All right.

Then you're right.

If that's what happens, you add it back in, and if in fact you had a 90-day bill, and what you did was, you gave it to 90 different people for a day, you would discover there was virtually no interest that wasn't taxed.

Mr. Wittler: That's right.

Unknown Speaker: That's what your point is.

Mr. Wittler: That's our position.

Unknown Speaker: Yes.

All right, got it.

But then this entire case, this entire controversy comes up because... because of the requirement of the addback.

In other words, if Nebraska didn't have that requirement, you would have no case, Loewenstein would have no case, is that right?

Nevada--

Mr. Wittler: No, Your Honor.

The... it's a twostep addback.

We start at the Federal level, where the income is included, because Federal law says--

Unknown Speaker: --Let's just--

Mr. Wittler: --Yes.

Unknown Speaker: --focus on this part about the addback that the repoer has to do under Nebraska law.

If Nebraska didn't require that, you would have no case, is that correct?

Mr. Wittler: Well, I'd have no case, but I'd also owe no tax.

I would have gotten an exemption.

Unknown Speaker: How would you have gotten the exemption?

Isn't it... if Nebraska... you, I thought, are arguing for Loewenstein--

Mr. Wittler: Yes, ma'am.

Unknown Speaker: --not the repoer.

Mr. Wittler: That's right.

Unknown Speaker: Okay.

The repoer doesn't get all the interest, and doesn't have to add back any... any offsetting cost of borrowing for whatever the borrowing is for--

Mr. Wittler: All right.

I'm sorry.

Unknown Speaker: --so every dollar is accounted for, but the repoer gets it all.

Mr. Wittler: Right.

Unknown Speaker: And the reverser gets interest income.

Mr. Wittler: Right.

Unknown Speaker: If that's the position that Nebraska took, there would be no argument under 3124, and Loewenstein would lose, is that--

Mr. Wittler: That's right, but Loewenstein would know that he was going to lose, and he would say to the repoer, I'm not going to cut the deal that I cut with you last year, because now I know I'm going to have to pay tax on it, so now I want more money, because I'm going to have to pay tax.

Unknown Speaker: --If I'm right about Nebraska having a choice, if what they're doing is not permissible, then they have a choice.

Mr. Wittler: Yes.

Unknown Speaker: And why should a court, a Federal court, make that choice for them?

Mr. Wittler: Because the... they have a choice only in the sense they have to do it the constitutional way.

Unknown Speaker: Yes, but you told me the Constitution doesn't care about whether the repoer or the reverser gets the benefit.

Mr. Wittler: I'm saying somebody has to get it.

They've said nobody gets it.

If--

Unknown Speaker: But if they... even if... even if that... even if you would prevail on that point, somebody gets it, what authority does this Court have to say which somebody it should be?

Mr. Wittler: --It hasn't.

I think no authority.

I think all it can do is interpret 3124, that says, somebody gets it, and Nebraska says nobody gets it.

Unknown Speaker: But it seems to me--

Mr. Wittler: And that violates the Supremacy Clause.

Unknown Speaker: --But it seems to me quite plausible for Nebraska to say that you don't get it, because by your contract, you pay all of the Federal interest back.

Loewenstein pays all of the Federal interest back to the original holder.

Mr. Wittler: But as--

Unknown Speaker: And if--

Mr. Wittler: --I pointed out, money is fungible.

That doesn't make any difference.

We could redraft the contract tomorrow to say it's cut the other way, and the net effect is the same.

Unknown Speaker: --Well, that might make a difference.

Well, suppose... think about it in terms of a zero coupon bond, and there's just one coupon that's clipped at the end of the line, and that's the person that gets the interest, and in the meantime there's a repo transaction, and... and the dealer transfers the Federal obligation to the repoer, and the repoer has to pay... pays the money over and receives interest for that, which is not the interest on the Federal obligation.

I mean, why cannot the State tax that interest quite properly, and then at the end of the line, whoever owns, presumably the dealer by that time, the bond with the coupon will clip the coupon, get the interest, and get the deduction?

Mr. Wittler: First of all, Your Honor, Nebraska law incorporates by reference Federal tax law.

Even if it didn't, 31 U.S.C. 3124(b) says, in determining the tax status of interest, we look at Federal law.

Federal law has made a policy decision that we're going to prorate that zero coupon interest over a period of time, and I don't know, but I presume the reason is because otherwise people could wait till the day before that comes due, run out, buy it, say,

"Even though I've only owned this 30-year bond 1 day, all of the interest in this last payment is mine. "

and that leads to the sorts of tax manipulation that the Court found unacceptable in the Frank Lyon case.

But here, the basic principle is that somebody has to get tax exempt interest income according to the statute, and under the law of the State of Nebraska, they have tried to take away at least a portion of that exemption.

Unknown Speaker: Well, but... this is just repeating Justice Ginsburg's question, but I still don't understand your answer to it.

Granted what you've just said, that they've taken away the interest income, somebody's entitled to get it, don't you have more of a case to make than that?

Don't you have to show that your client is entitled to get it, and all we can say is, somebody's entitled to get it?

Why does that mean that you win?

I mean, you're claiming--

Mr. Wittler: Because--

Unknown Speaker: --You're claiming that Nebraska has to give it to your client, not to the repoer.

Why is that?

Whereas all you come before us and say is, Nebraska has to give it to either my client or the repoer.

Mr. Wittler: --Because Nebraska has said, in a separate statute, Mr. Repoer, you clearly don't get it.

We're not going to give it to you because you've entered into a repurchase arrangement, and you've been paying out interest over time.

We're not going to let you get the deduction.

They've taken that position.

If that's their position, then I say somebody's got to get it, and my guy was the one who should have got it, and you can work through the arithmetic in the statute to show why he should have.

Unknown Speaker: So we just decided, in effect, on the hypothetical, we assume that the repoer doesn't get it, and therefore you're left.

Mr. Wittler: Your Honor, with all due respect, I don't think it's a hypothetical.

It's simply, the literal language of the statute says--

Unknown Speaker: Is it clear under the statute that the repoer doesn't get it?

Mr. Wittler: --I believe it's clear, yes, Your Honor.

Unknown Speaker: Is it clear under the statute that your client doesn't get it?

Mr. Wittler: It's clear under the revenue rule that my client doesn't get it.

The statute does not address that.

Unknown Speaker: Whereas the statute does address the repoer?

I mean, it seems to me the uncertainty stems from revenue rulings under both, doesn't it?

Mr. Wittler: No, sir.

There's a statute that talks about taking interest deductions, and there's a statute that talks about excluding Federal obligations.

Unknown Speaker: Yes, but isn't it true that although the... let's assume there's 600 dollars of Federal interest, and 500 dollars of interest paid to the buyerlender.

Now, the 500 doesn't reduce the amount of the Government interest that's exempt from tax, but is it not available as an ordinary deduction for interest payments in connection with what the person wanted to use the money for?

He does get the benefit from it in a different form, does he not?

Mr. Wittler: He gets the same benefit, Your Honor, that he would have gotten if he bought a fully taxable obligation.

Unknown Speaker: Right.

Mr. Wittler: He gets an interest deduction.

Unknown Speaker: But he does therefore get the benefit of the deduction.

Mr. Wittler: Yes, but that has nothing to do with the fact that it was a taxable or nontaxable--

Unknown Speaker: Instead of treating it as 600 of taxfree income, he treats it as 100 of taxfree income and a 500 deduction from your gross income, which brings you out to the same figure.

Mr. Wittler: --But where did the... where did the other 500 go?

That's the question.

Unknown Speaker: Well, the other 500 is income to the person who lent the money.

The 500 is interest to the buyerlender.

Mr. Wittler: But then we have two people who have gotten 500 dollars, Your Honor.

Unknown Speaker: No.

One of them's a deduction, one of them's income.

It's true that... I understand what you're saying about changing the character of it.

It's not Federal income exempt from taxation under the statute, but the 500 dollars is a business expense, I should think, because it's the cost of borrowing that money.

Mr. Wittler: It's a business expense, and it goes against the taxexempt income, except--

Unknown Speaker: Well, but it brings you down to the same amount of taxable income, it seems to me.

Maybe I'm missing something.

Mr. Wittler: --No, Your Honor.

I agree, for one party to the transaction, he gets a deductionfree interest payment, just like he'd get whether he was dealing in taxable or taxexempt obligations, and he gets a little, tiny exemption for what's left over, the difference between the 500 and 600.

He gets 100.

But no... the remainder paid by the Federal Government goes to somebody else who now becomes fully taxable, and that's the evil in the approach the State of Nebraska takes.

Unknown Speaker: So could we do this, could we say, suppose you said, look, the States have to respect 15,000 dollars of the original issue discount, and they have a lot of leeway as to how they do it, but they have to respect it.

One way they could do it here is, they could say, the repoer gets the 15,000, gets the whole thing, and doesn't deduct this as a cost.

Another way they could do it is give it to their... your client.

We don't know how Nebraska does it.

We send it back to the Nebraska supreme court and tell them to decide Nebraska law and how it works out consistent with the principle.

Could we do that?

Mr. Wittler: You certainly could do that, Your Honor, but the Federal law says--

Unknown Speaker: xx--

Mr. Wittler: --it will be governed by the Internal Revenue Code, and the Internal Revenue Code explains how we allocate these payments that occur over time, so... and Nebraska law then incorporates by reference the Federal Internal Revenue Code, so it wouldn't advance us a great deal.

Unknown Speaker: --Yes, but if you're going by the Code you'd say, fine, you allocate the original issue discount day by day, but I don't know that the Federal Code would require giving days 3 to the repoer, or to the person who's holding the security, say, Ford Motor, or General Motors.

I don't see anything in the Code that tells you the answer to that question.

The natural thing, if it's--

Mr. Wittler: Thank you.

Unknown Speaker: --Thank you, Mr. Wittler.

Mr. Bartel, you have 3 minutes remaining.

Rebuttal of L. Jay Bartel

Mr. Bartel: Again, may it please the Court--

It seems that the issue in respondent's argument is focused on the validity of the addback provision which Nebraska and apparently other States have.

We believe the validity of the addback provision was established by the Court's decision in First National Bank of Atlanta v. Bartow County, and if that is the only argument that they have to present, we think that the Court can certainly reverse the decision of the court below.

Unknown Speaker: I have just one question about why Nebraska is not taking the position that California and some other States have taken that all of this is beside the point, because what Loewenstein receives is simply a taxable dividend from the mutual fund.

Mr. Bartel: Of course, that's largely a policy question.

Our Department of Revenue simply, in looking at the cases, I suppose, from the other States, saw that the trend was to allow the passthrough of interest income earned by direct ownership of Federal obligations.

We have not raised the issue, but I assume it's based on the trend in those decisions, but, of course, our position isn't binding on what other States may attempt.

There's been no decision, obviously, by this Court on that question.

Chief Justice Rehnquist: Thank you, Mr. Bartel.

The case is submitted.

Attribution:

The OYEZ Project

Featured:

Harper v. Virginia Department Of Taxation - Oral Argument

Fri, 09 Jan 2009 14:49:27 +0000

Case:

Harper v. Virginia Department Of Taxation

Media File:

91-794_19921202-argument.mp3

Related Transcript:

1992_91_794_argument.xml

Transcript:

Argument of Michael J. Kator

Chief Justice Rehnquist: We'll hear argument first this morning in No. 91-794, Henry Harper v. Virginia Department of Taxation.

Mr. Kator.

Mr. Kator: Thank you, Mr. Chief Justice, and may it please the Court:

This cases arises as the sequel to Davis v. Michigan Department of the Treasury.

Petitioners are Federal retirees who, relying on Davis, sought refunds of the taxes Virginia unconstitutionally imposed on their pension.

The court below denied petitioners their refunds, principally holding that Davis was not to be applied retroactively.

This case presents the question whether Davis must be applied retroactively, and if so whether the Department of Taxation must refund petitioners the taxes unconstitutionally imposed upon them.

In reaching its conclusion to apply Davis nonretroactively, the court below relied on its application of Chevron Oil v. Huson.

Well, we submit that the lower court's Chevron analysis is flawed in every respect.

More fundamentally we submit that the court below erred in even reaching Chevron.

Foremost, retroactivity of Davis is compelled by this Court's decision in Beam v. Georgia.

In Beam this Court rejected modified or selective prospectivity in the civil arena.

It held that if this Court applies its rule to the parties before it in one case all other courts must similarly apply that rule to litigants before them.

Thus for choice of law purposes the dispositive question here is whether the Court applied its ruling to the parties in Davis.

On this point there can be no real dispute.

As a result of this Court's holding Michigan paid and Paul Davis received a refund of the taxes unconstitutionally imposed on his pension.

It is not important how or why this Court reached that determination.

It matters only under Beam that it did.

Accordingly, under Beam, the court below was required to apply Davis retroactively.

The second point that we raise is our statutory point.

What the Department of Taxation is asking the Court to do in this case is something that it has never done before.

It is asking the Court to use Chevron to ignore the plain, unambiguous terms of a lawfully enacted act of Congress.

This is not anything that any of the authorities that the Department of Taxation has cited in its brief suggests that this Court has ever done.

And admitted, it would seem to me that there's no precedent which would support it.

In enacting the Public Salary Tax Act in 1939 Congress said taxes imposed after December 31, 1938 must be non-discriminatory.

50 years later Virginia says no, that statute should go into effect December 31, 1988.

This Court cannot accept Virginia's equitable plea.

They say it's going to be very burdensome for us to comply with the statute.

Congress has spoken, and that, according to this Court's precedent, is the end of the matter.

In our briefs we speak at great detail about the Chevron analysis.

We address the bounds and propriety of prospectivity and we address the application of Chevron to the facts of this case.

As this Court has most recently applied Chevron, it could not reach a case such as this, a case against a governmental entity where there is no contention that past precedent of this Court has been overruled and where there is no suggestion that this Court has answered a novel question of law in a revolutionary manner.

Application of Chevron in any event yields retroactive application of Davis as each element of that analysis favors retroactivity.

For these reasons as well the court below erred in holding that Davis was nonretroactive.

What I think is the tricky issue in this case is not so much the choice of law issue.

The more complicated issue is the remedy issue.

The court below offered two reasons for denying petitioners' refunds.

Its first reason was that under Chevron Davis didn't need to be applied retroactively.

And that I submit is incorrect.

Its second reason was that under its own state law analysis, its own state law retroactivity analysis, Davis would not be applied retroactively.

As this Court made clear in Ashland Oil, in Beam, and the various opinions in the American Trucking Association v. Smith, the question of retroactivity of a decision of this Court is a question of Federal law, not state law.

The Virginia Supreme Court was simply wrong in holding that as a matter of state law you could deny retroactive effect to Davis.

The second thing that the Supreme Court of Virginia did in its second opinion was it suggested that no remedy was required here even if Davis is retroactive because it can continue to consider the remedial, or the equitable considerations of Chevron in the remedial calculus.

It can say even if the law is unconstitutional, the statute is unconstitutional as declared by Davis, nonetheless it can deny relief.

Unknown Speaker: Well certainly the state can, in a tax case the state can require a claimant to go through the procedures required of other claimants for tax refunds, can it not?

Mr. Kator: Certainly a state can structure its tax refund statute in a way that provides it protection.

Certainly.

That's not what we have here in this case.

The bottom line, as McKesson makes clear, is a clear and certain remedy for the unlawful deprivation of property.

That's what we had in this case.

Virginia seems to suggest that McKesson only applies in the situation where it's foreseeable at the time that the statute was enacted that the statute would be challenged and likely invalidated.

And I submit that McKesson cannot be so limited.

McKesson speaks in terms of constitutional due process.

The due process clause doesn't say you get due, due process may not be taken in bad faith without due process of law.

It says property may not be taken without due process of law.

Their reading of McKesson is far too parsimonious.

In this case Virginia must provide a clear and certain remedy, and their statute presumably does so.

If it doesn't, then the Constitution requires that a remedy be provided.

Unknown Speaker: Well, and I suppose the state can also put a time bar on the remedy, that you must apply for a refund or pay under protest within a certain amount of time or you can't do it?

Mr. Kator: Certainly.

As this Court held in Beam and in McKesson, the states are allowed to erect procedural barriers, procedural protections around them to shield them from liability.

And that's what most states have done.

They have created a system whereby the statute of limitations, 3 years, whatever, within which to present claims, and that's the procedure the petitioners have followed in this case.

Unknown Speaker: What are the limits in Virginia, the statute of limitations or the time requirements on a tax claim?

Mr. Kator: In an ordinary case it would be 3 years as a general rule.

It's 3 years or I believe 60 days after your Federal return is corrected in a Federal claim, piggy-backs it in that sense.

In this particular case, shortly after Davis was decided by this Court the Virginia legislature met and amended its refund statute for the explicit purpose of allowing Federal, the claims of Federal, retroactivity of Davis to be resolved, it amended the refund statute to say claims for refunds for Davis type taxes may be submitted up to a year after final resolution of the retroactivity of Davis.

So in Virginia the door is still open.

Unknown Speaker: You are only extending it to a year after this Court renders a decision in this case?

Mr. Kator: Well, perhaps this Court, perhaps the Supreme Court of Virginia on remand.

It's a little unclear, but the door is still open in Virginia.

Unknown Speaker: But how far back does that go?

Mr. Kator: Only to 1984 would be the first... I'm sorry, 1985 would be the first tax year at issue, in dispute in this case.

Most of the petitioners filed their refund claims in March, April of 1989, and that would have entitled them to go back to 1985.

So the tax years in dispute are '85, '86, '87, and '88.

Virginia didn't impose the tax in '89.

Unknown Speaker: I'm a little puzzled because they make the argument in their brief that as long as you had a prepayment procedure you don't have to have a host payment refund claim.

That seems a little inconsistent with what you've just said.

Is it... you think it's perfectly clear as a matter of Virginia law that... have they already decided that there is a remedy in this case?

Mr. Kator: In this case all the court has held is that the reason its refund statute does not apply is because of non-retroactivity of Davis.

Unknown Speaker: Right.

Mr. Kator: In its second opinion it intimated that it could continue to play the Chevron game with respect to a remedy, but that's not anything that it had done before.

We also challenge the assertion that there's any meaningful predeprivation remedy in Virginia.

In Virginia the predeprivation remedy is essentially to go to the tax commissioner and say I don't think I should have to pay these taxes.

In order to get judicial review of that determination by the tax commissioner you must pay the taxes and you are funnelled into the same refund procedure that we filed, the petitioners filed in this case.

So because this case involves constitutionality of the Virginia statute, the Virginia tax commissioner has no authority to say the tax is unconstitutional to absolve petitioners from paying that tax.

Therefore there is no meaningful predeprivation remedy.

Unknown Speaker: Even if he had that authority, does Virginia require you to go to the tax commissioner in order later to ask for a refund?

Mr. Kator: No.

And that's the second point, Your Honor.

Virginia doesn't require that you choose any one particular route.

It has various routes.

And what the argument seems to be is that well, you had this other route you could have taken and therefore we can cut off the route that you happened to choose to take.

And I submit that that would violate fundamental notions of due process as in the Brinkerhoff-Faris case.

Unknown Speaker: Virginia does not say you must go to the tax commissioner?

You can choose not to, pay the tax and challenge it later, ask for a refund later, without having gone to the tax commissioner?

Mr. Kator: You had to pay the tax first.

Unknown Speaker: Yes, you have to pay it first.

Mr. Kator: Yes.

Unknown Speaker: But I take it, or maybe it's not correct, if you apply to the commissioner for a prepayment remedy would that extend the period of time in which you have to file your refund because the, I take it the commissioner can hold your claim in abeyance while the commissioner is determining it, and then if the commissioner denies it I take it the refund remedy, the limitation of the refund remedy begins to run from either the denial or the payment.

Mr. Kator: Virginia does have a procedure whereby you can preserve a refund claim in just that manner.

But the fact remains that in terms of getting an unconstitutional tax refunded it can't be done unless you go to court, and you can't go to court unless you pay the tax.

Unknown Speaker: But there is a functional difference in the two routes in that if you apply for the predeprivation, for the prepayment determination it is going to have the effect of extending the period of time in which you have to ultimately file a court action.

Mr. Kator: Yes, it would extend your statute of limitations.

It doesn't allow you to go back any further, but it would extend the time that you could finally file suit.

But I don't see that that would necessarily reflect on the meaningfulness of the predeprivation remedy because the bottom line still remains unless you go to court you can't get your money back, and unless you pay your taxes you can't go to court.

And that is what I see as the central component of the predeprivation remedy that's required.

Unknown Speaker: Mr. Kator, I think you said that the commissioner cannot relieve you of your tax liability on grounds of unconstitutionality.

Is that correct?

Mr. Kator: That's correct.

Unknown Speaker: He can't forgive it.

Can he make a declaration of unconstitutionality and then say well, I'm terribly sorry, I can't let you go but I admit that the tax is unconstitutional?

Mr. Kator: I don't... I suspect it's conceivable that he could say I'm very sympathetic, I think this tax is unconstitutional but there's nothing I can do about it, but I know--

Unknown Speaker: He cannot make a declaration of unconstitutionality with any legally operative significance, is that what you're saying?

Mr. Kator: --Exactly.

Not in Virginia, not in the United States, and not in any jurisdiction that I'm familiar with.

Unknown Speaker: Don't they make another argument, another argument that there's some sort of an equitable doctrine of repose that the Virginia court can apply that could be comparable to a statute of limitations when they think there's gross unfairness in collecting a tax retroactively?

Mr. Kator: The argument that I understand the Department of Taxation to make is that the state has its own retroactivity analysis, the Fountain v.--

Unknown Speaker: I understood that to go not to the question of whether the rule of law is retroactive but whether there really is a state remedy.

Obviously there would not be if the statute of limitations had run or if they had said in so many words you must file a pre, you know, a prepayment challenge.

But they say there's sort of another thing, I don't know if there are any cases that support it but that there's some sort of a, they can create a doctrine of repose when they are confronted with this sudden trauma that has come over the state.

Mr. Kator: --Well, the only authority they cite for that is the Fountain case and another one that was decided on or about the same date, and those cases are retroactivity cases.

And they, the department, the attorney general's office briefed Chevron in those cases and the court came down, essentially following the Chevron analysis in state law cases, and said this is how we apply it.

I don't understand how Virginia could do that, but that comes back to my, to the bottom line of our brief which is if Virginia doesn't provide a remedy, then the Constitution must and the Fourteenth Amendment takes over.

Petitioners are entitled to a clear and certain remedy for the denial of their property, for the taking of their property, and if Virginia's statute doesn't provide it then the Fourteenth Amendment would.

And I think that this is an important point that comes up not only in this case but is before this Court in several other petitions that are pending.

Unknown Speaker: May I just interrupt you right there?

Why would it require it if you acknowledge that a statute of limitation would bar it?

Anything barred by limitation the Federal Constitution doesn't trump.

Mr. Kator: Correct.

Unknown Speaker: Now why does the Federal Constitution necessarily trumps this sort of, this new equitable doctrine they're coming up with?

Mr. Kator: Because if it's new then there wasn't a clear and certain remedy.

Unknown Speaker: I see.

Mr. Kator: You have a Brinkerhoff-Faris situation where they undermined your claim, your existing claim.

And that's what... obviously this Court cannot say Virginia's refund statute provides X.

That's for the Virginia Supreme Court to say.

But what this Court can say, and what we ask it to say, is that if Virginia's refund statute doesn't provide a remedy then the Fourteenth Amendment does.

And this is the issue, the Brinkerhoff-Faris issue that I was mentioning.

That's before the Court in the Norwest Bank case that's on petition.

It is also before the case in, the Court in the Bass case which is pending.

Recently in Georgia in the, not in the Beam case but in the Federal Retirees case, the Supreme Court of Georgia held that yes, Davis must be applied retroactively but its refund statute only applies to illegal taxes collected under a valid statute and not illegal taxes collected under an invalid statute.

And therefore in Georgia they tell us, notwithstanding what counsel for the attorney, for Georgia told this Court in Beam, that the only way to recover your taxes in Georgia is to pay them under protest.

This is the kind of, these are the kinds of defenses that are coming up in these cases now, and they're before the Court.

Unknown Speaker: Do you say that an even-handedly applied requirement that you pay under protest in order to recover cannot bar recovery?

Mr. Kator: I wouldn't say that, I wouldn't say that it... well, yes.

Unknown Speaker: What's your authority for that?

Mr. Kator: Okay.

Let me start with a case that I'm more familiar with, which is the Bass case.

In Bass the supreme court said yes, you must pay under protest.

Well, the pay under protest provision in Bass had previously been upheld by this Court as being not a plain, speedy, and efficient remedy.

I would suggest that in that context you would not have, that would not be an adequate remedy.

In, as a general rule, yes.

That's what McKesson stands for, that you can impose pay under protest.

Unknown Speaker: Well, why would the general rule, why is the general rule not applicable, could it not be applicable to this situation?

Mr. Kator: It could be, Your Honor, if it were imposed in the future.

If you try to impose it retroactively, you can't.

Unknown Speaker: Well, supposing that Virginia had in 1980, say before all of this litigation arose, adopted a rule that in order to ever get a refund for a tax you have to have paid it under protest and applied that evenhandedly up until now.

Would that be an adequate bar to recovery here to someone who had not paid under protest?

Mr. Kator: I think that that's what McKesson holds, Your Honor.

Unknown Speaker: I think it is too.

Mr. Kator: But that is not the situation that we have here.

Unknown Speaker: As I understand, you say what the situation here is that you may go through a protest procedure with the commissioner, but you need not.

You have the option of either using that or else paying the tax and seeking a refund.

Mr. Kator: Yes, as is the case with many other states.

There are various ways to go about it.

Petitioner has elected this route.

If I may reserve my remaining time.

Thank you.

Unknown Speaker: Very well, Mr. Kator.

Ms. Marshall, we'll hear from you now.

I think it would be helpful to me and very likely to some of my colleagues if sometime during your argument you would describe to us what the Virginia tax recovery provisions are.

Argument of Gail Starling Marshall

Mr. Marshall: Let me begin with that.

May it please the Court and Mr. Chief Justice.

Thank you.

The predeprivation remedy that Virginia has is not limited just to the administrative proceeding here, administrating proceeding that admittedly none of these petitioners came forward in.

It is also involves predeprivation possibility of going to court in a declaratory judgment.

And actually the Perkins case, which we cited to this Court, is in fact a declaratory judgment case.

Unknown Speaker: You say the procedure also involves going to court.

Is that an alternative?

Mr. Marshall: Yes.

Yes, Your Honor.

Unknown Speaker: You can do one or the other, and either one will be sufficient?

Mr. Marshall: There are various predeprivation remedies.

They are set forth in our supplemental appendix.

They include not only the administrative procedure which has been addressed here to the tax commissioner, and I disagree with what was stated earlier.

The tax commissioner can exonerate a taxpayer from payment.

He may not be able to declare anything unconstitutional, but he certainly can give a taxpayer relief.

Unknown Speaker: Ms. Marshall, are they... I know they are available but does the state say you must use those and unless you use those you can't come in later, which is what it seems to me it's saying here?

These people came in later and the state is now saying well, you could have come in earlier and therefore we don't have to pay you.

And they're saying well, we could have come in later but you, earlier but you didn't tell us we had to come in earlier.

Did the state tell them they had to come in earlier?

Mr. Marshall: Mr. Justice Scalia, the state gives them an option under the regulations--

Unknown Speaker: Okay.

Mr. Marshall: --which are part of our submission in our brief.

The regulations actually encourage people to use the predeprivation remedies.

What I suggest to this Court is that the predeprivation remedy or the remedy that this, these petitioners choose, and they chose a post-deprivation remedy, when they choose that, which was an option they have, they take that remedy as it is in state law.

And that remedy is not a mandatory refund remedy in facts of this nature.

For 2 decades there has been--

Unknown Speaker: Ms. Marshall, may I interrupt you just a moment before you get into that?

I just want to go back to something you said before.

I guess I have two questions.

The first is with respect to the declaratory judgment remedy.

Is that set out as a peculiar or a particular ailment of the tax refund procedure or is there simply a general statute in Virginia providing for declaratory judgment remedies?

Mr. Marshall: --There is a general statute and it is applied.

We do not, in other words our tax exemption or injunction statute does not bar that.

Unknown Speaker: Okay.

Mr. Marshall: Perkins itself, the case that our supreme court relied on in forming and declaring the nature of the refund remedy, which the option that these petitioners took, relied on the Perkins case and it itself was a declaratory judgment action.

Unknown Speaker: Okay.

Thank you.

Now, my second question goes to your statement that the commissioner could forgive the tax but could not declare it unconstitutional.

Mr. Marshall: Well, whether he could or not, that hasn't been litigated in Virginia, but the point is whether these petitioners could have gotten relief and they certainly could have gotten relief.

He has the authority to exonerate the taxpayer and the limitations of the kinds of reasons you can argue to the commissioner is unlimited for why you should be exonerated.

Unknown Speaker: It may be, and I certainly will accept your answer on that point, but isn't it clear that unless he is able to declare the tax unconstitutional he could not, as you put it, exonerate them on the kind of claim that we have before us here?

Mr. Marshall: No, I disagree.

The regulations in the statute, it's section 1821 of the Code, specifically state that he can compromise the claim, he can foreclose or not have any collection action or assessment action--

Unknown Speaker: Oh, I'm sure he has that general power but isn't it equally clear that he could not legally use that power without stating a legally sufficient reason?

In fact we've been saying unconstitutional, I guess it's really a supremacy clause issue here, if there's a difference.

Unless he could say yes, under the supremacy clause of the United States Constitution I may not collect this tax given the Federal statute, then he couldn't exonerate the taxpayer in this case.

Mr. Marshall: --Well, I mean, he is subject, of course, to writs of prohibition and mandamus for arbitrary actions, but, and certainly he is presumed to act in, presumptively to act in good faith reliance on what a reasonable interpretation of the law is.

But he does have the authority to exonerate.

If the petitioner, for example, had done that and had lost that case he could then have brought it to a judicial body, a declaratory judgment prior to paying the tax.

Unknown Speaker: Well, if he had gone to the commissioner first, not declaratory judgment first but if he had gone to the commissioner first could he then have sought judicial review without payment of the tax?

Mr. Marshall: As a declaratory judgment, that's correct.

Unknown Speaker: I see.

Mr. Marshall: That's correct.

Unknown Speaker: May I ask though--

Mr. Marshall: Yes.

Unknown Speaker: --Do you have any authorities in your brief for the proposition that failure to pursue the prepayment remedy bars an otherwise available post-payment refund remedy?

Mr. Marshall: Your Honor, that case has never come before the court.

In other words--

Unknown Speaker: This is the first case?

Mr. Marshall: --That's... well, I'm sorry--

Unknown Speaker: And my second question--

Mr. Marshall: --Could I--

Unknown Speaker: --I'm sorry, I didn't mean to interrupt you.

Mr. Marshall: --I wanted to say that the question of what would have occurred had they taken any of these other remedies has not been litigated in the Virginia court.

Unknown Speaker: I understand.

I'm assuming that, I'm accepting your statement they could have won if they had done it that way.

But the question I have is even so is there anything saying their failure to do it that way bars their post--

Mr. Marshall: I suggest, Your Honor, that Perkins and Capehart, the two cases in the 1970s, give notice to the petitioners that if they choose this particular remedy, which is one of several available remedies, it comes with that limitation, the limitation which has been engrafted on the law by our supreme court 2 decades ago.

And I suggest that is notice to petitioners--

Unknown Speaker: --What's the limit... I'm not sure I... that if they choose the post-refund remedy it comes with what limitation?

Mr. Marshall: --It comes with the statutory interpretation by the Virginia Supreme Court in Perkins and Capehart that in cases where there is reliance by all parties on the law and there would be a failure of the administration of justice for that to be overturned--

Unknown Speaker: I see.

Mr. Marshall: --that the remedy of refund is not mandatory.

The 1826, the part of our Code 1826 is not mandatory.

Unknown Speaker: I see.

All right.

Then my second question is at what stage of this litigation did you first advance this defense?

Mr. Marshall: At the trial court.

The Perkins and Capehart cases--

Unknown Speaker: You have argued all the way through that there's no remedy here even if there is--

Mr. Marshall: --We have argued all the way through.

Yes, Your Honor.

Unknown Speaker: --And the... why has not the Virginia Supreme Court addressed that question before?

Mr. Marshall: Well, Your Honor, I believe that there are two things that the Virginia Supreme Court did address, and there are various lens that this Court can look at the case.

If I may suggest, for example, this Court could find that Davis is prospective, and if it finds that for whatever reason this case is over because there are no other legal issues for the Court to address.

If, however, this Court finds that it is not prospective, we submit that you could still and should still affirm the decision of the Virginia Supreme Court below because the Virginia Supreme Court not only determined under Chevron that it was prospective and therefore not an erroneous or improper exaction of tax, which is what 1826 requires, but it also had another leg to its opinion in which it said that under 1826 and under our precedents, Perkins and Capehart, we look in those cases to the reliance of the parties and the factors of the administration of justice in determining whether or not our particular statutory state remedy encompasses the facts that you petitioners have chosen to bring before us and that you have, the route you have chosen to take.

Unknown Speaker: Ms. Marshall, did Perkins and Capehart make clear and did you argue in this case at the trial court that the rule is different for post-payment remedies than it is for the declaratory judgment remedy?

I mean, if I read Perkins and Capehart I would think that that applies to all remedies from the Virginia Supreme Court for taxes, whether you do it before or after.

You're arguing now though a very sophisticated and subtle distinction between post-payment remedies and prepayment remedies.

Is that clear in Perkins and Capehart, that had you come earlier we wouldn't play this equitable game, but as it is you have come late and we have a different rule for post-payment cases?

Is that clear?

Mr. Marshall: Let me suggest, Your Honor, that I believe it is clearly derived from Perkins.

Perkins was a prepayment case.

It was a declaratory judgment.

And it received the relief of the court from what was determined to be an erroneous assessment methodology used by, widespread.

Similar here where this is used in 23 states, that was used in many counties.

Capehart came later.

Capehart paid the tax and then asked for the refund, and Capehart's refund claim was denied.

So I suggest that the prepayment/post-payment is really intrinsically in those two cases.

But whether you say have we litigated a lot of cases in that area, no, Your Honor, we have not.

But I suggest to Your Honor for several reasons that whether you find Davis to be retroactive or not, the Supreme Court of Virginia should be affirmed because what Virginia has done in the second part of its opinion is it looked to its state law remedy and it has defined the scope even-handedly and based on precedent that is 2 decades old.

It has defined the scope of that remedy.

And only, I would suggest, if this Court finds that there is not, as we argue there is, a procedural bar to these further Federal constitutional questions such as due process, only if you find that that procedural bar does not exist in this case would you be correct in remanding this for the court below to consider those due process issues.

Petitioners have argued that the due process issues were argued to the Virginia Supreme Court in their reply brief at the supreme court stage, but we argue there is a state procedural bar and certainly putting it in your reply brief is not a proper way of preserving the point.

The assignments of error under Virginia law clearly state what issues are waived and which ones are not waived.

Speaking of McKesson, I'd like to mention also that in McKesson not only did they violate clearly established law at the time of the enactment and the collection of the tax, but they protested the tax ahead of time, as these people had the option to do, not the requirement to do but the option to do.

These people never came forward and raised their hand.

Also in McKesson, their complaint was based on two alternative grounds or theories of recovery, state law refund and directly on the Constitution.

That is not the case here.

These petitioners have chosen to put all of their eggs into one basket, and that is into the basket of the State Refund Act.

And we submit that that state remedy simply does not exist for them on the facts of this case.

Unknown Speaker: Ms. Marshall, you have made a statement that I don't understand.

Why have they placed all their eggs in the basket of the state refund remedy?

Mr. Marshall: When you look at their complaints, which we reproduced in the appendix, the only use they make of section 111 or the Federal law is to establish or try to bootstrap themselves into the state refund statute.

In other words they did not bring a claim on the Fourteenth Amendment.

They did not bring a claim on due process.

There is no Federal grounded claim that they have brought in their complaint.

Moreover, when they went--

Unknown Speaker: But do they have such a claim until you deny their request for compensation?

Mr. Marshall: --Well, in McKesson, McKesson brought its claim both on Federal grounds and on state grounds, and they suggest here, and even in the supreme court, the Supreme Court of Virginia, the assignments of error decide what is waived and what is put forward, and yet in assignments of error they make no claim of unconstitutionality or due process problems with the remedial face of the case.

Unknown Speaker: I assume there is no Federal constitutional remedy if the state provides an adequate refund remedy.

So if their request for refund was granted as they asked it to be there would have been no constitutional claim.

Mr. Marshall: But, Your Honor, when they brought the claim they surely knew of Perkins and Capehart.

They knew it was not a mandatory remedy and that it had certain limitations which we do suggest are similar to the policies behind the statute of limitations in repose to protect the reliance interest.

And if there's anything this case really is about, it is about settled expectations and reliance interest.

Unknown Speaker: It seems to me that's like saying a capital, a capital defendant who pursues an appeal to the state supreme court and is denied the basis of his appeal cannot then come to this Court saying that that denial was a violation of the Federal Constitution unless he has before the state court anticipated the denial and argued that the denial would be a violation of the Federal Constitution.

I'm not sure that that's true.

Mr. Marshall: Well, of course, Your Honor, when this case came to the Virginia Supreme Court the claim had been denied.

The Commonwealth was granted summary judgment by the trial court.

If there was any question at that time that Virginia's procedural scheme had any further Federal constitutional grounds, then certainly at that time it should have been presented to the Virginia Supreme Court.

Unknown Speaker: No, but the state supreme court didn't deny it on the ground there was no remedy.

It denied it because they thought there was no merit to the claim.

They thought the rule was not retroactive.

Mr. Marshall: Again, Your Honor--

Unknown Speaker: But they have never said that if the rule is retroactive you don't have a remedy.

At least they haven't said it up until now.

Mr. Marshall: --Your Honor, that is a possible way of reading the case below.

I believe another way of reading it is that it had an independent ground which said regardless of the Federal retroactivity we have to look at how our state statute and remedy that these petitioners have chosen to pursue is written and how it should, and how it has been applied in our courts.

Now, if there is a feeling in this Court that that is not clear in the decision below it would certainly be an appropriate disposition to remand it for consideration by the Virginia Supreme Court.

The Virginia Supreme Court in my view had two grounds for its state law rule.

One is it was dependent on Federal law.

That said it followed, if it's not retroactive it's not erroneous.

But it went on to say there are other reasons why, citing these 1971 cases, why our particular, the particular remedy you have chosen simply is not one that is available to you on these facts.

Unknown Speaker: Ms. Marshall, before we get away from the point, in case it should make a difference to me later, can you tell me when the first, when the point was either as a matter of pleading or briefing, when your, when the claimants here first mentioned the Fourteenth Amendment as a basis for their claim?

Mr. Marshall: I believe it was in this Court.

They state in their brief in this Court that well, if the statute does not give us, the refund statute does not give us relief we have relief directly under the Fourteenth Amendment.

Unknown Speaker: Okay.

Mr. Marshall: If you look at the assignments of error it's very clear there were two issues they presented to the Virginia Supreme Court.

Your statute clearly on its face requires that you give us a refund, and you have wrongly applied Chevron below.

Those were the two issues that were presented.

I would like to suggest that it's very important for the Court, whatever lens it sees this case through, to focus on and to look at the reliance interest and the settled expectations of the parties.

It's also important to look at the nature of the harm alleged.

What is it that Virginia is supposed to have done that was offensive to Federal law?

This is not a case, we suggest, where there was any over-reaching.

Virginia was not pushing the envelope in any way of valid taxation.

It turned out that it was in fatal collision, unknown to it and unknown to these petitioners who never came forward and raised their hands and said there was a problem until after this Court's decision in March of 1989.

But it was certainly reasonable both for the petitioners and the 23 states who have, as you know, a massive refund liability on this case of approximately $1.8 billion, it was reasonable for those states to believe that they had a legitimate purpose to give benefits to their own former state retirees, former state employees.

This was a legitimate purpose and the fact that they had done it through an indirect benefit of taxes rather than through a direct cash benefit did not appear, and reasonably so, to be of any legal significance.

What Virginia did was it exempted its state retirees, there are approximately 60,000 of those today.

Then it taxed the entire individual taxpaying public identically, $2.56 million.

Fewer than 10 percent of that are represented by the Federal retirees here.

In other words Virginia's state retirees are outnumbered by citizens and voters who are Federal retirees by about 3 to 1.

When you look at that number and you also consider, which is in the record and the affidavit and the legislative history, the disparity between the general size of Federal retirement income and the size of state retirement income you can do a rough estimate of what the value was of the benefit now found to be offending under Davis, and we don't dispute that.

We quickly changed our law immediately to conform with Davis.

But that value of the benefit given during the 4 years in issue here is approximately $8 million to $12 million.

Now we suggest that the penalty here that is being requested or demanded of a 100 percent refund, which for Virginia alone now is approximately $467 million, that no Federal interest requires that.

There is no Federal interest or underpinning in the intergovernmental tax immunity doctrine that would lead to that inequitable result.

Unknown Speaker: Are you suggesting... excuse me.

You go ahead.

Are you suggesting the retroactivity rule would be different if the discrimination was say against women instead of one class of retirees and not another?

Mr. Marshall: Well, as you know, this was based principally on the statute, and it was interpreted to be simply Federal retirees versus state.

Unknown Speaker: I understand, but I'm not sure that answers my question.

Mr. Marshall: Yes.

Unknown Speaker: You're saying that on the, that really for reasons I found very persuasive there really was a discrimination here.

Mr. Marshall: That's right.

Unknown Speaker: But supposing it was discrimination against a class that we're particularly interested in protecting, say females.

Would you make the same remedial argument?

Mr. Marshall: Oh, I think, Your Honor, that that would be an Equal Protection claim and I think that you would look to, if you were looking under a Federal rule, you would look to all of the points which this Court has established as a very workable and fair rule in Chevron.

Was it a new principle of law?

Did everyone rely on its being... I believe for example--

Unknown Speaker: Yeah, but you're making those arguments... I'm just asking you if your basic argument about remedy would be different if it were a different kind of discrimination, if it were a constitutional discrimination against women rather than statutory discrimination against some retirees and not the entire population.

Mr. Marshall: --I think that goes to, Your Honor, to the foreseeability of it and the reliance interest.

Even this Court under Title VII has found it's not--

Unknown Speaker: It seems to me it's hard to argue foreseeability when 8 members of the Court disagree with you.

Mr. Marshall: --Well, Your Honor, we had a very courtly dissent in that case, as you know, and we suggest that what was unforeseeable to the states... if it was foreseeable we wonder why did not any one of these petitioners come forward and, as they can, it doesn't cost any money, come forward and ask for a legal opinion by the highest legal officer of the state.

If it was so foreseeable at least since 1961, for example, or since McCullough, why did not a single petitioner, there are hundreds of thousands of them over the country who are in the same boat, they had every economic interest to come forward not only for a refund but taxpayers always have motivations to come forward to exonerate themselves from ongoing law.

No one came forward.

No one even--

Unknown Speaker: They claim that they didn't have to, and that gets back ultimately to the argument of whether indeed your law required that they make that claim beforehand or allows them to do it afterwards.

It all comes back to that, I suppose.

They weren't behaving unreasonably if they thought well--

Mr. Marshall: --I don't say that they were behaving unreasonably.

Nor was the state, Your Honor, behaving unreasonably.

We all found Davis and the fact that there was a legal edifice out there that cast its shadow in the direction of Davis.

We found that that was a surprise, the discrimination of a general tax doing a legitimate government purpose to benefit state retirees, the fact that that was somehow discrimination was a surprise to all of us.

We accept that now, but we also believe, Your Honor, that there is no personal compensable rights that these petitioners have suffered.

I suggested to you, for example, that there were 2.5 million taxpayers, and that the rough estimate of this now found to be offending benefit that the state gave to its own retirees was approximately $12 million a year.

That comes to $5 per taxpayer per year.

Unknown Speaker: --Well then it won't be hard to refund it if it's--

[Laughter]

Mr. Marshall: Pardon?

Your Honor, they have never asked for that refund.

They have asked for 100 percent refund, despite the fact that the refund is 10 times the amount of the offending benefit and despite the fact that they, as a very small percentage of the 2.5 million, they did not fund the vast majority of this.

Unknown Speaker: Well, they're asking for a refund that is disproportionate to the amount of the discrimination that was imposed?

Mr. Marshall: Your Honor, I don't think there was any discrimination based on the Federal Government, but that has been decided in Davis.

Unknown Speaker: Yes.

Mr. Marshall: And what they're asking for is roughly 10 times the amount of what was now found to be the offending benefit that was given, and it was not funded by these 200,000 people.

It was funded by the entire taxpaying public and corporate taxpayers who are amici here.

Unknown Speaker: Well, why do you say it's... how do you calculate that it's 10 times the amount of the--

Mr. Marshall: This is a rough estimate based, Your Honor, on the fact that there were very many fewer, there were very many fewer state retirees in Virginia.

Virginia state retirees are about 60,000.

Federal retirees are about 200,000.

In the record is also a differential of, for example in 1982 the average Federal retiree in Virginia got $15,000 in income and the average state retiree got less than $5,000.

Unknown Speaker: --But are the class of Federal retirees asking as refunds any more than they actually paid?

Mr. Marshall: They are asking for 100 percent tax exemption, and certainly the intergovernmental tax immunity doctrine never entitled them to an exemption.

They have no personal harm which is really being redressed here.

Unknown Speaker: But Virginia I suppose has the choice after a case like Davis to say that we will withdraw the benefit we have given to state retirees and treat everybody equally.

But if you don't do that then you've got to treat Federal retirees like state retirees.

Mr. Marshall: Well, Your Honor, what I am suggesting is that there is no Federal interest that is being advanced by what really amounts to taking from these 2.5 million taxpayers a massive amount of what would otherwise be state assets available for construction of prisons and various services and transferring it to these 200,000 people.

Whatever the intergovernmental tax immunity purpose was, I don't believe it was to give a personal benefit, unlike the equal protection clause and the sex discrimination clause, where the purpose, the Federal purpose of the statute, and even in commerce clause, is to give a personal benefit to an individual.

Unknown Speaker: Ms. Marshall, you describe this as though it's a tort case, as though what's at issue is how blameworthy was Virginia and how entitled to... it's really not that, it's just a matter of, it's a simple Federal statute that says these people were entitled, given your tax structure, to this amount of money.

And they come in and they say you took this money from us, you shouldn't have done it.

Mr. Marshall: Your Honor, the statute--

Unknown Speaker: And, you know, end of problem as far as this argument is concerned.

Now, maybe they should have made their protest earlier, but I don't see that this is a tort question.

Mr. Marshall: --But, Your Honor, let's go back to what is the remedial question.

One thing that's very clear is that the plain language of section 111 says nothing about remedy.

It has no hint that it was intended to have any remedial prospect.

That therefore we contend is not, and it's not what they base their claim on.

They base their claim on 1826 of the Virginia Code.

We suggest to Your Honor that--

Unknown Speaker: I don't know what you mean when you said it has no remedial aspect to it.

You mean you think it could be disregarded by the states at will and--

Mr. Marshall: --Absolutely not, Your Honor.

Unknown Speaker: --nothing would happen?

Mr. Marshall: And it was not.

Once it was declared in Davis that there was an unexpected, and I think as J. Harvey Wilkinson, Judge Wilkinson said in the Fourth Circuit, a totally unexpected collision between these Federal statutes and what was thought to be a benign and modest state benefit, once that was determined Virginia changed its law immediately.

What I'm suggesting is that the intergovernmental tax immunity doctrine requires no more than that prospective change.

This Court has cited recently Justice Harlan in the state of Donnelly case.

Sometimes at the remedial phase recision is all that's required, not money damages.

Unknown Speaker: Well, in your position then if there had been a predeprivation proceeding brought, either administratively in the first place or by declaratory judgment, it would have been appropriate let's say in the latter instance for the court to say you're absolutely right that you should not be assessed this tax, but the only obligation Virginia has now is to change its law, and therefore under no circumstances can you get a penny back even though you win the case.

Would that have been an appropriate resolution?

Mr. Marshall: At a minimum you would certainly change the law, and that was appropriately done.

Unknown Speaker: Well, I am talking about not minimums but maximums.

Would that have been a proper application of Federal law?

Mr. Marshall: It's a position of the tax department that we would be in a totally--

Unknown Speaker: Well now, excuse me, I don't want the position of the tax department as such.

Would that have been a proper application of Federal law?

Mr. Marshall: --I do not believe so because there would have been no reliance then by the state.

In other words they would have been put on notice that a sum certain was under a cloud or a challenge of invalidity.

Unknown Speaker: No, but there would have been reliance at least with respect to the period for the tax year in question.

They would have budgeted their, they would have passed their state budget on the assumption that they were going to get this money.

So they would have had reliance.

Mr. Marshall: In a declaratory judgment though we're talking about a prepayment remedy.

What the declaratory judgment would say and what was said in Perkins is we contend that this money that we have not yet paid, you cannot rely on that because we are putting you on notice that that money is under a claim of invalidity.

And in that case we believe the equities would not be the same, that there would have been a refund remedy if the time ran and they had to pay or a declaratory judgment--

Unknown Speaker: But in the instance in which I gave in which there was the declaratory judgment, following that declaratory judgment the commissioner or the state would have been under no obligation to do anything but go ahead and collect the tax merely in hopes that the state legislature would change the law?

Mr. Marshall: --No, Your Honor, I think that after the declaratory judgment the tax collector, the tax commissioner would be obligated to follow the declaration of the law that it was an invalid tax and to withhold exaction or collection of the tax--

Unknown Speaker: Well, then the law--

Mr. Marshall: --and to refund.

Unknown Speaker: --Then the Federal statute implies something other than prospective changes of the law as the appropriate form of relief, which I think is the proposition you were disputing a moment ago.

Mr. Marshall: What I'm suggesting is that when you do not take a predeprivation route and when you do not base your claim for remedy directly on a Federal right, either through a 1983 or through any other injunctive action... for example, Phillips was an injunctive action.

It was not a refund case.

Unknown Speaker: Well, they were at least claiming a Federal right here, you don't dispute that?

Mr. Marshall: They were not basing their claim... if you look at their complaint we say it is based solely on a refund statute which--

Unknown Speaker: Well, it was based on a refund statute, but their predicate for claiming the refund was the claim of a Federal right, isn't that correct?

Mr. Marshall: --Your Honor, they used the Davis decision in order to try to establish that the plain language of the refund remedy statute applied, i.e. that it was improper or erroneous.

Unknown Speaker: I don't think we're getting anywhere.

Mr. Marshall: So, Your Honors, I would suggest that as a result of the law-changing decision that this Court made in March of 1981 that this Court should affirm the decision below.

Unknown Speaker: Thank you, Ms. Marshall.

Mr. Kator, you have 10 minutes remaining.

Rebuttal of Michael J. Kator

Mr. Kator: Thank you, Your Honor.

At the outset let me clarify the issue of whether Virginia has a declaratory judgment statute that would reach this kind of claim.

They don't.

In fact Virginia has a statute in its books that states that you may not file a declaratory judgment for income taxes, and there is quite a bit of case law that says you may not do so.

Let me also address the issue of whether or not we raised a Federal claim.

In each--

Unknown Speaker: How can there be such diametric opposition on such a fundamental point?

You have cases that--

Mr. Kator: --I believe we did, we may have cited the cases in our earlier papers in this Court.

This has not been an issue until this morning.

But my recollection from 3 years ago when I was looking at this is yes, indeed Virginia has a statute, it says you may not file a declaratory judgment.

And I am certain that there is case law, for one of the things that we thought about doing was trying to enjoin the imposition of the 1988 taxes, which were not due until May 1, 1989, and we found that we couldn't do it.

I regret that I don't have that authority in front of me, but I submit that it would be very easy to find.

Unknown Speaker: --Could you provide it, please?

I'd like to see it.

Mr. Kator: I'd be delighted to, Your Honor.

The second point is the history of the Fourteenth Amendment claim, if you will.

In each of our complaints in this case, and several were consolidated, in each of the complaints there was a claim that, under statement of claims and Virginia is a notice pleading state, during the years since 1985 plaintiffs have paid excessive taxes which have been unconstitutionally and illegally exacted.

And the relief requested was a judgment for the refund of all unconstitutionally assessed and collected taxes.

I don't understand how Virginia can state that there is no constitutional claim alleged in these papers.

There certainly is.

They suggest that we didn't put in our petition our points of error, it's called.

Unknown Speaker: Well, I think there are two different constitutional violations at issue here, aren't there?

One is violation of the supremacy clause, and I take that to be referring to a violation of the supremacy clause.

The other is a violation of the takings clause or the due process clause in not giving you your money.

Mr. Kator: I think--

Unknown Speaker: And I think they're saying you didn't make that claim until now.

Mr. Kator: --To be fair, Your Honor, we didn't contemplate at the time that we filed our complaint, I think that was before McKesson came down, I don't believe that we were addressing that.

But we moved for partial summary judgment on the refund statute.

If we have to go back and move for partial summary judgment on the Constitution, I believe it's fairly pled within the complaint.

But the points of error, the circuit court for Alexandria, where this case came from, issued its opinion, and that's the opinion we appealed to the Supreme Court of Virginia, solely on retroactivity of Davis.

The issue that is raised here was raised for the first time by the attorney general in the Supreme Court of Virginia, and that was a point that we raised in our reply briefs.

We said why are you raising this point here.

And the reason they were raising that point there, and then at that time, was because that was after the Supreme Court of South Carolina in its Bass case said wait, we've got a better idea.

We'll change our refund statute and say it doesn't apply.

And that's exactly what Virginia, the attorney general is trying to convince its court to do, and to its credit the Supreme Court of Virginia has not at least yet gone and changed its refund statute.

Another point that I think bears emphasis, if it were so clear and certain that petitioners had no remedy under the refund statute, why did the Virginia General Assembly amend the statute to extend the statute of limitations for petitioners to file their claims solely and expressly for the purpose of allowing retroactivity of Davis to be resolved?

Certainly the legislature of Virginia thought the refund statute applied, and perhaps in retrospect maybe Virginia is right, it didn't apply it.

But it must now because the supreme, the legislature of Virginia has amended it to say so.

Unknown Speaker: Are you going to comment on Perkins and Capehart?

Mr. Kator: Perkins and Capehart, Your Honor, first of all those are what we would call modified prospectivity cases.

In both... in Perkins the taxpayer said your particular method of assessment is unconstitutional, and the Supreme Court of Virginia said you are right, we'll give you the remedy that you've asked for, and in Capehart... but we're going to apply that prospectively only.

And then in Capehart, when somebody else in another county tried to do it, the Supreme Court of Virginia said no, we said in Perkins prospective only and that's what we meant.

The Supreme Court of Virginia in this case, and this is at 15(a) of the cert petition, says Harper's state law contention also fails for another reason.

We previously have held that this court's ruling declaring a taxing scheme unconstitutional is to be applied prospectively only.

This is Virginia's state law prospectivity doctrine, and it's simply inapposite in a Federal question, in a case involving Federal retroactivity.

Unknown Speaker: What the state says, and now they may be right or wrong, is that the post-deprivation remedy is more limited than the predeprivation remedy, and that so long as the predeprivation remedy is full they are not required to give you a full post-deprivation remedy.

Mr. Kator: Your Honor, I think that that is an accurate statement of McKesson, that if in fact they have a full predeprivation remedy they can have no post-deprivation remedy.

But the critical point here is, what McKesson's requirement is is a clear and certain remedy.

And it was anything but clear and certain, even after this morning I submit, that Virginia's post-deprivation remedy doesn't apply to this.

If Virginia wants to change its rules and say that its post-deprivation statute doesn't apply, and there are people who have obtained refunds of unconstitutional taxes under that statute--

Unknown Speaker: That's not quite fair.

What has to be clear and certain is the availability of the predeprivation remedy, not the non-availability of the post-deprivation remedy.

Mr. Kator: --Your Honor, I would submit that what must be clear and certain is the bundle of routes available to challenge the tax.

And this brings us back into Brinkerhoff-Faris.

They simply can't say you have two statutes, two means to challenge it available to you, both adequate.

One is an adequate predeprivation remedy which... don't misunderstand me.

We dispute that there is an adequate predeprivation remedy.

But they can't say you've got two routes and therefore since you have two we're going to cut one off.

That is unconstitutional.

That the Fourteenth Amendment prohibits.

And that is what I believe Virginia is arguing that its court should do.

I don't think that it's arguing--

Unknown Speaker: I think Virginia is arguing that its court has done that.

Mr. Kator: --Well, I don't think that that can fairly be read from the supreme court's opinion.

Unknown Speaker: I realize that, but I just thought that was what the state is arguing.

Mr. Kator: Okay.

Unknown Speaker: Not that they should do it now, but that they have already done it.

Mr. Kator: Correct, Your Honor, and my point is I don't think that it is, it can be seen from that.

I think it also bears emphasis that when this case was originally brought in the Eastern District of Virginia the Virginia Attorney General pled the existence of the refund statute as a plain, speedy, and efficient remedy.

And I don't think the significance of that should be lost on the Court.

The bottom line as we see it, Your Honor, is McKesson's requirement for a clear and certain remedy.

I don't think there's any real dispute that Davis must be applied retroactively.

That being so, there must be a clear and certain remedy.

What we ask this Court to do is no more than say that it meant what it said in Davis, that it meant what it said in Beam, and that it meant what it said in McKesson, and on that basis to reverse the decision below.

Unknown Speaker: May I ask you one last question before you... the second part of the Virginia Supreme Court opinion seems to me to be responding to this argument that you made, and tell me if I am right on your presentation.

Did you argue that even if it's not retroactive as a matter of Federal law it is in any event retroactive as a matter of state law, and they said no to that?

Mr. Kator: The argument was, my argument was your refund statute says erroneous and illegal.

That's the legislature's conclusion of how it wants to gauge this, and therefore you can't play the retroactivity game.

This is essentially the argument that was accepted by the Supreme Court of Missouri in Hackman.

In rejecting that the Supreme Court of Virginia said no, the retroactivity of Davis comes first and therefore, because we find that Davis is not retroactive, it's not erroneous or illegal.

And moreover, just so you know, we have done this before.

That's essentially what their state law holding was.

If there are no further questions.

Unknown Speaker: Thank you, Mr. Kator.

Mr. Kator: Thank you.

Chief Justice Rehnquist: The case is submitted.

Attribution:

The OYEZ Project

Featured:

Barker v. Kansas - Oral Argument

Fri, 09 Jan 2009 14:49:34 +0000

Case:

Barker v. Kansas

Media File:

91-611_19920303-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of Kevin M. Fowler

Chief Justice Rehnquist: We'll hear argument next in No. 91-611, Keyton Barker and Pauline Barker v. Kansas.

Mr. Fowler, you may proceed.

Mr. Fowler: Thank you, Mr. Chief Justice Rehnquist, and may it please the Court:

The question presented for decision in this case is whether the Kansas Income Tax Act violates controlling principles of intergovernmental tax immunity by favoring retired employees of the State and its political subdivisions over retired members of the United States Armed Forces.

Just three terms ago, in the case of Davis v. Michigan Department of Treasury, this Court applied settled principles of intergovernmental tax immunity to strike down Michigan's differential income-tax deduction scheme because it uniformly favored all retired State or local government retirees.

Unknown Speaker: The Court also construed a statute, didn't it?

Mr. Fowler: That is correct, Your Honor, it construed a statute which this Court--

Unknown Speaker: And just said that that incorporates the intergovernmental rules.

Mr. Fowler: --Your Honor, I believe in the Davis case the Court said that 4 U.S.C., section 111 is coextensive with, and thus fully preserves the modern doctrine of intergovernmental tax immunity.

Unknown Speaker: So all you need is the statute?

Mr. Fowler: Your Honor, perhaps the statute is sufficient in and of itself because it plainly prohibits discrimination against Federal officers or employees because of the Federal source of their pay or compensation.

And that is precisely what the Kansas Supreme Court has endorsed here under State standards of review.

For the reasons set forth in our briefs, which I will attempt to elaborate on here, we respectfully submit that the decision below should be reversed, because the Kansas income tax structure plainly discriminates in favor of all retired employees of the States and its political subdivisions over retired members of the United States Armed Forces in Kansas.

Petitioners represent a class of approximately 14,000 retired members of the Armed Forces in Kansas, and their joint taxpayer spouses were applicable, who have been subject to disparate income tax treatment by the State of Kansas from at least tax year 1984 through tax year 1989.

Several named petitioners brought suit in 1989 challenging that disparate tax treatment in the wake of Davis v. Michigan Department of Treasury, on the basis that the Kansas income tax structure, on its face and as applied, violates governing principles of intergovernmental tax immunity.

Notwithstanding the arguments raised below, the Kansas Supreme Court held that differential tax treatment of military retirement income by the State of Kansas was constitutionally permissible, because it was directly related to and justified by significant differences between the classes of retirees.

However, in route to its decision, the Kansas supreme court violated several cardinal principles of law that this Court has recognized since at least 1960.

Those principles are as follows.

Because the Federal Government's interest must weigh in the balance whenever intergovernmental tax immunity is at issue, the reviewing court must examine the applicable tax structure as a whole, and must focus on the nature of the classification erected by statute to determine whether the proffered reasons for discrimination furnish the actual basis for differential treatment, and if so, whether those differences furnish an adequate justification for differential treatment.

The Kansas income tax structure utilizes Federal adjusted gross income as the starting point for determining an individual taxpayer's Kansas taxable income.

Because Federal adjusted gross income incorporates and includes all forms of retirement income... from whatever source derived... Kansas, one would think, should uniformly tax all forms of nondisability government retirement income.

But it does not.

Because of a specific, statutory exemption scheme adopted by the Kansas legislature and in effect for more than 30 years, Kansas exempts from State income taxation all retirement benefits paid by the State and its political subdivisions to their respective retirees.

Unknown Speaker: Well, did Kansas rely on some Federal cases that hold that military retirement benefits are not deferred compensation, but instead are reduced pay for current services?

Mr. Fowler: That is correct, Your Honor.

The Kansas Supreme--

Unknown Speaker: Are those cases wrong?

Mr. Fowler: --Your Honor, those cases are not wrong for what they stand for.

Those cases did not involve taxation, they did not involve discrimination against Federal military retirees, and they did not involve 4 U.S.C. section 111 or the doctrine of intergovernmental tax immunity.

For tax purposes, military retired pay is substantially analogous to all other forms of pension or annuity income.

And that is a point that has been expressly recognized by Congress.

Unknown Speaker: Well, I guess the answer to the question almost depends on the lens with which you're viewing it.

At what level of generality do we answer the question that you raise?

There are differences.

Mr. Fowler: Your Honor--

Unknown Speaker: When do we recognize them and when don't we?

Mr. Fowler: --Your Honor, there are differences between retired members of the military and other forms of government retirees.

The differences should be recognized only if they are significant, and only if they are directly related to the particular purpose and classification at issue.

In this case, Kansas does not draw distinctions based upon the characterization of retired income... retirement income as either deferred compensation or current compensation.

The tax structure does not draw that classification.

The purpose for the exemptions for State and local government retirement income is unquestionably to extend the value of that State and local retirement income, while reducing and minimizing the State's employment costs.

And that, of course, is a purpose that this Court recognized clearly in... Davis as being illegitimate.

Now--

Unknown Speaker: Now if you win here, the holding presumably would be retroactive?

Mr. Fowler: --Your Honor, under the general rule applicable in civil cases, I believe this Court has recognized, we would assume that it would be retroactive at least for the parties before the Court.

That issue, however, is not expressly presented by this case.

But moreover, we would submit that there is--

Unknown Speaker: Well, it's certainly lurking there.

What do you suppose we're calking about, looking at all 50 States here?

Mr. Fowler: --Your Honor, in our judgment, there is no retroactivity question presented by this case for the simple reason that reversal of the decision below simply requires application of 4 U.S.C. section 111.

Unknown Speaker: Well, but didn't the Jim Beam opinion indicate that if we don't say anything about it, then it is generally retroactive?

Mr. Fowler: That's correct.

Unknown Speaker: So you're saying don't say anything about it.

And isn't that the consequence?

Mr. Fowler: Well, Your Honor, that would suit just fine with me.

[Laughter]

But there is no retroactivity issue in this case.

Because reversal of the judgment below simply requires application of section 111 of title 4 of the United States Code.

Unknown Speaker: Well, you don't think it's bad that if these retirees' money has been taken from them unconstitutionally it should be given back.

You're... you're not apologizing for that, are you?

Mr. Fowler: Absolutely not, Your Honor.

We believe it should be given back.

But as this Court has recognized previously, the remedial issues involved in this case, which have not yet been passed upon by the Kansas Supreme Court, are typically left to the State courts to pass on in the first instance.

But back to my other point, there is no retroactivity question in this case simply because it requires application of a statute, which this Court, just three terms ago, described as having unmistakable language and meaning, which has been on the books for more than 50 years.

In order to hold that a decision in this case is not retroactive, would in effect suspend the effective date of a controlling Federal statute which has been the supreme law of the land since 1939.

And I think Fleming v. Fleming certainly supports the proposition that that is something that would be inappropriate to do.

Unknown Speaker: May I ask--

Mr. Fowler: Now if this were an ambiguous statute, perhaps the conclusion might be different.

But this is a plain and unambiguous statute.

Unknown Speaker: --Of course, it's a statute that gives consent to tax.

It's not a prohibition, isn't it?

But let me ask you a question about your basic... one of the differences in this case is that there is... at least one or two categories of Federal retirees who are not taxed by Kansas.

Isn't that right?

Mr. Fowler: That's correct, Your Honor.

Unknown Speaker: Now, what if Kansas, in its retirement system, had several categories of State employees, and didn't tax... or did tax two or three of those categories.

Would that eliminate the discrimination?

Mr. Fowler: It wouldn't eliminate the discrimination, Your Honor.

In fact, that was precisely the case in Phillips Chemical Company v. Dumas Independent School District, where the State of Texas imposed a discriminatory tax which generally provided benefits to lessees of State and local property, but there were some lessees of State and local properties that didn't get the same benefits and were subject to the same tax treatment as the United States lessees.

The Court simply stated in passing that that may reduce the extent of the discrimination; it obviously does not eliminate it.

Unknown Speaker: Well, supposing the State gave a tax... tax-free retirement benefits to only 10 percent of its retirees, and Federal retirees, 90 percent were tax-free under the State but there were 10 percent that were taxed.

Would that 10 percent also be entitled to the benefit?

Mr. Fowler: Your Honor, I think that it would depend upon the purpose behind the exemptions, and the classification as it's drawn.

Unknown Speaker: Well, the purpose in the State exemptions is to increase... encourage people to work for the State.

It's a form of extra compensation.

That's perfectly clear.

Mr. Fowler: Your Honor, the Court recognized in Davis that simply relying upon that legitimate State purpose is not a basis for discrimination.

Because it says nothing about differences between the classes.

It needs to be kept in mind that in dealing with intergovernmental tax immunity, that sovereign Federal interest must be weighed in the balance.

And the only way that that can be accomplished is if the discriminatory classification is truly intended to account for significant differences between the classes, and it furthers a legitimate State interest which does not trench upon the prerogatives of the national Government.

Now, if that--

Unknown Speaker: What all that boils down to is that if they give a tax-free retirement benefit to any State employees, they must give them to all Federal employees.

That's your position, I gather.

Mr. Fowler: --We're not suggesting that, Your Honor.

But certainly, if the... if preferential treatment is being given... especially to all State and local retirees... but if it is given to State and local retirees, one must look to the purpose for it and how the classification is drawn in order to properly evaluate it.

And that's all we're asking the Court to do here.

Because the Kansas Supreme Court failed to examine the applicable tax structure, as a whole, and it failed to focus on the nature of the statutory classification.

Unknown Speaker: Because if you examine it as a whole, the Federal employees are basically treated like everybody else in Kansas.

They're just not treated like this small group of people who get a special benefit.

Mr. Fowler: Well, Your Honor, this small group of people that get a special benefit, as this Court recognized in Davis, because they are in privity with the State, the danger that a State is violating the doctrine of intergovernmental tax immunity is greatest in this case.

Once a decision has been made to discriminate by giving exemptions to a favored class of State and local government employees, there is no political check in the system to turn back the clock.

And the reason for that is simple.

In order to provide the check, to provide equal treatment which is mandated under the nondiscrimination clause of section 111, that would either require an exemption for similarly situated Federal retirees, which would reduce tax revenue; or, if the tax were applied uniformly, as this Court recognized in Davis, in order to provide State and local retirees with the same level of benefits, benefits would have to be increased in fact beyond the level of that necessary by a tax exemption.

Which means once the decision to discriminate has been made, there is no political check because there are political, economic, and institutional forces against changing the status quo.

Because any way they turn, they are going to be losing revenue.

And it may result in a tax increase across the board.

And the vast majority of voters in the State will not stand for that, which is why we are here in Court.

Because military retirees in Kansas have been fighting for equal treatment in the legislature for over 20 years.

They haven't gotten it.

And we are now asking this Court to provide them with equal treatment, because they are substantially analogous to every State and local government retiree for all material purposes.

Military retirees must serve for at least 20 years in the Armed Forces before they are eligible for retirement.

They must meet statutory criteria before they are eligible for retirement; when members of the military retire, they lose their entitlement to active duty pay and allowances and instead receive retired pay.

That retired pay is calculated based upon past years of service.

It's calculated in accordance with their highest rank of paid rate held.

While in retirement... retired members of the Armed Forces are not required to perform any active, service, or affirmative duties to receive military retired pay.

For these reasons, it isn't surprising that under the Internal Revenue Code Congress has determined that these military retired folks are entitled to the same tax treatment as all other Government retirees.

They're given equal treatment by Congress, and as we noted in our brief, Congress has expressly determined that there are no substantial grounds for distinguishing the tax treatment of the plan for the uniformed services from these other plans.

The States are not given the power or the authority to override or veto that authoritative determination.

There are no significant differences.

There is no justification for disparate treatment.

If there are no--

Unknown Speaker: Well, don't... don't the military get some benefit?

They get to go to the PX when they're retired; they get military medical treatment that perhaps Federal retirees, as a class, don't get?

Mr. Fowler: --That's correct, Your Honor.

And those types of benefits, which are also available to members of the military on active duty, are expressly exempt from taxation under the Internal Revenue Code.

Since the State of Kansas has adopted the piggy-back approach, those allowances or special entitlements don't qualify as income to a retired person.

But it would seem to me, Your Honor, that if Congress has decided to provide retired members of the military who have provided honorable service to the United States for 20 years or more with access to medical services, so that they might remain fit in retirement, with access to PX or commissary privileges, it's not a proper domestic concern of the State that the Federal Government has elected to provide these additional services to them.

Unknown Speaker: No, but it does tend to distinguish the military retirees from the Federal Government as a whole retirees that were involved in the Davis case.

Mr. Fowler: Your Honor, there may be distinguishing features.

We're not denying that.

But they must be relevant for tax purposes.

Military retirees can wear uniforms, too.

And although the State of Kansas is suggesting that that's another reason that they can tax them, it must be relevant to some legitimate aspect of tax policy.

Unknown Speaker: I must say it's hard to say what's relevant to a legitimate aspect of tax policy.

I assume it would be constitutional to impose a tax on uniforms.

I mean, I suppose you could... a State could... you know, we're going to... any uniform, nurses uniform, soldier's uniform.

Mr. Fowler: Your Honor, perhaps I misspoke.

Part of the State's argument in this case is not that they can tax retired members of the military because they... well, they're saying precisely that they can impose an income tax on retired members of the military in part because they can wear a uniform in retirement.

They're not suggesting that they can tax the uniforms... and perhaps they could tax the uniforms.

But certainly the fact that they can wear uniforms doesn't seem to us to be a legitimate justification for taxing the income received by those members of our retirement... retired community.

Unknown Speaker: Do you really want to rest on the question of what is a legitimate justification as opposed to what is a generally applicable distinction within the tax structure?

Mr. Fowler: Your Honor--

Unknown Speaker: If Kansas generally drew a distinction between the taxation of deferred income and reduced income for reduced services you wouldn't be here, would you?

Mr. Fowler: --That may or may not be true, Your Honor, because Kansas has not drawn that distinction.

But even if they were to do so, under the Davis and Phillips test, it still becomes necessary... even if one concludes that a direct relationship exists... whether that is constitutionally permissible under the second prong of the test, which is the ultimate standard of justification.

And in the event that Congress has foreclosed a State from relying upon a particular justification because it doesn't hinge upon a proper domestic concern and it trenches upon the prerogatives of Congress, then certainly further inquiry would be required.

Unknown Speaker: So you're saying we can't avoid the substantive inquiry, even though we would in a first-tier equal protection case?

Mr. Fowler: That's correct, Your Honor.

As the Court has noted in the past, equal protection analysis is not necessarily controlling here, because Federal sovereign interests must be weighed in the balance.

If there are no--

Unknown Speaker: Well, and because... because of the statute.

Mr. Fowler: --Because of 4 U.S.C. section 111.

Unknown Speaker: Yes.

Mr. Fowler: And the modern doctrine of intergovernmental tax immunity, the heart of which is nondiscrimination.

Unknown Speaker: Well, why do you need more than the statute?

Mr. Fowler: Your Honor, perhaps we don't need more than the statute.

We would like some relief either under the constitutional doctrine, or its statutory embodiment in 4 U.S.C. section 111.

If the Court chooses to give us relief under one, rather than the other, we will be just as happy.

Thank you.

Unknown Speaker: Mr. Manning, we'll hear from you.

Argument of John F. Manning

Mr. Manning: Thank you, Mr. Chief Justice, and may it please the Court:

I'd like to begin by addressing Justice O'Connor's question about the level of generality at which this issue must be addressed.

The statute prohibits taxation that discriminates against an officer or employee because of the source of the compensation.

In Davis, this Court defined that test as prohibiting discriminatory taxation between Federal and State retirees unless there were significant differences between the two classes of taxpayers.

Unknown Speaker: It really doesn't prohibit it.

It just doesn't extend the consent.

Mr. Manning: It does... by negative implication, I believe... in... this Court, in Davis held that by negative implication it also prohibits it and that it's coextensive with the constitutional doctrine of intergovernmental tax immunity.

But to return to the question of what a significant difference would be, for purposes of Davis, we believe that significance has to be assessed in terms of a legitimate tax purpose.

Now, there are many differences between Federal and State employees.

To give one example, Federal patent officers are different from any State or local government employees, because unlike State and local government employees, they're authorized to issue patents.

That is a significant difference between a Federal employee and a State and local government employee.

But it is not a difference that has any significance for tax purposes.

And we believe that this Court would invalidate a statute that taxed Federal patent officers more heavily than State and local government employees.

Unknown Speaker: Assuming the case in which a State made a difference between contributory and noncontributory plans for taxation or exemption of retirement benefits, and it just so happened that Federal employees were disadvantaged, would that be a legitimate tax distinction in your view?

Mr. Manning: We believe that a neutrally drawn classification that attempted to account for double taxation by reference to the manner of funding would be a legitimate classification and would survive scrutiny under section 111.

However, that is not that... the... what is going on in this case.

In this case, it is true that no part of the military retired pay is taxed before it is received because it is not funded by employee... in any part, by previous employee contributions.

It is also true that State and local government retirement benefits are funded in part through employee contributions that were previously taxed.

But Kansas also exempts that portion of State and local government retirement benefits that consist of employer contributions and accumulated interest which, like military retired pay, have never previously been taxed.

Now, we submit that a nondiscriminatory tax truly intended to avoid double taxation would not fully exempt State and local government retirement benefits based on their source, but would generally exempt retirement benefits to the extent they reflect previously taxed contributions.

And that, by the way, is the way in which the Federal Government taxes... benefits disbursed pursuant to qualified pension plans under section 72 and section 402 of the Internal Revenue Code.

So there is ample precedent for Kansas to draw a classification in a neutral way that accounted for the justification that they cite.

I would also like to address Justice O'Connor's point about the other Federal cases.

The legal conclusion that retired pay is current compensation in cases involving such matters as bankruptcy or laches does not necessarily govern the question in the context of section 111 and the doctrine of intergovernmental tax immunity.

As Mr. Fowler pointed out, Congress, in fact, treats military retired pay not as current pay in the Internal Revenue Code, but as deferred compensation in such statutes as the... as FICA, and in the individual retirement account statute.

So there is certainly a recognition in the Federal code that military retired pay can have aspects of deferred compensation.

And we believe--

Unknown Speaker: How many other States have a plan like Kansas that singles out retired military?

Mr. Manning: --Justice O'Connor, I'm not aware of the exact number.

I'm certain that there are at least three other States: Arkansas, Missouri, and Colorado; and that a number of other States raised... that the question is presented in a number of States because statutes were amended following this Court's decision in Davis to give exemptions of various degrees to Federal retirees.

Some of them extended them fully to civil servants and military retirees; some of them extended them only to civil servants.

But prior to Davis, a number of States taxed both in their refund claims pending, and in a number of States--

Unknown Speaker: But there've been amendments in some of those States since Davis?

Mr. Manning: --There have been... 19 States, I believe, have amended their statutes in the aftermath of Davis to--

Unknown Speaker: And three or four that have not?

Mr. Manning: --At least three or four have not taken into account the military retired... have not treated military retired pay the way they have treated Federal civil servants.

I believe there may be more than that, but I am not aware of the exact number, Your Honor.

We submit that the State mischaracterizes military retired pay in substance when it compares it to the salaries of current State and local government employees.

We believe that military retired pay is much more like the deferred compensation that's received by State retirees.

As this Court noted in Davis, the earmarks of deferred compensation are receipt of benefits based upon past years of service, and highest pay-rank achieved.

And that's precisely the system that's used by the Kansas retirement system, as well as the Federal military retirement system.

But more--

Unknown Speaker: Excuse me.

I didn't want to interrupt you if you weren't through with the point.

I was just wondering, in your view of Davis and the statute, supposing that Kansas taxed... did not have tax-free retirement benefits for its State Police and all its law enforcement officers.

Would they then be able to tax the military retirees?

Mr. Manning: --I'm... no, Your Honor, I don't believe that they would.

It would depend, of course, on the justification that was proffered by the State for granting the exemption.

The Davis--

Unknown Speaker: Say their reason for doing it was they wanted to treat all law enforcement and military people alike, figuring that they're somewhat... the most comparable State employees, and they wanted the tax.

They wanted to get this additional tax revenue, and then treat Federal military retirees just like other Kansas citizens.

Mr. Manning: --The assertion that military retirees are most like State and local police would not be sufficient to overcome the requirements of the quality that are imposed by section 111, which states that the State cannot discriminate against Federal employees... as extended to retirees in Davis, or as applied to retirees in Davis... because of the source of their compensation.

We believe that a conclusion that these are the closest categories is not sufficient to establish that the taxation of military retirees is not because of the Federal source of their compensation.

Rather, we submit that the State would have to come up with some substantive characteristic--

Unknown Speaker: So that if they grant any tax-free retirement benefits to even a tiny fraction of their retired work force, they must grant all Federal employees the tax-free--

Mr. Manning: --It would depend on whether they applied their classification in a neutral and even-handed way.

It might well be that if Kansas granted an exemption for schoolteachers because they wanted to encourage people to go and become schoolteachers that it might be a valid justification if it was applied even-handedly to cover schoolteachers on Indian reservations or schoolteachers who taught in schools on military bases.

As long as the classification is drawn in a neutral way and captures the policy that the State asserts as the basis for its tax, then it doesn't violate section 111's prohibition against taxation because of the source of the Federal compensation.

That would be taxation that was because of the social policy of encouraging people to become teachers.

Now that's not to say that the State might not draw a classification in that sort of circumstance that would run afoul of section 111.

For example, if the State drew a classification that was very general, but that burdened only a tiny, tiny percentage... an inconsequential percentage of State employees, but burdened a large number of Federal employees, this Court might well conclude that that was a pretext for discrimination.

Unknown Speaker: --That's your... that's your patent officer example.

That's why that was bad, really, because they picked out a category that just doesn't exist except at the Federal level.

Mr. Manning: That... that's right, Your Honor.

And the... we submit that that's exactly what they're doing in this case with military retirees.

The State has not indicate that there are any tax consequences that flow from the fact that military retirees are subject to recall or must comply with the Uniform Code of Military Justice.

All they have asserted is that these are characteristics that have substantial consequences, it's true.

But they have not suggested that there's any relationship between those consequences and any legitimate interest of the State in tax... in taxation, except that they want to get more money from military retirees and not from any State or local government retirees.

In addition, we believe that... we believe that the facial discrimination is sufficient to invalidate--

Unknown Speaker: Well, excuse me.

You wouldn't mind that if there were a sufficient number of State people who were also irrationally burdened in that way.

I mean, I don't know what is a rational tax.

If they... if they want to choose... if they want to tax medals they can tax medals, I presume, so long as... so long as it doesn't seem targeted at the Federal Government.

Mr. Manning: --You're absolutely right, Your Honor.

They could tax medals, as long as they did it in an even-handed and neutral way, and as long as the burden that fell on State employees as opposed to Federal employees was not so lopsided that it suggested that its irrationality was merely a show for discrimination.

If there are no further questions--

Unknown Speaker: Thank you, Mr. Manning.

Mr. Bartle, we will hear from you.

Argument of James A. D. Bartle

Mr. Bartle: Thank you, Mr. Chief Justice, and may it please the Court:

In Kansas, military retired pay is taxable, and State retirement benefits are not taxable.

And it's our position that this differential tax treatment is valid because it satisfies the test set out in Davis v. Michigan.

And that test requires that differential tax treatment must be directly related to and justified by significant differences between the two classes of taxpayers.

And our position is, very simply, that these two classes are taxed differently because they are different.

And the primary justification for different tax treatment is the fact that military retirees receive current pay for current services; and State retirees receive pension benefits... they receive deferred compensation for prior services.

The character of the compensation received by these two classes of taxpayers is fundamentally different.

And the different tax treatment is based on the nature... on the character of the income.

It is not based on the source of the income.

And taxation based on the source is the only type of discrimination that the statute prohibits.

The statute does not prohibit a State from drawing reasonable distinctions in its income tax structure where there's a legitimate reason for doing so.

The only prohibition is where it's discriminatory because the Federal Government is the source of the income.

Now there really is no question that this Court has characterized military retired pay as current pay for current services.

And in McCarty v. McCarty, this Court stated that military retired pay differs in some significant respects from a typical pension and retirement plan.

Unknown Speaker: But what indication is there that that's the distinction that the State was drawing?

The State also taxes retired pay of CIA employees, I gather.

Mr. Bartle: Well--

Unknown Speaker: And they are not in the same position that military retirees are, subject to recall.

Mr. Bartle: --First, I'm not sure that we have any CIA retirees in the State of Kansas.

And the record does not reflect that we do.

Unknown Speaker: What difference does that make?

Mr. Bartle: Yes, the CIA, that's secret.

Unknown Speaker: Yes, that's right.

[Laughter]

Good point, good point.

If you had any--

[Laughter]

If you had any, they would be taxed, wouldn't they?

Mr. Bartle: I believe that's correct, yes.

Unknown Speaker: Yes, now that has nothing to do with the distinction you're justifying the tax on the military retirees by.

I mean, I suppose you could also say military retirees have brown uniforms or, you know... it's a distinction, but we have no reason to believe that's the distinction that the State was using in creating the tax code.

Mr. Bartle: I wanted to get to--

Unknown Speaker: Good.

Mr. Bartle: --that question of uniforms in a minute.

As to the CIA retirees, I believe you're correct, that they are substantially different.

They're not similarly situated with military retirees, and the same set of justifications which would justify taxing the military retirees would not necessarily also justify taxing the CIA retirees.

Unknown Speaker: But you'd have another one for them, right?

Mr. Bartle: Perhaps we would.

Unknown Speaker: I see.

Mr. Bartle: Or, Your Honor, perhaps we wouldn't.

Perhaps it is the case that the taxation of certain Federal retirees, other than military retirees, does not measure up to the Davis standard.

Perhaps the State, if it had to, would be unable to justify that different tax treatment.

And perhaps, as to certain other Federal retirees, the tax might be unconstitutional.

But we don't believe that's the case here.

Unknown Speaker: So is it... is it your submission that under a properly drawn statute... and, of course, you would say that this is one... but under a properly drawn statute, the State of Kansas could say if any retiree has current obligations the payments received by him are taxable?

Is that the submission you're making?

Mr. Bartle: No, Your Honor.

Our primary justification is the distinction between current pay and deferred compensation.

And we--

Unknown Speaker: So it's not the obligations; it's the pay?

Mr. Bartle: --We make the point of the continuing obligations that the military retirees owe to the Federal Government, because that is characteristic of a class of people who are receiving current compensation.

They have ongoing duties and responsibilities.

Unknown Speaker: And so we know whether or not there's current versus... pay versus some other kind of pay because they have current obligations to perform.

Is that how we know that it's current pay?

Mr. Bartle: I think that is one indicia, yes.

Unknown Speaker: And what are those current obligations here?

Mr. Bartle: The current obligations are that military retirees are not retired from the military service.

They are placed on retired status.

But they remain in the military service of the United States.

They are not discharged from the military.

They are not civilians.

They can be recalled to active duty, and that's a recall on an involuntary basis.

And just last year there were many military retirees recalled and sent to the Persian Gulf.

And they're subject to the Uniform Code of Military Justice.

They're prohibited from engaging in certain employment and civilian occupations.

And there was some discussion earlier that, consistent with their status as employees of the Federal Government, they are entitled to various employee benefits and privileges that, of course, are not available to members of the general public.

We cite these things not because they, alone, are significant... not the fact that military retirees are authorized to wear their military uniforms.

But they can wear their uniforms because they have military status.

Unknown Speaker: But why do all of these factors you've just mentioned... how do they bear on any sort of tax policy the State might have?

Mr. Bartle: Well, I cite all those differences because I do believe they all go to our ultimate point: that military retirees are receiving current compensation, that they are current employees.

Unknown Speaker: Well, I have the same problem as the Chief Justice.

If you're a tax policy planner, what is the tax theory on which you justified this differential?

Why is it that the military person who receives current pay... and presumably, therefore, has more burdens... is not exempt from the tax?

Mr. Bartle: Well, the legislature, in drawing these distinctions... and, of course, our legislature is keenly aware of the military retirees and the fact that their retirement pay is taxable.

They have looked at a broad range of factors.

Unknown Speaker: But what is it that would motive the decision to tax, versus to exempt on this criterion?

Mr. Bartle: On the distinction between current pay--

Unknown Speaker: Yes.

Mr. Bartle: --versus deferred compensation?

Unknown Speaker: Yes.

Mr. Bartle: Well, that has traditionally been a very significant for... very significant difference for purposes of taxation on both the Federal and the State level.

Taxation by its very nature treats certain classes of income differently.

It treats current pay differently.

It treats deferred compensation differently.

It treats capital gains differently.

It's all income.

Unknown Speaker: Well, is the... is the theory that it... in the case of the military officer it's earned for current status?

Mr. Bartle: It is.

I believe that's--

Unknown Speaker: Is that the theoretical difference?

Mr. Bartle: --I believe it's correct that it is earned on an ongoing basis, that it's not a vested right, not an enforceable right to receive military retired pay.

So as long as you fulfill the conditions of your retirement, you are able to receive military retirement pay.

Unknown Speaker: Well, you can say that about some of your State employees who are disabled.

Don't you have restrictions on certain activities of State employees after they leave State service?

Mr. Bartle: I think there are very narrow restrictions.

Unknown Speaker: Well, whatever they are, if they violate those restrictions they can be deprived of their retirement income.

And yet you do not tax that retirement income.

Mr. Bartle: That point, Your Honor, I don't believe I could agree with.

At least I'm not aware.

The only exception I know of is that if a person retires from working for the State government and is receiving their retirement benefits, and then elects to become re-employed by the State, there is a limit on the amount of their retirement benefits they can receive.

That is the only instance that I'm aware of.

The military retirement system has always been regarded as unique.

And that is not simply just our contention.

That is clearly the petition of... the position of the Federal Government.

And on page 15 of our brief, we quote from a 1987 report by the United States Department of Defense.

And there they say that while there may be a superficial resemblance between the military retirement system and retirement systems that exist in the private sector, there are, in fact, substantial differences between the military retirement system and all other retirement systems.

I'd--

Unknown Speaker: Here's one of the examples I was thinking of.

If a State employee... this is from the Government's brief... has participated in contracting with any person or business within the employee's last 2 years of public employment, the employee may not accept a job with that person or business for a year after the employee's public service terminates.

That's a restriction under the Kansas statutes.

And if he violates that, I gather that the retirement pay can be... can be terminated or withheld.

Mr. Bartle: --The retired State employees have a vested right to receive their retirement.

And I think there's very narrow limits on the extent to which the State can discontinue or modify their right to receive their retirement benefits.

I think Your Honor is correct in citing that proposition--

Unknown Speaker: Well, I must say... in fairness to you... the Government puts it in a footnote with a lot of other things where... the kind of things that you mention, if a State employee goes back to work for the State he would forfeit it.

This is also cited in the same footnote.

But I don't see a citation to the statute that says one of the consequences of violating that 1-year prohibition is that you lose your retirement pay.

It's the implication, but I don't see the statute cited.

Mr. Bartle: --Again, Your Honor, I'm not aware that that is the case.

Unknown Speaker: You may be right.

Mr. Bartle: I would like to focus, for a moment, on the Davis case.

And in Davis, the State of Michigan taxed Federal Civil Service retirement benefits, but it did not tax State retirement benefits.

And the Court recognized that there was different tax treatment here.

And if you'd like to call it discriminatory tax treatment, we can call it that.

But the Court conducted an inquiry to determine if this different tax treatment was justified.

And I think this demonstrates first it is not just the mere fact of discrimination, not the fact that Federal retirees receive less favorable treatment than retired State employees.

That is not conclusive.

And the Court proceeded to conduct this inquiry, and searched for significant differences between the two classes.

Now, in Davis, it happened that the Court found no such differences, and the conclusion therefore was that since there were no differences between the two classes themselves, no intrinsic differences, the taxation must be based on some other factor, some outside factor.

And, of course, in Davis, the Federal Civil Service retirees receive their pay from the Federal Government, and the State retirees were paid by the State.

So that was determined to be a tax that distinguished based on the source.

And that is why, I believe, the conclusion was that it was a violation of the statute.

Because it discriminated based on the source.

Now, there were many States just like Michigan that taxed Federal Civil Service retirement benefits, but did not tax State retirement benefits.

But Kansas was not one of those States.

Kansas did not have to go back and modify its Income Tax Act to conform with the Davis decision.

At this point, I would like to mention a point that was raised earlier, as to what would be the effect upon the State if the law was struck down, and retroactively... retroactive relief was required.

That would be approximately $91 million that we would be required to refund to the Federal military retirees.

Unknown Speaker: What fiscal period does that cover?

Is it 2 years?

Mr. Bartle: That covers the tax year 1988 and all years forward, together with interest calculated at the statutory rate on the tax refunds.

Unknown Speaker: And why do you cut it off at 1988?

Because of the State statute of limitations, or--

Mr. Bartle: Your Honor, did I say 1988?

Unknown Speaker: --Yes.

Mr. Bartle: Well, what I meant to say was from tax year 1984 and all years forward.

Unknown Speaker: '84.

And why do you cut it off at 1984?

Mr. Bartle: That is the... earliest year under our statute of limitations that the taxpayers could claim income tax refunds.

Unknown Speaker: You mean anyone can come forward now... not merely the parties to this case... but anyone can come forward now and still file a timely claim as to 1984?

Mr. Bartle: Your Honor, this matter has been certified as a class action.

And the class embraces--

Unknown Speaker: I see.

Mr. Bartle: --all military retirees in the State.

So we would regard them--

Unknown Speaker: I see.

Mr. Bartle: --as covered by the outcome of this litigation.

Unknown Speaker: I take it Kansas does not have a requirement to pay under protest, or to raise a protest in payment in order to go after a refund later?

Mr. Bartle: That is not a requirement.

Unknown Speaker: I don't... most of the times when we have objections to retroactivity we're talking about a change in the law.

We wouldn't be... in finding against you... we wouldn't be reversing any decision of cours, would we?

I mean, as far as I know, this is a... this is a new issue.

What is the great unfairness in finding a new issue against you?

And you say gee, I have to pay back the money I wrongly took.

I mean, that always happens, doesn't it?

Mr. Bartle: I think the point, Your Honor, this case is, of course, derived from the Davis case.

And Davis was a case of first impression.

But there has been considerable controversy over what was the effect of this Court's decision in Davis.

Does it have retroactive or prospective effect?

That is of great concern to the States that have this issue.

Now--

Unknown Speaker: Davis wasn't a constitutional case, really.

It was just interpreting 4 U.S.C. section 111.

Mr. Bartle: --It was, Your Honor.

But Mr. Fowler stated earlier that that statute is regarded as co-extensive with the constitutional doctrine.

So the two seem to go hand in hand.

Unknown Speaker: Well, it... I'm not sure whether that's in your favor or not.

Mr. Bartle: Well, I'm just trying to say what I believe is the case.

Unknown Speaker: And 111 has been on the books quite awhile.

Mr. Bartle: It has, Your Honor, over 50 years.

If there is any great unfairness here... and, of course, this is speaking to remedial issues which is not presented in this case, but, of course, hang over it like a black cloud.

Davis, to the States, was just like a bolt out of the blue.

States had always believed that they could engage in this practice of exempting their own retirees and taxing Federal retirees, just as they taxed all other retirees from private sector retirement and other ordinary income in the State.

And it was--

Unknown Speaker: The special class as viewed by the States was really their own retirees, wasn't it?

Everybody else was treated differently.

Mr. Bartle: --I think the States operated on the assumption that there was nothing impermissible about them according some favorable tax treatment to its own employees and retirees.

Unknown Speaker: Well, of course, you aren't arguing here... you aren't arguing to sustain that broad notion that the States had.

You don't defend that in this case.

You're just... you just zero in on the military now.

Mr. Bartle: Yes, Your Honor.

There are several classes of Federal retirees who we do not tax.

Unknown Speaker: And you're saying that... awhile ago you said well, maybe we're in trouble with respect to other types of Government employees who might be taxed.

Mr. Bartle: I'm afraid I don't understand Your Honor's question.

Unknown Speaker: Well, I'm going back to the CIA example.

You went on to say that except for the military, which you certainly try to justify, you might be in trouble if you tried to tax other kinds of Government employees.

Mr. Bartle: I believe that's true, Your Honor.

And I mentioned earlier that we do not necessarily contend that the justifications for taxing the military retirees would also justify taxing other retirees.

But that--

Unknown Speaker: And yet you say the States, up until the time of Davis, thought that they could tax all Government retirees... United States retirees... including Kansas.

Mr. Bartle: --While exempting... while exempting their own retirees?

Unknown Speaker: Yes.

Mr. Bartle: Your Honor, Kansas was not directly affected by the Davis decision because Kansas does not tax Federal Civil Service retirees, and it hasn't taxed them for more than 30 years.

Unknown Speaker: I know.

But a lot of other States did.

Mr. Bartle: Correct, correct.

At the time the Kansas legislature created the Kansas Public Employees Retirement System, they provided that the benefits paid from that system would be exempt from State income tax.

And in that same legislative session, they also enacted an exemption for Federal Civil Service retirement benefits.

Unknown Speaker: Why did they do that?

Do you know?

Mr. Bartle: I can't tell you precisely, Your Honor.

But we would contend that it certainly is evidence of an appreciation that similarly situated State and Federal retirees should be treated equal... equally.

Unknown Speaker: Well, Mr. Bartle, there are, though, some other classifications of Federal retired people who are subject to the Kansas tax, in addition to the military retirees.

Mr. Bartle: Correct.

Unknown Speaker: And as to those other classifications, Kansas does not have and does not purport to rely on the differences that it's trying to articulate with regard to military.

Mr. Bartle: Precisely.

And that is because military retirees are unique.

They are different than State retirees, and they are different than all other classes of Federal retirees.

Unknown Speaker: Well, the problem is, we have to look at all of the classes of Federal employees, I suppose, that Kansas says we can tax, and try to figure out if there's some legitimate State policy being implemented.

And so it would clearly be easier to do if the reasons extended across the board to all the classes that Kansas purports to tax.

Mr. Bartle: It certainly would make the Court's task much easier.

Unknown Speaker: Well, at least the fact that you tax some other classes of Federal employees for which you don't have the military argument sort of impugns the State's submission that you are not taxing military just because of the source.

Mr. Bartle: I can see Your Honor's point.

I'd like to point out that in Kansas, we have three large classes of Federal retirees: Federal Civil Service retirees... there are about 20,000 of them; railroad retirees... and there's almost 20,000 of them; and military retirees... between 14 and 15,000.

These other classes of retirees that we discussed today and that are mentioned in the briefs, may be classes of one, two, or three.

I know we have one lady who's retired from the Federal Foreign Service.

I know we have less than half a dozen retired Federal judges.

Some of these other classes, I don't know whether we have any of those people residing in the State or not.

But--

Unknown Speaker: What is the explanation for that, if it's not too indelicate to inquire?

You exempt the retirement of State judges, but not the retirement of Federal judges.

[Laughter]

It seems like a very bad idea.

[Laughter]

Mr. Bartle: --I can see Your Honor's point.

But suppose we were called upon to defend that position.

What would we do?

We would search... first for what the legislature has done.

We would try to see if there were concrete differences between these two classes.

For example, Federal judges, as I understand it, have a lifetime appointment, and their compensation cannot be reduced at any point.

Maybe this is a significant difference.

Maybe State judges are treated differently.

That is the sort of thing we would look to to see if there were legitimate differences between the two classes.

As to these other classes of Federal retirees, I'm saying that perhaps there are justifications which would permit us to tax them in the manner that we do.

And we would look to what they do, and what is the character of their income, and how do they compare with similarly situated State retirees.

That is, we are just simply applying the rationale and the analysis that this Court set out in Davis.

Unknown Speaker: Now, would you refresh my recollection?

Are there some classes of State employees, State retirees that you do tax?

Mr. Bartle: Virtually all State and local government retirees are all exempt.

Unknown Speaker: They're all exempt.

Okay.

Mr. Bartle: I think that comparing the facts in Davis to the facts of this case... as I said, Davis involved Federal Civil Service retirees and retired State employees.

And those two groups were both fully, and unconditionally retired from Government service.

They both participated in contributory retirement plans.

They both received deferred compensation for prior services.

Now, of course, those differences simply don't... those similarities simply don't exist in this case.

Military retirees continue to remain in the military service.

State employees are completely severed from employment.

State retirees contribute to their retirement program, and they pay tax on those contributions.

Unknown Speaker: Mr. Bartle, as a practical matter, you know, how often are military retirees called up, do you think?

Mr. Bartle: I mentioned earlier that there was quite a few retirees recalled to serve in the Persian Gulf.

And, of course, how often they are recalled--

Unknown Speaker: Now, was that a call-up of retirees who put in 20 years, rather than National Guard or Reserves?

Mr. Bartle: --There were Reserves called up; there were National Guard called up.

There were also military retirees called up.

Unknown Speaker: Do you have any idea how many?

Mr. Bartle: I believe the number runs into the thousands, Your Honor.

Unknown Speaker: Throughout the country?

Mr. Bartle: Yes, they were assigned to both foreign posts and posts here in the United States.

I'm looking right now at a press release that was issued by the Pentagon.

They said retirees are needed to fill critical requirements as doctors, nurses, linguists, aviators, water purification specialists.

Unknown Speaker: But of course, when they were called up, I suppose they got their regular pay, and not just their retirement, for retired service.

Mr. Bartle: That's correct, Your Honor.

I think the point is that particularly now that it appears to be the future policy of the Government to downsize the active-duty forces, there is going to be an increasing reliance on reserve and retirement personnel to fill the need when the need arises.

At any rate in Davis, the State of Michigan came forward and tried to justify their different... differential tax treatment.

And they said that on the average, Federal Civil Service retirement benefits are higher than the benefits that we pay to our State retirees.

And because of this disparity in the amounts, we feel that there's a justification for according this tax benefit to the State retirees, whereas we would not give such a benefit to the Federal retirees.

But this Court rejected that justification because, while it might have been true on the average... as a general proposition... it certainly wasn't true in every instance.

There were, of course, some State retirees who had a higher pension than the Federal Civil Service retirees.

And the Court said that this justification is not directly related to the differences.

It does not apply in each instance.

But, of course, the justifications that we are putting forward today, do apply across the board.

An even-handed application of the rationale that we advance for justifying different tax treatment results in the taxation of all military retirees, but it does not result in the taxation of any State retirees.

Unknown Speaker: Is there any indication of that rationale in the history of this statute... I mean, in the legislative debates or anything else?

What I'm worried about is, it seems to me, as far as I can tell, it's just an invented justification.

Had the Kansas statute said a tax shall be imposed... despite the exemption for everybody else, shall be imposed upon all retirees who have an obligation to return to their former employee's service upon call.

Then I think you... you know, I'd feel quite differently about this statute.

But it doesn't say that.

It just says a tax shall be imposed on military retirees.

And then you come in and say well, this is why they are different.

But do we know that that's why the State made the distinction?

Mr. Bartle: Your Honor, out statutes do not state that a tax shall be imposed on military retirees.

Military retired pay is included in Federal adjusted gross income, which is the basis that the tax is imposed at the State level.

So it's... it is not singled out in any statutory manner.

Unknown Speaker: It is not given the same exemption that other retirement pay is.

Mr. Bartle: That is correct, yes.

Unknown Speaker: That's singled out, I think.

Mr. Bartle: It's not singled out in the same manner that there is a specific provision that says we are setting aside this discrete group of taxpayers.

We are subjecting them to unusual tax burdens that do not apply, as a general proposition, to other taxpayers of the State.

I believe I understood the Solicitor General earlier to say that if Kansas had statutory provision that said deferred compensation shall be exempt, and current pay for current services shall be taxable, that they would feel that would pass muster.

Unknown Speaker: Well, I don't think he conceded that.

I think he conceded they would then look to the... I think he referred to the degree of lopsidedness, to see whether there was still a whiff of the pretextual about it.

So I don't think he was precluding a further substantive examination.

Mr. Bartle: Well, I took his comments to mean that if the statute set out, in specific terms, a neutral classification, a neutral basis for different tax treatment, that that would be permissible.

For example, there are other States that have such provisions.

They say benefits reserved... received from contributory retirement programs shall be exempt, and noncontributory retirement programs shall be taxable.

And, of course, that is what we have here in Kansas.

It's simply that our statute is not framed in that manner.

And I think the Court ought to look to the practical effect of this tax, rather than the form in which the statutory language appears.

I'd like to turn to the policy reasons that underlie the doctrine of intergovernmental tax immunity.

And, of course, the principle that the Federal Government is immune from certain State taxes does not arise from the actual text of the Constitution.

It's implied from the supremacy clause.

It's deemed to be necessary to protect the operations of the Federal Government from interference by the State.

And here, it is not alleged that the tax results in any... any interference to any Federal function.

And, of course, that is the purpose of this constitutional doctrine.

It does not exist for the benefit of individual taxpayers, such as the petitioners.

Unknown Speaker: Well, do you think the statute, section 111, requires some sort of interference with the Federal operations before it can be applied?

Mr. Bartle: I think the statute prohibits a tax that discriminates because the Federal Government is the source of the pay of compensation.

And we believe that that is Congress' way of prohibiting a tax that is trying to reach out and interfere with, or hinder, a Federal function.

That if a tax is using its sovereign taxing authority to interfere with Federal operations, that that ought to be permitted.

Unknown Speaker: Well, the statute certainly doesn't contain that additional language.

But you say that was Congress' purpose in passing it?

Mr. Bartle: That's what I believe arises out of the principle that they are prohibiting a tax that discriminates based on the source.

Taxes will no be prohibited if it discriminates for any other legitimate basis.

It is only the source-based taxation that is prohibited.

Now, this Court is not the petitioners' only source for relief.

And they can... ought to seek relief from Congress in the first instance.

And if Congress actually perceived that its interests were being threatened by this State tax, why, you'd think that they would do something about it.

Congress could pass a law--

Unknown Speaker: Would that be under its power to enforce sovereign immunity?

Mr. Bartle: --Yes, Congress may, by statute--

Unknown Speaker: Well, but that... but I thought you agreed that the Constitution and the statute here are coterminous, so far as... so far as the doctrine of governmental Immunity is concerned.

Mr. Bartle: --Yes, I did say that... the current statute.

And what I'm saying is that Congress--

Unknown Speaker: But if... but if it fails under the current statute, the Congress would have no constitutional power to do that.

Mr. Bartle: --Correct.

Unknown Speaker: Unless it's under some other clause.

Mr. Bartle: Correct.

But, of course, it's our position that the tax does not violate the current statutory provision.

Congress could always step into this field and extend Federal tax immunity by statute beyond the limit that the Constitution would otherwise establish.

Thank you.

Chief Justice Rehnquist: Thank you, Mr. Bartle.

The case is submitted.

Attribution:

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California Equalization Bd. v. Sierra Summit - Oral Argument

Sun, 06 Feb 2011 03:47:16 +0000

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California Equalization Bd. v. Sierra Summit

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88-681_19890419-argument.mp3

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88-681_19890419-argument.xml

Transcript:

ORAL ARGUMENT OF ROBERT F. TYLER, JR. ON BEHALF OF THE PETITIONER

Chief Justice William H. Rehnquist: We'll have argument next in No. 88-681, Tyler v. David Ray Jenkins.

No, I'm sorry, California Board of Education v. Sierra Summit.

Mr. Tyler, you may proceed whenever you're ready.

Mr. Tyler: Thank you, Mr. Chief Justice and may it please the Court:

At issue in this case is a proper interface between Federal bankruptcy power and the fundamental sovereign rights of the states to tax commerce and property within their borders.

The case concerns the Ninth Circuit's holding that a state may not tax a private party's subsequent commercial rentals of property purchased at a bankruptcy liquidation sale by reason of the purported preemptive effect of 28 U.S.C. Section 960 and the purported unconstitutional interference such taxation is seen as imposing upon the bankruptcy processes.

The state contends that this ruling is in error for three reasons.

First, whatever it is, Section 960 is obviously not a clear expression of preemptive intent stated to be necessary to preempt state taxation under this Court's ruling in Swarts v. Hammer.

Second, whatever the limits of intergovernmental immunity, the imposition of a nondiscriminatory tax on a liquidation sale or the purchaser therefrom certainly does not cross them.

Third, whatever the limits of bankruptcy jurisdiction, a bankruptcy court clearly has no jurisdiction to adjudicate a controversy between a state and a nonbankruptcy party concerning the taxability of transactions occurring long after the bankruptcy is closed.

Unidentified Justice: Mr. Tyler, there is kind of a procedural wrinkle in this case, isn't there, in that... it comes up because your client in effect was held in contempt for disobeying an injunction?

Mr. Tyler: That's correct.

Unidentified Justice: Do you think the Ninth Circuit in this case, or the bankruptcy courts, did more than just interpret the terms of the injunction?

Mr. Tyler: Yes, I do, for the simple reason that the injunction is circumscribed by the judgment underlying it and that judgment in turn is circumscribed by the pleadings brought by the parties underlying the adversary complaint.

That pleading, in turn, was brought by the debtor... if one will... or the trustee, state receiver's, under Bankruptcy Code Section 505.

In turn, Bankruptcy Code Section 505 only allows adjudication of the debtor and the estate's rights... tax rights and obligations... on property in the bankruptcy estate.

That's all that the trustee--

Unidentified Justice: I don't understand that answer.

Your answer is that the judgment could not possibly go beyond the jurisdiction permitted?

Surely, it could.

Mr. Tyler: --No.

The jurisdiction permitted is circumscribed in the Bankruptcy Code.

Unidentified Justice: You mean no court has ever issued a judgment which went beyond what the court could do, legally?

Mr. Tyler: That was not the case presented in this situation.

The Bankruptcy Court clearly did not mean to exceed the jurisdictional grant in 505.

Unidentified Justice: Well, nobody ever means to do that, but the question is whether it did so.

Whether the text of the judgment was clear enough that it meant to cover even subsequent... subsequent taxation such as was involved here.

Isn't that simply a question of construing the judgment?

Mr. Tyler: Yes.

The Bankruptcy Court construed the judgment to the contrary.

It found that this was not a contemptuous action because its prior order was not meant to have the ambit urged upon it by Respondent herein.

Unidentified Justice: But then the bankruptcy appellate panel reversed that, didn't it?

Mr. Tyler: Yes, but the Bankruptcy Court itself obviously knew what it had in mind in framing its original order and I think that that construction is one which should be paid deference on appeal.

Unidentified Justice: Well, we ought to get out of the business of interpreting statutes, then.

Just let Congress interpret them.

I thought... you know, once you utter a judgment, it exists out there and it's not up to you to say in the future what it is.

It's up to the appellate courts to say.

Mr. Tyler: But the Bankruptcy Court... what you have here is a nebulous phrase.

It's included by some draftsmen in the judgment ultimately entered by the court, the "or other persons".

Unidentified Justice: Could you have stipulated to an injunction which would forbid you from collecting tax from an ultimate user?

Mr. Tyler: I'm sorry, I don't understand what you mean by the ultimate user.

Unidentified Justice: Well, suppose... suppose the judge said I'm going to enter an injunction and you can't tax this transaction, and you can't tax ultimate use based on the exempt nature of this transaction.

Could you say, we stipulate to that, Your Honor?

Mr. Tyler: I believe so.

I think you can assent to that.

Unidentified Justice: All right.

Well, hasn't that in effect happened, because the judge... at least arguably... issued a very broad injunction and you didn't appeal it.

If... if you can stipulate to it, you can't come up here and say well, it's beyond their jurisdiction.

Mr. Tyler: No.

The judge had no intent to affect the relationship between Respondent and its--

Unidentified Justice: Well, that's the second question.

Let's assume that the injunction can be prohibited... can be interpreted to prohibit the tax in this transaction.

Let's assume that for the moment.

If that's the case and you didn't appeal the injunction, aren't you barred by res judicata?

Mr. Tyler: --If in fact that was the intent of the court, the Bankruptcy Court, to enter such a judgment, yes.

Well--

Unidentified Justice: All right.

And if not... if not, then we don't have the issue before us anyway, because the injunction doesn't even apply.

So I don't see how in either case we reach the constitutional issue.

Either you're bound by the injunction and the injunction covers you, or the injunction doesn't cover you, but in either event I don't see how we ever reached the Goggin case.

Mr. Tyler: --It was clear that the intent of the parties and the understanding of the parties and the Bankruptcy Court in 1983, when the original adversary judgment was entered, was simply that it only related... that judgment only related to the taxability of the debtor and the estate through the trustee and that... it begs reason--

Unidentified Justice: Well, if that's true then that's the end of the case and we never reach the Goggin principle.

Mr. Tyler: --No.

That's not... I would beg to differ.

Under res judicata principles what the Court essentially would be holding us to there is to adjudicate hypothetical controversies with the trustee concerning taxability of transactions of third parties and clearly the trustee has no desire to do that and clearly the Board has no desire to do that, considering that in 1983 all of this exists as a mere hypothetical.

Unidentified Justice: Is this all part of one proceeding?

Was... is the proceeding we have here before us now basically just a continuation of the proceeding in which the injunction was entered?

Mr. Tyler: I... it's hard to answer that question.

What happened was that the bankruptcy was opened, dismissed, reopened again for the purpose of the original adversary proceeding by the trustee, dismissed again, two and a half years later it's reopened again by Sierra Summit for the purpose of ostensibly bringing the instant contempt citation.

In one sense it is a continuation, but in another sense it is very attenuated.

Unidentified Justice: Okay.

I know you intend to argue the merits of the case and please feel free to do so.

Mr. Tyler: Thank you, Your Honor.

The main fault with the Ninth Circuit's ruling in this case exists and the cases upon which it rests... Goggins I and Goggins II... rests upon their interpretation that 28 U.S.C. Section 960 bars the taxation of a liquidation sale or property rights that a purchaser acquires therein.

Whatever it is, Section 960 is not the clear expression of Congressional preemptive intent to preclude state taxation in this area.

If anything, Section 960 is an affirmation of tax liability, establishing the liability of the bankruptcy estate for all state and local taxes otherwise applicable to its operations.

Congress meant, by enactment of this statute, to advance two specific purposes.

First, to create a level playing field by equalizing tax burdens between bankruptcy estates and commercial competitors outside the bankruptcy protection.

Second, it meant to ensure the continued flow of tax revenues to the states to fund the services and protections that those states afford.

Unidentified Justice: Suppose there was no Section 960.

Mr. Tyler: Excuse me?

Unidentified Justice: Suppose there was no 960?

Or to put it another way, why did Congress think it was necessary to pass 960?

Mr. Tyler: Because the courts, previous to the enactment of 960, had been engaging in essentially Socratic dialogue, splitting hairs over whether or not a bankruptcy trustee was doing business or not doing business.

Unidentified Justice: Well, what if he was?

Mr. Tyler: They were finding states' tax statutes inapplicable on the--

Unidentified Justice: Is the problem that the bankruptcy trustee is a Federal Instrumentality and there's some argument that you can't tax a Federal Instrumentality?

Mr. Tyler: --Conceivably that would be the situation.

Unidentified Justice: Well, did any court ever hold that?

Mr. Tyler: Goggin II did.

Unidentified Justice: Uh-huh.

So we really needed 960 to really make sure that the states could tax, if the business was being operated?

Mr. Tyler: No.

Because this court had previously held in Swarts v. Hammer that the general rule, the presumption is taxability of bankruptcy estates, and absent a clear expression by Congress--

Unidentified Justice: So they didn't need 960?

Mr. Tyler: --No, they did not need it, but the courts had been mired in a construction... essentially, a fruitless construction... splitting hairs over what was the conduct of business, what wasn't the conduct of business.

The focus, prior to 960, as always, has been a focus on whether or not the transaction or property in question is taxable under state law.

Unidentified Justice: So absent 960, your submission is that the sales tax could surely have been imposed on the sale of this estate.

Mr. Tyler: The only question remaining then would be one of intergovernmental tax immunity and that is the only question that actually is in this case, according to our view and we believe that that's a well-founded view.

Unidentified Justice: I thought you said that we had already decided that there wasn't any such thing.

Mr. Tyler: As intergovernmental tax immunity?

Unidentified Justice: No, in this bankruptcy situation.

That you could tax trustees and transactions just normally, even absent 960.

Mr. Tyler: Yes, that's true.

But one still ends up with the question of whether or not there is a conflict between the fundamental purposes of the Bankruptcy Code and the efforts of the state to tax.

It's essentially a Tenth Amendment analysis at that point.

Going back, the immediate reason for enactment of 960 by Congress was simple: to clarify previously confused law in an area by providing a rule of construction whereby the taxability of an activity conducted under the jurisdiction of the Bankruptcy Court would be determined by reference to state law rather than by distinguishing whether or not it was conducted by a trustee or receiver.

My opponents assert that 960 was meant to have preemptive intent with regard to state taxation of liquidating activities by Congress' inclusion of language, "conduct of business" within the terminology of that statute.

They argue that that terminology was meant to resurrect and maintain a pre-act distinction in the act between liquidating and nonliquidating activities and by innuendo to retain a purported bar to state and Federal taxation on liquidation activities.

The argument's invalid for three reasons.

First, It's factually incorrect, for even assuming that such a distinction was made under the act, there was no bar on taxation of liquidation activities.

The Hendersonville case cited in my brief amply demonstrates that a taxation on property held in the liquidating state was taxable.

Similarly, the Mason/Tire case, although ultimately holding that no tax was due, found that there was no immunity to such taxation but found that as a matter of construction of Ohio law that a personal property tax on the monetary proceeds from a liquidation sale was not due and owing under Ohio law, as a matter of Ohio construction.

The argument ultimately rests on a totally improper preemption analysis posited by negative innuendo from what is otherwise an affirmative statement of tax liability.

As before, Swarts demands a clear expression of Congressional preemptive intent.

Swarts is in line with the recent cases by this Court, most recently exemplified by the Puerto Rico decision cited in my brief, holding essentially that the states' exercise of their sovereign rights may be abridged only by the clear and direct statement of congressional intent to do so.

Here we are talking, of course, the most fundamental of those rights essentially, the state's very existence... the right to tax to create the lifeblood by which the services and protections demanded by bankruptcy estates are provided.

The clear expression here is asserted to lie in hidden subtlety of meaning, a purported term of arts, but it Congress meant a preemptive effect to take place here, it should have said so in direct language, such as doing business, except that the estate shall not be liable for any state, local or Federal tax on liquidation activities.

Congress intended to create a level playing field, and at worst it left one ambiguity as to the extent of that field.

That the ambiguity exists is demonstrated by the fact that I stand in front of the Court today, for the conflict of the circuits essentially created the jurisdiction of this Court and the fact that you have a myriad of cases cited on both sides, by both myself and my opponents, as to whether or not Section 960 includes liquidating activities.

In practical terms, the Ninth Circuit's construction differentiating liquidating activities from the definition of business leads to absurd results and creates a rule which is both impossible to consistently and rationally apply.

The inconsistent application of this rule is most amply demonstrated within the Ninth Circuit itself, for in United States v. Sampsell, considering Federal taxation of liquidating activities, the Ninth Circuit held that liquidating activities are included within the ambit of 960.

Now, there's no rational differentiation one can make between Federal and state taxation for the purposes of the instant analysis.

The Code at least, and the act since 1850, certainly made no distinction between Federal and state taxation.

And the fact that one is undertaken under a supremacy clause analysis, whereas the other one is under statutory construction, is really of no regard, for the analysis is the same: harmonization to avoid conflict.

If in fact... I would note that the contrary construction to the Ninth Circuit's analysis is one of common commercial usage and is one given terms in other statutes such as the Internal Revenue Code.

This Court noted in Magruder, cited in my brief, that the term "doing business" is one of broad import, fairly limitless, and specifically stated that liquidation activities were included within that phrase.

Obviously Sampsell stands for the same proposition.

But perhaps the greatest fault of the Goggins rules is the fact that there's no rational test for differentiate... by which one can differentiate liquidating from nonliquidating activities.

In this case, China Peak is a debtor in possession operated by a state receiver.

It filed a bankruptcy proceeding to essentially gain protection from the state receivership and then dismissed it shortly after the liquidation sale... or what was termed a liquidation sale... took place.

It was filed under Chapter 11, but no plan was ever filed.

No trustee was ever appointed.

It was never adjudicated.

It was not brought under Chapter 7.

It was not even what would now be termed as a liquidating 11.

The sale was not for the benefit of the creditors of the estate but, by order of the Bankruptcy Court, was passed directly through to the state receivership to be distributed by the state receivership to whatever creditors or persons were deemed worthy of receipt therein.

The sale here, because it was done in bankruptcy, was felt to be a liquidation sale and because of that was exempt from the same taxation given for the benefit of the state receivership, which would have borne it in the first place, had it been conducted by it directly.

The Goggin cases are also good examples of the problem with the Goggin rules, for there, Mr. Goggin as trustee took a debtor's inventory, consisting of partly finished goods, utilized the debtor's work force and plant to continue finishing those goods and then sold them.

Obviously, that is the normal course of business operations for the debtor, or under any common construction of the term and phrase, yet it was held to be a liquidation and thus immune from state taxation.

The Oklahoma trustee amicus here, by analogy, argues that, as long as he is not operating under an order under Section 721, that he should be regarded as a liquidator.

But consider the amicus banks, who argue that receivership should be taken as liquidating entitles also.

This Court has previously refused to draw such a distinction in Michigan v. Michigan Trust, where a liquidating receivership, if one will, was still held to be a receivership and properly subject to state taxation on receivers.

But perhaps the most pernicious hypothetical that one can draw is in fact a Chapter 11 11> ["] by a retail grocery chain or hotel chain consisting of a... of a multiple series of outlets.

The hypothetical in particular is one of 16, possibly 17, of say 18 or 19 outlets where they are sold at sales deemed to be a liquidation sale, because they are virtually all of the assets, not within the ordinary course of business, but providing the debtor with a sufficient amount of cash to successfully reorganize and come out of Chapter 11.

You've now come full circle, for the debtor obviously falls directly within the language of Section 960 but yet has been held to be immune from taxation because it's liquidating as opposed to operating a business.

Two cited cases, cited by both of us for contrary rules, also demonstrate the perniciousness of the rule.

In Glick v. Missouri you have a bankruptcy trustee who is held liable for unemployment taxes by reason of Section 960, or actually who was allowed to... who was stated to be subject, 960 notwithstanding.

Under Goggin this is arguably an Incorrect statement of the law, but it's an... an absurd application, because there is absolutely no reason advanced why a... a liquidation trustee should be exempt from paying unemployment taxes on the debtor's employees.

There is absolutely no reason to deny those employees unemployment insurance benefits because they were operating under a liquidating trustee rather than an operating trustee.

Similarly, in Cusado the Eleventh Circuit's wholesaler liquor case, liquor taxes were imposed at the wholesale level on the debtor and because of this, under the Goggin analysis, were held to be improperly applied and barred, yet there's no practical purpose inuring to the benefit of the bankruptcy estate from this.

Under Goggin, the only... under this analysis, only the estate is benefited by receiving more dollars by avoiding taxes that a regular business would otherwise have to pay.

This is done so that a retailer receives a better price from the estate and arguably makes a better profit at the retail level.

But they are not going to provide the services and protection, that the state has to provide those.

The ultimate effect... the ultimate effect of the entire analysis is that, essentially, an unevil... an uneven playing field, the uneven playing field decried by Congress has been created and you have liquor entering the commercial transactions of the State of Florida, which surfers absolutely no tax burden whatsoever.

All of these results are produced by, in essence, resurrecting... quibbling over much the same terms of art that Section 960 was designed to obviate by essentially reading them back into the statute.

All of this creates a rule whereby tax-advantaged goods are created where to do so directly violates the concept of a level playing field, the concept underlying the promulgation of Section 960 in the first place and all without advancing any discernible Federal purpose.

The last point underscores the next.

It in fact there is no preemption under 960, the only bar is intergovernmental immunity.

Yet whatever, these concepts mean, they are clearly not reached here.

At issue in this case is a nondiscriminatory tax, broadly based, applicable to all retail sales in the State of California.

It neither falls on a Federal Instrumentality nor imposes a cognizable burden on the processes of the Federal court.

One need only look at who is paying the tax.

There are no Federal dollars involved in this.

The taxes come out of the estate.

The trustee doesn't even pay the taxes, he passes them through to the estate.

Who is complaining in this case?

Not the Federal Government.

We have private parties before us.

Private parties who, simply put, want a better deal than they can get in the normal course of commercial discourse.

Simply put, they want a bar to the efforts of the state to equalize the tax burdens on the property they own.

They don't stand in the shoes of the government, to use the terms of this Court, and there's simply no Federal interest in barring the state's efforts to equalize that tax burden.

This Court has recently declared its solicitousness of the efforts of states to raise revenues in this manner in the United States v. Washington case.

Conversely, there is absolutely no tax on a government instrumentality, in that a government instrumentality is not involved in a liquidation sale.

Goggin II speaks of the trustee.

Under United States v. New Mexico, the test is whether or not a trustee is incorporated into the government structure.

The trustee is paid by the estate, not by the government.

The trustee is a private individual, operating his own business interests rather than being an employee of the Federal Government and he's acting to advance the private purposes of the creditors of the estate, rather than those of the Federal Government.

Goggin II speaks of the liquidation sale as the process.

Yet, since the promulgation of the Code, Section 363 in specific, the sale is... the sale is by the trustee, not the court and obviously one can speak of Levy and those... those cases as holding that there is a Federal instrumentality involved, but since the promulgation of the Code that analysis is no longer correct.

There are two purposes of bankruptcy, only one of which is arguably affected by the instant taxation efforts and that is the efficient administration and distribution of the bankrupt property.

Yet the efficiency of the administration and distribution is not what's impaired.

The impairment raised by Respondents rises solely from the equalization of the tax burden to support the services and protection that that property receives.

That equalization effort is felt to be a permissible abridgment on the exercise of enumerated powers as held... as stated, generally, in Massachusetts v. United States and Swarts v. Hammer.

Unidentified Justice: Mr. Tyler, can I interrupt you to go back to the problem that some of us... some of my colleagues raised at the outset?

Exactly what... supposing we agree with you that Goggin is incorrectly decided and all of the legal points you're making.

Precisely what relief do we grant in the... in this case?

What is the order you're seeking here?

Mr. Tyler: The order I'm seeking is a dissolution of the contempt citation.

Unidentified Justice: Would that require a vacation of the injunction, too?

I mean, it is the law of the case that you violated the injunction, according to the Court of Appeals.

And... and... I... I'm still not quite clear on what happens if we agree with all of your legal analysis, but nevertheless feel that as the court of appeals held, you did not comply with the terms of an injunction which may have been erroneously entered.

How... how... I'm just not quite clear on what happens.

Mr. Tyler: Well, obviously our contention is that the injunction entered had nothing to do with the taxation activities at issue in this case.

The injunction entered--

Unidentified Justice: But if that's true, we don't reach all the Goggin issues, if that's true.

Mr. Tyler: --Well, under the Goggin analysis you do have to reach them, because Goggin provides this... Goggin utilizes this elaborate hypothetical, or elaborate rather arcane structure of in lieu of taxes and creates these bootstraps, consecutive bootstraps.

Now, one can... I argued to the Ninth Circuit that those consecutive bootstraps were nonavailing in this particular circumstance, but they have held that those are the logical end result of the Goggin analysis and that the but for test, if one will, rising from one tax to the other, to the other, is one which they feel compelled to indicate in these cases.

Unidentified Justice: I must confess, I'm still puzzled about how reversing Goggin helps you in this case.

Maybe I'm dense, but I just don't--

Mr. Tyler: Well, on the first line, we felt that we should have won in the Ninth Circuit under the debtor's reorganizer's rationale.

Unidentified Justice: --And of course you might have won if you'd objected to the entry of the injunction, or appealed from that.

Mr. Tyler: But there was no reason to appeal from that injunction.

Simply put--

Unidentified Justice: Did... did that injunction bar you from collecting a use tax on the purchaser at the time of the sale?

Mr. Tyler: --No.

No, that injunction... if you read the injunction, the injunction said you may not take from the debtor, from the trustee or a person who is liable to reimburse them, for a sales tax--

Unidentified Justice: No.

It says you may not enforce a sales or other tax against the receiver or its principals or other parties by reason of the sale.

Mr. Tyler: --But the other parties... in turn it has to be limited by the pleadings underlying the judgment itself and that is all that the trustee asked for.

If one reads the conclusions of law and the findings of fact entered by the Court at that time, that is the conclusion that the Court came to.

It was seeking to reach only the tax obligations of the debtor and the trustee and that is totally consistent with Bankruptcy Section 505, because that is... those are the only tax obligations raised under 505 and the only tax obligations that are litigable under Section 505.

And the Court obviously meant to adjudicate that which was brought before it and nothing else.

Unidentified Justice: Well, you litigated that and lost it and didn't appeal, though didn't you?

Mr. Tyler: That's correct.

Unidentified Justice: So it's too late.

Mr. Tyler: No.

Unidentified Justice: No, you want to raise it again?

Mr. Tyler: Why... why... why... and, I'm sorry, I don't mean to argue with you.

But why does an adjudication of rights between two parties... how does that affect... or, why should a party have to adjudicate with a disinterested party, essentially, the rights of subsequent persons, persons who subsequently come in possession of that property for subsequent retail transactions?

There is simply no rational purpose and no rational reason why those parties should litigate that question at that time, and that's why res judicata should not be applied in this case.

And simply put, none of the parties to that prior proceeding foresaw the application of this particular rule to these transactions on behalf of Respondent herein.

Unidentified Justice: That goes to the question whether the use tax can be imposed by the leases by the purchaser of the equipment.

Mr. Tyler: Yes.

Unidentified Justice: But if you're right on Goggin, your fundamental position, you really could have objected to the injunction against the collection of the sales tax, couldn't you?

Mr. Tyler: That is correct.

That is correct.

We've always felt that Goggin... I mean, we have... this Court knows we have attempted to bring the Goggin issue before this Court by certiorari in numerous instances.

Unidentified Justice: But we don't have to reach that question here and indeed, probably can't.

All we can decide in view of your failure to appeal on the Goggin question below in the first litigation, all we have before us is whether you can be held in contempt for the present application of the tax to the subsequent purchaser.

Isn't that all we can do?

Mr. Tyler: No, this Court can also state that the previous injunction was improperly entered.

I have the ability to be here because of the fact that I can collaterally attack that order by reason of the jurisdictional differences and the fact that res judicata will not apply to our case.

I think that the Court brought up... and I deign to say why the Court brought the issue up before it at this time... but the reason and the patent conflict between the circuits is there.

The question is one of law and there are no facts to be adjudicated further than what's in the record before you now.

You will never have a record that says anything different from this record, because the only things in issue are the legal rights, obligations and constructions of Section 960 intergovernmental tax immunity and the ability of the states to exercise such a tax, and I would like to reserve the rest of my time.

Unidentified Justice: Very well, Mr. Tyler.

Mr. Jenkins?

ORAL ARGUMENT OF DAVID RAY JENKINS ON BEHALF OF THE RESPONDENT

Mr. Jenkins: Mr. Chief Justice, may it please the Court:

I agree with Ms. Justice O'Connor.

I don't think you can reach the substantive Goggin issues in this case, and I don't think you can allow a collateral attack of this judgment without doing great violence to your own precedent.

Unidentified Justice: The court of appeals seemed to me in its opinion to have reached the merits.

Do you disagree with that?

Mr. Jenkins: I think the Court of Appeals discussed the merits.

Unidentified Justice: At great length... not much else.

Mr. Jenkins: Basically, what was admitted before the court of appeal was that the injunction was intended to enjoin whatever Goggin II proscribed and that's why they discussed the merits of what Goggin II proscribes compared to what was going on in this case.

Let's look at the record very briefly, because some, in my view, misrepresentations have been made to you about the status of the record.

In the joint appendix at page 3 is the prayer of the complaint by which this injunction was sought.

Paragraph 2 of the prayer requests a judgment determining that the debtor, the plaintiff... who was the estate... and any and all other parties which may have any obligation in connection therewith, have no liability or obligation to the defendant.

If you then look at the--

Unidentified Justice: But you didn't read the whole sentence... have liability in connection with the particular transaction before the Court.

Mr. Jenkins: --That's correct.

Unidentified Justice: And this transaction that the tax was imposed on occurred quite a while later, didn't it?

Mr. Jenkins: No, Your Honor.

This tax is in effect a tax on the sale, because--

Unidentified Justice: Well, I understand that, but they didn't actually try to collect it until sometime later.

Mr. Jenkins: --They came back and tried to collect it later.

Unidentified Justice: After there had been leases of the equipment.

Mr. Jenkins: That's correct, Your Honor, but the tax that they're trying to collect is only due because no sales tax--

Unidentified Justice: Well, I understand that legal argument and the party from whom they're trying to collect it was not a party to the case that you read from the pleading.

Mr. Jenkins: --No, Your Honor.

My client was not a party to that proceeding, but my client was intended to be a beneficiary of the injunction even at the time the complaint was filed.

Unidentified Justice: Well, the district... the judge who entered the injunction didn't think so, but apparently the Court of Appeals did.

Mr. Jenkins: I would agree with counsel for the Petitioner that as an ordinary rule of construction, if you're looking at an order or a judgment that's entered by a court, that you ought to give some deference to what that judge thinks it means.

This case is different for two reasons, in my opinion.

One reason is that I think this judge took a view of his own order that simply isn't supported by the literal language of the order.

The second reason is that if you look at the findings and the opinion that the judge issued in that case, the order was clearly intended to proscribe whatever Goggin II proscribed.

So it basically incorporated by reference a Ninth Circuit Court of Appeals case, and the Petitioner has admitted that.

They have admitted that this injunction was intended to cover whatever Goggin II covered and I think that in that regard, deference should be given to the court which authored the Goggin II case and that's the Ninth Circuit Court of Appeals.

Unidentified Justice: But then is it not correct that either the meaning or the accuracy of the Goggin doctrine is before us because that's what illuminates the meaning of the underlying order.

And is it also not true that in your brief in opposition to the petition for certiorari, you did not suggest that we would not be able to reach the Goggin issue?

You suggested it wouldn't affect the outcome, but you did seem to agree at that time that the Goggin rule was before the Court under the questions presented.

Mr. Jenkins: I think that what the Court needs to determine is what the Goggin case means.

I think that the Goggin case defines the parameters of this injunction, and I don't think this Court can reverse the Goggin cases.

I think all it can do is construe what they mean for the purpose of determining what the injunction meant.

Unidentified Justice: Well certainly, we aren't going to ordinarily take a case in order to construe something that the Ninth Circuit said 40 years ago.

Mr. Jenkins: I would think not.

Unidentified Justice: But as Justice Stevens pointed out, under our Tuttle case it's your obligation, it it's nonjurisdictional point you want to raise, in your response to the petition for certiorari to point out that we can't reach the issue that the Petitioner seeks to reach.

Mr. Jenkins: I did not do that.

In any event, they are bound by the doctrines of res judicata and collateral estoppel.

Unidentified Justice: xxx.

Mr. Jenkins: No, Your Honor.

But they cannot collaterally attack this injunction.

This court has a long line of precedent that says that they can't, including a specific precedent that says--

Unidentified Justice: Well, that's sort of like a defense and if you don't ever raise it, you can't just raise it any time you want to.

Mr. Jenkins: --Your Honor, I did raise that in my brief.

Unidentified Justice: No, you didn't.

Well, you didn't raise it when... before we granted certiorari.

Mr. Jenkins: No, Your Honor, I did not.

I raised it in my brief that the doctrine... the doctrines of collateral estoppel and res judicata prevent a collateral attack on an injunction in contempt proceedings and the state had every opportunity in this case for a complete trial.

As it happens in this case, the facts were all not subject to dispute and there was a stipulated statement of facts, but they had the opportunity to present each and every fact that they wanted to present in connection with their case and they had the opportunity to file a brief.

And they did file a brief in connection with the injunction, in which they had the opportunity to raise all of the arguments that they're raising here and further, they in fact raised almost all of those arguments in their brief on the injunction action.

Unidentified Justice: Let me just make one other... ask you one other question about the Court of Appeals opinion.

The Court of Appeals, as I read judge Noonan's opinion, seemed to think that the question whether Goggin was wrongly decided was open, but they... but as I read him he says, but we're not going to... we, as a panel, unlike a court sitting en banc, we don't have the power to reexamine and we're not inclined to change a rule that's been in force for over 30 years anyway.

But as I read that opinion, I thought that the Court of Appeals considered the issue of whether Goggin correctly stated the rule was something that, had it been sitting en banc, they could have passed upon.

Mr. Jenkins: That was not my impression when I argued before them and it's not the way I read that opinion.

Unidentified Justice: It is not?

Mr. Jenkins: Because they specifically say that they're bound by Goggin I and Goggin II.

Unidentified Justice: Right, they're bound by it in a precedential sense and as a panel they don't have the power to overrule a Ninth Circuit precedent that's been on the books for 30 years.

But if they didn't feel bound by stare decisis, it would seem to me they would have said that was an issue they could have confronted.

At least, that's the way I had thought the opinion read.

Mr. Jenkins: Again, my understanding from having been there was that they felt that Goggin II not only bound them but absolutely and very clearly controlled this issue.

Are there any other questions about this particular issue?

Because if there aren't.

I'll get into the substantive issues.

Unidentified Justice: Let me just refer you to one part of the Ninth Circuit's opinion, at page A4 of the petition where Judge Noonan says the Board suggests that Goggin II was wrongly decided.

The Second and Fifth Circuits are in the Board's corner, but this circuit was aware of the Second Circuit's reasoning and refused to follow it and the Supreme Court, denying certiorari, accepted a certain regionalism in the administration of Federal bankruptcy law.

Then it goes on to say, it's not within the power of this panel and not within its heart to change a rule of this circuit that has been in force for over 30 years.

It seems to me if they were saying that the merits of this question of whether the state can tax, levy a use tax or a sales tax, were simply not before it at all they wouldn't have used that language.

Mr. Jenkins: I must be reading that differently from you, Your Honor.

When they talk about what this circuit was aware of, I believe they're talking about at the time the Goggin cases were decided.

And when they're talking about it not within their heart to change the rule, I think they're telling you that they wouldn't if they could.

Unidentified Justice: Yes, I believe that, but it seems to me the reason they say they're not going to change it is because the panel can't overrule an earlier decision and doesn't want to overrule it, not that the parties before them have no... have no right to have a decision on the merits.

Mr. Jenkins: In another part of the decision, the court also makes reference to the fact that they could have litigated this issue on an appeal from the injunction and that it's now too late.

I think in that particular portion of the opinion, what they're doing is they're dealing with the petitioner's argument that the other circuits are right and Goggin is wrong.

Unidentified Justice: Well, I didn't mean to prevent you from going on to your argument on the merits.

Mr. Jenkins: Thank you, Mr. Chief Justice.

We have never taken the position, as far as I can recall, that 28 U.S.C. Section 960 in and of itself directly limits states from imposing this tax.

Our position is that it impliedly creates such a limitation, and we are well aware that as a rule of construction this Court disfavors implied preemption.

But the argument that we're making in this case is not substantially different from the line of reasoning that this Court used in the First Agricultural National Bank case in construing 12 U.S.C. Section 548.

In that case, looking at the legislative history, the Court determined that Congress must have intended that this Section pro... prescribe those areas in which taxation was permitted to the exclusion of taxation in other areas, and the Court so held.

I do want to point out, Swarts v. Hammer was decided 30 years before Section 960 was enacted.

Presumably Congress was aware of Swarts v. Hammer at the time it enacted 960.

The Swarts v. Hammer case doesn't deal with taxes of this type.

What Swarts v. Hammer says is that there's no magic that occurs to property of the estate when a bankruptcy is filed such, that that property changes its nature so that the property shouldn't any longer be subject to property taxation, and we don't deny that property in bankruptcy estates is subject to ad valorem taxes.

We have no issue with that.

Section 960 when it was enacted was enacted at a time when intergovernmental immunity was at its high water mark and basically there were decisions which tended to limit the ability of state governments to tax almost anything having to do with the Federal instrumentality.

And the courts on some occasions had found bankruptcy estates, or Federal receivers, to be instrumentalities of the Federal Government.

If the Supreme Court... I'm sorry.

If Congress hadn't felt that taxation was generally proscribed, it wouldn't have enacted 960 because it's superfluous otherwise, and I can see a reasonable and logical argument that 960 is over 50 years old and it's basically now a historic anomaly.

The problem with that argument is that Congress undertook an exhaustive review of bankruptcy law in 1978 and at that time it reviewed, among other things, the provisions of the chapter in which Section 960 is and Congress in fact made some conforming changes to Section 959.

If Congress had felt that Section 960 were no longer necessary or that it required some change to conform with the present status of the law, Congress could easily have made those changes.

Unidentified Justice: Was 960 enacted as part of the Chandler Act?

Mr. Jenkins: No, Your Honor, I believe it was separate statute.

Unidentified Justice: When... when was it enacted?

Mr. Jenkins: 1934.

I believe it was specifically designed to deal with a discrete problem and the problem that was presented... bearing in mind that that was a time of great economic hardship in the country... the basic problem that was presented was, you have two businesses, substantially identical to one another, one of which happens to be in a Federal receivership, the other of which happens not to be.

The receivership business at that time was allowed to operate at a great advantage over the one who wasn't and I think the feeling was that everybody in the world was going to wind up in receivership if we didn't solve that problem.

The second reason we think that the tax is not permitted on a bankruptcy estate has to do with McCulloch v. Maryland.

Basically, this tax is an assertion by the state... or a tax on the liquidation process itself is an assertion by the state of control in some form over the liquidation process, and the liquidation process is what bankruptcy is all about.

It's the absolute essence of bankruptcy.

Even in those cases where liquidation is not ordinarily contemplated, such as Chapters 11, 12 and 13--

Unidentified Justice: Well, at this stage the liquidation is over.

The assets have been sold and someone else has acquired them and is in business.

It's just very hare for me to see why, under any interpretation of the statute, it shouldn't be taxable.

Mr. Jenkins: --Because, in essence, this is still a tax on the liquidation sale itself.

It doesn't make any difference whether the state collects the tax at my cash register out of my customer's pocket, or mugs him on the street, they're still doing the same thing.

Unidentified Justice: The sale is over.

Mr. Jenkins: The sale is over, but--

Unidentified Justice: Your client acquired the assets and now wants to rent the skis.

Mr. Jenkins: --Yes, Your Honor and we... if they impose a tax generally that said, if you rent skis you have to pay a tax, we'd pay it.

The only reason we owe this tax is because no sales tax was paid, so it's still a tax on the liquidation sale itself and in operation the way this tax works, it's basically designed to terrorize you into paying the sales tax.

Because if you don't pay the sales tax you pay a tax measured by the same percentage of your rental income and as a general proposition, if you don't think you're going to generate at least as much rental income as you paid for the property, you wouldn't buy it.

So as a general proposition you would ordinarily expect to, you know, wind up paying a higher use tax than the sales tax would have been.

So basically what this is, Your Honor, is it's an effort on the part of the state to go far enough down the stream that they think they can safely do it, but still tax a transaction that is a Federal transaction and is not taxable.

It's an effort on their part--

Unidentified Justice: I guess other courts have held that the liquidation sale itself is doing business and can be taxed under 960.

Mr. Jenkins: --I'm aware of those holdings and I disagree with them.

It's not unusual for there to be different constructions of different words in different parts of the Code.

For example, the term willful, as used in the Internal Revenue Code dealing with the 100 percent penalty for failure to withhold and turn over, at least as construed in the Ninth Circuit, it means that you were alive at the time.

Willful in the context of the Bankruptcy Code means something much more limited than that.

I think that you don't have to apply doing business from the IRC to the bankruptcy context and I think in the bankruptcy context you have a long line of established case authority dealing with what is doing business and what isn't; and you're certainly going to have factual questions, but I don't think that the fact that a court is going to have to determine some factual issues justifies coming up with a rule that goes too far.

The concept that I would like to discuss with you for why this tax isn't allowable is one that I think the Court... and now I'm talking about the specific tax on my client... is a concept that the court has alluded to in the United States v. New Mexico case and also in the Red Cross case dealing with employment taxes, and the concept is this:

There are some transactions irrespective of who the incidence of the tax falls on, there are some transactions which are Federal transactions and the states are not entitled to exercise control or authority over them, and they can't do that by simply choosing to place the incidence of the tax on somebody other than the Federal entity itself, and that's exactly what you have here.

No matter how far downstream you go, as long as they're still collecting a tax that's only due because no sales tax was paid, it's still basically a tax on the sale itself and that transaction is a Federal transaction conducted by a Federal bankruptcy estate, conducted with the requirement that it be approved by the Federal Bankruptcy Court and it's subject to a whole system of Federal regulation.

The states have no business asserting control over that transaction and to allow them to is to basically concede to them control over the bankruptcy process.

Unidentified Justice: Your argument would make a lot more sense if McCulloch against Maryland still stood as law in all its language, rather than having been toned down much later.

You know, the idea that the power to tax is the power to destroy is no longer accepted by the Court.

It's treated on a more pragmatic basis, don't you think?

Mr. Jenkins: I agree with that, but I think even under the more pragmatic basis that the Court now uses, that this transaction should not be taxable and it's part of the bankruptcy process.

The states have no more business asserting control over the bankruptcy liquidation process than they do asserting control over national banks, and that's exactly what they're trying to do.

Now, I do want to discuss with you the case of Washington v. The United States, because it appears to be contrary to me.

In that case, there was a sales tax system where ordinarily in a contractor setting if I'm a contractor and I'm building a house for you and I go down to the hardware store, the incidence of the sales tax... the liability for the sales tax in the State of Washington is placed on you as the owner of the property that I'm going to improve.

But the statute provides for a specific exception which says, if the owner of the property is a Federal entity then the tax falls on the contractor and in response to the argument that that was just an evasion of intergovernmental immunity, this Court said, look, the transaction is taxable.

The fact that by an accident of state law the incidence of that tax would ordinarily fall on an exempt entity does not prevent the state from shifting the incidence of the tax to somebody else.

But the key in that case is that the transaction was itself taxable, and the transaction was me, a contractor, not a Federal entity, going down to the hardware store, which is also not a Federal entity and buying stuff to use to improve your home.

That's a taxable transaction.

The difference in the bankruptcy case is that it's a Federal transaction governed by Federal law and the state has no right to attempt to control it.

You also need to look at the impact that your ruling is going to have on the Bankruptcy Code as a whole.

For example, if you hold that states can tax the liquidation process because what happens in the reorganization chapters is measured by what would happen in a liquidation, if I were to have to pay a 6.5 percent sales tax if I liquidated, that's 6.5 percent of the estate that I get to pocket as the debtor, because it's something that wouldn't have to go to the creditors and in Chapter 11, the floor on what you have to pay the creditors is what they would get in a reorganization and there are similar provisions in both Chapters 12 and 13.

That... the net result of that would be that if you find that states can tax bankruptcy liquidation sales you're going to be allowing debtors to achieve a great windfall and I don't think that Congress had that in mind at all.

Unless there are further questions, I will remit the rest of my time.

Chief Justice William H. Rehnquist: Thank you, Mr. Jenkins.

The case is submitted.

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United States v. New Mexico - Oral Argument

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ORAL ARGUMENT OF GEORGE W. JONES, ESQ. ON BEHALF OF THE PETITIONER

Chief Justice Burger: We will hear arguments first this morning in... 80-702, United States v. New Mexico, et al. Mr. Jones, you may proceed whenever you are ready.

Mr. Jones: Mr. Chief Justice, and may it please the Court:

The issue in this case is whether, under standard Atomic Commission management contracts, three private contractors received and disbursed funds of the United States as agents of the federal government and are, therefore, constitutionally immune from New Mexico's gross receipts and compensating use taxes.

Each of the contractors is a party to a management contract with the Department of Energy, a form of contract developed by its predecessor, the Atomic Energy Commission.

The United States filed this action in the United States District Court for the District of New Mexico, seeking declaratory judgment that sales of tangible personal property to the Department of Energy through the management contractors was a sale to the United States and therefore exempt from the New Mexico gross receipts and compensating taxes.

Unidentified Justice: May I ask, Mr. Jones, you said this is a standard form of contract developed by the predecessor of FERC?

Mr. Jones: Yes.

The management contract concept, I suppose it could be called, was developed by the Atomic Energy Commission shortly after the World War II, and--

Unidentified Justice: And I gather everything that it uses is supplied by the government, isn't it?

All the funds it spends and everything else is supplied by the government.

Mr. Jones: --That's right.

Unidentified Justice: Do they make a profit under these contracts?

Mr. Jones: Well, Sandia, one of the contractors, makes no profit, receives no fee and does no other work, other than the work it does for the government.

Zia and LACI, the two other contractors in this case, receive a management fee.

In addition,--

Unidentified Justice: Is that substantial?

Mr. Jones: --I guess it's relative.

If you compare it to the amount of money they spend, it's not substantial, it's a small percentage.

I'm not sure of the fee that Zia received, but it's not... in the mid-seventies I think it was not more than $50,000.

Unidentified Justice: What is it, the government does this sort of thing just to get the management know-how of these companies?

Is that it?

Mr. Jones: That's the primary reason.

It really started--

Unidentified Justice: Rather than do the job itself.

Mr. Jones: --That's right.

It would be very difficult, I imagine, for the government to do the job because they'd have to hire all of these people who have expertise in particular areas who might well be working for private companies in different areas using that expertise.

And very early on... I think this is primarily historical.

The Manhattan Engineer District, which is responsible for the development of the atomic bomb in World War II, decided that the quickest and most efficient way of getting the manpower and the knowledge and the know-how for the development of the atomic bomb was to draw on the resources of private industry.

And Congress after World War II when it created the Atomic Energy Commission and gave it statutory authority to control the development of atomic energy, it specifically indicated that the Commission should be permitted to, or the Commission could continue this policy of drawing on or relying on private contractors for the carrying out of its functions.

And although the Atomic Energy Commission replaced the Manhattan Engineers District in 1947 and then was in turn replaced by the Energy Research and Development Administration in, I guess, 1975, and then ERDA, the Energy Research and Development Administration, was replaced by the Department of Energy in 1977, they have all continued to use these same kinds of management contracts for the purpose of carrying out their responsibilities.

The United States filed this action seeking a declaratory judgment that sales to the management contractors were sales to its agents, and therefore, to the United States.

And as a result, immune or exempt from New Mexico gross receipts tax.

The United States also sought declaratory judgment that the funds disbursed by these three contractors were not subject to either the New Mexico gross receipts tax or the compensating tax.

On cross motions for summary judgment, the district court held that the management contractors were, in fact, agents, and that the sales of personal property to them were exempt from both the gross receipts and compensating taxes, and that the disbursements by the contractors were also exempt from such taxes.

The Tenth Circuit reversed, holding that the management contractors were not agents and consequently subject to such taxes.

The court of appeals explained its decision by saying our reiterated antipathy to wholesale deprivations of state treasuries without congressional action requires at the least some special arrangement before tax immunity attaches.

The relevance of the court of appeals' hostility to federal immunity or deprivations of state treasuries would be dubious in almost any case.

And I will attempt to show, that the court's stated antipathy is misdirected is misdirected in this case.

Unidentified Justice: Well, Mr. Jones, are you going to elaborate on your footnote on page 27 of your brief of the Carson-Roane and then repeal of 9(b) and then Kern-Limerick?

Because certainly, Congress itself was not entirely happy with the Carson-Roane decision, I take it.

Mr. Jones: But, Justice Rehnquist, there's a substantial difference between saying that the... everyone or all of the contractors with the Atomic Energy Commission are completely immune from state taxation and saying that the contractor shall be immune to the extent that all other contracts with the federal government would be immune.

And Congress clearly recognized the distinction because they made it clear that all they were doing was repealing the decision that this Court had interpreted as creating a statutory immunity.

And I'm not sure what further elaboration on that point you were seeking.

Unidentified Justice: In other words, the government concedes that these contractors are on the same footing as any other sort of government contractors; they don't occupy any special status by virtue of the earlier legislation that was passed in the forties.

Mr. Jones: We concede only that there's no statutory immunity, such as Section 9(b), but it is not our position that these contractors are like any other contractors.

I mean, their immunity from taxation is determined in the same way that any other private contractor's immunity would be determined, but the nature of their relationship with the Atomic Energy Commission we think is very different from that of many other private contractors.

Unidentified Justice: Mr. Jones, is it the position of the government that it is immune from the state tax insofar as it relates to the payments by these contractors for the services of its employees?

Mr. Jones: Yes.

It's the position of the government that the disbursements--

Unidentified Justice: As well as the goods that are purchased.

Mr. Jones: --That's right.

In our view, there is no distinction, no reasonable distinction, to be drawn between the disbursements by these contractors of funds for the payment of services and their disbursement of funds for the payment of goods, because in both cases, the contractors are acting on behalf of the United States.

They have no interest in the money they use to purchase these things.

Unidentified Justice: But you do conceive that the employees work for the contractor and not the government.

Mr. Jones: Well, they work for the contractor in a very peculiar sense.

Sandia is totally a creation or a product of this arrangement with the government.

It had no existence until 1949.

As I mentioned earlier, it receives no fee from the government, it does no other work.

Furthermore, in the contract between the United States and Sandia, and Sandia's parent company, Western Electric Company, it indicates that if the contract is terminated, Western Electric, which owns all of the stock of Sandia, would be required to dispose of that stock as directed by the Department of Energy, and before doing that, required to designate a new board of directors, as indicated by the Department of Energy.

The employees at Sandia were hired solely to perform functions for the government in exactly the same sense as Sandia's purchase of supplies from a third party vendor are made solely for... on behalf of the Government.

Sandia is the largest of the three contractors and it was created in 1949 as a special subsidiary of Western Electric.

From 1949 until the present time, Sandia has carried on its responsibilities for the government, notwithstanding the changes in the various government agencies that had responsibility for the development of atomic energy.

Unidentified Justice: Well, it is... it certainly is true, though, that making the employees technically employees of Sandia rather than the government distinguishes them in very substantial ways from other employees of the government.

They aren't civil service people, they aren't subject to the normal rules about government employees, are they?

Mr. Jones: Sure.

But it seems to me that their distinction from ordinary government employees for those purposes--

Unidentified Justice: Is it in the record or is it agreed what the real motivation was for moving into the Sandia type operations?

Did you say they just thought it was the best way of drawing on the private sector?

Mr. Jones: --Yes.

The--

Unidentified Justice: And most efficient?

Mr. Jones: --The article that is cited most that discusses the sort of general development of these things is an article by... I think the guy who is a former general counsel of the Atomic Energy Commission, and he discusses in some detail the development of these things.

And it appears that the... it's by Highstein and Florshim, called The AEC Management Contract Concept.

But it appears that the Manhattan Engineer District needed to mobilize a great deal of knowledge and resources and energy in a very short time and do it secretly, and they decided that the best way to do it was to hire private contractors to mobilize or draw on the resources of private contractors.

Unidentified Justice: And they would hire... they would have to pay what the market required them to pay for that kind of skill.

Mr. Jones: I'm not sure that that's what occurred because of the circumstances.

Unidentified Justice: I know, but Mr. Jones, these employees, do they not, have the protections, for example, of the Fair Labor Standards Act, the National Labor Relations Act, the Davis-Bacon Acts and all the rest of them, don't they?

Mr. Jones: Sure, they do.

Unidentified Justice: And the same things that are applicable to other private employees.

Mr. Jones: That's right.

Unidentified Justice: But they weren't Grade 18.

Mr. Jones: That's right.

But we are not sure what their salaries are, and those are very carefully controlled in some circumstances by the Atomic Energy Commission, the Department of Energy now.

Unidentified Justice: Are you familiar with the so-called government-owned/contractor operated system that was in effect during the war in all the munitions plants in the country?

Mr. Jones: No, I'm not.

The other contractor, LACI, which is Los Alamos Constructors, Inc, was also... is a subsidiary of Zia and was also formed specifically to do work for the government.

It performs... its only work is construction and repair and alterations at the Los Alamos Scientific Laboratory.

Under these contracts, neither Sandia, Zia nor LACI is required to spend any money in performance of the contracts with the Department of Energy.

Unidentified Justice: Mr. Jones, in that regard, I take it you agree with New Mexico that there are over 10,000 other contracts around the country using advanced funding arrangements like this in which the contractors are not apparently purchasing agents of the government.

Mr. Jones: I don't think that's Mexico's position.

I think they say that there are 10,000 other letter of credit arrangements.

Most of those, as we point out, most of those letter of credit arrangements are grants to private individuals and not contractors.

So in our view, the fact that there are these letters of credit available and used by other agencies in other contexts for other purposes has no bearing at all on whether the use of letters of credit by contractors to purchase property, title to which passes directly to the United States--

Unidentified Justice: Well, does the record show us how many comparable advanced funding arrangements there are in existence that the government has?

Comparable to these?

Mr. Jones: --Well, I am not sure the record indicates anything specific about the nature of the other contracts.

If you look at the attachments to the deposition of Mr. McGrath, you will see that they are... that the letters of credit are to institutions that are not doing work for the government.

There are about 40 or so attached, and they are all to... most of them are to grantees.

There is one from the Department of Health, Education and Welfare... it's not that anymore, it's Health and Human Services now... to a professional review board.

But it's not clear what the nature of the relationship between that organization and HAS is.

So it's not even clear that the one example they point to is comparable to the contracts here.

Our impression, however, is that the type of relationship that exists between the management contractors and the Atomic Energy Commission here is virtually unique.

There may be other contracts in which various aspects of the relationship are duplicated.

But as far as we know, there's no substantial number of government contracts in which you have the unique combination of elements of a contract that exist between the management contractors and Department of Energy.

Unidentified Justice: When you say unique, you don't mean because they're Atomic Energy contractors, but because of the nature of the relationship.

Mr. Jones: That's right, the relationship created by the contract is relatively unique.

None of these contractors spend any money under the contract.

Unidentified Justice: You mean of their own.

Mr. Jones: Of their own.

Unidentified Justice: Of course, these people aren't doing this out of pure altruism, as indicated by the fact of... is it Sandia that gets licenses on any of the developments in the laboratory work?

Mr. Jones: Well, they give as much as they get, however.

We don't suggest that they're doing it because of altruism.

As the state points out in some detail, there are benefits to the private contractors.

I mean, the knowledge and experience that's developed in these areas.

The dissenting opinion in Livingston points out in great detail that these contractors receive a large number of benefits from the government or in the course of their work.

That does not change the nature of their relationship to the government, however.

Employees of the government learn a lot in the course of their work for the government.

A lot of young lawyers work at the Justice Department for some time and then go on to private practice, using what they've learned.

So we don't think that changes the relationship between the two.

The New Mexico gross receipts tax involved in this case is essentially a sales tax.

It's assessed on the total amount of money that is realized from the sale of goods or from performing services, including professional and construction services.

In addition, New Mexico has what's called a compensating tax imposed on the use of property that is imported into the state without the payment of a gross receipts tax.

Although use is one of the aspects of... one of the factors that triggers application of the tax, it is not a use tax of the sort considered by this Court in Boyd, which was a tax on the use per se of the property.

The use tax involved in this case is essentially a complement to the gross receipts tax to protect New Mexico businessmen from the unfair competition that would result from businessmen, their competitors, being able to buy property outside the state and bring it into the state without paying a gross receipts tax.

Since 1819, it has been unquestionably clear that the federal government and its instrumentalities are constitutionally immune from any form of state taxation, absent congressional consent.

In our system, the tax immunity of the federal government is the unavoidable consequence of the supremacy declared by the Constitution.

Kern-Limerick establishes the principle that the federal government's immunity from taxation is preserved even though the federal government chooses to exercise or to perform its work through private contractors or private agents.

Kern-Limerick rests very soundly on the truism that the government can only function through employees or agents.

And if the individuals or entities through whom the government works can be taxed with respect to their activities on behalf of the government, federal immunity would be largely illusory.

Accepting this analysis, the court of appeals nonetheless found that the management contractors in this case are not agents for the purposes of procuring goods and services for the United States.

That conclusion is contrary to every other court that has considered the question; this Court's summary affirmative decision in Livingston, the Ninth Circuit's decision in Nevada Tax Commission, and the Tennessee Supreme Court's decision in United States v. Boyd, which was not--

Unidentified Justice: Are those entirely consistent with County of Fresno?

Mr. Jones: --Yes.

County of Fresno involved the question of the state's power to tax an employee of the government's interest, beneficial interest or beneficial use of government-owned property.

Here, New Mexico hasn't purported to tax the contractor's interest in or use of the government's property.

They have tried to impose a tax or interpreted their gross receipts tax to apply to money that the contractors have no interest in and no use of.

They are simply acting as agents for, disbursing agents, for the government.

The money goes into the special account, or the special account is set up in the name of the contractor and the Atomic Energy Commission.

The contractor acquires no interest in the funds in that account; title always remains in the government, and the contractor writes a draft, executes a draft on the account--

Unidentified Justice: May I interrupt on this advanced spending point.

Would the government's position be the same if there were no advanced funding but there was merely a cost plus arrangement, with the government reimbursing the contractor?

Mr. Jones: --No.

Unidentified Justice: Why would the legal incidence of the tax be any different?

Mr. Jones: Because in the latter case... well, our position might be the same depending on what other aspects of the arrangement--

Unidentified Justice: That's the only change.

Everything else is the same except instead of paying in advance, you purchase on credit and then as soon as the contractor pays the ball, the government reimburses the contractor, but the legal liabilities are all exactly the same as here Would it be a different case?

Mr. Jones: --I think it probably would be a different case, but as this Court's decision in Kern-Limerick makes clear, the fact that the government could have accomplished its goals in different ways by adopting a different contract than the one it did, does not indicate or nullify the effectiveness of the contract that it did adopt.

And it's our position that the relationship here including the advanced funding for the purchase of goods for the United States and services for the United States indicates an agency relationship, at least as clearly as the relationship indicated in Kern-Limerick.

Unidentified Justice: Mr. Jones, did I understand you to say that the use tax in Boyd is different from the use tax in this case?

Mr. Jones: Yes.

Unidentified Justice: In what respect?

Mr. Jones: In Boyd there were three taxes involved.

There was a gross receipts tax and a compensating tax of the sort involved here,--

Unidentified Justice: You have a gross receipts tax here also.

Mr. Jones: --That's right.

A gross receipts tax and a compensating tax that were of the sort, exactly the same sort that are involved here.

Those were not reviewed by this Court.

The only tax that was considered by this Court was what the Tennessee Supreme Court described as a use per se tax.

It was a tax on the use of government property, wholly without regard to who purchased it or where it was purchased.

And this Court--

Unidentified Justice: Isn't the economic effect the same for both types of use taxes as you describe them?

Mr. Jones: --I think not, because the use tax in New Mexico is not a use tax; it's properly called a compensating tax,--

Unidentified Justice: Well, who uses it in New Mexico?

Who uses the property in New Mexico?

Doesn't the contractor use it?

Mr. Jones: --Certainly, but the tax is not on his use.

The tax is simply to collect the gross receipts tax that was avoided by purchasing the property outside the state.

Unidentified Justice: But in the end in both situations, the United States government pays the tax.

Mr. Jones: Oh, that's for sure.

But the holding in Boyd is simply that the contractor's beneficial use of the property of the government was a taxable interest.

Unidentified Justice: Does all of this depend on precisely the way that the state legislature writes the tax?

Mr. Jones: Well, I don't know, precisely the way the state legislature writes a tax.

But it does depend on the nature of the interest that the state purports to tax.

For example, this Court last term affirmed the decision of the Tenth Circuit in a case, United States v. State of Colorado precisely because the state of Colorado purported to tax the use by a management contractor of a facility, a government-owned facility, on its full value to the contractor.

And the Tenth Circuit held in that case that there was no meaningful use that the state could tax to the contractor.

If there are no further questions I'd like to reserve the remainder of my time for rebuttal.

Chief Justice Burger: Mr. Friedman.

ORAL ARGUMENT OF DANIEL H. FRIEDMAN ON BEHALF OF THE RESPONDENT

Mr. Friedman: Mr. Chief Justice, and may it please the Court:

I'd like to begin by responding to Justice Stevens' question because I think that question hit the nail on the head.

The only thing that is different, if anything is different, about these contractors compared to the contractors in the Kern-Limerick case or King & Boozer is that they get their money up front instead of after the fact.

When you read particularly the reply brief of the United States, it is clear that that is all that they are saying.

Now, the benchmark I believe that would assist in analyzing the contractors today is the Boyd case, the case that this Court considered.

It is true that there a use tax was being considered rather than a gross receipts tax.

But principles were enunciated in that case which indicate that this Court has already scrutinized standard management contractors and said that the mere fact that they contract with the United States, the fact that they operate in a government facility, use advance funds, have a complete absence of risk as a result of advanced funding, undertake important federal duties, have the title to their purchases passed to the United States, that all of this is simply symptomatic of government contracting.

It does not create agents, it does not create instrumentalities.

An important concession found at page 201 of the Appendix is the concession by the United States, which I think is proper following the Boyd decision, that these contractors are not instrumentalities.

Now, I'm never sure what an instrumentality is, but in some way I read that to mean that the mere fact of a contractual association is not enough to make you an agent.

Advanced funding was used from the beginning of the Atomic Energy Commission, it was used at the time this Court decided Roane-Anderson, it is continued to be used after Congress legislatively reversed the Roane-Anderson case.

The United States is simply selecting one contractual element of the relationship and after the fact reading in great significance.

There is really no difference, as shown by the history of advance funding within the Atomic Energy Commission.

We have cited in our brief and in the transcript the fact that the Atomic Energy Commission has always viewed these contractors as cost plus contractors.

This Court in Boyd called them cost plus contractors, even though they were getting advanced funding.

Unidentified Justice: Well, there's no plus in the Sandia case.

Mr. Friedman: No, that is correct, Justice White, and in the fourth part of our brief we discuss at some length the benefits that accrue to Sandia.

I believe Justice Brennan pointed out licenses, payments effectively of overhead to Western Electric, totaling some $300,000 in the year in which the interrogatory was responded to.

Unidentified Justice: Those license might produce very valuable results for Sandia, might they not?

Mr. Friedman: They might, indeed, Justice Burger, and basically, it's important to remember, I believe, that Sandia, although it was created to undertake these contracts, was created, if you'll pardon the colloquial expression, by the telephone company.

Sometimes I feel as if the telephone company is the government of the United States, but that is only in jest.

Route 128 around Boston, Silicone Valley in San Francisco, is surrounded by companies that are created to work for the government, that only exist to work for the government.

The real comparison, I believe, is with the corporations that the United States did set up in World War II to build ships, to build munitions.

There were reasons why the United States has chosen to go the private route.

And as Justice Brennan asked about GOGCO plants, government owned, contractor operated, I believe the Michigan property cases are decisions by this Court recognizing that even though you are working in a government facility, using government property, you're still subject to taxes.

I think what the United States confuses in looking at advance funding is the difference between absence of risk, which I say is endemic to government contracting.

If you're on cost plus, whether you get paid in advance or get paid after, unless you're taking vacations in Tahiti with the money, there is no risk.

What the government is confusing is the absence of risk compared to who has the obligation.

Unidentified Justice: What about the risk of loss of the property?

Mr. Friedman: I believe that the risk of loss becomes simply an element of the cost plus contract--

Unidentified Justice: Well, not if it's the contractor's fault.

Mr. Friedman: --Well, in the case of Sandia I believe that absent malfeasance,--

Unidentified Justice: I know that may be true about Sandia, but what about an ordinary cost plus contractor?

If he negligently... if the property is negligently destroyed by him, it's not going to go into his cost.

Mr. Friedman: --That is correct, Justice White.

Unidentified Justice: But here, I don't know.

What about Sandia?

Mr. Friedman: Sandia has a slightly higher threshold of responsibility.

There is still written into the contract that if there is malfeasance at a high enough level, that again there will be responsibility in that sense, Justice White.

Unidentified Justice: But the risk of loss of the property is on the government for almost all purposes here?

Mr. Friedman: Yes, but again, I think it's hard to show negligence in normal government contracting, also.

I don't think that contractors get burned very often.

Unidentified Justice: Mr. Friedman, suppose we were to determine that the lower court was correct, and that the government is not immune from these taxes.

And let's further suppose that the contractor, Sandia or the others, simply refused to pay them.

Do you think New Mexico could seize the property in that event?

Mr. Friedman: No.

I think that it is established in the case law, Justice O'Connor, that although a state is free to tax a government contractor, it may not seize property of the United States, it may not levy against the United States.

Unidentified Justice: Does that mean that the incidence of the tax then is on the government?

Mr. Friedman: Apparently not.

And an example that I would give you is in the Boyd case, after the decision in Boyd by this Court that the Boyd contractor was subject to property taxes, it was paid from advance funding.

And I've cited in my brief from the pleadings in that case indicating that it was the contractor who paid the tax, but he paid it with advance funding.

The important point I believe from that illustration is that it was the contractor's obligation to pay the tax; he was the one that was liable.

And turning to a question that was asked, similarly with the employees.

And remember there are 7000 employees of these contractors, only 160 of whom are involved in procurement, meaning transactions with third parties.

Fifty-eight percent of all these contractors' receipts are not in that classic agent relationship of dealing with third parties; 58 % are simply to meet the payroll.

And we are in a situation in which the United States has conceded they are not instrumentalities; we are not liable for their torts, we don't want to be involved in their labor relations; we conceived that the contractors are independent contractors in hiring and supervising these employees, and yet when the taxman comes calling, suddenly as the reply brief says, they are simply independent contractors working for a fee for the Zia Company or for Sandia.

This to me strains the concept of employee greatly.

The United States has made so many concessions in this case about its relationship vis a vis the contractors' employees that there is no way of finding that the contractors' 7000 employees in some way have a direct contractual relationship with the United States.

True, advanced funding is used to meet the payroll, but the question is, is it the United States' obligation to pay those employees or is it the contractor's?

I think the distinction has to be that under these contracts, as under any cost plus contract, it is the United States that has an obligation to Sandia, Zia and LACI to pay them.

Unidentified Justice: Do you think... you don't think that an employee or a vendor of goods to the contractor could ever sue the United States?

Mr. Friedman: Your Honor, in the deposition of Mr. McGrath, the Treasury Department representative, he says that there is no way that a third party can go against the letter of credit, can go against the Federal Reserve Bank, can go against the--

Unidentified Justice: So if the contractor somehow absconds with the funds that have been advanced, whoever should have been paid with them is out of luck.

Mr. Friedman: --I think that he has to sue the contractor.

Yes, that is correct.

Unidentified Justice: He couldn't get the money, but how about suing the United States in the Court of Claims?

Mr. Friedman: I assume that there are various mechanisms for end-running the process, Mr. Justice Stevens, and frankly,--

Unidentified Justice: What does that mean?

That he could or could not sue in the Court of Claims?

Mr. Friedman: --I don't know the answer to that, sir.

Unidentified Justice: Well, if the United States is an obligor, why couldn't he sue them?

I would think he could.

But I thought your message to us was that the only obligation that's owed to any third parties is the contractor's obligation.

Mr. Friedman: I think that is indicated under the purchase documents--

Unidentified Justice: Well, if that is right, there is no direct obligation or indirect of the United States to third parties, including employees and vendors.

Mr. Friedman: --I am sorry I am not familiar with procedure in the Court of Claims, and so my answer is--

Unidentified Justice: Well, let's just assume the answer... that whether you can sue in the Court of Claims depends on whether or not there is some kind of a contractual obligation with the United States between the third party and the United States.

Is there or not?

Mr. Friedman: --There is not, Mr. Justice White.

And looking at page, for example,--

Unidentified Justice: Perhaps we can find out what the United States' position is on that shortly.

Mr. Friedman: --At page 120 of the Appendix, there is a clear distinction drawn between the Zia Company as the buyer.

It is defined in the purchase documents as the buyer, and indeed, the government in its reply brief concedes; they call it the nominal buyer, I say it's the buyer and that's what the purchase--

Unidentified Justice: You say whatever authority the contractor has in this case, it is your position I take it, that it has no authority to obligate the United States.

Mr. Friedman: --It has no authority any different from that of any other cost plus contractor.

I do not understand them to have that.

As I indicate, by the concessions in this case, there is no direct claim between the contractors' employees and the United States, so that is one segment of these receipts.

In dealing with third parties, the contractors are required to order in their own names.

The purchase documents indicate that the purchase orders could be assigned to the United States, which to me indicates that they are not parties to that purchase, but discovery reveals that they never are assigned.

Unidentified Justice: I suppose if... well, never mind.

Mr. Friedman: In other jurisdictions, as discussed in our brief I believe in the footnote at page 16, the Atomic Energy Commission deliberately structured transactions in a totally different way from these transactions.

It had the purchase orders assigned to it, it made payments directly to the vendors.

It was done deliberately to avoid taxes.

The fact that those procedures have been viewed by the Atomic Energy Commission as a means of avoiding state taxes strongly suggests that the mere contractual interplay that is at issue here does not amount to the same relationship.

Unidentified Justice: Help me again.

I thought the district court in this case found that the relationship insofar as purchasing was concerned made these three companies purchasing agents of the United States, which would seem to me to mean they had the authority to obligate the United States.

Mr. Friedman: Justice Stevens, this was done on cross motions for summary judgment.

The district court did find that the contractor was an agent in all respects, based on the contract documents and exhibits, none of which was controverted.

The Tenth Circuit reversed.

Unidentified Justice: The Tenth Circuit reversed saying even if that's true we would reverse.

Mr. Friedman: But also, the Tenth Circuit said that given all the concessions in regard to the relationship with the contractor's employees, given the fact that the contractors were contractually required to order in their own name, contractually required to use purchase forms that said Zia is the buyer, not the United States, militated the conclusion that the contractors were the only parties that were obligated to the vendors.

I agree that it is easier to find agency in the relationship with third parties.

That is the classic agent use of an agent.

And therefore, also, that the relationship with the employees is far more clearly a non-agent relationship, particularly given the concession that these contractors are not instrumentalities.

Unidentified Justice: If one of these contractors buys from a third party and he is required to order in his own name, that's perfectly true.

But upon delivery, the United States owns the property.

Mr. Friedman: It does, Justice White, but--

Unidentified Justice: And I suppose there have probably been weaker claims of contract with the United States that have prevailed in the court of claims than this one.

Mr. Friedman: --Justice White, the United States has advanced no claims in this case in the record or elsewhere; they have purely argued that advanced funding equal the relationship.

They have not brought in examples of litigation in the Court of Claims.

But the Boyd contractor in the Boyd case also involving these same Atomic Energy Commission contractors, title to the purchase is passed to the United States.

That was true in the Kern-Limerick case, it was true in the Alabama v. King & Boozer case.

I believe that what this Court has consistently said is that the mere fact that title is passed, and the mere fact that contractors in some loose and general sense are operating for the government, or acting as agents for the government... and this is from the Alabama v. King & Boozer case... does not amount to an agency relationship.

Unidentified Justice: Your submission I suppose is if the United States wants a tax immunity, it ought to either have what might be called an instrumentality or they just ought to do it with their own employees.

Mr. Friedman: That is correct, Justice White, and I believe that that is what was said in the opinion in Boyd.

That the government knows how to make agents, it knows how to use its own employees; if it wants to, let it go ahead.

That is the same contractors as we are dealing with here.

Yet, it is only two years into the case, and I'm a trial lawyer.

In a contract case, if somebody starts changing his contracts in the middle of the case, I start thinking maybe he had a weak case.

And even these contract modifications are still reluctant to come out and say flat out, I am designating you as an agent.

Our brief in the first section discusses at great length documentation of the Atomic Energy Commission's reluctance, its fear about designating its contractors as agents, its fear that they will become enmeshed in exactly the sort of red tape that leads the government in the first place to use private companies.

Obviously, the government has, on other occasions, created instrumentalities, on other occasions it has created corporations.

Yet that is not the thrust of federal contracting.

Unidentified Justice: Mr. Friedman, what about the first question in the Boyd case that was not appealed?

Isn't it correct that the Tennessee court held that the contractor was a purchasing agent and therefore was immune from the sales tax?

Mr. Friedman: That is correct, Justice Stevens.

Unidentified Justice: If that is still good law, why doesn't that apply here?

Mr. Friedman: Because of the factual difference between this case and that one.

There, the Atomic Energy Commission, following Roane-Anderson, had gone back and rewritten its purchase documents to say nothing herein shall preclude direct liability of the United States to the third parties.

So there is an excellent example of the Atomic Energy Commission taking the standard contract form which is supposed to have such magic and putting in much stronger language in order to make sure that that happened.

Unidentified Justice: Do you say that the legal issue here is... the bottom line is whether the United States had a direct obligation to the vendor?

That's really what we have to--

Mr. Friedman: Yes, and certainly in regard to the employees, Justice Stevens.

It is unlike the Kern-Limerick case, unlike the Boyd case.

Unidentified Justice: --I don't understand what you mean by with regard to the employees.

They don't have responsibility for labor negotiations and all that.

I understand that.

Mr. Friedman: Yes.

I'm saying that unlike other cases, the Kern-Limerick case purely involved a relationship between a contractor and a third party supplier.

In this case, 42 % of the receipts relate to that sort of transaction; 58 % of the receipts are simply meeting the internal payroll of Sandia, Zia and LACI.

And again, as to those relationships, the government has disclaimed a direct relationship with the contractors' employees.

The United States in its reply brief I think gives a strained interpretation.

If the government says, in regard to the contract... I'm sorry.

Unidentified Justice: Maybe I'm confused on the facts a little bit on this 48 % and 52 %.

The tax that is sought to be imposed here is on the receipts by the vendor in making--

Mr. Friedman: No.

I'm sorry, Justice Stevens.

It is on the receipts of the contractors, and the question is what did they do, what kind of transactions did those receipts relate to.

Unidentified Justice: --Receipts by the contractors paid by whom?

Mr. Friedman: The contractor draws from the United States funds sufficient to meet its payrolls, sufficient to pay its vendor.

Unidentified Justice: And is the state of New Mexico seeking to impose a tax on what the United States pays the contractor for its labor costs?

Mr. Friedman: That is right, because it is a gross receipts tax.

I run a law firm; my law firm pays... I pay 4 % on all my fees even though much of it goes for internal costs.

That is the nature of the gross receipts tax.

Unidentified Justice: Is it true that nearly 60 % of that total is payment to employees for salaries?

Mr. Friedman: Absolutely correct, Justice Burger.

Unidentified Justice: There are 7400 employees?

Mr. Friedman: I forget the number, it's somewhere in the neighborhood of 7000 employees.

Unidentified Justice: Mr. Friedman, the gross receipts tax is on the receipts by the contractor with respect to employees.

But what purchases?

Is it also measured by his advanced funding from the government for purchases?

Mr. Friedman: Yes.

Unidentified Justice: Or is it how much... or is the tax collected by the vendors?

Mr. Friedman: At page 25 of the U.S.'s brief, it is conceded that absent the finding of an agency relationship, the legal incidence of this tax is on the contractor, not on the United States.

Unidentified Justice: I know that.

But just mechanically, is it the vendor who pays the tax and then adds it to the bill?

Mr. Friedman: No.

The contractor pays the tax based on what he has received from the United States.

In transactions in which there is also dealing with a second party in the chain, there is a system of non-taxable transactions.

Unidentified Justice: So that the vendor of goods to the contractor doesn't pay a gross receipts tax.

Mr. Friedman: He will pay a gross receipts tax.

Unidentified Justice: But not on those sales.

Mr. Friedman: No.

If they are not agents he will pay that tax.

Unidentified Justice: So there are two gross receipts on--

Mr. Friedman: No, I'm sorry, I appreciate the correction, and let me explain it.

I'm saying... there are non-taxable transaction certificates made available to insulate one of those levels of transaction.

Perhaps that--

Unidentified Justice: --And if you tax the contractor, the contractor's vendors are not going to have to pay that.

Mr. Friedman: --Because he will have given a resale certificate.

That is still... in New Mexico we have already litigated against White Sands Missile Range contractors, Air Force contractors, various civilian agency contractors.

We are negotiating with them to work out precisely those transactions so that we can give them the non-taxable certificates.

Unidentified Justice: I take it that Sandia occupies quite a bit of property around Albuquerque, and all of that property is tax exempt.

Mr. Friedman: That is correct, Mr. Justice White.

I think underlying the Court's concern in this area is the need to strike a balance between the needs of the states for revenue and the need to protect the United States from affronts to its supremacy.

I think what distinguishes this type of case from the type of case in which there really is an attempt to tax the United States is that here the affront is, in effect, self-created by the United States.

If the tax burden is too onerous, that is for Congress to adjust, if the amount is too great.

As this Court has said in other recent cases.

But we are dealing here with contract drafting by a federal contracting officer designed to assure that there will be an affront to the supremacy of the United States.

And because of the relationship between the Kern-Limerick case and the underlying James v. Dravo case, which established the general rule that federal contractors are liable for state taxes, the arbiter of this balance between the state's needs and the federal interests lies in the hands of individual contracting officers.

Unidentified Justice: Mr. Friedman, do you think that for you to prevail, Kern-Limerick has to be overruled?

Mr. Friedman: Absolutely not, Justice White.

Because--

Unidentified Justice: Anymore than Boyd had to overrule it, is that it?

Mr. Friedman: --Exactly, that is right.

There is no need to... we rely on Boyd, and the difference between this case and the Kern-Limerick case is that Kern-Limerick dealt exclusively with transactions with third parties; whereas here, 58 % relate to employment relationships--

Unidentified Justice: Is this case like Kern-Limerick to the extent it has third party dealings--

Mr. Friedman: --No.

I wanted to continue, Justice White.

Unidentified Justice: --Please do.

Mr. Friedman: Second, in Kern-Limerick the government plastered the contracts and plastered the purchase orders with clear statements: we will be bound, they are merely our agents, we will pay.

It was done deliberately to conserve federal funds.

No such language is found here until July 1, 1977, when very timid contractual modifications are inserted only in the contracts, leaving the purchase orders exactly the way they were, leaving all the relationships exactly the way they were.

Third, Kern-Limerick inserted all this contractual language long in advance of the taxman coming calling.

Here, the contracts are modified two years into a tax case.

I think this is a case in which putting in the... it indicates the government's interpretation of the Kern-Limerick case.

I don't believe that this Court intended that the mere insertion of certain magic words at the time the taxman came knocking was the intent of protecting the government against affronts to its supremacy.

We are long past the days of McCulloch v. Maryland when there was danger that discriminatory taxation by the states would consume the newly-hatched federal government.

If anything, the shoe is on the other foot today.

But having given the power to federal contracting officers to insert agency-creating clauses, whatever the wisdom of that balance may be, it seems to me that great scrutiny should be given when the affront to the supremacy of the United States that is claimed is self-created, and when, in fact, these contractors are indistinguishable from other cost plus contractors.

The only difference here is the advanced funding.

Our brief indicates clearly that advanced funding was viewed by the Atomic Energy Commission only as a reimbursement method for cost plus contractors.

You paid them in advance, but later on you had an audit and you netted out what you would have advanced against what would otherwise be subject to reimbursement.

Unidentified Justice: Didn't the contract in Carson also involve advanced funding?

Mr. Friedman: It did, Justice Powell.

Unidentified Justice: So why do you say that's the only difference here?

Mr. Friedman: Well, it's similar.

I'm sorry.

Unidentified Justice: The contract is almost identical, isn't it?

The contract involved in Carson is almost identical to the contract here.

Mr. Friedman: That is correct, Justice Powell, and I think it is significant that at the time that Congress reversed... if you will pardon that expression--

Unidentified Justice: Congress repealed Section 9(b), following Carson.

Mr. Friedman: --That's right.

But they left intact Section 4(c) which this Court had referred to in Roane-Anderson.

Obviously, in repealing the Roane-Anderson decision, I don't believe that Congress intended that chance contractual clauses could be grouped together to equal an agency relationship.

That is simply the way the Atomic Energy Commission has always done business.

Thank you very much.

Chief Justice Burger: Do you have anything further, Mr. Jones?

ORAL ARGUMENT BY GEORGE W. JONES, ESQ. ON BEHALF OF PETITIONER -- Rebuttal

Mr. Jones: I have two points.

First, in both Sandia and... Sandia's purchase order, the standard terms and provisions of Sandia's purchase order, and the purchase order or standard terms of Zia's purchase order they indicate that any claims against the contractor arising out of this subcontract, in effect, this purchase order, that are not resolved by the contractor and the supplier must be submitted to a government contracting officer.

The ERDA official or the Department of Energy official who supervises the contract, and if--

Unidentified Justice: Excuse me, that's sort of an arbitration of a dispute.

Mr. Jones: --And if the dispute is not resolved at that point, the supplier must seek redress before the Department of Energy Contract Board of Appeals.

Unidentified Justice: But that doesn't mean he wins; that just tells him where to go to get--

Mr. Jones: But that very clearly indicates that he has a claim against the United States.

And if he's not satisfied with the conclusion of the Contract Board of Appeals, his recourse is to seek judicial review.

Unidentified Justice: --Well, I don't know if that follows.

The contract might say that he has to go to the American Arbitration Association, but it doesn't mean the American Arbitration Association will be liable on the contract.

But let me ask you a different question.

Supposing there was a contract, an order to purchase something for delivery in six months, and there was a... then a cancellation of the order, which would be in normal commercial terms, a breach of the contract.

Would you say that the vendor could then sue the United States directly?

Mr. Jones: Yes.

Sue both the contractor, and the United States.

Unidentified Justice: Say the contractor went insolvent or something like that.

You say there's definitely a direct obligation... and that's the key to your case, is it?

The United States is obligated on the contract.

Mr. Jones: Well, it follows from our position that these guys are agents of the United States.

It necessarily follows.

The consequence of having an agent act for you is that you are bound by their actions--

Unidentified Justice: That's even before they're paid, so you really don't have to rely on advanced funding, if that's right.

Mr. Jones: --Well, that's right, yes.

Unidentified Justice: Let me ask one other question if I may.

With regard to the 50 or 60 % of the receipts by the contractor that are used to reimburse his own employees, not to pay vendors, does the government contend that those receipts are also immune from the tax?

Mr. Jones: Yes.

Unidentified Justice: You do?

Mr. Jones: Yes, absolutely.

Unidentified Justice: And the whole purchasing relationship has nothing to do with that part of... say you had a contractor that didn't ever buy anything; had all the same contractual setup, but all they did was do a lot of research and services of one kind or another.

You'd say they're still immune?

Mr. Jones: That's right, because the contractors have no interest in the money.

They purchase these services of these third parties--

Unidentified Justice: No, the third parties here are employees.

Mr. Jones: --That's right, but they hire these employees for the United States, to provide services to the United States.

Unidentified Justice: But the employees are not United States employees.

Mr. Jones: That's right.

Unidentified Justice: And if the employees were not paid by the contractor, the employees then go to the Court of Claims, against the United States?

Mr. Jones: I suppose they would have a contract claim against the United States in the Court of Claims.

Unidentified Justice: Well, was your answer yes?

Mr. Jones: Yes.

And one final point.

The contract modifications in this case that the state makes so much of in 1977 simply confirmed what nobody denied until 1967.

Even the state of New Mexico recognized that these contractors or contractors of this sort were agents of the United States, even though... on all of their receipts from the United States except their fees.

Unidentified Justice: Well, if you're wrong on the... you think the case does turn on whether the United States is obligated directly to the third parties and to the employees?

Mr. Jones: No, I don't think it turns on that.

It seems, as I said, that--

Unidentified Justice: What if you were wrong on that?

Would you lose the case?

Mr. Jones: --No.

Well, I mean I can't be wrong on that if these guys are agents.

If the contractors are agents for the United States, then the United States is bound by their contractual undertakings on behalf of the United States.

Unidentified Justice: Within the scope of their authority.

Mr. Jones: Within the scope of their authority, as all agents.

Chief Justice Burger: Very well.

Thank you, gentlemen, the case is submitted.

Attribution:

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Featured:

Massachusetts v. United States - Oral Argument

Sun, 08 Aug 2010 19:13:50 +0000

Case:

Massachusetts v. United States

Media File:

76-1500_19771206-argument.mp3

Related Transcript:

76-1500_19771206-argument.xml

Transcript:

Argument of Terence P. O'malley

Chief Justice Warren E. Burger: We will hear arguments next in Number 1500, Massachusetts against the United States.

Mr. O'Malley, you may proceed whenever you are ready.

Mr. O'Malley: Mr. Chief Justice and May it please the court.

This court has granted the petition of Commonwealth of Massachusetts to issue a writ of certiorari to the United States, Court of Appeals for the First Circuit.

The basic issue raised on review concerns the constitutionality of applying the Federal Excise Tax on the use of civil Aircraft to a state police helicopter owned by the Commonwealth of Massachusetts and use exclusively for public safety purposes.

The action was initiated by the Commonwealth of Massachusetts in the United States, District Court of the District of Massachusetts on a petition to refund of the tax.

The tax computed is computed by $25 flat fee plus a varying amount based on the weight of the aircraft.

The tax was $131.43 for the taxable year ended June 30th 1971.

The total collected by a levy on funds of a Commonwealth was $183.38.

The Commonwealth alleged in its --

Unknown Speaker: That was before and not the --

Mr. O'Malley: For this taxable year, Your Honor, that's not an accurate indicate of how much money would be involved in the years between now and then.

Chief Justice Warren E. Burger: How many aircrafts does the state --

Mr. O'Malley: The State Police has one, the State Aeronautics Commission has three and there is large bill pending for those aircraft also.

But it's not --it hasn't been litigated, it's in abance pending disposition of this case.

Justice Potter Stewart: Also there is what --

Mr. O'Malley: Other aircraft owned by the Massachusetts Aeronautics Commission and there are tax bills in abance of a much larger figure than the $180.

Talking about strictly for this year 1971.

Commonwealth alleged that the helicopter was used by the State Police only for public safety purposes such as promoting highway safety and conducting searches for suspected criminals or escapees from correctional facilities.

The United States moved to dismiss the complaint, prepared a state acclaimed on which relief could be granted.

The District court allowed the motion stating that the decisions of this court talking about state immunity from federal taxation were essentially of historical interest only.

And the court also stated that this is a classic case of a user fee.

That rationale was based on the fact that the revenue derived from these aircraft taxes is used to make grants to state-owned airports or airport expansion and development.

On appeal the United States Court of Appeals affirmed the judgment of the District Court but only discussed the user fee rationale.

That rationale was based largely on an analogy, the team concerning cases of this court which upheld forfeit fees by municipalities as not in violation of the constitutional prohibition against duties on tonnage.

Commonwealth petitioned this court to certiorari.

The Solicitor General agreed that the case should be resolved because there was a decision by a federal court in Georgia which has sustained the immunity of Georgia from this particular tax.

The essential position of the Commonwealth, that this particular tax violates the constitutional principle of intergovernmental tax immunity.

The basic defense of the United States is that this tax is also a users fee and therefore exempt from the principal.

The Commonwealth view the argument will be broken down in to three basic parts.

First of all that there is no exception to the principle of intergovernmental tax immunity for taxes which are also designated, user fees.

Second, that even if we discuss the user fee rationale, the taxing question even fails on those terms.

Third, I would briefly discuss the implications of the case of National League of Cities v. Usery, concerning the position of the Commonwealth here.

Justice William H. Rehnquist: Did the Court of Appeals ever address itself to the question of whether the general language of the statute meant that the tax should be applicable to state-owned vehicles.

Mr. O'Malley: It was agreed by all that the Commonwealth does come within the definition because the definition concerns all aircrafts which are registered or must be registered with the FAA.

This aircraft was registered and we believe must be registered with the FAA.

Justice William H. Rehnquist: There is some language in some of our cases which is treated in part in the Fright case, which came out the other way I think that even though you have general language, sometimes you require more than that in order to apply a particular regulation or a tax to a state.

Mr. O'Malley: There is also Legislative History, Your Honor, which explains why the exemption from the passage of tax, that used to exist for government employees, that's no longer in effect.

And the Legislative History states that they think all aircrafts should pay their way for the use of the aircraft system.

So that issue was never really raised and we do not contest the applicability of the tax as matter of statutory construction.

The tax is clearly a tax irrespective of whether or not we also describe it as a users fee.

As such it clearly comes within the scope of the principle as historically stated.

First of all, there is a direct imposition on the funds of the Commonwealth of Massachusetts.

Second of all even though the amount of the tax is not excessive in its direct terms, it's only $131 for this year.

In all decisions concerning the principle of tax immunity whether it's federal immunity or state immunity the court has always stated that the amount is immaterial.

The basic issue is whether or not there is a an infringement of sovereignty not whether or not the tax in question is excessive.

It also is --

Justice William H. Rehnquist: Now, Mr. O'Malley what if 120- 130 years ago, whenever it was a crucial, national issue, the federal government had build a toll road over the Appalachians and it charged everybody who was pulling a wagon over that toll road, whatever say a dollar.

Do you think a state could have claimed immunity from that sort of a charge?

Mr. O'Malley: No, we deny, Your Honor, if a particular charge is not a tax but strictly a fee, such as a toll, for the use of a particular road owned by the United States, we would not claim free usage of the road just as we do not claim as the government says, that we think we should be able to use mails for free.

We have to buy the the stamps like everyone else.

Justice Potter Stewart: Even though you are performing a sovereign function in the using.

Mr. O'Malley: Yes Your Honor, the crux of the issue is that there is a direct imposition on the Commonwealth's funds for the general support of government rather than the individual act of a proprietor trying to get compensation for the use of it.

Chief Justice Warren E. Burger: And you defied with this if the wagons were carrying ammunition to Valley Forge.

Mr. O'Malley: Well, if we proved the factual matter, there was a great infringement on the sovereignty because of the unique fact like that, I think may be that would be a separate case but as a general proposition, the proprietorship type fee, we do not challenge.

Chief Justice Warren E. Burger: You leave me a little confused there.

But for some purposes the state, the federal government could make a use charge but for some purposes they could not.

And on each of them, there are two sovereigns.

Mr. O'Malley: If I may backtrack a bit, Your Honor, our basic position is that if it is a tax, and we don't think that the type of toll concerning the use of a road is a tax, I think your question you related to, if the imposition of the toll, somehow or another prevented that it really threatened the existence of a state or of a governmental entity, that would raise separate issues which we don't think are involved in --

Chief Justice Warren E. Burger: But usually tolls on toll roads are, if not always, dedicated an earmark to amortize the bond issue, that was the basis of building it.

You don't have in this case I take it, a impounding of this use charge.

Mr. O'Malley: The revenue derived from this charge does go in to a trust fund in the treasury

And that money is used to make grants to the states for airport expansion and development.

Now, the facilities are still owned by the states or their subdivisions and the money is used, however to further -- the tax here though is a tax on the use of a navigable airspace.

It does not specifically geared to a particular use such as driving over a toll road and paying a one time charge for it.

At some point these charges may -- the lines of distinction become fine ones but in this case it has never been contested that this is not really a tax, the only argument has been that it also has aspects of being a use of shape.

Chief Justice Warren E. Burger: And the federal government had spent hundreds of millions of dollars on river channels in order to make river navigation feasible.

On your theory could they charge a state- owned barges for carrying tasks for the state?

Mr. O'Malley: I do not think that could make a direct tax of the states because they happen to use -- have designated this particular revenue for river improvements, however, if on a one time basis, there is an agency that has a particular expense and has a charge against both, for the particular use and its clearly user's fee and it does not involve those sovereign issues such as the levying on funds of a state or exerting the power who even sees the facilities of a state, because they want to enforce this revenue contribution.

The different considerations that --

Justice Thurgood Marshall: Mr. O'Malley, wasn't it true that for years, the state official business didn't have to pay taxes on the plane tickets?

Mr. O'Malley: Yes, Your Honor.

Justice Thurgood Marshall: And now they do.

Mr. O'Malley: Now, they do Your Honor.

Justice Thurgood Marshall: Who is raising that change?

Mr. O'Malley: The Legislative History --

Justice Thurgood Marshall: Or is that by legislature?

Mr. O'Malley: A legislature repealed the exemption for the employees and I think the tax here is quite different because at least it's user oriented in that case, Your Honor.

There are a number of exceptions that are recognized in the immunity principle, so that there is no question about the federal power raised revenue being unduly interfered with.

In other words, the states have to be engaging in the sovereign function and they cannot immunize contract as all of the employees from incidental federal taxes.

These type of considerations have often been recognized but the fact is that no other exception has ever been recognized for taxes such as this, where the government claims, they have a particular use if they want to make for this particular revenue.

The sole argument that the government seems to make is that this court should analagyse this tax with taxes that are enacted from interstate carriers or even state highways.

We consider the questions involved in an undue burden of interstate commerce issue quite different from the sovereignty issues raised in the tax immunity argument.

The interstate commerce burden question necessarily involves a question of degree.

The relative judgments have to be made but in terms of the constitutional principle involving the status of the states under the constitution, questions of degree do not illuminate whether or not there is actually an infringement in the constitutional sense.

But even when reference is made to the user fee argument, there are two aspect that the Commonwealth wishes to raise.

First of all, this case was decided on a motion to dismiss.

In the first instance, whether or not there has been an approximate benefit relative to the amount of the tax would raise the factual question which probably would have to require a hearing but more importantly, we think the failure of the user fee to even qualify as such in this case indicates that this type of innovation is unworthy in the tax immunity area because even though different difficult factual issues will be raised, they do not illuminate the questions of sovereignty that are involved here that are not involved in cases where you have an interstate carrier claiming that their activities are being unduly burdened.

Justice John Paul Stevens: Mr. O'Malley, with regard just to your first argument, is it your position that even if it were a user fee, in which the charge was related to the amount of usage of the air system that the state aircraft did use that would still be invalid.

Mr. O'Malley: Yes, when they use it in the form of a tax.

If there is another way to exact an administrative charge and it's based on a voluntary participation in a particular program or use of a particular road then --

Justice John Paul Stevens: But if that is your position why don't you challenge -- and apparently the state has not challenged the tax on airline tickets by state employees.

Mr. O'Malley: We have not Your Honor, there is question there whether or not the incidence of the tax is actually on the Commonwealth of the state or on the particular employees who then may or may not get reimbursed by the government.

Well there is that separate issue there, there is no question here but that the internal revenue agents, in this case levied on funds of the Commonwealth quite directly.

Chief Justice Warren E. Burger: Surely some of the Massachusetts travelers are reimbursed by the state, are you suggesting that it was a demeanor or something?

Mr. O'Malley: No, Your Honor, I think it is more analogous to the cases where the salaries of government employees that once considered immune from federal taxation but that particular aspect of the doctrine is since been discarded because -- just because the state has to perhaps make up the difference in order to supply a wage and cover that tax, the connection between the state and the imposition of the taxes was more remote and do not justify the protection that they thought the constitution required.

The formula in this case only involved weight, there was no formula which speaks of the amount of the use of the system concerning the amount of a tax, but even when you get beyond the formula and you look to the result, the user fee is not proved to be a rough accommodation, approximation of the amount of use of a system.

The Secretary of Transportation was required by Congress in this Act to make a cost allocation study concerning whether or not these charges were actually geared to in any way, the use of a system.

The secretary's findings are clear that the amount of the tax is not related to the use of the system.

Now, this is a report filed by the federal official chart with the regulation of the airways and it should be given considerable weight by this court and should also be an indication that getting into this type of problem in the sovereignty area is not a productive one because it in no way illuminates what we consider to be the basic question of power rather than the question of degree.

Finally, the United States really does not address the failure of this particular tax to work out as a rough approximation of the use of a system.

Rather it makes a comparison that the Commonwealth in this particular year involved did receive $1.5 million in grants for airport expansion and development and then compute it with the amount of the tax.

We think this is clearly indicative of why it would not be appropriate to use the user fee issue in the tax immunity area.

First of all, the amount awarded was pursuant to a Matching Grant Program.

These are the type of programs that are often used in Federal state areas such as welfare and education.

They have programs of co-operative federalism.

The United States states does not mention, first of all, they don't mention that this is a Matching Grant Program and second of all they do not mention the amount that the Commonwealth supplied in programs of this nature.

If necessary, the Commonwealth would prove that the Commonwealth supplied $346,000 to meet the grants made by the federal government.

Now, if this figure are degree of matching grant is not satisfactory, then Congress would be free to change the formulas so that the state had to supply more money.

But at least it would be done on a voluntary cooperative federal state basis and it would not require the unilateral and potentially cohesive measure such as the tax and measuring question here.

And finally in the cases involving the use of the highways and their requirement to pay their way in interstate commerce, the court has always been satisfied that the highways were provided by the states and the states were really just demanding compensation for the use of the highways, and if the state was really in a proprietary capacity for the most part in making the charge.

In this case the tax is on the use of the navigable airspace.

The federal government does not own the airspace and even when reference is made to the airport facilities, there are still state based facilities that is either owned by the state or the political subdivisions and in some cases these facilities may or may not receive federal funding.

This indicates how we have difficulty in approximating the amount of use with the amount of a tax, the difficulty also added in this case is that we are not even sure what the use of what facility is being compensated for, by levying a tax on the use of a navigable air space.

Justice Lewis F. Powell: But the air controller federal employees, --

Mr. O'Malley: Pardon me Your Honor.

Justice Lewis F. Powell: Aren't the controllers at the airports federal employee?

Mr. O'Malley: There are federal employees involved at airports but the airport facilities themselves apart from the National Airport and Dallas Airport are not federally owned facilities.

Justice Byron R. White: There is a lot of federal money in them though, I take it.

Mr. O'Malley: Yes Your Honor, generally they do participate in the programs but also to be noted Your Honor is that there are limitations as to what part of the facility these funds are available for.

For example, they don't give money for the use of terminal facilities.

It's mostly directed towards the actual airport side.

Justice Byron R. White: Whose communications facilities are they?

Between airport and aircraft?

Mr. O'Malley: As I understand it, the grants here are made to the states to provide the facilities.

Justice Byron R. White: But they are federal funds, I think on the communication,

Mr. O'Malley: Yes there federal funds involved in these programs and again there are matching funds to varying extents under the statute.

Justice Byron R. White: And Federal regulation, the frequencies used.

Mr. O'Malley: There is a considerable federal regulation --

Justice Byron R. White: Management of the frequencies used.

Mr. O'Malley: In terms of the rules enacted by the Federal Aviation Administration with some Federal Aviation Administration personnel involved in implementing the measure on.

Justice Lewis F. Powell: The navigational aids controlled by airways all across the country are federal, aren't they?

Mr. O'Malley: Well, some of them, I don't think so, Your Honor, I think some of the facilities and the equipment is provided by the grants of the nature involved here but that the states are involved in it. May be --

Justice Lewis F. Powell: The traffic is controlled interstate basis.

Mr. O'Malley: There may be a subdivision of the various facilities that would only be --

Justice Lewis F. Powell: The record in this case contain any information.

Mr. O'Malley: No Your Honors, it was decided strictly on the basis of the motion to dismiss and the user fee rationale is actually evolved.

In this case, it's gone along rather than something that was clearly understood at the beginning.

Justice Thurgood Marshall: You do not want to convince me there that the state controls the traffic from one side of this country to the other.

Mr. O'Malley: Certainly not Your Honor.

Chief Justice Warren E. Burger: Then the problem is that--

Justice Thurgood Marshall: It is definitely regulated by the federal government.

But the--

Justice Thurgood Marshall: It is not the federal government, it is the air force.

Mr. O'Malley: Air force?

Justice Thurgood Marshall: It is not the Air force, it is NASA.

Its anything that is far away from state as you can get.

Mr. O'Malley: We are talking about the commercial aircrafts in general aviation.

Justice Thurgood Marshall: All aviations is controlled by the federal government.

Mr. O'Malley: In one form or another, yes Your Honor.

Justice John Paul Stevens: Mr. O'Malley it is true though, isn't that this helicopter involved in this case, helicopter could take off from the roof of the hospital say, fly around and land, never talk to anybody on the radio, never use any federal facility and still have to pay the tax.

Mr. O'Malley: Certainly Your Honor , the tax is on --

Justice John Paul Stevens: The same tax is there if it spent $100, 000 during the year using all the facility, precisely the same tax.

Would it?

Mr. O'Malley: It would be based solely on the weight of the aircraft and it has nothing to do with the use.

A helicopter by a chance would use these facilities less that an airplane would because of its maneuverability.

The costly feature involved in making these grants is concerning the terminal airspace.

Justice John Paul Stevens: And the helicopter could take off and land without talking to any federal employee, couldn't it?

Mr. O'Malley: Certainly could Your Honor and very often it does.

Justice Lewis F. Powell: Is your submission limited to helicopters?

Mr. O'Malley: I don't think this case should turn of helicopter but it is strictly a state aircraft use for public safety purposes and if the aircraft did use the --

if it were the argument would not differ Your Honor.

Chief Justice Warren E. Burger: What are your arrangements on the automobiles?

Any of them subject to any tax?

Mr. O'Malley: The fuel tax, if there's an exemption on the fuel tax for the state crude because I don't believe there's any other federal tax involved and the state does not tax its own property in that fashion.

The final point is that while most of the discussion of the tax immunity is contained in older cases and perhaps considered by man to be just an old historical doctrine, we believe that the court's recent decision in the National League of Cities v. Usery dramatically shows of the concepts of a state sovereignty that are at the very core of the complaint raised in this case are still very much alive, in that case the court was concerned with the exercise of the commerce clause power but I think the court implicitly, if not explicitly, recognized the continuing vitality of this constitutional principle and was clear to state that were not going to resolve a case on a particularized assessment of impact.

The particular federal statute was declared unconstitutional because this fine would fringe upon the essential role of a states in our union and we think that this case requires similar treatment.

Therefore, we think the judgment of the Court of Appeal should be reversed.

Chief Justice Warren E. Burger: Mr Ryan.

Argument of Allan A. Ryan, Jr.

Mr. Allan A. Ryan, Jr.: Mr. Chief Justice Burger, May it please the court.

In 1970, Congress enacted a law entitled an Act to provide for an expansion and improvement of the nation's airport and airways system and for the imposition of the airport and airway user charges.

This Act was divided into two titles.

Title 1, the Airport and Airway Development Act authorized the Secretary of Transportation, to spend a great deal of money to improve the nation's airports and the services which make air travel safe, services such as air traffic control, communication and navigation aids.

Title 2, the Airport and Airway Revenue Act imposed or increased charges on those who use the nation's airports and such supporting services.

One of those charges is that a issue here, a charge or tax on the use of any taxable civil aircraft of $25 per year or plus a few cents propound.

Title 2 also established a Trust Fund to ensure that the funds raised by the charges in Title 2 would help pay for the improvements required by Title 1.

The issue in this case is whether the Commonwealth of Massachusetts which uses the services made possible by Title 1, every time its helicopter lifts off the pad must pay its share of the cost imposed by Title 2.

Justice William H. Rehnquist: You say the helicopter uses the services made possible by Title 1 every time the helicopter lifts off the pad, do you disagree with your opponent's response to Mr. Justice Steven's question?

Mr. Allan A. Ryan, Jr.: I do although, I think that --

strictly speaking as a factual matter it's not reflected by this record.

I make that statement because I think that something that --

Can be presumed and to that extent I do disagree.

I think it is physically possible as Mr. Justice Stevens perhaps was suggesting, that a helicopter could take off from a hospital --

Justice John Paul Stevens: I am saying lawfully there is no legal limit on the take off from uncontrolled airport, you don't have to talk to anyone?

Mr. Allan A. Ryan, Jr.: Not in the taking off process I don't believe Mr. Justice.

Justice John Paul Stevens: Neither in landing nor in flying.

Unknown Speaker: You are being interrogated by an expert.

Mr. Allan A. Ryan, Jr.: Well, I am not an expert.

Justice John Paul Stevens: I can assure you, I have done it.

Let me ask you this.

Does your legal position depend on as a factual matter, the plane actually making use of any federal communication facility?

Mr. Allan A. Ryan, Jr.: No it does not, not strictly speaking.

And if you tell me that this helicopter can take off and fly over a Logan Airport.

Justice John Paul Stevens: No, on the Logan airport it can not but there are many areas on the State of Massachusetts which are uncontrolled their space in which an aircraft can fly without talking to anyone.

It can take off from uncontrolled fields and land on uncontrolled fields.

The tax applies to those planes.

Mr. Allan A. Ryan, Jr.: Yes it does.

I would suggest this Mr. Justice Stevens that if it did so, if it took off and landed on an uncontrolled airfield and flipped off all its switches and talked to nobody, if it was involved in a mid-air collision with a private plane heading say from Connecticut to New Hampshire and if it were found that that private plane had the right of way and the helicopter had it been listening, would have been told to drop down a thousand feet, the Commonwealth would certainly be in no position to say that the collision was not its fault.

In other words, if it disregards those federal services, it does so at its peril.

And I think that --

Justice Thurgood Marshall: It is not in this case is it?

Mr. Allan A. Ryan, Jr.: Well, I think it --

Justice Thurgood Marshall: I understood from the State of Massachusetts that they had to pay regardless of whether they took off from the hospital or Logan Airport or any place.

Unknown Speaker: Or ever took off --

Justice Thurgood Marshall: Or ever took off --

Mr. Allan A. Ryan, Jr.: Well, I would agree with the former but not the latter.

There is no tax on the possession of the aircraft.

If it is simply possessed on the ground all year long, there is no tax.

If it takes off once or if it takes off 365 times during the year, it's the same tax.

Unknown Speaker: But the facilities are there for its use.

Mr. Allan A. Ryan, Jr.: Absolutely .

And I think as a practical matter, although even if this helicopter may not use federal services on one trip or another one, over the course of the year, I think it is certainly reasonable to expect that they will almost --

Chief Justice Warren E. Burger: Then what I wish to make is your legal position, as I understand it, does not depend on the aircraft actually making use of anything that the federal government spends money for.

Mr. Allan A. Ryan, Jr.: That's correct ,it does not.

Unknown Speaker: But does it depend on the fact that the facilities are available?

Mr. Allan A. Ryan, Jr.: The facilities are there.

It is --

Unknown Speaker: Which it may use.

Mr. Allan A. Ryan, Jr.: Which it may use, and which it provided at federal expense through the imposition of this tax in Title 2.

Justice William H. Rehnquist: Well, could the Federal government open a store up in Boston, kind of a PX type store would have price items and tax the State of Massachusetts for the privilege of using the store even though it decided never to use it?

Mr. Allan A. Ryan, Jr.: In that situation, I think we are somewhat --

we are not in the same position we are here.

I think, let me refer this another tax that was passed as part of this Airway Development Act which imposed an excise tax on aviation fuels of so much per gallon.

Now, Congress in its wisdom exempted the states from payment of that tax.

But I think that is the corollary there that perhaps shows that this is closely tied to use that the $25 or the $130 charge is there on one time basis, and it is there to defray the costs of administering the Federal Aviation Act and maintaining the navigability of the airspace.

The aviation fuels charge is there to precisely calibrate the payment of taxes by the amount of hours or miles flown.

Justice Thurgood Marshall: Not that it matters.

Would you get more money to pay excise tax on, the gasolines.

Mr. Allan A. Ryan, Jr.: I assume that the government would.

I think that the reason that was --

Justice Thurgood Marshall: That is up to them I mean,--

Mr. Allan A. Ryan, Jr.: That is up to the Congress responding to whatever political forces it feels.

Justice John Paul Stevens: Well, Mr. Ryan, can I test your theory with another question?

Supposing the situation were reversed.

Now let's say the state of Virginia puts money in its airports and supposing it imposed a $25 tax on every aircraft that landed at any one of the --

That was based at any one of the airfields in the state, as a user charge, it is the same theory as you have here.

And the FBI on the plane that was flying out one of those airplanes, does the State of Virginia tax United States for the ownership of that plane?

Mr. Allan A. Ryan, Jr.: I believe so.

We think that the theory of Packet Co. v. Keokuk in the head money cases and Clyde Mallory Lines stand for the proposition that user charges are not taxes or more precisely they are subject to the same restraints that the constitution --.

Justice John Paul Stevens: Would it be so, they did not have a Trust Fund?

Mr. Allan A. Ryan, Jr.: If it still could be considered a user charge, we think that Trust Fund here is evidence or proof that this is truly a user charge.

In the absence of a Trust Fund, I think you could still find a user charge and in fact I think in the Montanic trucking case which we cite in our brief, this court did.

Justice John Paul Stevens: And so one time annual measured, suppose if they measure it on the value of the aircraft instead of the weight of the aircraft, could they do that?

Mr. Allan A. Ryan, Jr.: It makes no difference.

Justice John Paul Stevens: So, in other words the State of Virginia could impose a personal property tax on the United States?

Mr. Allan A. Ryan, Jr.: Well, if it was a user charge, regardless of what they call it, whether they call personal property tax or anything else, if the --

Justice John Paul Stevens: It is explained in the Legislative History, the reason is to help pay for airports and will only tax airplanes that land or based at Virginia.

Mr. Allan A. Ryan, Jr.: I think that would be so.

You run into a problem of course, with the Supremacy clause.

The traditional genesis of intergovernmental immunity that it does not work both ways.

Justice John Paul Stevens: If you can call it a user charge why would not it work both ways.

That's really what I was trying to figure out.

Mr. Allan A. Ryan, Jr.: Well, if it is a user charge --

Justice John Paul Stevens: And that can be a user charge, it is just the tax based on the value of the aircraft as long it just lands at a state-owned facility on the one case or uses the federal facility in the other case.

Mr. Allan A. Ryan, Jr.: I think that would be actual use of state powers.

Justice Thurgood Marshall: Well, we have a big military convoy fully loaded and armed and stuff to pay toll, what would happen?

You would weigh it wouldn't you?

It happened several times on a World War II.

Mr. Allan A. Ryan, Jr.: If it was asked to pay a toll on Massachusetts toll booth --

Justice Thurgood Marshall: One what the judge (Inaudible) here.

Mr. Allan A. Ryan, Jr.: I am informed and we thought we might get it, and including this area, the federal military convoys do pay state highway tolls.

Justice Thurgood Marshall: Not all do that.

Mr. Allan A. Ryan, Jr.: It is the policy.

Justice Thurgood Marshall: I had a court-martial involvement throughout --

Mr. Allan A. Ryan, Jr.: May be that is why it is not a policy.

Chief Justice Warren E. Burger: Do you think there is a difference because of the toll fees are explicitly impounded for the purpose of discharging the bonds issued to build the road and situation presented by this case?

Mr. Allan A. Ryan, Jr.: I think the question is, is it a user charge ;or is it not?

I think the --

Chief Justice Warren E. Burger: My question is broader than that.

Mr. Allan A. Ryan, Jr.: Yes I realize that.

I think your question goes to --

Chief Justice Warren E. Burger: Are you going to make them pay the capital costs, that is what the toll roads do.

The toll charged on a toll road is to pay the capital cost of building the road.

You are not dealing with the capital cost here precisely, are you?

Mr. Allan A. Ryan, Jr.: Well, I think it is not entirely a capital cost but it is certainly to the extent that the Act finances the building of airports and air facilities, to that extent it is a capital cost.

The Act is quite explicit and that it says the expenses in the Trust Fund go to improving and operating and maintaining as well as establishing.

Justice William H. Rehnquist: What is it that the government owns that is being charged for the use of here?

Mr. Allan A. Ryan, Jr.: It regulates the navigable air space of the United States.

Justice William H. Rehnquist: I know that.

Mr. Allan A. Ryan, Jr.: In terms of what it owns in a proprietary sense, nothing.

Justice William H. Rehnquist: Nothing.

Mr. Allan A. Ryan, Jr.: I think, once you accept the proposition that this is a user charge, the doctrine of intergovernmental immunity simply need not be faced.

That was the rationale of the Court of Appeals, and we think that this court can affirm on the same rationale, however if the court feels it necessary or desirable to face that question, we think that it need go no further than to reaffirm the case of New York v. United States, and we believe that an affirmance on that ground would still result in an affirmance of the judgment of the Court of Appeals.

We still uphold the tax.

The case of New York v. United States as this court is aware was decided without a majority of the court as such.

Well, Chief Justice Stone's opinion can be read as the opinion of the court.

Justice Potter Stewart: Is that the mineral water case?

Mr. Allan A. Ryan, Jr.: Yes Sir it was.

The tax involved there was a federal tax on mineral waters which New York sold from its springs at Saratoga.

The State of New York contended that it was disposing of its natural resources and in a classic case of exercising its sovereign functions and this court did not disagree, but the test that Chief Justice Stone formulated in that opinion was whether a tax even though non-discriminatory ?May nevertheless so affect the state merely because it is a state that is being taxed as to interfere unduly with the state's performance of its sovereign functions of government? Chief Justice Stone, it should be added, voted to sustain the tax and the tax was sustained.

As I understand, the Commonwealth's case, they are essentially relying on this statement by Mr. Chief Justice Stone, but there is no evidence in this case nor is there any claim as to what that evidence might be, as to how this tax unduly interferes with Massachusetts performance of its sovereign function.

We think the reason for that is that it does not interfere at all.

Massachusetts in its complaint which is taken as true for present purposes simply made no allegation, nor do I understand the Commonwealth to make any allegation in their brief now that this tax interferes with the performance of their sovereign duties.

Justice John Paul Stevens: Mr. Ryan can I just ask two other questions.

Suppose by analogy, the United States decided to propose the tax on the use of the interstate highway system that could charge a flat sum for all vehicles including state-owned vehicles.

All the water systems, boats owned by the states, I mean, that same sort of thing could be done, couldn't it?

Mr. Allan A. Ryan, Jr.: Yes, Mr. Justice Stevens, that falls.

Justice John Paul Stevens: Right.

Mr. Allan A. Ryan, Jr.: I understood the Commonwealth, my brother Mr. O'Malley to take the position in his opening statement that legitimate user fee such as for toll road or river tolls, so forth are not within the scope of governmental immunity and the Commonwealth would not be immune from paying those tolls but here he said it's different because it is a tax and it is not something that is voluntarily paid by Commonwealth of Massachusetts, once of course, they decide to buy a helicopter.

I would infer from what he says that a toll or tax or a duty or levy or whatever it's labeled of a dollar per hour would not be objectionable to the Commonwealth of Massachusetts or to take a more concrete example that Massachusetts would see no problem with the fuel tax of so many cents per gallon being imposed on it because that is a very closely correlated tax, correlating the amount paid to use.

So, I think that given that view of the facts by the Commonwealth to then turn around and say, well, this is levied directly against the state and therefore comes in under the intergovernmental immunities doctrine whatever present status of that doctrine may be, is an elevation of form of nicety over the facts of the case.

That the airspace is there, the facilities are there, as a practical matter they are used.

I think that can safely be said. And this is nothing more than the federal governments seeking too fairly and equitably charge those users whether they be an individual, or corporation, or national government or a state government for the use of those facilities.

Saying it in that way I think requires that the judgment of the District court and the Court of Appeals be affirmed.

Chief Justice Warren E. Burger: Does this record show or do you know what's the total amount of revenue that the federal government achieves under this program over the whole country.

Mr. Allan A. Ryan, Jr.: The record doesn't show it, I don't know it.

Chief Justice Warren E. Burger: But very much money I suspect, is it?

It is not a great sum of money in the todays fiscal arrangements between states and federal government.

Mr. Allan A. Ryan, Jr.: The amount of tax raised by imposing the tax on state governments.

Chief Justice Warren E. Burger: Total.

Mr. Allan A. Ryan, Jr.: I assume it is small Mr. Chief Justice.

The Act authorizes well over a billion dollars to be spent for the improvements in Title 1 but that of course is gathered from all sources and I don't know how that's broken down in terms of what the different states pay.

Justice Potter Stewart: Your brother Mr. O'Malley mentioned National League of Cities, I think have you?

Mr. Allan A. Ryan, Jr.: I have not mentioned it Mr. Justice Stewart.

Justice Potter Stewart: I suppose there was reason why you didn't feel that was relevant.

Mr. Allan A. Ryan, Jr.: I didn't mention it because I think it is not a part of this case.

I thank the court.

Chief Justice Warren E. Burger: Anything further Mr. O'Malley.

Thank you gentlemen.

The case is submitted.

Attribution:

The OYEZ Project

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Agricultural Bank v. Tax Comm'n - Oral Argument

Thu, 23 Aug 2012 18:30:25 +0000

Case:

Agricultural Bank v. Tax Comm'n

Media File:

755_19680422-argument.mp3

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755_19680422-argument

Transcript:

Argument of Ronald H. Kessel

Chief Justice Earl Warren: Number 755, First Agricultural National Bank of Berkshire County, appellant versus State Tax Commission.

Mr.Kessel, you may proceed with your argument.

Mr. Ronald H. Kessel: Mr.Chief Justice and may it please the Court.

The appellant, the First Agricultural National Bank of Berkshire County is a national bank chartered under Title 12, the United States Code as such just one of 19 national banks conducting banking operations in the Commonwealth.

For over two years, it has paid under protest, Massachusetts sales and use taxes on purchases of tangible personal property for its own use.

Immediately prior to the enactment of the sales and use tax statute of the appellant request of the appellee, the State Tax Commission, for a ruling or an emergency regulation that it was exempt from these taxes, no such ruling was issued.

However, emergency regulation number 6 was promulgated which stated that the sales lease or rental of tangible personal property of the national banks and to Federal Savings and Home Loan Associations was subject to the sales and use taxes.

The appellant filed a fail for declaratory release seeking in substance that it was exempt from these taxes.

The case was reserved and reported without decision to the Supreme Judicial Court for the Commonwealth of Massachusetts for the issues which are raised on this appeal were passed on by that Court.

There are five issues in the case.

Two of them relate to the nature of the Massachusetts sales tax and one of the natures of that tax is probably reviewable by this Court.

Three of them relate to the tax immune status of the national banks.

The third -- the first is whether Section 548 of Title 12 prohibits the imposition of a sales and use tax on purchases by the appellant.

If this Court should decide that issue affirmative why then none of the other tax immunity issues need be reached.

If, however, this Court should decide as the appellant submits it should not, that Section 548 is a purely permissive statute.

Why then the second immunity issue is raised, that is whether after long standing congressional reliance and acceptance of the decisions of this Court which have held at a several states are wholly without power to levy any tax direct or indirect on national banks except as Congress permits, whether those decisions should be reexamined.

Only if this Court should decide that these decisions should be sole reexamined is the pure constitution -- constitutional issue presented.

That is whether national banks, the federal instrumentalities should continue to enjoy the constitutional protection from state taxation, again, except this Congress permits.

Inherent in the nature of our federalism, is a necessity of accommodating the affairs of the nation and the power of the several states to tax.

Congress is fashioned its accommodation in Section 548.

Section 548 provides that the several states can levy taxes on national bank shares, dividends there from and on the income of national banks and taxes measured by a recording the income of these banks in addition to real estate taxes.

Section 548 does not permit the levying of a sales and use tax.

Despite the language of Section 548 and despite the overwhelming authority of the decisions of this Court, the appellee now urges upon this Court that the appellant is subject to state sales and use taxes.

The original predecessor to Section 548 was enacted in 1864, one year after the National Banking System was created.

The debates prior to the enactment of this section indicate that the Congress was well aware that it was making a decision into determining the sculpt of permissible state taxation of national banks which was a purely legislative market and was not one of constitutional dimension.

For example, one of the objects of the 1864 Legislation was to encourage the conversion of not state banks international banks.

Congress knew that any types of protection for the national banks would encourage such conversions.

This objective is of course one of legislator policy.

The congressional debates further indicate that the Congress is well aware of the decision of the McCulloch versus Maryland and of the constitutional provision against a tax on national banks.

For this reason, we're fully conscious that in setting forth the permissible mode of state taxation they were determining the outer limits beyond which the state could not tax.

Subsequent legislative activity with respect to Section 548 confirms this.

In 1923, an amendment was enacted which permitted the several states to tax the dividends and the income of national banks

The original predecessor had only permitted the taxation of national bank shares in real estate -- in the real estate of the banks.

In 1926, the amendment was passed which authorized the states to levy excise and franchise taxes.

In 1935, the Congress subjected national banks to state unemployment taxes.

In short, Congress has always seen fit to carefully define the precise scope of state taxation of these banks.

It has never seen to authorize and subject the national banks to general state taxation.

In 1950, the Congress rejected a bill which would have expressly authorized the taxation of the purchases of national banks under state sales and use taxes.

This bill never became law.

The decision below is in effect an attempt to resurrect and judicially enact that bill.

In so doing the court below relied on the cannon of construction that tax immunity is not to be granted by implication.

But the case has relied on or in opposite.

Either they are not cases of statutory construction or they aren't cases where a statutory immunity was conferred, a limited immunity.

And the issue was whether that immunity should be extended by implication.

The issue on this appeal is a far different matter.

It is a question of whether the Congress by expressly authorizing four casually defined methods of taxation, intended that other such methods of taxation should be prohibited.

Moreover, resort to that judicial kind of construction --

Justice Byron R. White: What's the case in this Court that most squarely says that answers yesterday's question.

Mr. Ronald H. Kessel: The case starting – a line of decisions starting with Owensboro --

Justice Byron R. White: Are they square holding for the --

Mr. Ronald H. Kessel: Yes, they are square holdings.

Owensboro, Bank of California versus Richardson, the --

Justice Byron R. White: Well that's alright.

Mr. Ronald H. Kessel: Des Moines National Bank versus Fairweather, First National Bank of Guthrie Center versus Anderson.

Justice Byron R. White: But either -- you need not go on but your position is that the -- these cases squarely construe the statute to exclude the other type of standard?

Mr. Ronald H. Kessel: Position we take is that this is perfectly clear.

They have in citing the statute, they have always stated unequivocally and -- and without any intimation to the contrary and the over century that this Court has construed this section that except for the permissive legislation of Congress, the states are wholly without power to levy a tax.

Justice Byron R. White: Well that's one thing right, but do you think they have -- do you think they -- these cases have held of national banks would simply immune because their federal instrumentalities or have they held that they are immune because Congress has set them to be immune?

Mr. Ronald H. Kessel: I think that the cases of -- are subject to both interpretations that the -- they can be construed as holding one that Section 548 as a legislative matter, has defined the scope beyond which states cannot tax national banks.

I further submit that they are also --

Justice Byron R. White: Whether did they would be immune constitutionally or not?

Mr. Ronald H. Kessel: Whether they would be immune constitutionally or not, and this is the first proposition upon which we were relying.

Those cases I think can also be right standing for the proposition that -- where it not so permissive legislation of Congress.

The national banks could not be taxed because it was a constitutional provision.

Justice William J. Brennan: Well you are saying that the statute said in terms that states could impose these taxes against national bank.

You'd then be arguing that that statute was unconstitutional?

Mr. Ronald H. Kessel: I would not like be in a position of having in advance with that argument.

Our position is that if Congress had authorized the state taxation of national banks, why of that -- by means of a sales and use tax well that's actually perfectly -- would be perfectly okay.

Justice Byron R. White: Congress can wave immunity.

Mr. Ronald H. Kessel: That's exactly right.

And Congress can prohibit the taxation of national banks as it sees fit.

The Court, as I mentioned, relied on this cannon of construction that immunity is not to be extended by implication as we suggest the cases are in opposite and they do not present a statute where four carefully defined modes were permitted.

The effect of the decision below is this, by utilizing that cannon of construction, it would require an expressed provision in Section 548.

But the requirement of an expressed provision in Section 548 is exactly what this Court in its decisions has made superfluous and this approaches judicial legislation in the form of judicial construction.

The analysis is somewhat disturbing.

The result is we submitted even more so.

Now, under Section 548, if a statement of levy one of the four permissible taxes, why would have to make some very complicated criteria relating to whether it was taxing at a rate higher than or rate of money capital in the hands of individuals and several others.

But now according to the Court and its interpretation, the several states could levy in numerable other taxes without having to meet a complex set of criteria which Congress has enacted in the case of Section 548.

Moreover, under Section 548 if you choose one of the four permissible modes, you cannot tax on any or the other three ways that provides other tax in either one of the fours in lieu of all the others.

But now again if the Court's interpretation, the Massachusetts's Court interpretation is -- is accepted why the states would be free to again impose many other forms of state taxation.

Mr. Ronald H. Kessel: I should like to address myself for a moment to the question of congressional reliance.

Justice Potter Stewart: Before you leave that, if 548 by its term seems to be directed to the matter in which the state may tax the shares of the National Banking Association.

Mr. Ronald H. Kessel: The statute goes on to --

Justice Potter Stewart: And then later the statute it says nothing here in to show --

Mr. Ronald H. Kessel: Yes and (Voice Overlap) --

Justice Potter Stewart: --(Voice Overlap) prohibit states power to tax the real estate of a bank.

Mr. Ronald H. Kessel: And -- but it goes on to say that the several states may tax such shares or the dividends or tax such associations on in that income or under the four subdivision, tax such associations according to a measure by the state incomes.

The latter was the 1926 Amendment or the effect of which was to authorize the levying of the state excise franchised taxes on the banks.

The reason for that first sentence which would seem to indicate that all of the Section 548 I was talking about on national bank shares is a really historical vestige.

In 1864, when the original statute was passed why it permitted only the taxation of national bank shares and that first sentence says, “Come down through the century and the amendments authorizing the taxation of national bank income and authorizing excise of franchise taxes which is added as later sentences.”

But I certainly -- we strongly submit that Section 548 covers much more than the taxation of national bank shares.

Indeed it comprehensibly controls the entire scope of the national bank taxation.

Justice Potter Stewart: I suppose your argument would be that if it didn't cover much, much more than that there would be no reason at all from putting any paragraph like paragraph three which says that nothing here in contained shall be deemed to prohibit a state from taxing the real estate of a bank.

Mr. Ronald H. Kessel: That is true too.

Justice Potter Stewart: That would be an entirely unnecessary if all the statute were directed where the matter at which shares could be taxed.

Mr. Ronald H. Kessel: That's true.

This Court has -- has held that where there has been long standing congressional reliance and acceptance of the decision to this Court that those decisions should remain undisturbed.

This is precisely the case with respect to Section 548.

The -- prior to the enactment of Section 548 this Court decided for McCulloch versus Maryland and Osborn versus the Bank of the United States, prior to the 1923 Amendment there was Owensboro National Bank and the Bank of California and I need not go on.

I think that the parallel legislative and judicial activity with respect to this section whereas Congress over the course of the years carefully defined another form of state taxation, there were constantly decisions before under which this Court had held without any qualification that except for the Section 548 the states could not levy any taxes.

This Court should decide that the -- that this congressional reliance does not preclude in reexamination of these decisions but as we suggest that it should not.

In fact it is -- it's difficult to imagine a situation where there's going to be more meaningful dialogue between this Court and the legislative branch of the government and I think that in a very real sense these decisions have become an integral part of Section 548.

If, however, this Court should decide that it will reexamine those decisions, we submit that a national bank as a federal instrumentality is still entitled to constitutional protection.

The responsibility of the Congress in the area of banking and currency is a very unique one unlike other regulatory areas such as the antitrust laws.

The Congress is responsible for designing and creating the very financial structure that the fiscal policies and affairs of this nation have conducted primary and vital with the structure on national banks.

They are the sine qua non of the National Banking System.

As such, Congress in affecting its policies has resort to a nationwide uniform system of facts.

It need not rely and be dependent upon state banks and the governments of the several states.

The national banks moreover are the keystones of the Federal Reserve System.

They are the only financial institutions in the country which are required to be members of that system.

It is true that state banks, state commercial banks can become members of the system but this in no way that we submit the tracks from the indispensable role of the national banks in affecting national monetary and fiscal policy.

Of course national banks have a proprietary aspect but this has always been and still is a fundamental part of the congressional scheme.

The -- perhaps to the matter is that these federal instruments they are vital and essential to affecting monetary and fiscal policy.

We submit that for this reason, this Court could unanimously say in Department of Employment versus the United States decided just a little over a year ago that national banks were tax immune instrumentalities and that this status was beyond dispute.

I should like to address myself for a moment to the issues relating to the --

Justice Byron R. White: What's the basis for -- if this bank is not a federal instrumentality what's the congressional basis for immunizing a national bank from state taxation.

Mr. Ronald H. Kessel: The Court has held at -- the Congress has -- there's been a trend of decisions which had indicated as the court below has suggested that the power for the Congress to immunize a federal instrumentality is a very broad one.

Justice Byron R. White: Well yes, I know.

What if it is a federal instrumentality?

Mr. Ronald H. Kessel: Well.

We submit that it -- well we submit that in the eyes of Congress that Congress clearly considered as a federal instrumentality and that the question of whether it's a federal instrumentality for the purposes of this -- of a constitutional immunity might present this Court with a different question than a question of whether --

Justice Byron R. White: You mean it isn't automatic that just because it's a federal instrumentality it doesn't mean it's immune?

Mr. Ronald H. Kessel: No which I would suggest that there are various vehicles for carrying out some of the aims of the Government where they would not (Voice Overlap)

Justice Byron R. White: Well let's assume that (Voice Overlap)

Mr. Ronald H. Kessel: -- be entitled of constitutional immunity.

Justice Byron R. White: -- federal instrumentality for the purposes of giving Congress the power to immunize it.

Then is it automatically immune from -- unconstitutionally?

Mr. Ronald H. Kessel: I would submit that that does necessarily follow.

I think it is an easier question for the Court to hold a federal instrumental immune from state taxation where Congress has created an immunity.

I think it's a slightly closer question is the question where before this Court de novo of whether a federal instrumentality should be entitled to a constitutional immunity.

We submit that the clear -- clear stance in this case is under Section 548 where there has been the congressional conference of an immunity.

Justice Byron R. White: Well, but again now, let's assume the Court presided in its own mind that the -- this bank wasn't entitled to any constitutional immunity and then you come to the statute that you argue that that's immunize --

Mr. Ronald H. Kessel: Yes.

Justice Byron R. White: -- bank.

Well where does Congress get to parallel immunize the national bank which has been titled to a constitutional immunity?

Mr. Ronald H. Kessel: Because the -- under the --

Justice Byron R. White: Is this interstate commerce or what?

Mr. Ronald H. Kessel: Under the implied powers of the national government to create national banks and a national banking system as an implied power of the federal government implied from the authority to levying collect taxes to develop and be all means to run the affairs of the government why the decision of McCulloch versus Maryland put to rest forever.

The question of whether the Federal Government, the Congress could fashion a national banking institution.

And in fashioning that institution why -- and because this institution is fashioned under the paramount law of the United States -- of the Federal Government why it is well within the power of Congress to immunize that institution.

This Court in turning to the state sales tax issue, this Court has held at where a sales tax is required to be added to sales price and collective from a purchaser and that this tax is a debt from the purchaser to the vendor that this is a tax on the purchaser.

This is precisely the nature of the Massachusetts sales tax.

Subsection 3 cited right in appendix 57 of the appellant's brief states that reimbursement for the tax here imposed shall be paid by the purchaser to the vendor and each vendor in the Commonwealth shall add to the sales price and shall collect from the purchaser the full amount of the tax imposed by this section and that such tax shall be a debt from the purchaser to the vendor.

As a penalty for a vendor's failure to so add and so collect the tax, its registration can be suspended or revoked and it can be force to seize doing business in the common law.

Tax moreover must be separately stated and separately charged.

In addition, a vendor is prohibited from advertising that he will absorb or assume it or that he will not add it to the sales price.

Despite these characteristics, the Court below held that the sales tax was a tax on a retail merchant.

The appellee contends that this question is not before this Court.

We submit that the teachings of this Court have established that where federal rights were involved such as the appellant's rights in this appeal, that the characterization of state tax by a state court is not binding on this Court and we think that for this reason, this Court should find that the sales tax is a tax levied on the appellant as a purchaser.

Perhaps the court below relied very heavily on what it assumed to be the case that is that there was no penalty on a vendor on failing to collect the tax from the purchaser.

At the time that the Court decided this case, there wasn't affect to Massachusetts a temporary sales and use tax.

Under the temporary sales and use tax, the entire Sales Tax Act was entitled the section and all of provisions relating to the sales tax with designated subsections.

In the general penalty provision relating to the registration of vendors and the suspension on revocation of it, it said that a registration could be revoked or suspended for a vendor's failure to violate any provision of this section.

And there was some ambiguity as to whether the reference to any provisions of this section meant the subsection or the section itself which was the entire Sales Tax Act that any ambiguity has been resolved.

After the decision by the court below, the Massachusetts Sales Tax Act became permanent law.

As part of the permanent general laws of the Commonwealth, the Sales Tax Act is now a chapter.

And so the section which deals with the revocation and suspension of a vendor's registration states that a registration can be suspended or revoked for failure to comply with the provisions of any section of this chapter.

And so there are no longer is any ambiguity and there clearly is within the statute of penalty for a vendor's failure to collect the tax.

In conclusion, we submit that Section 548 prohibits the imposition of the Massachusetts sales and use tax on purchases by the appellant for its own use of tangible personal property.

We further submit that in view of the long standing congressional reliance and acceptance of the decisions of this Court which have held squarely and without any intimation to the contrary that national banks cannot be taxed by the several states except this Congress permits should not be reexamined.

We further submit that national banks and their role as federal instrumentalities in effecting the national and fiscal policies of this nation are entitled to a constitutional immunity from state taxation.

We further submit that the Massachusetts sales tax is a tax on national bank as a purchaser and that this question is properly reviewable by this Court.

Chief Justice Earl Warren: Mr.Dimond.

Argument of Alan J. Dimond

Mr. Alan J. Dimond: Mr.Chief Justice, may I please the Court.

I think it might be useful to look briefly at the record in this case to see some of the purchases at which the bank complains even though the same purchases when made by neighbors across the street state banks to not entitle those banks to any immunity.

On page 19 and following of the appendix, there's enumerated about 40 or 50 names of vendors from home purchases have been made here and the names of these vendors indicates the nature of the articles involved.

You'll see here vendors of office supplies and equipments.

You'll see on page 19 to be an advertising company.

You'll see on page 20 Pittsfield Neon Signs, page 21 Universal Match Company, names which indicate the exclusively commercial promotional type of articles which are included in this list.

On page 27, there's included particular items of office equipment and supplies including one waste basket.

Now what is the structure in which these articles are housed?

Reference has been made in the brief to an arch for the keystone to it, supporting it.

I submit that the keystone that supported the arch of constitutional immunity of national banks from state taxation has long been removed and that the arch or the structure such as it is today is not supported by any keystone such as that which was originally installed.

What was that keystone?

The keystone was a bond secured currency.

The bond secured bank note currency.

To explain this proposition, it's necessary to go back the time of the creation of the national banks during the Civil War.

There were two purposes which I think all financial historians accept as being the reasons for the creation of the -- what is now known as the National Bank System.

One was to establish a uniform national currency.

The second was to extend the market for government bonds solely needed in 1863 to finance of the Civil War.

As for the uniform currency, the Second Bank of the United States having gone out of existence when its charter expired in 1836 there was no federally chartered bankin existence thereafter.

Banking was wholly in the hands of state institutions.

These institutions, then conducting banking in the way in which banking of course was then conducted as a form of the issuance of bank notes as distinguished from the creation and transfer of demand deposits which is now distinctive characteristic of commercial banking.

Prior to the Civil War, the number of state bank notes ran into to thousands.

They varied in value from state to state and within the same state.

Counterfeiting of the notes was widespread.

So much so that counterfeiting had almost become a hobby.

No business or financial institution could then function without what was then known as a counterfeit detective in the office.

State bank notes were known via some other colorful terms.

There were the shinplasters of Michigan and the red dogs of Indiana and Nebraska, the wild cats of Georgia and Pennsylvania and the stump-tails of Illinois and Wisconsin.

So serious was the irregularity in the bank note system that demands the reform came from many sources, chief of whom, at that time was Secretary of the Treasury Salmon P. Chase.

When December of 1861 and a message to Congress urged a replacement of the state bank notes by a uniform federal bank note currency.

He got no immediate results but as the finances of the north worsen during the Civil War and it became necessary to enlarge the market for the government bonds then issued or to be issued by the north, a combination of Chase's objective and the fiscal needs of the Treasury were then joined so as to create what was known as the National Currency Act of 1863.

Under this Act, five or more persons could organize what were known as National Banking Associations.

By depositing with the treasurer or the comptroller of the currency, certain government bonds to hold a security for the issuance of bank notes which would then be entitled to qualify as legal tender throughout the country, the bonds which are eligible for deposit were said or since said to have had was known as the circulation privilege.

The National Currency Act was amended and replaced in 1864 but without significant change in the essential characteristic that it originally had namely the issuance of a bond secured currency.

Now, the national bank currency thereafter had an interesting and not very edifying history.

Much has been written about its defects, chief of which was its so-called inelasticity.

That is, its inability to expand or contract according to the needs of business and agriculture.

When time look good, the banks consider buying more bonds as a base for augmenting the bank note issue would put their money to other purposes so that at the very time that an augmented currency was needed to meet the expense -- expanding demands of industry and agriculture, the currency was not there.

Although it might be an overstatement to say that this inelasticity brought on the panics of 1873 or 1884 or 1903 or 1893 or 1907, I think it is fair to say reading from his financial historians that the national bank note currency due to its inelasticity and it was also sometimes called its reversed elasticity seriously intensified the crisis and the money panics once they had started.

After the panic of 1907, country had just about had enough.

In that year the National Monetary Commission was established and in a series of studies which number over 20 volumes made an intensive study of banking practices both here and abroad.

Commission filed its report in 1912, finding many inadequacies in the existing banking structure of this country.

Many of which of course had often been noted the immobility of reserves, scattering of reserves, the lack of any centralized control over reserve -- banking reserves.

But among the chief defects found in the existing banking system was the national bank note currency which was indicted by the National Monetary Commission or its inelasticity as I have just described it.

The result of course of the National Monetary Commission's work was the enactment of the Federal Reserve Act in 1913.

Worth not for the threat and danger causing a serious loss on the bonds that have the circulation privilege, the Federal Reserve Act would have abolished the national bank notes in that year.

As it was, the Federal Reserve Act of course created a new form of bank note currency with greater elasticity Federal Reserve notes.

It was anticipated, however, that the national bank notes would be retired in due course and indeed in 1935 they were so retired.

When the Secretary of the Treasury called in for redemption, all bonds then possessing the circulation privilege, the result was that from 1935 on national banks have seized to have their originally distinctive function namely the issuance of bank notes.

Any national bank notes now in circulation are simply those notes which have not been turned in for redemption.

The -- if any distinction now exists between the national banks and the state banks, it is simply that they are each subject to different supervisory agencies and even the state banks today are subject to such a variety of federal controls that to speak of our dual banking system is it sometimes called -- is actually and is nowhere we have today Federal Reserve System, we have the Federal Deposit Insurance Corporation and the comptroller of the currency all exercising controls of various sorts of both the faith of the state as well it has of the federal banks.

Justice Potter Stewart: Mr.Dimond, I understand that the trust of what you've been telling us is to show the difference between what national banks are today and what they were today as of McCulloch against Maryland or even in the days of 1864 --

Mr. Alan J. Dimond: Yes, Your Honor.

Justice Potter Stewart: Or prior to 1913, which goes I supposed to the constitutionality of state imposing nondiscriminatory taxes upon national banks in 1968.

Mr. Alan J. Dimond: Yes sir.

Justice Potter Stewart: Does this mean that if Congress -- if this is mean that if Section 548 means what your opponent says it means is, that is that Congress has given permission to states to tax national banks only in certain specified ways that that Act of Congress is not within the power of Congress to enact to constitutionally or what does it mean?

In other words, does your argument go at all to the -- to your opponent's argument based on the statute?

Mr. Alan J. Dimond: I have not gone as far as Your Honor suggests, I'm not aware of any decision of this Court that goes that far.

I suppose it would not be unreasonable to anticipate that under the necessary improper clause, Congress might extend 548 to national banks even though they do not enjoy constitutional immunity so that it is conceivable that the absence of a constitution immunity and the reach of 548 to national banks that was standing immunity might co-exist.

But --

Justice Potter Stewart: Because as I understood, your brother's argument on the other side it was primarily bottomed down the statute.

Mr. Alan J. Dimond: It was Your Honor.

Justice Potter Stewart: And if the statute means what he says it means then that wins the case for him unless there's some reason that statute was not within the -- unless for some reason that statute is not constitutionally there because it was not within the constitutionally power of Congress to enact or because it violate some explicit constitutional provision.

Mr. Alan J. Dimond: Well, the -- he started that one end of the street and I've started at the other.

I would try to get to the middle of the street if I may.

The interpretation of Section 548 which is relied on here by the appellant is one that is so interwoven with this concept of immunity that I think it cannot be adequately comprehended without some attempt as I am tried to do perhaps to show that the constitutional underpinnings have been eroded.

If the 548 is read as it is written, there is absolutely no language of immunity contained in it.

There has been concededly a traditional gloss placed on it over the years.

Justice Byron R. White: Do you think that you concede that the Court has squarely construed that statute to exclude other form of protection?

Mr. Alan J. Dimond: It has done it in terms -- in these terms Your Honor.

It's done it by making some broad statements to that effect but it's done it in --

Justice Byron R. White: Or has it ever invalidated the tax because the statute immunizes the banks from the kind of taxation of suddenly imposed?

Mr. Alan J. Dimond: It is done so Your Honor in circumstances where the tax sought to be imposed as had a direct effect shall we say on the value of an investment in a national bank as compared to the investment in other forms of moneyed capital.

All these cases in which the broad statements of immunity had been made, have been cases which have with the exception of Owensboro I believe, have dealt with a discriminatory form of taxation.

They've all been cases which have dealt with investments in national banks, has dealt with their franchises, their income, things which directly are related to what an investor would be concerned about when he would be -- making a decision as to whether to invest in a national bank as against a state bank.

Justice Byron R. White: But nevertheless, these taxes were invalidated because it held that Congress had intended to authorize those taxes.

Mr. Alan J. Dimond: Yes, Your Honor.

The cases --

Justice Byron R. White: Or Congress intended to immunize against those taxes.

Mr. Alan J. Dimond: Immunize against those actually.

Justice Byron R. White: And as evidenced by the statute.

Mr. Alan J. Dimond: Yes, Your Honor.

And quite frankly, we are attempting today to ask the Court to reexamine some of those decisions to conclude that they have stated rules that are much to sweeping, that they --

Justice William J. Brennan: But ordinarily if it goes out far though that kind of problem after lapse of time and Congress has let it alone, don't you think they'll let Congress handle rather than we do?

Mr. Alan J. Dimond: In some circumstances that would be so Your Honor.

If it could be said that an existing form of business or industry has structured itself in reliance on those interpretations.

There are many situations where of course such position would be warranted.

Here, however, we are dealing with (Voice Overlap) --

Justice William J. Brennan: Well you're not suggest -- you're not suggesting are you that we apply that principle that Congress take care of it if they don't like the interpretation.

Only in cases which demonstrated that there's been some kind of reliance by the affected industry.

Mr. Alan J. Dimond: I won't say, only then I think that is a factor that would be considered Your Honor.

Justice Byron R. White: Now how do we -- how do we know that situation has so changed about banks just by judicial notice?

Mr. Alan J. Dimond: What we've attempted to document the change in our brief, there is I believe references to the various sources which indicate the fundamental change in the character of national banks so that today there's simply ordinary private commercial institution say perform no significant fiscal or monetary function for the Federal Government.

It has been suggested that they are so imminently connected with the Federal Reserve System that they should be given an immunity on that ground.

Justice Thurgood Marshall: Is there anything in your argument or in your brief that isn't thoroughly familiar on Capitol Hill?

Mr. Alan J. Dimond: I think every item of history that I've cited here your Honor is generally familiar.

On the other hand, I respectfully submit some of it is not as well-known as it should be.

Justice Thurgood Marshall: Well isn't it is well-known as it is to -- me for example?

Mr. Alan J. Dimond: Well --

Justice Thurgood Marshall: That's the other question I ask is, the Congress has intention to it.

Mr. Alan J. Dimond: Congress has not and I think it has -- once again, not had occasion to do it.

There was reference made to the 1950 bill.

I am curious, that bill -- everybody wanted the bill to pass in putting the banks.

So there was no opposition to it.

It just seems to dive on legislative process.

So this is something that you can't say Congress has been opposed that this based on the 1950 episode that has been referred to you.

It just --

Justice Byron R. White: Were this state tax, applied to Federal Reserve bank?

Mr. Alan J. Dimond: No Your Honor, because they are specifically exempt by Act of Congress from state taxation.

The word of exemption is used in the Federal Reserve Act with respect to state taxation.

Our position here is that Section 548 does not speak in terms of an exemption.

It speaks wholly in terms of a regulation of the types of taxation enumerated in Section 548.

Now, may I say this.

When 548 was first passed which I took the form of proviso in Section 41 I believe it was of the Currency Act of 1864.

It was cast in the form that it was I submit for two reasons.

One was the nature of state taxation in those days and the other was the continuing vitality of an important reservation in McCulloch versus Maryland.

In 1864, the only type of state taxation of any consequence was the local property tax.

So that when Congress adopted this proviso which was all that it was in 1864, it was thinking only in terms of the local property tax and I believe I've documented that statement in a brief.

As for the reservation in McCulloch versus Maryland, there is an important statement in that case which I believe is often gone unnoticed where Chief Justice Marshall pointed out that nothing in that decision was to prevent local taxation of the property of national banks.

And may I say this -- I should say -- no I shouldn't say national banks, I should say the Second Bank of the United States which was a true federal instrumentality certainly significantly different from the national banks as we know them today.

And may I say this further with respect to McCulloch versus Maryland because I think this is important.

The reference to which that case is given -- which is given to that case is based on the centrally -- because of its enunciation of the implied powers doctrine and doctrine of the supremacy of the Constitution.

In the course of that opinion, Chief Justice Marshall said that it wasn't even worth discussing whether or not the Second Bank of the United States was a true federal instrumentality because at that time, in view of its history and its functions, it was a true agent, fiscal agent of the Government of the United States.

And in Osborn against the Bank of the United States a few years later when factual examination of the Second Bank was considered more fully, Chief Justice Marshall again stated almost summarily.

His words were that the banks exercise of these, its banking faculties greatly facilitates the fiscal operations of the Government is too obvious for controversy.

Well it's not too obvious for controversy today Your Honors.

It's an entirely different banking system.

It's an entirely different bank.

And as far as Section 548 is concerned, may I just point out this.

This is not the first time, I'm sure it would be the last that a litigant has attempted to use the shield as a sword.

548, historically, was designed to prevent discrimination against the national banks.

It was not designed to give the national banks a preference over their competitors, the state banks.

And this is what the appellant here –-

Justice Byron R. White: Or do you suggest that national banks perform no -- for the no of role for the Federal Government at all?

Mr. Alan J. Dimond: No role of sufficient importance to justify than being given a constitutional immunity Your Honor.

Justice Byron R. White: But some role.

Mr. Alan J. Dimond: They perform some role, yes.

But the same as many other (Voice Overlap) --

Justice William J. Brennan: Well the basic of a role I put this squarely.

Mr. Alan J. Dimond: Yes, Your Honor.

Justice William J. Brennan: That suggests that Congress could grant them this immunity and that constitutional authority would be a necessary part of course as it related to the national --

Mr. Alan J. Dimond: I -- as I say, I would -- I've suggested as a possibility.

I would not want to say that that may necessarily be a valid ground --

Justice William J. Brennan: Well would you not see fit to --

Mr. Alan J. Dimond: No, I'm not challenging you.

Justice William J. Brennan: To challenge the statute.

If it were to be interpreted as your adversary suggests, you don't challenge the Constitution.

Mr. Alan J. Dimond: I have not Your Honor in my brief.

Justice Byron R. White: (Inaudible)

Mr. Alan J. Dimond: Very minor in terms of the criteria which this Court has in recent years established for the enjoyment by an organization of a constitutional immunity.

I think we have -- we might have one standard with regard to the -- say the necessary improper clause, I think we have an entirely different standard with respect to a constitutional immunity.

And under recent decisions of this Court, immunities are very, very carefully restricted.

This is not a time when intergovernmental immunities should be extended and I respectfully point out that the essence of the banks' argument here today is really that they are asking for the creation of a new immunity, because they in effect acknowledge as I read their argument that the old grounds have disappeared.

Your Honors, I respectfully submit that the decision of the Massachusetts Supreme Judicial Court is correct and should be affirmed.

Featured:

Dept. Of Employment v. U.S. - Oral Argument

Thu, 23 Aug 2012 18:30:46 +0000

Case:

Dept. Of Employment v. U.S.

Media File:

78_19661115-argument.mp3

Related Transcript:

78_19661115-argument

Transcript:

Argument of James D. Mckevitt

Chief Justice Earl Warren: No. 78, Department of Employment, et. al., appellants versus United States, et al.

McKevitt?

Mr. James D. Mckevitt: Mr. Chief Justice, may it please the Court?

This is a direct from a three-judge court sitting in the United Stated District Court in and for the District of Colorado.

There are three questions presented to this Court.

No. 1 is whether the District Court had jurisdiction over the parties in the subject matter to this action; the second question is whether the American National Red Cross is an instrumentality or agency, and I use the words interchangeably, of the United States Government; and the third question is if the Court finds that the American National Red Cross is an agency of the United States Government, has Congress waived its immunity from taxation by its 1960 Amendments to the Federal Unemployment Tax Act which became effective, January 1962.

This action arose, and I go on way of background, that because of the proviso of the Amendment to the Colorado Employment Security Act which is set forth in Chapter 82, 1963 CRS (Colorado Revised Statutes) which taxes all non-profit organizations in the State of Colorado.

For example, we tax hospitals, churches; there are clerical exemptions, etcetera but other organizations such as the Salvation Army, the Colorado Bar Association, etcetera, are covered under the Colorado Employment Security Act.

Colorado is one of three states which taxes non-profit corporations under its Colorado Employment Security Act.

The other two states are Alaska and Hawaii.

Now two of these states, namely: Colorado and Alaska elected to tax the American National Red Cross under the Employment Security Acts and as a result, this action was brought in the Colorado District Court, United Stated District Court, seeking a permanent injunction against the Colorado Department of Employment and its executive director, Bernardi Tist, from assessing further taxes against the American National Red Cross.

The Department of Employment appeared and moved to dismiss the action and moved to strike the United States of America as a party-plaintiff to this action and the appellee moved for a summary judgment.

These matters were argued to a three-judge court in the United States District Court and upon hearing of oral arguments, the United State District Court denied the Motion for Summary Judgment, denied our Motion to Dismiss and granted our Motion to Strike the United States Government on the grounds that they had failed to state an adequate claim for relief.

Then, the matter was heard on its merits and upon the conclusion of the trial, the United States District Court so ruled that the American National Red Cross is an instrumentality or agency of the United States Government.

They reinstated the United States as a party-plaintiff on this matter and this matter is now on appeal to this Court on a direct appeal.

Now, directing my argument to these three issues, I would like to direct my argument primarily first of all to the second question because it has near relation to question no. 1.

We submit that the American National Red Cross is not an instrumentality or an agency of the United States Government.

It is a creature of Congress under Title XXXVI and so is the Boy Scouts, there is the American Revolution, the American Historical Society, reference of foreign works, etcetera.

But Congress has manifested and expressed intent that the American National Red Cross is an agency or instrumentality of the United States Government.

In fact, looking at the Act itself in Title XXXVI and referring also to Title X, Congress conveys fact that this is a private organization rendering voluntary assistance to the United States Government when it is requested to do so.

Now, under Title X, for example, there are two provisos in there which I think are significant in construing the legal status of the American National Red Cross.

One is the fact that refers to the power of the President to accept the assistance of the American National Red Cross.

It never speaks about a duty for the American National Red Cross to comply with federal request.

In fact, all of these matters in which the Red Cross assists the United States Government are bilateral agreements and of a voluntary nature.

The second matter, which is of importance in Title X is the fact that Congress specifically provided in Section 2602 (e) that Red Cross employee should not be considered as Federal employee or employees of the United States Government.

Now, there are -- in other -- in actions in the past, some of which I do not submit as precedent, and I’m sure counsel for the other side would not as submit as precedent, there are ceremonies of proclamations by former Presidents of the United States which say that, “It is a quasi organization or an instrumentality or agency of the United States Government”.

On the other hand, the Secretary of Labor in 1944 passed a regulation stating that Red Cross and Salvation Army were not instrumentalities of the United States Government.

Internal Revenue Code has made rulings on this matter, but Congress has spoken once again in Title XLII under the National Disaster Act.

And, of course, one of the roles of the American National Red Cross, it has four-fold purposes: one, is to assist the Armed Forces; two, is to give disaster relief; three, is to conduct fund appeals and four, is to interpret the Red Cross to the local community and these are brought out by the testimony on page 100 of the record.

But one of their -- as their assistance to the Armed Forces or, excuse me, under the -- so far as the National Disaster is concerned under the Title XLII, under the National Disaster Act, it specifically provides in defining federal agencies that the American National Read Cross shall not be considered an agency of the United States Government.

Now, looking to the charter so to speak for the enabling statute for the American Red Cross, there are other manifestations of Congress which show that the United States has not exerted a power or a controlling power over the American National Red Cross.

For one, the President has the power to appoint 8 to a board of 50 members.

In of this, none fit into the executive committee.

Then the Act refers to voluntary relief, voluntary assistance etcetera and then once again and by previous actions of the Red Cross, and by the evidence in the record it shows that these are agreements where they meet, they enter into a bilateral agreement and they carry these matters up.

The Red Cross would point out that they are the sole agent who disperses problems or supplies in times of disaster and yet the Salvation Army has brought up, by the evidence also, renders valuable assistance even though they may not be the recognized dispersing authority.

The Salvation Army plays just as important role so far as the National Disasters are concerned and yet, the Salvation Army is taxed under the Colorado Employment Security Act.

It does not rule itself out as an instrumentality or an agency of the United States Government.

The President of the United States has only the power to accept the assistance of the Red Cross in other words, and I submit that that Red Cross works only in a private sector and not a public sector.

This was brought out by the testimony of Mr. Dermet (ph), who was former Director of the Office of the Emergency Planning and his testimony is set forth in folios or pages 79 and 86 of the record.

So in essence, the Red Cross gives voluntary relief to private needs and from private funds.

Now, another interesting facet -- is the fact that the American National Red Cross is one of various national organizations which belongs to the International Red Cross Conference.

And as brought out also in the testimony on the record, the International Red Cross Conference, which is worldwide, requires in its charter that its member organizations remain autonomous, by that I mean that they remain autonomous from the government with which it works.

There is no doubt that the role of the American National Red Cross is a noble one and a humanitarian one.

And the interesting part of the testimony is the fact that it's not national humanitarian; it's international humanitarianism.

In other words, as brought out by the testimony, they assist Armed Forces of enemy countries as well as those of our country.

So they have this international humanitarian scheme.

Of course, the Salvation Army renders the same service.

Justice Abe Fortas: What are the particular respects which to your mind most clearly differentiate the Red Cross and National Banks for purposes of this question, the legal issue here?

Mr. James D. Mckevitt: Mr. Justice Fortas, my answer to that is Title X or, excuse me, Title XXII and that is this: that Congress has set forth a great number or many more controls over the instrument of National Banks.

They have the power to pass on their mergers, appoint receivers, to pass on the or approve on the stock that they issue and that brief – they would take -- there are number ones which I have set forth in my Brief but they explicitly have (voice overlap) much more authority.

Justice Abe Fortas: You have this in your Brief?

Mr. James D. Mckevitt: Yes, I do, Your Honor.

I think it is in Title XXII.

I would like to point out, for example the inside operation of the American National Red Cross.

Yes it's true that they do have their national headquarters here on the United States Government land and interestingly enough, the next building to the South is the Daughters of the American Revolution.

But at the same time, let's go to the Trade Michigan where they have a commercial building which they operate for a profit which the money goes back into the operation of the National Red Cross.

Let's take for example the fact that through out the country, they retain private legal counsel.

They have a private public accounting firm.

They have two audits every year and one is conducted at their expense by asking themselves certified public accountants and the other is conducted by the Department of Defense and they are required to reimburse the Department of Defense for the audit.

Now, this is one of the checks that the United States Government makes upon, but at the same time, the interesting point is that the United States Government does not give them any money.

In fact, the Red Cross over the years has prided themselves on the fact that they receive no money from the United States Government.

The Red Cross does not have a title so to speak in the American National Red Cross and in fact, looking at their motor vehicles, they are titled in the name of the American National Red Cross.

Through out the states, they have -- they title their vehicles in their respective state registration requirements.

There are nurses who are subject to local and state registrations and they subject themselves to withholding tax, for example, in the State of Colorado and another states.

These matters are also set forth in the record.

Now, counsel points out this case of Standard Oil versus Johnson, which this case is previously entered as decision in 316 US and which is set forth in both Briefs and, I think that that case is not controlling so far as this case is concerned.

In fact, I think, it is easily distinguished.

In that case, we talked about an army post exchange, a situation or a post exchange that was run by a member of the military service where the money is originally appropriated from the treasury to run the post exchange where salaries are paid by the United States Government for employees to run this and in the event that it closes up, the reversion of profits or balance goes back to the treasury.

I submit another or in fact a better test insofar is the question on these matter is concerned is the case of Unemployment Compensation Commission of North Carolina versus Wachovia Bank and Trust, this is North Carolina case which is set forth on my Brief.

And in there, the Court, the North Carolina Supreme Court, stated five elements to determine what constitutes a government instrumentality or agency.

One was, did the government create it?

Well, that's applicable here.

No. 2, is that wholly owned by the government?

This is not true here because it is not even partially owned by the government.

Three, was it operated for profit?

Well, this would be applicable here, the Red Cross is a non-profit organization.

Is it engaged primarily in the governmental function is the forth test and we submit, the evidence was substantiated, that this is not their primary function.

This is one of their functions, but this is not their major function.

And the fifth and most important test is whether the proposed tax such as the Colorado Employment Security Act tax, which would come out of that Act, would that impose an economic burden on the Government of the United States?

And I submit that this would not be the case.

The United States Government would not be subject to this tax or would it create a burden on the United States Government in this regard.

And this comes to – one of the key issues, I think the point is, that the reason the instrumentality exemption is set forth is to prevent a burden, undue burden on the United States Government.

There would be no tax imposed.

The United States Government would not be obligated in anyway for the payment of this tax and for such reason I think that that's the key test along with the other onus in the Wachovia case to show that Red Cross does not qualify as an agency of the United States Government.

I've already pointed out the four functions of the American National Red Cross.

I would like to refer to another case, that's Miller versus City of Greenbelt and in that – it cites also Grace versus New York, 306 US 466.

In the language of the Court there, I'm referring to Grace versus New York, says that, “when the National Government lawfully acts through a corporation which it owns and controls, those activities are governmental functions entitled to tax immunity”.

That is not the situation here.

Concluding on this particular point, I think that the status of the Red Cross is best defined by Mr. Basal O'Conner, who was National Chairman of the American National Red Cross in 1946 and this is set forth in his quotation in the appellee's-plaintiff Exhibit “8” -- “18” which is the 1946 American Annual or American Red Cross Annual Report.

Mr. O'conner stated “the International Red Cross Committee has always maintained that the National Societies, while cooperating closely with their own government and with other agencies but at the same time remain independent.

This explains to a certain extent the unique position of the American Red Cross in the light of the country.

Cooperating closely with the government it is in no sense a part of the government.

Working hand in hand with many agencies, it still retains its freedom of action.

And now, Your Honors, I would like to address my next remark issue no. 1 and that is the jurisdiction so far as the United States District Court is concerned.

First of all – sir?

Chief Justice Earl Warren: Before you get to that, do you have any comment to make on the colloquy between Congressman Ikard and Congressman Mills, the chairmen of the Committee that reported the Bill out in which Mr. Mills said, “the gentlemen have very clearly stated when I say the understanding that I have of the Bill in this respect.”

Certainly, this statement is a very clear reflection and he said that similarly it is not the intention of the Bill to remove the present exemption of Red Cross employment from the State Unemployment Compensation.

Mr. James D. Mckevitt: Mr. Chief Justice, I was going to answer that question, my third argument but I'll answer briefly now.

I have submitted on page 41 of my Brief three decisions of this Court which I feel would defeat any significance to be given by that testimony or statements by members and committee because of the fact, if that was such a vital concern, Congress had the power to expressly exempt the American National Red Cross from coverage under the 1960 Amendment.

And the 1960 Amendment makes specific language which specifically exempts only certain organizations or a certain type of organization.

And, I submit on the basis of the Aldridge Case, the Pennsylvania Railroad Case, in the United States versus Trade Association that this could not be given construction in determining the intent of Congress.

Does it answer your question, Mr. Chief Justice?

Chief Justice Earl Warren: Well, it states your position.

Mr. James D. Mckevitt: Alright, sir.

So far as the jurisdiction of the US District Court in Denver's concern, Your Honors, we based our objection and feel that the doctrine of abstention should have applied in this regard in that the US District Court should have refused to accept jurisdiction of the matter because of Title XXVIII, Section 1351 which as Your Honor is well aware provides that the Courts shall not enjoin the assessment of state taxes when the relief may be had in state courts.

Now, we submit that the United states or should I say (Inaudible) that the American National Red Cross had an adequate remedy in the Denver District Court under the provisions of Chapter 82 Article IX and Section 9 of the 1963 and then the 1953 Colorado Revised Statutes.

They simply had to ask for a refund, have an objection applied or refusal thereto and immediately file suit in the Denver District Court for an interpretation or for a judicial ruling on their entitlement or non-entitlement to a refund under the Colorado Employment Security Act.

Justice Potter Stewart: Well, the United States (Inaudible) to one side was made a party to this case, wasn't it?

The United States America --

Mr. James D. Mckevitt: Yes, Mr. Justice Stewart, they were.

Justice Potter Stewart: And according to the counsel for the United States, that statute has been held many times not to be applicable to the United States.

Do you accept those authorities with --

Mr. James D. Mckevitt: My answer to that is this.

I think that it touches upon a gray area because they touch – they mentioned first of all the Arlington case and the Livingstone case.

Now, those cases don't just give unqualified authority on applicability or non-applicability of 1341 whether is the United States named as a party because in the Arlington case, they refer to it not being applicable where the United States has the proprietary function.

And this was a case where Bottomly, a naval officer his taxes were involved.

The Livingstone case referred to the question of whether the United States has a pecuniary interest.

And I submit, perhaps that this is a fine point, but I submit that in neither of these cases, that the United States have a proprietary interest or a pecuniary interest.

In fact, they did not even allege in their complaint nor did they prove it.

The unique part is that they were dismissed throughout the trial and then they reinstated at the end of the trial from the motion to strike.

And for such reason, I submit that the Arlington and the Livingstone case, although being warm on the subject, are not absolute authority for this premise.

I would also point out the fact that proprietary insofar as Webster is concerned, is one who has exclusive title or ownership in something and this is certainly not the case with the United States Government.

Now, there a question also arises that would they have an adequate and speedy remedy at law?

There's no doubt the United States has presented cases here which have merit upon this point, but there are also cases to the contrary.

And, I submit that -- of course, I will submit that these cases; one of them is the Toomer versus Witsell case, the previous decision of this Court and I submit that Matthews versus Rogers, although it's not the case in point, has language which has significance as to the reasoning behind it.

And, I cite the Washington case of State versus Police Court of Seattle and they say there is not a general rule; it depends upon the facts.

The interesting point of this case is the US District Court made no ruling on the question of interest so that they say they were not entitled to interest on the refund.

That's as far as they went.

And, I question the logic of -- and perhaps this is through my ignorance, Your Honors, but why this would have so much bearing so far as the awarding of interest is concerned on a plain and adequate and speedy remedy at law.

Because the main thing is, as the Washington case points out and also the Matthews versus Rogers decision of this Court, it goes into a much greater significance so far as the reasonable remedies which they have.

For example, one of the cases that talks about - I think it's the Matthews case, that talks about where there were four hearings involved instead of two and they said that regardless to that fact that there would still be -- this would not deprive them of a speedy and adequate remedy.

Now the Toomer case for example is where the Georgia Fishermen sought to enjoin the South Carolina Tax Commission for taxing for fishing in South Carolina territory and in that case, there was no discussion about refund one way or the other, but there's no language by the court to show that a refund of interest would have been paid and yet, this Court held that there was jurisdiction there in the state court.

Now, I'd like to answer lastly the third question and that is, if this Court is to rule that the American National Red Cross is an agency or instrumentality of the United States Government, has Congress waived its immunity?

And in doing so, I'd like to go into background once again and that is the Federal Unemployment Tax Act which is set forth in Title XXVI, Section 3301 in sequence, and the Federal Unemployment Tax Act, I think has to be understood from its basic roots to understand what Congress did in 1960 and that has thrown exception in the 1930s.

The Federal Unemployment Tax Act was set up as a sort of a guideline to the states saying that you will pass laws if you wish to tax in your states, certain employers but we will provide minimum standards.

They used to be, for example, eight or more employees for a period of 20 weeks.

Now, one of the minimum standards is four more employees for 20 calendar weeks in one year.

And so they set forth these minimum standards and the states go along and they have different discretions on certain matters.

For example, Alaska, Colorado and Hawaii tax non-profits; the rest of them do not.

Congress has not stated that you have to tax non-profits, but they say -- they don't also say that you cannot, excuse me -- they don't say that you can't tax non-profit organizations.

So this is a discretionary matter with the states, but the reason 3306 (c) (6) of Title XXVI comes into play here is the fact that Congress has made it very clear that they don't want the states to tax Federal employees because they are already covered by the United States Government.

In other words, civil service employees of the United States Government are covered under the Federal Unemployment Tax Act.

And when a person is laid off or has a claim for unemployment benefits, he files a claim and the claim is filed through the state agency who acts as a dispersing agent only and yet it is governed under the Federal Unemployment Tax Act.

And so, my point is this, that in referring to this law, the state, and I would like to point before my argument is closed, I noticed just recently that in page 38 of my Brief, Section 3305 has the old laws instead of the new laws and the new laws are set forth in the appendix, and my apologies to the Court for this error by the printer and also by myself.

But taking these, was briefly in sequence, 3301 is the start of the Federal Unemployment Tax Act.

Then 3306 was amended and it provides that the legislature of the states my tax instrumentalities of the United States Government in certain instances.

And then, in fact, it's set forth in the appendix of my Brief, page 45, it says, “The legislature of any state my require any instrumentalities of the United States other than an instrumentality to which Section 3306 (c) (6) applies.

And that is the only specific exception set forth by the Congress of the United States and so we have this enabling legislation in 1960, effective of 1962 and the State of Colorado already have a law on the books which is set forth on my Brief, enabling the Department of Employment to tax instrumentalities.

And so, we look to the language of 3306 (c) (6) and in there, and this is the only exception which Congress has not waived its immunity, its service in the employ of the United States Government or an instrumentality of the United States which is wholly or partially owned by the United States.

This is not applicable to the American National Red Cross.

The other exception is (b) where it says, “Exempt from the tax imposed by Section 3301 by virtue of any provision of law which specifically refers to such Section or the corresponding section of prior law in granting such exemption.

It's also is not applicable to the American National Red Cross because there is no specific reference to 3301.

And for such reason, I submit, Your Honors, that Congress' intent in setting up this 3306 exception was to say, “you may tax instrumentalities, but do not tax our employees.

We already cover them as a self-insured so to speak and for such reason it would be ridiculous.

That completes my argument.

Thank you very much.

Justice Abe Fortas: Are you satisfied that this is a proper case for a three-judge court? You have not briefed that point, have you?

Mr. James D. Mckevitt: I addressed my matters to the Court in the beginning of my Brief and I appreciate you bringing that point up.

I submit that it's a two-fold situation.

The Court must first of all find that this – the American National Red Cross is an instrumentality and that the United States Government had a proprietary or pecuniary interest in this matter before it can go back to this question of jurisdiction.

If it finds that it's not an instrumentality of the United States Government, then it would follow that it would defeat the jurisdiction of the United States District Court as well, but it would probably resolve the matters in entirety by that ruling and that's why, Mr. Justice Fortas, why my opening argument was the question on instrumentality.

Have I answered your question?

Justice Abe Fortas: Well, if it works the other way around though and we think that the Red Cross is an instrumentality of the United States then what would your position based as to whether three-judge -- this is a proper case for three-judge court?

Mr. James D. Mckevitt: Well, my position, it was in all candor I think it's hard though as an officer of this Court to openly advocate to say that the Livingstone case and the Arlington case don't resolve it because in effect, by dictum they probably do and in this Court would have jurisdiction and so would the US District Court, but there is a fine distinguishing factor there.

I mentioned this as a part of this argument.

Chief Justice Earl Warren: Mr. Levin?

Argument of Jack S. Levin

Mr. Jack S. Levin: Mr. Chief Justice, may it please the Court.

We have dealt with the jurisdictional issues at some length in our Brief and I would be happy to answer any specific questions, but if there are none, I would pass on to the merits of the case.

The American National Red Cross, the organization which is here in issue is, we submit, an organization which is formed by the Federal Government and which performs a large number of important Federal duties in close coordination with the other Federal agencies.

We agree to a certain extent with the argument that counsel for the appellant has made.

The employees of the American National Red Cross are not the employees of the United States, any more than the employees of the National Bank are the employees of the United States, but we don't believe that that is a lone determinative here.

We think that it is necessary to look at the operation of the American National Red Cross, the functions it performs, the degree to which it performs them in close coordination with the United States and the extent to which the American National Red Cross is provided with services, facilities, supplies, etcetera by the United States Government.

Justice Potter Stewart: Fact that it was created by the Federal Government is of course not dispositive, is it?

Mr. Jack S. Levin: No, it is not dispositive.

As counsel of the appellant points out Title XXXVI of the United States Code contains the charters of a number of federally incorporated organizations.

The Congress, of course, never put the Red Cross as charter in Title XXXVI, the revisers did and Congress has never approved that, but Congress has recently enacted a statute that we think is helpful in this regard and it's not mentioned in our Brief.

Section 1101 of Title XXXVI provides that the following corporations,” and then it contains a list, are constituted as “private corporations established under Federal Law, Private Corporations”.

It uses this term in making certain requirement that they be audited by CPAs etcetera and in listing the corporations which are private corporations established under Federal Law, Congress listed each and every organization within Title XXXVI with four exceptions; three of them are commissions wholly financed by the United States the officers of which are wholly appointed either by the President or Office of the United States Government regulating battle monuments and civil wars, centennials and things like that and the only other organization which is not listed there is the American National Red Cross.

Before 1860, it was not uncommon for an army after a battle to retire from the field, to regroup and press on the battle and leave it wounded and sick soldiers on the field.

Therefore, in 1864 a number of governments convened in Geneva and signed what is the First Geneva Convention.

That Convention, for the first time, imposed upon the member governments, the requirement and the duty that they care for the sick and wounded of both sides in a conflict, both their own and their enemies and they authorized each member government to form a red cross society, a national red cross society.

The United States became a party to that treaty in about 1880 and shortly thereafter, the American National Red Cross was formed.

In 1900, Congress for the first time gave it a national charter.

Now, whatever the status of the Red Cross was up until that time and beyond up until 1905, we submit that in 1905 an Act which Congress passed, made it a Federal instrumentality.

At that time, Congress passed what is referred to extensively in our Brief as the Act of 1905.

It dissolved the existing Red Cross society and it formed what is now the American National Red Cross, the charter for which is in Title XXXVI.

It gave this new Red Cross society, the American National Red Cross, all of the property and delegated to it all of the duties and the word “Duties” was specifically used, of the old Red Cross society and designated it the new American National Red Cross as the organization which is to perform the duties of the United States Government under the Geneva Convention of 1864 and any future convention of similar nature and there have been two: 1920 and 1949.

In the preamble to that Act, the 1905 Act, Congress said this.

“The importance of the work of the Red Cross demands a repeal of the present charter and the reincorporation of the society under government supervision”.

In the Act of 1905, Congress gave the President of the United States the power to appoint two-thirds of the Red Cross' board of directors, including its chairman.

It provided that the Red Cross was to be audited each year by the Department of Defense and the War Department and that the Red Cross was to submit audited statements both the detailed report of its proceedings during the year and a detailed full and complete itemized account of its receipts and expenditures.

Now, the provision regarding receipts and expenditures still remains and each year, the Department of Defense performs an audit.

The Congress subsequently saw fit to reduce the number of appointees which the President makes to the Red Cross' board to less than the majority.

But as Congress has shown in some more recent legislation, specifically a 1956 Resolution or a 1952 Committee Report, it still regards the Red Cross as adequately supervised by the Federal Government even though it no longer has a majority of its board appointed by the President.

And I think that the remainder of my argument would demonstrate that that is adequately briefed.

In the Act of 1905, Congress first designated the Red Cross as having the duty to perform the United States' obligations under the Geneva Conventions.

It also delegated two other functions to the Red Cross, both of which, I submit, are important governmental functions.

First the job of rendering aid to the military services of the United States, all branches of the armed services; and second, the task of carrying on disaster relief in case of national disasters.

I would like to take up in some detail each of these three functions which the Red Cross has since 1905 performed.

First its Geneva Convention duties; these might include such duties are caring for or supervising the care, a medical care given to captured enemy wounded.

It might include the inspection of facilities afforded for either American troops captured by the enemy or given to enemy troops captured by the United States.

It also includes the arranging of communications between US Soldiers in enemy prison camps and their families at home.

It includes the transmitting of food parcels and supplies, medical supplies, clothing from the United States to our troops who were imprisoned abroad.

For example, during the second World War, the Red Cross was instrumental in arranging and through the International Committee of the Red Cross transporting to American troops in Germany, Japan approximately 30 million parcels over the course of that four-year conflict.

It also arranged a large number of communications back and forth between families of US servicemen captured abroad and those servicemen.

All of these activities, of course, require the closest coordination between the American National Red Cross and the American Department of Defense and to some extent, the State Department because contacts with foreign governments both directly and through the International Committee of the Red Cross are certainly of interest to this government.

Justice Byron R. White: Do you say that the exempts to the Red Cross as the instrumentality rests on this Congressional assertion over the exemption or is this or just a judicial idea that federal instrumentalities should be exempt?

Mr. Jack S. Levin: Well, Mr. Justice White, I submit first of all that it is an implied exemption from the Constitution that when Congress creates an organization, gives that important Federal functions to perform, arranges for to do so in close coordination with the United States Executive Agencies including the Military, State Department and when it provides some financial support for it and takes all the steps, which it has done with regard the American National Red Cross, that the Constitution grants it an immunity just as this Court held in McCulloch versus Maryland with regard to the original bank of the United States which, of course, was 80% owned by private shareholders and the 20% by the United States –

Justice Byron R. White: But you don't think that the statute that we're dealing with here attempts to grant any more of an exception for federal instrumentality that would be true under the case law?

Mr. Jack S. Levin: Well, I think that the Constitution is sufficient to achieve the purpose which we are here discussing.

I think, however, that if this Court would have find for some reason, which I cannot at this time conceive, that the Constitution is not sufficient that the statutes here in question would affirmatively grant an immunity.

Justice Byron R. White: You think any entity which performs to any extent as the federal instrumentality if the Federal instrumentality right across the board is short?

Now, let us assume that 95% of the work of Red Cross is a “Case work”, social service work, and it is certainly the Red Cross that it did deal of it, all the private operations.

Let us assume that 95% in this work, does that 5% was billing all these things that you say require such full close coordination [Inaudible] the government?

Mr. Jack S. Levin: I shouldn't think that if an organization did 5% of its work in close coordination with the government and 95% of its work privately that it would become an instrumentality of the United States.

I should think, however, that the facts show, as I will endeavor to prove here, that the Red Cross is not in the category of organizations which you have described.

The Red Cross doesn't give an incidental amount of its effort to cooperate with the United States.

Justice Byron R. White: But what (voice overlap) -- shouldn't take your time that you're going to cover but I would have – you might address yourself to why it has to be one way or the other.

Does it really have to be either one way or all the other way?

Mr. Jack S. Levin: For what might you said that it is partially tax exempt, the salaries –

Justice Byron R. White: Like a lot of charitable -- in fact laws of the United States, for example, might tax some operations of charitable Foundation than others?

Mr. Jack S. Levin: I certainly think that would be conceivable solution that Congress could enact.

I'm not sure that the present statute do enact that sort of the solution.

Justice Byron R. White: And so you do rely on this statute?

Mr. Jack S. Levin: No.

I rely on the Constitution and the statute would have nothing but a negative effect, a waiver of the Constitutional immunity.

Justice Byron R. White: So you think the constitutional immunity that you're talking, you're relying on that has no room in it for saying that “well, entity was performing for the United States in part and in part it isn't and to the extent it is exempt from paying taxes?

Mr. Jack S. Levin: All I can say is that there had been no of such cases that I know of reaching that conclusion.

I don't think that it would be an inconceivable result.

Certainly, that result could be reached and I submit, Mr. Justice White, that if that is the result this Court reaches, then not 5% but 99.5% of the Red Cross' activities would be covered.

And that –

Justice Byron R. White: Your assertion is that we should not reach the constitutional exemption of instrumentalities, any such construction either are or they aren't?

Would that --

Mr. Jack S. Levin: My position is that you need not reach that question in this case because the Red Cross' activities as I will demonstrate are 99% or 95% directed towards achieving its federal duties and that many of the things which –

Justice Byron R. White: Would you speak with that in Colorado?

Mr. Jack S. Levin: Well, I'm talking about worldwide.

Justice Byron R. White: The record of that performance of the Red Cross in the State of Colorado --

Mr. Jack S. Levin: The record has very little in it about any specific activities within Colorado.

The record has a great deal in it about the general activities of the Red Cross and the purpose for which the local activities take place.

For example, if you're referring to blood collection drives --

Justice Byron R. White: Let us assume that in that State, the Red Cross does a very large amount of work and none of that, however, in that category about this [Inaudible] and all of that activity in the State are wholly private, unconnected, disconnected with the United States Government.

Not a single employee in that – say they got 500 and not single one of them was doing the work --

Mr. Jack S. Levin: I would try to answer your question this way.

I would ask your indulgence to pass on to the next point I've got here and then come back to it because my next point is, many of the activities which the Red Cross performs for the military and in disaster relief which require the existence of State and local chapters and the way in which those State and local chapters are integrated into a nationwide and even a worldwide network which are absolutely essential for the performance of the Red Cross' duties.

I would find your question very difficult were this not the fact. Certainly, if there was no one with any given state performing any federal duties or any federal functions, it would be difficult to say that the employees within that state couldn't be taxed.

But I submit that that's not the case.

Justice Byron R. White: And how come then that we don't need to record evidence about what the situation really is?

Mr. Jack S. Levin: Well, I think we do have record of evidence.

We have testimony among other things from the mid West Region Manager of the Red Cross which includes Colorado and he talked in here about the services which are performed in the mid West Region and in general about the services which the chapters performed.

He did not say, “This Colorado Chapter performs this service”.

The inference is there, it's pregnant.

In every sentence he says that he is not trying to –

Justice Tom C. Clark: May I ask?

I thought basically that the government provision was that this is an instrumentality immune from state taxation and that the immunity has not been waived by the Congress (voice overlap)

Mr. Jack S. Levin: That is correct.

Justice Tom C. Clark: Well, what difference does it make whether everything that it does in Colorado may be outside the -- may be the kind of thing which doesn't have a particular governmental phrase.

If you're right, doesn't the immunity apply that hasn't been waived?

Mr. Jack S. Levin: Yes.

Justice Byron R. White: (Voice overlap) one way or another?

Mr. Jack S. Levin: I would take the position that it's either one way or another, yes.

I could conceive of this Court reaching a different result but I don't think it's warranted either by the facts or by the law or by the cases this Court has decided.

Justice Hugo L. Black: Suppose that when an institution that the government selected, a waiver congressionally thought of coverage [Inaudible] by the Government under the same provision?

Mr. Jack S. Levin: I think that in that case, it could become an instrumentality of the United States and it would depend on the facts, such as the facts I'm here discussing.

One point –

Justice Hugo L. Black: Well, that indicates doesn't that it's not at all one way or the other?

Because you don't think this would [Inaudible] that any time the government creates a corporation?

Mr. Jack S. Levin: No.

Justice Hugo L. Black: -- used in collaboration with the government and it becomes immune from Federal taxation --

Mr. Jack S. Levin: No, of course, not.

But if the government created a new corporation to be engaged in ship building and this organization was a non-profit corporation, some of the officers of which were appointed by the President of the United States and which the United States supplied a great deal of aid to in the form of supplies and services and personnel, transportation, communication, millions of dollars worth of services annually and this organization then built ships solely for the use of the United States Government and naval officers were working in that shipyard hand in hand with the other employees of this non-profit corporation, I think that on those facts, it would be very likely that that corporation would become an arm of the Federal Government just as this Court held –

Justice Hugo L. Black: [Inaudible] institution which the Congress accepts to give tax exemptions [Inaudible]

Mr. Jack S. Levin: Because I think this Court has traditionally held over the years that in the absence of a waiver where the organization is, as I've described it, it has by force of the Constitution itself a portion of the United States' immunity.

Justice Hugo L. Black: By force of the Constitution or acquiesce?

Mr. Jack S. Levin: By force of the Constitution.

In the Clallam County case decided by this Court a few years ago involving a government corporation formed to build not ships but their airplanes for World War I which was a non-profit organization staffed by the government people at the high levels and the executive positions, this Court held that it had an immunity.

Justice Hugo L. Black: [Inaudible]

Mr. Jack S. Levin: I think that that would be one factor to be taken into consideration.

A profit making --

Justice Hugo L. Black: (Voice overlap) consideration as to whether to constitutionally exempt or whether it's impliedly exempt by Congress, a difference between constitutionally exempt?

Mr. Jack S. Levin: No, I've been using those two terms as meaning the same thing.

Let me define them further.

When I say “Constitutionally exempt”, I mean exempt by the force of the Constitution without Congress saying a word, but Congress can waive that exemption.

It has implied Constitutional exemption and that's just what the Court said in the Clallam County case.

This Court said that the immunity is derived from the Constitution in the same sense and upon the same principle that it would be of expressed in so many words.

Justice Hugo L. Black: While it being a non-profit and a profit corporation?

Mr. Jack S. Levin: It could be.

This Court so held in McCulloch versus Maryland with regard to the bank of the United States which was a profit making corporation, 80% owned by private shareholders.

It could be but I think that that's one factor to be considered.

This Court would be much less likely to conclude that a given organization, if it were a profit-making organization.

Justice Hugo L. Black: But why, on the constitutional basis or on the non-constitutional?

Mr. Jack S. Levin: On the constitutional basis.

The United States doesn't typically form profit-making organizations and make them instrumentalities tax exempt.

Unknown Speaker: What is this Colorado tax?

Mr. Jack S. Levin: This Colorado tax?

Unknown Speaker: Yes, what is it?

Mr. Jack S. Levin: It's unemployment compensation tax.

Unknown Speaker: What is it used for?

Mr. Jack S. Levin: It used partially to pay an employment compensation benefits to the employees of the particular employer who has been discharged.

Unknown Speaker: Does the Red Cross have any other way to – to each of the people of the VP employees to be protected, etcetera?

Mr. Jack S. Levin: The record doesn't speak on that.

But I say that –

Unknown Speaker: Does this mean that the states does not have a right of this kind of fact as this one group of employees in United States who would be left out to picket?

Mr. Jack S. Levin: I'd like to try to answer that in two steps.

In the first place, Your Honor, the State of Colorado does not impose a tax on the Red Cross, directly in proportion to the benefits which its employees received.

As we stated in our Brief, the State of Colorado sought the tax and didn't back tax the Red Cross over $28,000 in the 3 ½ years in Colorado that this suit was in progress.

It paid out during that period $404 in benefits to Red Cross employees, a ratio of $1 benefits for $70 of tax collected.

Unknown Speaker: That's a challenge to the method of taxation and I must forget.

Mr. Jack S. Levin: I think that it goes to the very nature of the tax.

Unknown Speaker: I'm really rather -- I thought that you had a nationwide system taxation of unemployment in this Country.

I didn't know that Red Cross was repealed.

Mr. Jack S. Levin: Well, Congress in 1966 considered a bill to specifically deal with this point.

And (voice overlap)

Unknown Speaker: We recess now.

Chief Justice William O. Douglas: Mr. Levin you may continue your argument.

Mr. Jack S. Levin: Mr. Chief Justice, may it please the Court.

To deal -- replay with just a couple of the items that were raised before lunch and then hopefully to spend the last three or four minutes on the activities of the Red Cross, it is our position, first of all, that if the Red Cross is, as we contend exempt from state taxation that that would include any type of tax on the Red Cross' operations as what this Court said in McCulloch versus Maryland, that's what this Court has reiterated in perhaps in dozen decisions and this would include the tax imposed upon the privilege of employing individuals.

Now, Congress recognized when it enacted the Social Security Amendments of 1960 that this was the result.

We submit that Congress had a very good reason for waiving Red Cross exempt from State Unemployment Compensation Tax.

This reason is demonstrated by the recent bill that came within a hair of passage in the 1966 Congress.

Both houses passed it but they failed to resolve a few minor inconsistencies in conference.

That bill submitted all charities, including the Red Cross although not by name, all charities to state taxation and required all states to impose unemployment compensation taxes on them but specifically required that those taxes be in direct proportion to the benefits paid out to the employees and Congress in the extensive committee reports and hearings that held on those bills recognized that charitable organizations have a much lower turnover rate in employee, in personnel than do most industrial concerns.

And, therefore, Congress took the position that some states in Colorado was specifically mentioned as we set forth in our briefs in this hearings, some states have been taxing charitable corporations in such a manner that the income from the charitable corporations is used to subsidize the benefits paid out to employees of industrial concerns.

They do not give them adequate recognition for their excellent employee and employment records.

Second, with regards to Mr. Justice White's question, we submit that where an organization is predominantly as is this one, engaged in governmental activities in the entire national organization is a – pointed in this direction and intended for this purpose that whether or not a given individual chapter may engage in more or less governmental activity is not the issue.

We also submit that there is some evidence on the record supporting those Colorado activities, not just mid West Region.

For example, there is a discussion by the mid West Regional Direct of the activities at Fit Simons Army Hospital and that institution is in Colorado.

Unknown Speaker: The US owed an awful lot their American military personnel, and the American Friends Committee, and all sort of --

Mr. Jack S. Levin: That's right.

Unknown Speaker: That can't alone be detected.

Mr. Jack S. Levin: I don't mean in any way to deprecate any of the activities carried on by these many fine organizations but the Red Cross is the only organization which is created by active Congress, heavily supported by federal contributions of services and supplies and activities, a number of the directors of which are appointed by Congress which has imposed upon it federal treaty duties, federal duties in disasters, federal duties with regard to aiding the military.

Many of the other organizations such as the Salvation Army of the US owned do perform some such functions.

Unknown Speaker: USO that's its exclusive function, doesn't it to be of help to military personnel and their family?

Mr. Jack S. Levin: Yes, the USO is perhaps the closest organization to the Red Cross but no other organization comes, I should to say, within a country mile of the Red Cross.

The Salvation Army, for example, contrary to what counsel for the appellant said, the record demonstrates over and over again that the Salvation Armies activities in this regard are much less in extent that those of the Red Cross and that in most federal institutions including all military hospitals, the record is the designated as the organization which will coordinate the activities of all other organizations including the Salvation Army –-

Unknown Speaker: What about in French service committee?

Mr. Jack S. Levin: There's no evidence on the record with regard the American French Committee and I'm not sufficiently familiar whether to speak to that subject.

I can tell you though that Salvation Army is a religious organization.

It has been called the “church”.

It engages in much religious activity and I don't think there's any question but it is not an instrumentality of the United States.

It's formed under state law.

Well, that's one factor.

I think the totality of the circumstances with regard to all other organizations with the USO perhaps been the only other organization that is closed.

None of them come near the Red Cross.

I would like at this point, however, briefly deal with some of the services of the Red Cross provides.

And, of course, I won't get through all of it; we set important detail on our Brief.

For example, the Red Cross provides a great deal of a day to day activity, hand and hand with the Military.

It is the only organization which is designated both by regulations, extensive regulations promulgated by the military which are exhibits to this case by Presidential Order and various other instruments that carries on a whole series of investigations and activities for the military.

One example is that, when a soldier receives a letter of notification that his some member of his family is ill or injured or has died, the regular procedure is to refer that sort of recommendation or that sort of a question to the Red Cross.

The Red Cross then, through military communications channels, which are open to it, contacts their local chapter in that area who makes an investigation and through military communication channels are used free of charged, sends the reply back to the local Red Cross man at the scene whether it be Vietnam or Berlin or wherever.

He turns his report over to the military commander who then uses this as one of the pieces of information and acting on a request for compassionate leave, compassionate discharge, compassionate transfer.

At the time of this trial, which is about two years ago or a year and a half ago, the number of communications involved in this sort of compassionate request for running a 2400 per day.

Unknown Speaker: Yeah, but what is the total budget of the Red Cross?

Mr. Jack S. Levin: Total budget of the Red Cross is approximately a hundred million dollars.

Unknown Speaker: And the federal government doesn't contribute a nickel to that.

Mr. Jack S. Levin: That's correct.

The federal government does, however, provide a vast volume which is not evaluated in money terms.

Unknown Speaker: Let's talk about the money.

Mr. Jack S. Levin: The money.

The Red Cross doesn't receive any money from the federal government.

Unknown Speaker: The graces that all lawfully was that it has some fee, some charges for their services.

Mr. Jack S. Levin: Yes, so far as I know, the charges for their services never exceed cost, for example when they supplied blood, they charge only the cost not –

Unknown Speaker: Does your position will be absolutely the same when the Red Cross, in order to raise its fund, the hundred million dollar it needs engaged in cock-making activities?

Mr. Jack S. Levin: No, my position would not be exactly the same.

I don't' think that that would be a much closer question.

Unknown Speaker: (Voice overlap) – let's just test that out.

Say I have an office building that is brand new office building and all its space is leased at a long terms leases and I give it to the Red Cross.

And Red Cross owns it and earns a very handsome profit of the year of the building.

Now, States wants A to tax in come at B at property taxes and C wants an employment compensation tax as all the employees around the building.

Mr. Jack S. Levin: In the first place, the Red Cross does not actually run any business operation.

It leases out a few building.

They have been left to it.

In the second place, the Red Cross takes no quarrel with property taxes.—

Unknown Speaker: Wait a minute.

The Red Cross does own some building?

Mr. Jack S. Levin: Yes.

Unknown Speaker: And lease them out and earn some money, some income but on the leases?

Mr. Jack S. Levin: Yes, one or two.

Unknown Speaker: And those buildings as you say, should not be subject to this local tax?

Mr. Jack S. Levin: No -- Your Honor, with regard to the property tax, it has been established since the time of McCulloch v. Maryland that a state may impose a non-discriminatory property tax on an instrumentality of the United States.

Unknown Speaker: How about the income tax?

Mr. Jack S. Levin: I should think that an income tax would not be appropriate and would probably not, will not in issue in this case.

I should then think that income tax would be permissible.

This incidentally is a test case, as the record shows and as counsel for the appellants admits.

Thank you very much.

Unknown Speaker: Mr. Chief Justice, may It please the Court?

Excuse me, Your Honor.

Unknown Speaker: (Inaudible)

Mr. Jack S. Levin: I would like to summarize in the last minute I have as follows: First of all, the acts of the Red Cross are voluntary.

It contracts with the government like other organizations to perform these services; no. 2, Congress has not specifically exempted it, their speculation as to what they might have done, but Congress has not so acted.

Other organizations of this type are now covered by the Colorado Employment Security Act and the fourth point is that the purpose the Colorado Security Act in taxing non-profit organizations is not to subsidize the rest of the fund.

We have an experience rating and after three years, if it has a good ratio of unemployment, it would be released from a tax depending the amount of paid in and the amount that was paid out.

That's all I have.

Thank you very much.

Featured:

United States v. Boyd - Oral Argument, Part 1

Wed, 16 Jan 2013 22:48:08 +0000

Case:

United States v. Boyd

Media File:

185_19640420-argument-1

Related Transcript:

185_19640420-argument-1

Transcript:

Argument of Cox

Chief Justice Earl Warren: Number 185, United States et al., Appellants, versus B. J. Boyd, Commissioner.

Mr. Solicitor General.

Mr. Cox: Mr. Chief Justice, may it please the Court.

This is an appeal by the United States and two government contractors from an adverse decision by the Supreme Court of Tennessee in an intergovernmental immunity tax case.

The question presented is whether Tennessee may constitutionally asses a tax upon the use of Government property in the operation of the Government's Oak Ridge atomic energy facilities, the operation for the sole account of the Government by contractors who engaged to supply managerial skills and services without risk of loss or hope of profit beyond the flat fee for their services and overhead expenses.

The facts of the case are essentially very simple.

The Atomic Energy Act of 1946 and 1954 contemplate that production facilities, like Oak Ridge, will be owned by the United States or technically, by the Atomic Energy Commission as agent for the United States.

But they authorized the Commission to draw upon private industry for managerial skill and administrative services and the like by entering into management contract of bringing those services and skills to service for the Government's account.

The identity of the contractors at any given facility may change from time to time or it maybe continuous, as indeed it has in the case of Union Carbide here.

In the present case, Carbide and Ferguson were the contractors at Oak Ridge at all times material to this proceeding.

The Carbide contract can be summarized in four points.

I shall refer to it in a little more detail in the course of the argument but it's enough for now, I think, simply to mention these highlights.

The first place, Carbide undertakes, and this is frankly the language of the contract, to manage, operate and maintain the plants in accordance with instructions from the Atomic Energy Commission.

The character of the work done, impart the schedule of production entirely, is determined by the Atomic Energy Commission.

Carbide, in effect, undertakes to run the plants, not to sell anything to the Government and except in the sense of running the plants not even to make anything that it is to deliver to the Government.

Indeed, the contract expressly stipulates that Carbide makes no representation or warranty whatsoever and assumes no responsibility or obligation that the plants can be operated successfully.

It just goes in there and supplies its services.

Third, I would emphasize that all the plant and facilities, all the equipment, all the materials and product belong to the Government in every substantial sense.

The working capital leave and this is supplied by the Government.

Carbide doesn't bring any of its money to the enterprise.

It all comes from special government bank accounts on which it withdrew.

All the risks are on the Government.

And fourth, it should be noted that what Carbide receives is a flat fee for performing what I call leave services.

The fee covers its profit and in addition, it covers salaries of corporate officials, a certain amount of backup administrative services for them in the home office and perhaps other branch offices and a certain amount of overhead.

I suppose it's theoretically possible, perhaps practically possible that Carbide can increase the amount of its net income a little bit by curtailing the amount of corporate officers and services that goes to this or the amount of overhead.

But that is the only conceivable way that -- that Carbide can affect its net income.

In all other respects, it's exactly like a salary and that is certainly small.

This was, in other words, essentially in undertaking the supply management services for a fee in operating the properties of the United States subject to such directions as the United States chose to give and for the sole use and benefit of the public or of the United States.

Ferguson's contract was essentially similar, although it related to modification of the facilities in the nature of construction work rather than to their operation in terms of producing products or research.

And it involved the kind of services that are preformed under other construction contracts.But here again, the only undertaking you will find when you read the contract was to supply services for a fee.

There was no responsibility for the result.

No promise in the contract to build any particular building and indeed, at the time the contract was executed, no one knew just what the work would be.

Ferguson, like Carbide, used exclusively government property, government equipment, all the way through the operations from start to finish and government money unlike any other edge.

This contract was unlike other construction contracts.

Indeed, unlike other construction contracts even cost-plus-fixed-fee contract that the Commission has at Oak Ridge.

We're not claiming that the doctrines we espouse here apply to all use of property under all construction contracts.

Under these contracts there was acquired a very large quantity and a very great variety of property for use at Oak Ridge either in operating the facilities or in the modification and enlargement of the Ferguson contract.

Justice Potter Stewart: I'm not quite clear what the Ferguson did.

Did it actually supply the -- the carpenters and electricians and so on?

Mr. Cox: Yes.

Justice Potter Stewart: Did it --

Mr. Cox: It hired the carpenters and electricians.

It supplied --

Justice Potter Stewart: Probably sub-contractors actually --

Mr. Cox: I think there were some sub-contractors and there were, no doubt, some direct employees as on any construction job.

What I conceive that it brought to the operation was the organization, administrative organization, the managerial, the executive talent and a considerable amount of construction know-how.

These were really the things the AEC got from.

Justice Potter Stewart: It kind of coordinating and planning?

Mr. Cox: Coordinating and planning but also seeing that it was done through employees they hired.

The reason, Mr. Justice Stewart, that it was done this way instead of by the usual structure program -- contract was three-fold.

In the first place, these modifications came in the course of a rapidly changing technology.

The AEC knew it was going to have to make modification.

At the time they signed the contract, they didn't really know just what it was going to be.

Second, Ferguson's contract, except for one subsequent aspect of it, related almost exclusively to facilities that were in production.

That's why they build something new on a vacant lot.

And the work, therefore, had to be tied in very closely with the production schedules, in other words, the Carbide was doing and coordinated with them.

And then there were aspects where they didn't know just how they were going to do some of these things that they would fit in with production.

So Ferguson said, in effect, "Well, we'll come and do this work as you schedule it, as you tell us to do it.

We will supply the know-how that a big construction company has.

And we will supply the executive organization.

Now, you give us the property, you give us the money, you assume all of risks, you supply the working capital and equipment and we'll do this work of pooling our skill with your directions."

And with Carbide, as a matter of fact, looking over their shoulder too because it had to be fitted in with the Carbide's -- Carbide's (Voice Overlap) --

Justice Potter Stewart: And that's -- who -- who supplied the bricks and the lumber and the structural steel and the (Voice Overlap) --

Mr. Cox: The bricks and -- the bricks and lumber --

Justice Potter Stewart: For the Ferguson Company.

Mr. Cox: -- structural steel, the cranes, the automobiles, the typewriters are on the Carbide side of the operation.

The chemicals, the computers, all was owned and supplied we would say, I'll explain that in a moment, by the United States.

It was procured in two ways.

Part of it, the lesser part in the case of the Carbide operations, but part of it may substantial impart, was obtained by Carbide or Ferguson as agent for the United States using government money withdrawn from a special account with title being bought -- title being taken in the name of the United States and the only obligation to pay being that of the United States.

And that is true of absolutely everything except to few Carbide automobiles that happen to be there and even those were leased to the United States for use in this operation.

That covered absolutely all the property and equipment.

Now, much of this property, which was used, as Tennessee says, by this contractor, was direct procurement by the AEC.

The larger part of it, indeed, in case of the Carbide contract, it place the order, the materials, the bricks and mortar as you say or the chemicals, supplies and equipment were shipped on the AEC's directions and were used in operating the facilities or in making the modifications.

What Carbide and Ferguson did was essentially what any agent would do in obtaining property for its principle and in using the property of its principle.

Tennessee has a --

Chief Justice Earl Warren: How long will this contract to run, General?

Was it to run --

Mr. Cox: Substantial periods.

They have, in fact, run for a period of years.

They'd been extended from time to time.

Chief Justice Earl Warren: And the termination of the contract, is there any -- to be any change in the ownership of any of the property?

Mr. Cox: But -- all would continue in the United States.

Chief Justice Earl Warren: All remain in the United States?

Mr. Cox: It would all remain in the United States.

None of it could pass, could possibly pass to either of these contractors.

The Tennessee, as I say, had a -- has a sales tax, the ordinary retail and sales tax and the compensating use tax with which the Court is familiar that cover articles obtained outside the State and paid a sales tax and are used inside the State.

In addition, it has a correlative provision that it's a special applicability here that appears on page 55 of the Government's brief.

The critical words, I skipped the unimportant ones, provide that, it's right -- just about the middle of 55 it begins, provide that where a contractor uses tangible personal property in the performance of his contract, whether the title be in the contractor or any other person or whether the title holder of such property would be subject to pay the sales or use tax, except where there's a church, such contractor or sub-contractor shall pay a tax at the rate prescribed by Section 67 something around there which, of course, is the rate prescribe for the state sales tax measured by the purchase price or fair market value of the property whichever is greater.

And last, there has perviously been a sales or use tax collected.

Acting under the Tennessee statutes, the Tennessee taxing authorities collected both sales taxes on these sales to the United States and use taxes.

The taxes were paid by the contractor with money furnished by the United States.

Of course, it had to be money furnished by the United States because all the money in this enterprise was put up by the United States.

And suit was brought for refunds by the United States and the two contractors as nominal titles.

I would emphasize that the Government, here, is the only real party in interest that the outcome of this suit, and any doctrine laid down in it, cannot operate to the benefit of any private contractor.

The actual money involved in these cases is small because they were confined to two single months, one for contractor, as you will imagine the total amount of money involved is enormous.

We estimate that there is about $10,000,000 in back taxes and this would operate in Tennessee in the future and undoubtedly, in other States where the AEC is involved in similar operation.

The best of my --

Justice Byron R. White: Mr. Solicitor, this is a -- this is just a one shot tax, I take it on -- it's only taxed once on the property that's acquired.

Mr. Cox: Yes, yes, that was --

Justice Byron R. White: It's not a -- it's not an annual tax on the property it would seem that (Voice Overlap) do you --

Mr. Cox: No, so I confess, I don't see why the arguments made here shouldn't be made in terms of an annual tax on the use of the old plant.

Justice Byron R. White: Yes, yes, yes.

Mr. Cox: I'm unable to distinguish that case --

Justice Byron R. White: Yes, oh, I --

Mr. Cox: -- if they're contention is out.

Justice Byron R. White: Yes, but as a matter of fact, the tax that's collected here, the $10,000,000 is just one tax on new property acquired.

Mr. Cox: Just from these enormous procurements, that's right.

The other thing I was about to say in order to complete the practical picture is that to the best of my knowledge, this method of contracting is confined to the Atomic Energy Commission but this would not -- does not affect, one way or the other, government procurements.

Now, I say to the best of my knowledge, there may be a few exceptions but that's the information I have been able to get.

The court below --

Unknown Speaker: (Inaudible)

Mr. Cox: Well, it may -- it -- it maybe, Mr. Justice and I hadn't thought of -- in that sense but I'm glad I put in the qualification.

It does not -- I do know that in general, it does not affect the Defense Department, I suppose and others like that.

Justice William J. Brennan: But suppose (Inaudible) either I think it -- what we're talking about here in material is not embraced by the proviso at page 55.

I don't really (Voice Overlap) --

Mr. Cox: These are materials not -- you're speaking of the atomic materials, you --

Justice William J. Brennan: Yes.

Mr. Cox: --say.

These --

Justice William J. Brennan: Well, I --

Mr. Cox: -- are materials not embraced by the proviso.

Furthermore, in order to be absolutely accurate, these are also materials which had -- these does not include materials that the Government had been using it some prior atomic energy facility and transferred to Oak Ridge.

The administrative authorities in Tennessee have said they won't tax that but this does involve all new procurements where the title has taken in Oak Ridge or whether directly by the United States which is the larger part of it or by the contractors as agents for the United States which is also a very large amount.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Cox: Except -- well, I -- in general, I accept that but there is one point toward the end of my argument that may not be consistent, Mr. Justice, with an unqualified answer.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Cox: If this is said to be a tax on the privilege or rendering services admitting that the United States gets the beneficial use of the property, then I would say it was discriminatory and be invalid for that reason.

Now, I can elaborate that better as we go along.

But it -- the privilege or rendering services is not generally taxed in Tennessee, that's the gist.

The court below held that the sales tax could not constitutionally be levied on these sales because there were sales to the United States with Carbide and Ferguson acting as agents and it judge that Kern-Limerick against Scurlock was decisive.

The court sustained the use tax upon the ground that Carbide and Ferguson had sufficient discretion to be independent contractors.

In other words, if the court assumed explicitly that the decisive question was the question of agent versus independent contractor and then making control or discretion on this old test, it said that Carbide and Ferguson have enough discretion to be independent contractors from which it assumed it followed that the tax would do.

I think the issue here, in view of the precedents, can be very quickly narrowed to small companies.

A State may not collect, even from a third person, a tax upon the property or activities of the United States.

A tax upon the United States use of its own property is clearly invalid.

I think Tennessee could see this one.

But second, we must concede on our side that the State may tax a private person for the privilege of using government-owned property in the taxpayer's business for the taxpayer's advantage.

So that it's the taxpayer that enjoys the fruits of the use, that's United States against City of Detroit and the companion cases in 355 Unites States and we have no power with them.Thus, as we see it, the real question here is, did the United States, on the one hand, or Carbide and Ferguson enjoy the beneficial use of this property?

Justice Arthur J. Goldberg: (Inaudible)

Mr. Cox: Well, it's -- it's -- here, we would say that any beneficial use that Carbide or Ferguson get is so small.

It's like the beneficial use I get at the library of the Solicitor General.

It's so small that that is really a tax on the property around the use of the property by the United States.

Now, I suppose some of the benefits, Mr. Justice Goldberg, are always divided.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Cox: No, no, they get paid.

Of course, any servant gets paid.

And I will have to argue later, so I didn't suppose there was any real question about it that a State could not tax the chauffer of the President's limousine for the value of the car or the captain of Air Force One, for the value of Air Force One or the Solicitor General for the value of the library.

It --

Justice Arthur J. Goldberg: (Inaudible)

Mr. Cox: No, but the tax is not on the privilege of employing employees.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Cox: First, I would say that whether Carbide is a servant or not and the element of control, in that sense, element of discretion, is utterly irrelevant.

I think that is our first quarrel with the opinion below.

Second, we say that the question, the true test, is to be asking in whose enterprise is the property use?

Who stands to profit or lose from -- in the -- in the sense of an entrepreneur, not of a salary first, from the use of the property?

Who, in other words, enjoys the fruits of the enterprise and therefore of the use to which the property is devoted?

And we say that judged by that test, neither Carbide nor Ferguson enjoyed the beneficial use of the property in present.

Now, if time forbids and it's going very rapidly, Mr. Kramer, who's associated with the Government in this case, will deal with the matter of control or service.

But so far as my argument goes, it is that that element, on this fact, is quite beside the point.

I think the best way to get at the proposition that neither Carbide nor Ferguson enjoyed the beneficial use of this property, so as to make it taxable to them, is by comparing United States against City of Detroit and the companion cases with the facts of the present case.

You will recall it in the City of Detroit, the United States owned industrial properties in Detroit and leased it to Borg-Warner, a private manufacturing business, for use in the conduct of its manufacturing business.

The Michigan statute provided that where exempt property is leased, loaned or otherwise made available to and used by a private person in connection with the business conducted for profit, then the user, the lessee should pay a tax as if he were the owner.

It was held that that tax was constitutional because Borg-Warner was using the plant, in the phrase in the case, for its own beneficial personal use and advantage and this was contrasting where they tax on government property.

The facts of the case make entirely clear, if there's any doubt about it, the meaning of that phrase for its own beneficial personal use and advantage.

Borg-Warner was free to use the property substantially as it wish.

It was free to carry on what business there it wanted to decide what levels of production, what it would make, what it would sell for and so forth.

Borg-Warner, in other words, suffered the profits -- suffered the losses and obtained profit.

Under those circumstances, to have said that the technical United States ownership of the fee or of the reversion exempted this property from taxation would give Borg-Warner, what the Court pointed out, was an unjustifiable advantage because the use of exempt property, in the Court's words, is worth as much as use of comparable tax property during the same interval.

If there were no tax on the properties, I say and as the Court pointed out, it might well give Borg-Warner a distinct economic preference, as the Court said, over the neighboring competitors as well as escaping their fair share of the local tax responsibility.

Now, this case, I submit, is really quite indisputably at the other end of the scale.

There's no question here of a private business getting the benefit as an entrepreneur from the use of this tax-free property.

Tennessee isn't taxing a property that is used for any private advantage in the sense that it wasn't Borg-Warner.

Indeed, it seems to us that it is trying to raise money out of the activities of the United States.

When you go through the contract in more detail, more detail than we have an opportunity to do now, I think this will become wholly clear.

But I would like to take a minute just to point out five particular points.

The contract -- the Carbide contract begins on page 428.

You'll see that the undertaking of the corporation, at the very bottom of 428, is to manage, operate and maintain said plants and facilities and to perform said work and services upon the terms of conditions and in accordance with the directions and instructions, not inconsistent with this contract, which the Commission may deem necessary or give to the Corporation from time to time then the specific plants that Carbide will deal wether mentioned, there at the very bottom of the page and speaking of the K-25 Plant.

The Corporation shall manage, operate and maintain the K-25 Plant in plant C in accordance with programs that prove in rating from time to time by the Commission to produce product K-25 in the amount and that the rate required by schedules to be provided by the Commission.

There is no obligation to produce or to sell anything, as I said before.

The obligation is on the part of Carbide to use its best efforts and that is clearly set forth in Article 9 over on page 450.

Second, I would emphasize that all the proofs of the enterprise, except the benefit of getting experience in rendering services, belong to the United States.

That's true, not only have the main province but it's through of incidental thing.

For example, all sketches, descriptions, notebooks on experiments, all kinds of papers and books of accounts and other proof, all belong to the Unites States from beginning to end and remain, Mr. Chief Justice, in the United States if at any times Carbide leaves the facilities.

Again, all inventions, discoveries, any right to patent or any patents that are taken out, all go to the United States.

So I think it's literally true to say that except for the experience that results from the use of the property, all the proofs go to the United States.

I pointed out in stating the facts that Carbide cannot gain or lose appreciably even by its own skill or ineptness in carrying out contract.

All expenses, losses, all risks, all liabilities are born by the United States under Article 11 of the contract.

And I emphasized again that in the most literal sense, Carbide has no money or property invested here, saved a few automobiles.

And finally, Carbide must not only do the work as scheduled by the United States but it must do it under such directions and instructions as the Atomic Energy Commission may have given.

We realize -- first, let me say that this case, appears to us to be as radically different from the City of Detroit case in terms of use or benefit as any two cases could be.

And second, that it comes squarely within the decision of the three-judge court involving a similar operation at Savannah River in South Carolina which was affirmed by this Court in United States against Livingston.

Now, I realized that some of the companion cases with the City of Detroit, it involved less opportunity for entrepreneurial gain, probably the Borg-Warner had in the City of Detroit case because they involved contracts with the Government and in one instance, a cost-plus contract with the Government.

But the Court made it very clear that the reason the tax was constitutional was that you couldn't distinguish a business conducted from -- for private profits that's sold to the Government from any other business conducted for private proper -- property.

And that the basis for the tax was that the individual enterprise had the right to use the property in the course of its own business.

Ferguson's situation, we submit, is essentially the same.

It is a little harder to distinguish from an ordinary government construction contract than Carbide's arrangement is from the ordinary government procurement contract of the supplies or goods because, of course, a larger part of what a contractor -- construction contractor does is render services.

But if one asked the essential question, has Ferguson agreed to build a building, which is what the contractor does?

Or has Ferguson -- any opportunities for gain or loss, anything invested here?

Then I think that it becomes clear that it falls on the same side of the line too.

It would seem to us that the futility, really, of the claim that Carbide or Ferguson upholds any government property for its own use and advantage, is revealed by the appellee's own arguments.

Now, the first thing appellee says is that Carbide has the beneficial use of this property because it enables it to sell its products made at the other plant to the United States for use at Oak Ridge.

Now, first, I think I can say without fear of contradiction that there's not a shred of evidence to support the insinuation that Carbide somehow is getting an advantage over other contractors in selling chemicals and such supplies to the United States.

Indeed, although I regret the record doesn't show it, this procurement from Carbide is by direct procurement, usually on a competitive bid.

The situation is no different than what it would be if General Electric or du Pont were running the Oak Ridge facility.

And in any event, certainly, the profit from the sales to the Oak Ridge facility is no part of the beneficial use of the property employed at Oak Ridge.

Second, the appellee say, “Well, the experience in using this property gives valuable training to Carbide's employees and officials,” and then when they're taken from Oak Ridge to other parts of the Carbide business, that is a benefit to Carbide.

Well, of course, the experience is valuable but the experience gained in rendering services, we submit, cannot be called the beneficial use of the property.

For example, if I were at a private practice, I would consider it -- of use to my firm to send a young man to work in the office of the Solicitor General and to some other Solicitor General for a period of two or three years and when he came back to my firm, I would think my firm would be to better off.

But I don't see how it could be said that my firm has the benefits of the use of the Department Of Justice Library or of the desk or typewriters that he uses or of books or papers or anything else.Similarly, it's argued here that Carbide receives compensation, as Mr. Justice Goldberg suggested that they weren't engaged in this as a -- out of share altruism.

In that respect, Mr. Justice, I suggest that what Carbide does is just like any employee or official does.

He expects to get compensated for his services and Carbide expects to get compensated for its services.

Now, if they said that Carbide has relatively greater discretion.

In the first place, I would question whether that was true if I can continue to be egocentric, I suspect that I have more discretion in relation to the use of the Justice Department Library or the conduct of government litigation in this Court than Carbide has in relation to the performance at Oak Ridge.

But the real point is that the item of control which seemed to be irrelevant because there is no rational connection between the element of control and the automatic imposition of the tax.

This isn't tax on the exercise of discretion in performing services for the Government.

This purports to be a tax related to the benefits of property and Carbide gets neither greater nor less benefit from the property in the sense of an entrepreneur whether it has wide discretion or some discretion, but not a great deal, or no discretion at all.

It has its widest discretion in fact in the area that Mr. Justice Goldberg mentioned earlier in the direction of the employment of the workforces and its lease discretion, probably, in the use of the property and in the scheduling of production.

But in either event, it has no interest in the fruits of the enterprise and it has no investment in the enterprise.

And I submit that the mere element of control is not something that Tennessee can tax or has really purported to tax.

Now, it would seem to us that that is really the end of the case.

But I suppose that in the exact analysis, there is one question left, that if one agrees, as I think one must, that Carbide has no beneficial use in any other sense than a government servant or employee or official, a post master, a lawyer or a chauffeur or a computer operation or a laboratory technician, then, I suppose, it might be said, strictly -- well, can't the State -- says to tax upon the privilege of rendering services to the Government and at the government enterprises measured by the value of the government property utilized in rendering the services so that the president chauffeur would be taxed on the value of the limousine, the laboratory scientist would be taxed on the value of the equipment and supplies he uses, the man who digs with a shovel would pay a tax on the shovel and the one who digs with a $50,000 crane would pay a tax on the crane.

But first, we say, that this is simply not such a tax.

It doesn't purport to be that kind of a tax.

At such a tax as that would be so arbitrary and capricious in its incidence because I think my illustration show that one, there'd be no relation to anything gained by the employee or enjoined by the employee and the tax that he was required to pay.

That very arbitrariness suggests to me that that isn't what Tennessee is trying to do that they are trying to tax the beneficial use of the property.

And we say that here, the benefits go so exclusively to the United States that this is a tax on Federal Government activities.

But if this does purport to be such a tax, we would say that it is unconstitutional for two reasons or really, because one reason or the other must be applicable and here, I come to the point about discrimination.

In the first place, we would say that such a tax on what was called the privilege of rendering services to the United States, measured by the value of the property that you put -- utilized in rendering the services, is really a tax on the United States and that no emphasis upon form or rather than substance could blind anyone to that point, the measures took place.

On the other hand, if it be said that the form must be decisive that we cannot go beyond saying that this is a tax on the privilege of rendering services for the United States, then we say that it's discriminatory because as it operates, no one is made to pay a tax on the privilege of rendering services to anybody else.

The sales or use tax would be collected, it virtually -- all other cases.

Now, I don't think it can be said that this is an effort to equalize taxation without falling back on the other harm of the dilemma, then it is really an effort to tax tax-exempt property or tax-exempt activities.

And consequently, we say, if the tax must be viewed in this artificial light, then it is unconstitutional as being either discriminatory or really a tax upon the United States enjoinment of its property.

Justice Potter Stewart: I don't understand why it would be discriminatory.

As I understand the Tennessee statute, it would apply, probably, privilege of rendering services to a -- the private owner of -- of the materials from which building were going to be built and he'd hire the contractor to put the materials together and --

Mr. Cox: Well, in those cases, if he bought ticket --

Justice Potter Stewart: -- and -- and make the building.

Mr. Cox: -- in those cases, if he bought the materials, he would already have paid the sales tax on them.

If this would bear only in the case where the sales tax couldn't be collected because it was government tax-exempt property, which I say in effect is just the same as taxing only the Government or only the rendering of services.

Justice Potter Stewart: For you to pay all -- pay the sales tax or use tax be (Inaudible) is it not?

Mr. Cox: Yes, yes.

So that in its actual operation, the only place this would bear is a tax on the privilege of rendering services would be services to a -- tax-exempt persons --

Justice Potter Stewart: How many --

Mr. Cox: -- for the Government.

Justice Potter Stewart: -- exempt from the sales for this tax.

Mr. Cox: Yes.

Justice Potter Stewart: tax.

Mr. Cox: Yes, and it doesn't apply to churches.

Justice Potter Stewart: Right.

Mr. Cox: It's even more precise than that.

I would like to give a few minutes to Mr. Kramer and then save the rest of our time for rebuttal.

Chief Justice Earl Warren: You may.

Mr. Kramer.

Argument of R. R. Kramer

Mr. R. R. Kramer: Mr. Chief Justice and members of the Court.

The Court -- Supreme Court of Tennessee, in determining that this use by the Government of government-owned property was taxable, rendered it's conclusion largely or based its conclusion largely, in note from its opinion, on a decision it made that the relationship which existed between Carbide on the one hand and Ferguson on the other and the Atomic Energy Commission for the relationship of a principle and an independent contractor and not a principle in agent or principle in service.

Getting back toward the question that Mr. Justice Goldberg asked a moment ago, I want to address myself for just a few moments to that question.

I want to point out without reading from the contract, the force of which was read by my co-counsel here, that the Atomic Energy Commission, in awarding this contract for the operation of this great complex to the equipment and the operations at Oak Ridge, included also the operations of the atomic energy at Paducah, Kentucky and it -- under its contract, made with -- I'll talk first about Carbide, with Carbide turned over to them the operation.

But how did it turn over those operations?

In order to be an independent contractor, the person to whom the operations were turned over, must have surrendered all control except as to end results.

There's no doubt about that principle.

But what did we do here?

They reserved -- the Atomic Energy Commission or the Government reserved the right to alter, to change, to control, a portion of that was read to Your Honors.

What did they do?

This record shows that pursuant to that authority, the Atomic Energy Commission issued to Carbide and similar to Ferguson manuals.

Those manuals, numbers, I don't recall the number, amounting to several hundred pages in each one.

And in those manuals were set out in detail what do Carbide must do, how you must handle this, how you must handle that, not just the end result of the appreciable or the nuclear materials but how we must do it.

How far did we go in that?

They went so far, and may it please this Honorable Court, and we must remember that every item of machinery, every item of equipment, every chair down there, every automobile, every piece of pencil, every piece of paper, every pencil, every pen that Carbide used or its employees used there in the operation of this contract belong to the Federal Government.

Carbide had nothing there but eight automobiles which is really -- which is leased to the Federal Government.

Everything that was there that Carbide used to the last analysis belongs to the Federal Government.

Now, how close did the Federal Government control the use of those?

Why it's said that only these people can operate the automobile, only these people can drive a truck, you can only go here with a truck, you can only go here with an automobile.

They exercise that complete control just as in the illustration.

Now, I want to get back to the question that Your Honor asked a moment ago on how far on the labor question did to go on which Your Honor has had something they argue with and then in which I have -- fortunately -- unfortunately had some connection as some they know.

But how far did they go?

It is true that this contract specify, I don't recall the page number here, that the employees of Carbide, the same is true in Ferguson, and one argument I make is to -- what I want to make is to the other except the different nature of jobs, that the employees, and there were some 10,000 or 12,000 of them from time to time employed at a single time by Carbide, there was 1000 to 1,500 a times employed by Ferguson maybe a few more, that those -- while the Government itself had about 1000 to 1200 employees there on the Carbide job, supervising as I'll come to, but what those employees, what was the relationship?

It's true they were the employees of the agent.

They were Carbide's employees, Carbide pay them but pay them with money furnished by the Government.

But, Carbide was not free, may it please the Court, generally, in the field of labor relations.

Here's what actually happened, both Carbide and Ferguson were under this situation that the atomic energy actually controlled those employees the numbers of them, the hours they worked.

If, may it please the Court, Carbide decided that they wanted to work overtime, any group of employees, before they could do it, Carbide had to go with the Atomic Energy Commission and say, “Can we work with these employees overtime?”

If Carbide wanted to give merits, increases and wages, it had to go to the Atomic Energy Commission.

If Carbide wanted to negotiate the collective bargaining agreement with its employees in which it did that some members may know, but what did it had to do?

It had to get that employ -- that -- that collective bargaining agreement approved by the Atomic Energy Commission.

It had to -- it was obligated also that it had to work its employees under the Tennessee Elective Workmen's Compensation Law, Workmen's Compensations Elective Remedy in Tennessee rather than the -- and thus getting around both by an employer or an employee.

Justice Arthur J. Goldberg: (Inaudible)

Mr. R. R. Kramer: No, it --

Justice Arthur J. Goldberg: (Inaudible)

Mr. R. R. Kramer: No.

Justice Arthur J. Goldberg: (Inaudible)

Mr. R. R. Kramer: And I understand your --

Justice Arthur J. Goldberg: (Inaudible)

Mr. R. R. Kramer: The Company determined in its discretion that it wanted to have the Union job, if they we wanted to, of course, they couldn't have in Tennessee, but it wanted to have a (Inaudible), a union shop, and a (Inaudible) on certain conditions.

But before it could go ahead and -- I enter in to an agreement for that union shop, it had to get the approval of the Atomic Energy Commission.

The Atomic Energy Commission could refuse that and did refuse it as the certain groups at one time or another.

But the whole basis of this and true and part of this is on control of cost, Your Honor, but not entirely on control of cost.

AEC control the hours.

Let me indicate another thing in this matter.

Justice Arthur J. Goldberg: Hours relate to cost (Inaudible)

Mr. R. R. Kramer: Yes, hours relate to cost, but may it please the Court, hours also rate -- relate to rate of production.

Hours do not relate solely to cost, hours relate to relate -- rate of production in which was the thing that AEC was interested in.

Let me point out this, this record shows that from time to time, one of these inspectors, and there were many of them, supervisors, of -- for Carbide by AEC, AEC had a 1000 to 1200 on there came along and he said, “Why Carbide you've got 25 -- you've got 25 weekly on this job today, you want to have but five, get 20 of them more.”

And they've got 20 more.

Now, Your Honor may say -- reason this out that that was again a saving of cost but they could say to Carbide, "Put those quickly over on another job and let them work over there.”

And they didn't do that.

Justice Arthur J. Goldberg: (Inaudible)

Mr. R. R. Kramer: In cost-plus-fixed-fee contractors, they, of course, enters a -- but they -- may it please the Court, we say they do not exercise the same degree of control.

This -- their degree of control was greater than it's in the ordinary cost-plus-fixed-fee contract and I think that's established clearly in the testimony of these witnesses.

One thing more I want to point out is to how far these controls went.

If a lawsuit were brought against Carbide down there of something going on with the operation, who looks after the defense of that?

Carbide has to go to the Atomic Energy Commission and say, “What shall I do with this lawsuit?

Shall I defend it?

Shall we employ counsel?

You don't employ counsel you're going to turn it over to the Department of Justice?”

The same thing was true with reference to many of this activity.

I could go on indefinitely, if time permitted, to show --

Justice Hugo L. Black: What actually happens to those lawsuits?

Mr. R. R. Kramer: Pardon?

Justice Hugo L. Black: What actually happens in connection with those lawsuits?

Mr. R. R. Kramer: Lawsuits, well --

Justice Hugo L. Black: Who -- who defend it?

Mr. R. R. Kramer: Occasionally, the Atomic Energy says, “We're going to take care of them.”

Occasionally, Atomic Energy says, “We're going to ask to the Department of Justice.

They may refuse and then or you go ahead and employ private counsel.”

Justice Hugo L. Black: Occasionally, what generally happens?

Mr. R. R. Kramer: Generally, Your Honor, I think 50% of the time, private counsels employed, that's only an approximation.

Justice Hugo L. Black: By whom?

Mr. R. R. Kramer: Private counsel is employed by the contractor.

Justice Hugo L. Black: Is that charged up to the Government with regards to the expense?

Mr. R. R. Kramer: Yes sir, the expense of defending those fee -- those fees for the counsel are refunded.

Carbide gets the refund of those, they are paid back and they paid out of this government money.

Justice Hugo L. Black: Does cost added to that?

Mr. R. R. Kramer: No, sir, no cost added to that.

Justice Hugo L. Black: You mean you don't put that in as a part of the expenses on which they get a fee?

Mr. R. R. Kramer: Your Honor, may it please the Court.

The fee of Carbide is not based exactly on any percentage of expenditure.

The expenditures by Carbide in its contract may go up and down thousands of dollars during a period of six months or a year or there is no adjustment to the fees.

Now, of course, if a great big new project is added on to Carbide, Carbide run the laboratories, Carbide run the machine shops, Carbide run the machine -- the operating park where the materials were refined, Carbide ordered the large part of the chemicals, Carbide had a broad scope not only here but at Paducah, Kentucky and on those propositions, Carbide's -- there's fluctuated from day to day, the amount of work, they did fluctuate from day to day.

They may have had 14,000 people employed by the one day.

Carbide may have had 8,000 the next, that didn't mean a necessary a change in fee.

Justice Hugo L. Black: How many employees does the Government have to supervise (Voice Overlap) --

Mr. R. R. Kramer: The Government had the Carbide from 1000 to 12,000 people sitting there, sitting over their hand, over the --

Justice Hugo L. Black: How many of them supervise, in detail, to what Carbide does?

Mr. R. R. Kramer: I don't -- most of those supervise the details, may it please the Court.

They supervise them to this extent.

They start -- would start to put in a piece of machinery or a piece of equipment.

Carbide with top to AEC people, we think that you can do a better job, you can save a little time, you can save a little money, you can do something by changing this piece of machinery and install somebody else.

We have some know-how.

AEC said, “No, we don't think that's proper.

Before we'll agree to that, we are going to examine ourselves and we are going to give the final word on whether you can put that in or whether you can't put that in.”

“We think,” says Carbide, “we -- you can save money and time by moving this piece of equipment or this, this series of this change or from here over to here.”

Who controls?

Not Carbide.

Carbide can recommend but Carbide's engineer will sit down beside the engineer of AEC and AEC makes the final decision in all of those instances under this record.

Justice Hugo L. Black: But what does the -- what does Carbide do for its money?

Mr. R. R. Kramer: Carbide, may it please the Court, maintains a large purchasing organization and buys millions of dollars worth of material.

Carbide has expert engineers who study this proposition and sit down there with the AEC engineers and participate in the discovery.Remember that this is a new piece of industrial development.

And AEC or Carbide does have a lot to know-how but not with atomic energy but it has capable engineers and "We want the best engineers we can get" says the Atomic Energy Commission.

You put your good engineers down here.

We're -- you're going to get your salaries out of us but we're not going to let that engineer go ahead and just say what shall be done.

We're going to reserve the right to control him and direct him but we want the benefit of his services and we're willing to pay for it because he can help us.

We can't go out and employ all these engineers ourselves.

First --

Justice Hugo L. Black: Was this led by competitive bidding?

Mr. R. R. Kramer: No sir, Your Honor this was not led by competitive bidding.

Carbide went in in 1940 -- well, I don't remember the year, way back under the Manhattan District before the Atomic Energy Act and Carbide had done some similar work not quite as broad as this work.

And then because Carbide had know-how and had experience and knew the situation, the Government went to Carbide and negotiated out this contract and it was in negotiated contract and it's been in effect.

The contractor is -- I think Chief Justice asked about how long it ran, it was originally and executed back in 1946 and it was renewed again in the final long run in the 1960 then an extension later on.

There was -- it was the intention to be continued from time to time right on and on.

Carbide rendered enormous services.

You take Carbide's chemist and so on.

We didn't have perhaps the time to -- and we didn't -- I mean -- I'm saying the Atomic Energy Commission, though Carbide is my client, Atomic Energy Commission needed someone to run its laboratories.

It employed as a part of its laboratory for that new chemical processes and for medical health and for discovery purposes.

It said to Carbide, “Give us some chemists, give us some people who can understand the chemistry of this product then what do we do?

They put that chemist into our library.

We put our chemist into the library.

They study the effect on health and conditions.

They study all of these effects.

But before the decision is reached on what to do and how to do it, Carbide says to them, “This is what we're going to do but we do get the valuable health and assistance from these people.

Highest trained people in America is high.”

But nevertheless, it is not subject as a matter of this handling.

It's not subject to -- only the end-product by the contractor.

It is a detailed supervision from day to day, week by week, month by month and year by year and we work it out together.

But we, AEC says, it has the final control.

Justice Hugo L. Black: Did I understand you to say -- did I understand you to say that the Atomic Energy people, Atomic Energy has 12,000 people and they are supervised from Carbide?

Mr. R. R. Kramer: No, no, it has 1000 to 1200 people.

Carbide had about 12,000 at that time when it -- AEC if I said, I -- I misstated myself.

Justice Hugo L. Black: You probably didn't realize it.

Mr. R. R. Kramer: Now, Carbide has a thousand -- I think it -- it shows Carbide sometimes has managed 1500 to 1800.

Justice Hugo L. Black: And they actually engage and supervise into details of what Carbide (Voice Overlap) --

Mr. R. R. Kramer: Oh, not entirely.

Supervising they were engaged in sitting down here at the drafting table and having their draft.

They were engaged in helping work out the details with these people.

They were supervising the installation of machinery and that sort of thing and part of them.

But others were chemist sitting here in the laboratory helping to study along with the --

Justice Hugo L. Black: They're acting in partnership?

Mr. R. R. Kramer: They were not in partnership because we did not agree to the partnership but we did supervise what the appellate did.

Here's the chemist from AEC sitting here, here's the chemist from Carbide sitting here.

The chemist from Carbide said, "That's wrong.

Let's try it this way."

And (Inaudible) the chemist some Carbide control.

They were not in partnership, they work together but they were not -- this is not a partnership agreement or partnership arrangement or operation.

Unknown Speaker: (Inaudible)

Mr. R. R. Kramer: No, Your Honor.

Unknown Speaker: (Inaudible)

Mr. R. R. Kramer: That's correct.

I agree with Your Honor.

But the difference is here, if Your Honor awarded said -- employ a contractor to build a house and the contractor agreed to build it at so much a day or a month or a year on this particular time.

And if Your Honor reserve the right and exercise this right that was done here to change from two-storey to three-storey, to change the type of placing on that house from brick to stone, to change the whole interior and the number of rooms on it.

Your Honor went there from day to day or have somebody else go there from day to day and supervise that, then Your -- he would not be an independent contractor.

Justice Arthur J. Goldberg: The contractor under the (Inaudible) the owner always does that.

Mr. R. R. Kramer: Well, I think sometimes that happens, Your Honor, but I'm not -- I'm not going to argue with that question.

But I'm saying that there is a vast difference between what we are doing here and the suggestion that -- the question suggested by Your Honor.

Chief Justice Earl Warren: Mr. Solicitor General, you may have five minutes for rebuttal and -- and counsel you may have five extra minutes if you wish --

Mr. R. R. Kramer: I'm sorry I don't (Inaudible)

Chief Justice Earl Warren: -- if you wish.

Alright.

Mr. Rice.

Argument of Milton P. Rice

Mr. Milton P. Rice: Mr. Chief Justice, may it please the Court.

I think that it's well-established, I take it that it is that a state tax is not invalid purely because the economic burden of that tax can be shown to fall upon the Federal Government.

It seems to me that principle has been to our established refute at this late date.

In the Dravo case, the case of Alabama versus King & Boozer, the Esso Standard Oil Company against Evans case and in the Michigan property tax cases to which allusion has been made.

I've been a little puzzled by the absence of any reference to the second and third of those cases that I mentioned, namely the King & Boozer case and the Esso Standard case because it seems to me that they control the situation presented by this case to an even greater extent than do the Michigan property tax cases, although we think that they are wholly consistent in principle.

In both the King & Boozer case and the Esso Standard case, I would emphasize that title to the property in question was solely and exclusively in the United States Government.

The contractor had no ultimate beneficial use of that property whatever.

The only use he had was during the time that he was handling that property and fashioning things out of it for the sole and exclusive benefit of the Government.

He was paid a fee in those cases in the King & Boozer case that was a cost-plus-fixed-fee contract just like this one is.

In the Esso Standard case that was a fee based on the amount of gallon each handle.

But in neither instance, it should be emphasized and it can't be emphasize too strongly.

The contractor didn't have any personal interest whatever in that property.

All of it were downed to the ultimate benefit of the Government and the contractor got through with it, he was through with it.

His interest though was consistent all the way throughout.

He had interest in that property so long as he was using it because that was his business.

It was Esso's business to handle and store this gasoline for the Government.

It was King & Boozer's business to build an army camp for the Government.

Now, I think it's further well-established that a state tax burdening the Government will be stricken down as invalid only in three instances.

One, if it is imposed directly upon the Government, such a thing is almost unthinkable has been since M'Culloch against Maryland anyway.

And certainly that's not what's happened in this case.

This tax is not imposed upon the Federal Government.

It's imposed on a private party.

Secondly, this Court has stricken down taxes which do not impose directly upon the Government itself were imposed upon one whose relationship to the Government were so close as to make it an agency relationship.

In other words, if you can't tax the Government, you can't tax the Government's agent either.

We have no quarrel with that concept.

Thirdly, taxes will be stricken down if they burden the Government, if they discriminate against the Government or those with whom it deals.

We most honestly submit that these taxes are not in any sense discriminatory.

They have not been applied in a discriminatory manner.

Well, this is not a reported case, I can tell the Court that upon the authority of this case, as before us today in the Tennessee Supreme Court's opinion in it, a tax was sustained as against a contractor with a local government in Tennessee where the local government had bought the materials used and turn them over to the contractor but the contractor had no interest whatsoever in the materials that he used.

Justice Byron R. White: That would be true to the church prior to construction.

Mr. Milton P. Rice: We have made an exception in the case of church construction, if Your Honor please, and that is the only exception.

And in that connection, I would invite the Court's attention to the Illinois case of Owen Madison.

Justice Byron R. White: (Inaudible)

Mr. Milton P. Rice: Yes, sir, I do.

Justice Byron R. White: Well, never mind (Voice Overlap) --

Mr. Milton P. Rice: You have to know in Madison against Illinois if the three-judge federal court opinion and this Court dismissed it summarily.

Now, the three-judge opinion held that that did not work discrimination.

The fact that Illinois had made an exception in the case of charities, of course, this is confined strictly to the churches, not just to Owen charities.

The property has got to be for church construction and otherwise the use tax has to be paid upon it.

Now, I can't emphasize too strongly here.

Justice Byron R. White: The three categories what you concede that -- make immunities.

Mr. Milton P. Rice: Yes, sir.

Justice Byron R. White: It makes three.

How about the fourth?

How about the taxes on government property?

Mr. Milton P. Rice: Well, if the tax is on Government property itself, I think that U.S. against Allegheny County undoubtedly would control.

Justice Byron R. White: Well, this is (Voice Overlap) --

Mr. Milton P. Rice: We're talking about an ad valorem property tax there.

Justice Byron R. White: And this -- this is the fourth category.

Mr. Milton P. Rice: Yes, sir.

This is a privilege tax case, however, and I eliminated that category for this reason, this is not an ad valorem tax but a privilege tax as well as the case in King & Boozer and Esso Standard.

Chief Justice Earl Warren: Mr. Rice, have we substituted in this contract for the Government, let us say General Electric, would -- would the petitioner still be liable for the tax?

Mr. Milton P. Rice: You mean if the contractee or owner where General Electric rather than the Atomic Energy Commission.

Chief Justice Earl Warren: Right.

Mr. Milton P. Rice: Yes, sir, he would if --

Chief Justice Earl Warren: You mean exactly --

Mr. Milton P. Rice: -- the taxed are not been theretofore been paid on it on the acquisition of purchase.

Chief Justice Earl Warren: Yes.

But where that -- where would the incidents of that tax fall under your Tennessee law?

Mr. Milton P. Rice: Assuming that the property have been acquired under some circumstances whereby --

Chief Justice Earl Warren: But the --

Mr. Milton P. Rice: -- not necessary.

Chief Justice Earl Warren: -- it was acquired exactly as it is here so -- and the relationship between the -- the General Electric and the -- these people is exactly the same as the relationship between the Government and these people.

Mr. Milton P. Rice: The instance of the tax, if Your Honor please, would be on the contractor.

Now, that's -- that's the case invariably.

Now, of course, if -- so we have, really, in Tennessee, this is a little bit peculiar, we have the normal retail sales tax.

We have also the conventional complimentary use tax.

Chief Justice Earl Warren: Yes.

Mr. Milton P. Rice: And we have added this third category now in which we tax use per se but we give credit of course during the sales tax previously paid with respect to the same property.

Oh, I'll say this, had General Electric acquired the property under some circumstances whereby it had not born sales tax and then brought it into Tennessee and turned it over to Carbide here or Ferguson.

The taxable incident would be Carbide or Ferguson's use of it just as it is in this case.

Justice Byron R. White: Well, if I have a -- if I'm into the State where there's no sales tax and I moved to your State, bring my automobile, all my household furniture, everything I owed and it's all five years old and I move their, I get taxed for used property in your state once.

Mr. Milton P. Rice: Yes, sir.

One time only.

Justice Byron R. White: Everybody.

Mr. Milton P. Rice: Yes, sir.

Justice Byron R. White: Everybody -- doesn't it make any difference -- can you get credit from car sales and used tax (Inaudible).

Mr. Milton P. Rice: Yes, sir, we have a reciprocal provision in our statute.

We give that credit to States to give it to us.

But in general, that's -- that's the correct statement.

I mean everybody is subject to tax once with the provision for credit for any previous taxes paid either to Tennessee or to some other State.

Now, this Tennessee statute -- there's two places that make it abundantly clear the nature of this tax.

Section 67-3003 Tennessee Code Annotated provides that every person is exercising a taxable privilege who uses or consumes tangible personal property irrespective of the ownership of that property or any tax immunity which the owner of that property might enjoy.

These taxes, the ones that have been imposed here, I would emphasize, are not upon procurement.

They are not upon procurement at all.

Now, that question is out of the way incidentally because the Tennessee Supreme Court resolved that in favor of these appellants.

The Chancery Court of Davidson County, which was the trial court, held liability under the statute as a whole.

When the case was appealed to the Tennessee Supreme Court, the -- that judgment was modified to the extent that it was held that these contractors, insofar of their procurement activities were concerned, were agents of the Government for the purpose of procurement only and that the Kern-Limerick case controlled.

They held however that in the general performance of their contractual duties, they were contractors and not agents of AEC.

Therefore, the contractors' use tax, and we have another provision here which I shall read, that's the following section of the Code, it provides that where a contractor uses his tangible personal property in the performance of his contract or to fulfill contract obligations, the tax shall be paid unless it is previously been paid.

Now, insofar as the Government is concerned, we have two sections of our sales tax statute that exempt the Government.

Section 67-3012 exempts the State and local governments any sale to the State of Tennessee directly or to a political subdivision of the State of Tennessee made directly is exempt from the tax.

We have accorded the Federal Government the same advantage.

In 67-3004 we specifically provide that direct sales to the Federal Government or to any agency of the Federal Government created by Congress are exempt from the Tennessee sales and use tax.

We've gone further than that and make them take some special recognition of the Atomic Energy Commission and that we have exempted specifically broad categories of materials which are used there, atomic weapons, atomic weapons parts and special nuclear materials, source materials and several other categories.

We have pointed them out specifically for exemption.

So I would certainly urge in all sincerity that there isn't any purpose or intent whatsoever in the Tennessee sales and use tax statute to discriminate against the Atomic Energy Commission.

We consider them to be a valuable addition to our State.

And we certainly do not discriminate against them and don't want to.

I think our statute makes that clear.

Chief Justice Earl Warren: (Voice Overlap) would the tax prevail?

Mr. Milton P. Rice: Yes, sir.

Chief Justice Earl Warren: The charge --

Mr. Milton P. Rice: No question about it.

Chief Justice Earl Warren: Just the same.

Mr. Milton P. Rice: Yes, sir.

It has in one case that ended in the trial court.

Justice Hugo L. Black: What kind of case was that?

Mr. Milton P. Rice: This was a contract, if Your Honor please, with the town of Millington which is a small place in Shelby County near Memphis.

They engaged the contractor to lay some sewer pipe for them.

They bought the sewer pipe themselves thinking they're going to save the sales tax, turned it over to the contractor.

When the tax them on it, they brought a suit.

And it was tried before the same trial judge who decided this cause and he had just decided it about only a month or so forth.

And on the strength of the holding that he made in this case, he did what he had to do there.He sustained the tax.

Justice Hugo L. Black: What was the tax that was imposed to them?

Mr. Milton P. Rice: Sales or use tax on the use of --

Justice Hugo L. Black: Sales tax?

Mr. Milton P. Rice: Well, it's the same tax, the contractor use tax on the materials.

Justice Hugo L. Black: You hold the use (Inaudible) of that tax --

Mr. Milton P. Rice: Yes, sir.

Justice Hugo L. Black: Not the sale tax.

Mr. Milton P. Rice: The city had gone and acquired the -- the sewer pipe and other materials directly.

Of course, there was no tax collected by the vendor and non-paid for the city, then the city turned it over to these private contractor to use in fulfilling its contract with the City of Millington.

Justice Hugo L. Black: Was that an ad valorem tax?

Mr. Milton P. Rice: No, sir, it's a sale or use tax.

It's the same one we have here.

Justice Hugo L. Black: Privilege tax?

Mr. Milton P. Rice: Yes, sir.

No question it's a privilege tax.

Justice Hugo L. Black: Measured by the value?

Mr. Milton P. Rice: Measured by the cost price or fair market value --

Unknown Speaker: (Inaudible)

Mr. Milton P. Rice: -- whichever is greater.

Unknown Speaker: (Inaudible)

Mr. Milton P. Rice: Those decisions, if Your Honor please, antedate the enactment of this statue we've been talking about.

Unknown Speaker: (Inaudible)

Mr. Milton P. Rice: They establish the proposition that under the Tennessee construction, the contractor is the user or consumer and not a reseller.

And when I say both of them antedate, one of them does not, the S. M. Lawrence case.

Unknown Speaker: (Inaudible)

Mr. Milton P. Rice: Yes, that's a -- a more recent case and it does involve the application of -- of this Section we're talking about.

Now, that was a case of a purchase of some air conditioning equipment by the City of Jackson and some of its agencies.

And the tax was sustained there also.

But most important in this case, I think this Court is aware that this is actually the second round of this controversy.

The first one culminated in this Court's decision in Roane-Anderson against Carson where the question before the Court at that time was the effect of what was formerly the last sentence of Section 9 (b) of the Atomic Energy Act, whether that language served to exempt Carbide and certain other contractors who were involved in that suit from the Tennessee sales taxes.

This Court held, construing that section that exempted the property, activities and income of the Commission, construed it to include the activities carried on by the contractors.

That was in 1952.

Now, what happened thereafter?

In 1953, the Congress of the United States amended the Atomic Energy Act in one particular own and that is to strike that last sentence from Section 9 (b).

Why was that done?

Well, the committee reports are revealing as to the purpose and intention of that action.

S. Rep. No. 694 and I believe that I have excerpts from it on page 23 of my brief, contains this statement, "Thus, the Atomic Energy Commission's contractors, by reason of the statutory exemption as interpreted by the Supreme Court, are entitled to an exemption from taxation which is not enjoyed by comparably situated contractors of other agencies and departments."

That was the conclusion of the Senate Committee after studying the Section 9 (b) in this Court's decision construing it.

Among other things found in this Senate Report, is a letter from the Atomic Energy Commission with respect to the proposed repealing legislation.

This letter was addressed to the Honorable Sterling Cole, who's the chairman of the joint committee on atomic energy.

It was written by the then chairman of the Atomic Energy Commission, Mr. Lewis Strauss.

And here's what Mr. Strauss said, “Reducing the Commission's exemption from state and local taxes to the constitutional immunity generally applicable would result in an increase of several million dollars annually in the cost of the atomic energy program in the form of added state and local taxes born by the Federal Government.”

There, if the Court please, we have a statement by the Atomic Energy Commission itself, "Congress, if you passed this legislation, you are going to cost us several million dollars a year."

Justice Byron R. White: Yes, but that doesn't say that the counts of legislation that takes the way this kind of a time of the tax?

Mr. Milton P. Rice: If Your Honor please, if they were entitled to the doctrine of implied constitutional immunity, it wouldn't cause them anything.

Justice Byron R. White: Well, I know.

But all -- all they intend to do is reduce immunity to constitutional limit.

Mr. Milton P. Rice: But reducing it --

Justice Byron R. White: But do you think they intended -- they didn't intend -- they didn't intend to revoke the constitutional immunity.

Mr. Milton P. Rice: No, sir.

I would suggest they did.

Justice Byron R. White: The one there in the legislative history is of just the facts like this is not within what Congress thought with the constitutional immunity of the Government.

Mr. Milton P. Rice: Well, I don't think we can disregard Mr. Strauss' opinion, if Your Honor please.

Justice Byron R. White: I didn't hear anything like that in his opinion that -- that this kind of attack that we're talking about in this case is outside the constitutional immunity.

Mr. Milton P. Rice: Well, it seems to me that if the repeal is going to cause the Atomic Energy Commission served a million of dollars.

Justice Byron R. White: (Inaudible)

Mr. Milton P. Rice: Well, if Your Honor please, the Carson against Roane-Anderson which prompted this thing was a sales or use tax --

Justice Byron R. White: I know but --

Mr. Milton P. Rice: -- case.

Justice Byron R. White: -- that's all they wanted to do is to get the -- in Carson they stopped.

They stopped that looking at 9 (b).

They didn't get the constitutional immunity but it maybe considerate.

You don't know what's the outcome of that case could have been if it hasn't gotten in the constitutional immunity.

Mr. Milton P. Rice: Perhaps so, if Your Honor please, but the Tennessee Supreme Court -- it held -- it agreed with this Court to Section 9 (b) example but it did also held on a very exhausted opinion that they were independent contractors.

Now, when the case came up here, there was no assignment of error made by the other side on that store.

Justice Byron R. White: Well, there's nothing in the opinion in that case rather than the fact that 9 (b) is addressed to it.

Mr. Milton P. Rice: Yes, sir, it's statutory entirely.

Justice Byron R. White: (Voice Overlap) so they had to get -- doesn't -- did they consider what the Constitution is?

Mr. Milton P. Rice: Oh, it was -- it was free the minute entirely.

Justice Byron R. White: But then the Congress came along and said, "Well, let's get rid of the statutory that's used for -- for exempting the -- even state taxation.

Let's just get rid of it and reduce it to a constitutional question," and there is no suggestion that (Inaudible) -- how Congress thought a case like this ought to be prepared.

Mr. Milton P. Rice: Well, it does involve sales or use taxes, if Your Honor please, just as the first case did.

And there were numerous States who were interested in -- at that time by reason of their sales and use taxes.

Justice Byron R. White: Yes, but they wanted to get rid of the statutory if -- if the statute was a part -- if the statute was a part in taxing this kind of -- this -- if they want to get rid of it.And one thing that they could do to get rid of the constitutional immunity I suppose.

Mr. Milton P. Rice: Well, I would certainly infer that the States who sponsored this were of the opinion that they could prevail on the matter of implied constitutional immunity if you just get rid of the statutory exemption.

Justice Byron R. White: But why they -- they might have been -- they might have been in that opinion but the -- but the -- the finding in the legislative history if Congress was?

Mr. Milton P. Rice: No, sir, I can't say they said so in so many words in there.

But I can escape the significance of Mr. Strauss' statement that is going to cost us a vast sum of money, if you repeal the statutory exemption.

Justice Byron R. White: That maybe so, that maybe so.

It might even -- not even been passed after the Tennessee case.

It maybe that the (Inaudible)

Mr. Milton P. Rice: Well, perhaps so, we can only guess about that.

Justice William J. Brennan: Well, I suppose the fact -- the question of constitutional immunity is now before us to (Inaudible)

Mr. Milton P. Rice: Yes, sir, I think that's true.

Justice William J. Brennan: (Inaudible)

Mr. Milton P. Rice: In this particular case.

Justice William J. Brennan: -- what happens if he would (Inaudible)

Mr. Milton P. Rice: I don't think, however, if Your Honor please, that we can lose sight of the history of -- of this thing.

Justice Byron R. White: Well, you can state -- wasn't this -- Livingston draw on the Constitution (Inaudible)

Mr. Milton P. Rice: Yes, sir, it did.

This Court did not deliver an opinion in Livingston though, it simply affirmed --

Justice Byron R. White: Well --

Mr. Milton P. Rice: -- per curiam.

Justice Byron R. White: The District Court -- the District Court do.

Mr. Milton P. Rice: The three-judge District Court did deliver an opinion by divided court and this Court affirmed per curiam.

Justice Byron R. White: On the constitutional basis of the use tax.

Mr. Milton P. Rice: Yes, sir.

Justice William J. Brennan: We affirmed that.

We didn't dismiss.

Mr. Milton P. Rice: But now, I'm coming to that.

I don't -- don't want to overlook that point at all.Livingston is a different situation from this in two very important respects.

The most important is that brought the tax that was imposed on du Pont in Livingston was the normal retailer sales tax.

There was no tax on use per se like we have here.

Justice Byron R. White: There was the use tax.

Mr. Milton P. Rice: There was a complimentary -- conventional complimentary use tax but there was no tax on use per se by a contractor.

So, that is an important difference.

I -- second and more compelling difference, in my mind even, is the fact that du Pont's undertaking in Livingston was just a free gratis proposition.

They were paid $1.

Justice Byron R. White: Court -- but the District Court didn't go on that basis.

District Court said even if this is what -- even if -- even if this was actuated by profitability who just -- for the financial benefit of du Pont nevertheless, there was immunity here.

Justice William J. Brennan: Yes, sir, I know the District Court held that.

Justice Byron R. White: (Voice Overlap) there was an affirmance.

Mr. Milton P. Rice: There was an affirmance which I assumed indicates the concurrence with the result.

Justice Hugo L. Black: You don't think -- you don't think it adapted all the reasoning that they have.

Mr. Milton P. Rice: No, sir, I think it's -- its normal -- normal statement that per curiam affirmance would not indicate a complete endorsement of the reasoning necessarily.

We think this case is different in any event.

Justice Hugo L. Black: They did refer to the fact, did they not, that they were getting no fee of any kind?

Mr. Milton P. Rice: Yes, sir.

That's made abundantly clear in the statement of facts there.

Justice Hugo L. Black: And of course, those who voted the affirmance that they have affirmed it on that ground.

Mr. Milton P. Rice: Well, that's possible I assume.

What they got was $1 for eight years.

Now, what Carbide is getting here for one essence is the quarter of million dollars a month.

Justice Hugo L. Black: They were not making a business copied out and they were doing it for nothing, is that right?Is that what you're arguing?

Mr. Milton P. Rice: No, sir, I don't think that --

Justice Hugo L. Black: Is that what you're arguing?

Mr. Milton P. Rice: Yes, sir.

The only benefits that could possibly have gotten out of is a very indirect and intangible benefits.

In fact, the record stated in there that du Pont had undertaken the assignment rather reluctantly and over the objection or some of its shareholders and directors and had been impelled by patriotic motives only.

Now, in this case, we -- it's -- it's vastly different.

Carbide has the same motive in this case that any contractor has.

It's a profit motive and I don't sanction them for it.

Certainly, nobody can be expected to work for nothing but there is a -- a vast difference between a contractor making a quarter of a million dollars a month, $2,750,000 a year on a capital investment of nothing.

And there are not many contractors I know of that are doing that well, cost-plus, cost-plus-fixed-fee, lump sum, time and material to what have you.

There's a lot of them whose loss money.

The Car -- Carbide has got a guaranteed return which compares very favorably with the compensation derived by anyone doing that sort of work.

Ferguson's fee is not set, it's the renegotiated periodically and it's geared to the amount of work done.

I think their fee during the period, we're concerned with here, was $20,000 or a -- something like a quarter of a million dollar contract.

But I don't think that we can contend for a moment that there isn't any relationship between the compensation received and the property which they actually are using.

Now, what is used anyhow?

Justice Hugo L. Black: How do you -- does your -- does your tax -- do you have a use tax --

Mr. Milton P. Rice: Yes, sir.

Justice Hugo L. Black: -- on the company where it's -- there's no profit coming from the Government?

Mr. Milton P. Rice: Well, it makes no difference as far as there is any profit -- profit coming from it or not.

Justice Hugo L. Black: Your taxes define just the same.

Mr. Milton P. Rice: Yes, sir.

They may be incurring a loss with it.

That won't affect their liability for a use tax with respect to it.

Now, we define "use" in our statute and I think it's rather conventional definition as the exercise of any power or dominion over that property which the owner could exercise because certainly, taking it and putting it together and reshaping it and evolving something new is a use of the -- if the owner could put the property to it.

Justice John M. Harlan: Why is the question of property have anything to do with the constitutional question?

Mr. Milton P. Rice: I don't think that it does, if Your Honor please.

Profit you said, didn't you?

Justice John M. Harlan: Yes.

You have decided that difference between this case and the du Pont case.

It's the reason I asked the question.

Mr. Milton P. Rice: Well, I think the absence of profit certainly would come to the negative any suggestion that -- that the contractor was -- was getting any use out of it at all.

Justice John M. Harlan: The real essence of this case is whether this is a government activity, isn't it?

Mr. Milton P. Rice: Yes, sir, I suppose it -- it could be put that way.

Not -- not -- even the government activities, certainly, the Government's interest in it would have to be conceded.

It is so exclusively a government activity though that is beyond the pail of taxation by a concurrent survey.

This is undoubtedly government business.

Now, we are not denying that for a moment and never have but we insist also that it's Carbide's and Ferguson's business, business that they're -- they're being paid for just like any other contractor is.

Justice Hugo L. Black: Whose benefit?

Mr. Milton P. Rice: The ultimate benefit is of course like in the case of any contract and the owner of the property.

Justice Byron R. White: Suppose (Inaudible) for a year --

Mr. Milton P. Rice: Yes, sir.

Justice Byron R. White: -- for Carbide for their benefits or --

Mr. Milton P. Rice: Yes, sir.

That's all the benefit any contractor gets out of it.

He gets the bricks and the lumber and the nails all put together and turns it over to the owner, he no longer has got any interest in it at all.

Justice Byron R. White: Would you agree that they could have put a use -- either a use or sales tax, your characteristic kind of it (Inaudible) but you could not like impose a sales tax on purposes like Carbide but it --

Mr. Milton P. Rice: No, sir, our Court so held.

Justice Byron R. White: That term?

Mr. Milton P. Rice: Yes.

We held so on the authority of Kern.

Justice Byron R. White: Yes.

And no -- and not in the characteristic each had.

Mr. Milton P. Rice: No, sir, the use tax or taxes when property is brought in to the State from without the State for use or consumption.

Of course, it came in and the title being in the Government or actually being in the Government's hands that it came from supply depots as some other did.

So you're correct.

The conventional sales or use tax would not have been applicable in this case.

Justice Byron R. White: Now, why do you only told it once?

If -- if I -- a piece of machinery from outside the State to bring it in, you couldn't -- either the sales in the ordinary use tax on it, would you say I want to tax it for the privilege of using it, the privilege of using it, the contract.

Now (Inaudible)

Mr. Milton P. Rice: No, sir.

Justice Byron R. White: Why not?

Mr. Milton P. Rice: Well, the statute simply doesn't provide.

Justice Byron R. White: Doesn't that make really a tax out of your argument of what the tax really is?

It's not a tax on the privilege of using (Inaudible)

Mr. Milton P. Rice: Well, no, sir.

The conventional complimentary use tax now is a tax on the privilege of using that which is brought into the State from without the States.

Justice Byron R. White: Now, do -- you do say that this isn't like the conventional use tax.

Mr. Milton P. Rice: Yes, sir, except that it will reach profit as acquired within the State too, if it's required under

Justice Byron R. White: So do you --

Mr. Milton P. Rice: -- circumstances.

Justice Byron R. White: -- think that has been a conventional use tax?

Mr. Milton P. Rice: It's a conventional use tax with a little bit broader application and that it will reach property acquired originally within the State but under non-taxable circumstances.

Justice Byron R. White: I would think Kern (Inaudible)

Mr. Milton P. Rice: I'm -- I'm sorry, I didn't understand you.

Justice Byron R. White: I would think Kern (Inaudible)

Mr. Milton P. Rice: Well, perhaps it would.

Now, you can't tax per curiam.

I think that's the essence of Kern.

Justice Byron R. White: That's right, that's right.

But what are you taxing with that here when you tax it only once?

Mr. Milton P. Rice: Also, the tax doesn't tax until it's actually -- until the contractor actually exercises some right or power or dominion over it.

Justice Byron R. White: Yes, but he doesn't tax here too.

Mr. Milton P. Rice: Well, I don't think that we're obliged to tax it every year, if Your Honor please.

Justice Byron R. White: Oh, I know you're obliged but -- but your -- your time has expired, what kind of a tax you've got?

And you say it for the privilege of using.

I thought for the privilege of using, what?

For a year in Tennessee or just --

Mr. Milton P. Rice: Well, now, take the case -- this illustrate -- our conventional sales tax exempts casual or isolated sales like if you are -- would sell our personal automobile.

Under those circumstances, the one who purchased it would not have a sales tax to pay on it but the minute he put a license plate on it to drive, he would have to show that a sales or use tax has been paid on if he could not so show, he had have to pay it to the county court clerk but he wouldn't pay it for once.

Justice Byron R. White: (Inaudible)

Mr. Milton P. Rice: But I'm not convinced from what you were driving at there that Kern would reach that.

In the Kern, I think, reaches only where the things are procured for in the name of the Government.

Justice Byron R. White: Which is undoubtedly is.

You have to -- I think your own court (Inaudible)

Mr. Milton P. Rice: Yes, sir.

And they held immunity as far as that aspect of it is concerned.

They applied the tax only on the privilege of using.

Justice Byron R. White: (Inaudible)

Mr. Milton P. Rice: I don't think, if Your Honor please --

Justice Byron R. White: (Inaudible)

Mr. Milton P. Rice: That's right.

The transfer of it is.

Justice Byron R. White: Or to use of it, is it not?

Mr. Milton P. Rice: The use of it by a private person, yes, sir.

Justice Byron R. White: Well, it does cover (Inaudible)

Mr. Milton P. Rice: I suppose that -- that it probably would.

I had not ever considered a case exactly like that but I -- I believe that it fits the statutory requisite said.

It would be an exercise of power or dominion consistent with ownership.

I think that including --

Justice Tom C. Clark: Did Detroit handle -- Detroit control this case?

Mr. Milton P. Rice: I think it controls along with other cases that I have mentioned.

Justice Tom C. Clark: There, the uses of dealing itself, wasn't it, at least the building to the contractor?

Mr. Milton P. Rice: That's the -- that was the Borg-Warner case I believe, if Your Honor please.

It did that --

Justice Tom C. Clark: Here, there's no -- no building listed there.

Mr. Milton P. Rice: No, sir.

Justice Tom C. Clark: This is just property that's put together under --

Mr. Milton P. Rice: Just tangible personal property, that's all we reach in Tennessee.

Justice Tom C. Clark: It's owned by the Government and this -- this contract to put you together in the manner in which the Government's instruction to do it.

Mr. Milton P. Rice: In the manner in which the Government generally instruction to do it.

Also the Government's reservation of control, I'm glad that's brought up, is a general control and that's spelled out in the contract.

Justice Tom C. Clark: So how does they use the property -- how's the contractor use it?

It looks like to me performing services rather than using (Inaudible) in the Detroit cases while he was using a -- a house, a building.

Here, he takes knick-knacks, uses his know-how to put them together and he turns the knick-knacks all together.

They already -- the Government -- does the Government use the whole period of time as he was dealing with them.

Mr. Milton P. Rice: Well, there's too much -- there's too great an area of discretion exercised by the contractor in this case, if Your Honor please --

Justice Tom C. Clark: (Voice Overlap) --

Mr. Milton P. Rice: -- I think now in terms of a mere service.

Justice Tom C. Clark: Your point is that they have more discretion?

Mr. Milton P. Rice: Yes, sir --

Justice Tom C. Clark: Yes.

Mr. Milton P. Rice: -- they do.

The contract spells out that they shall follow the general directions of the Commission.

But in the absence of specific directions, the contractor is expected to use his own best skill and judgment.

And the history of this thing demonstrates why that had to be.

The Atomic Energy Commission has no skill or experience or know-how in the operation of a vast industrial complex.

They went and got one of the titans of American industry who did have that experience.

That's the very reason they were engaged.

They were engaged because AEC had to engage and that's the way to get the job done.

And --

Unknown Speaker: (Inaudible)

Mr. Milton P. Rice: Well, I think you find, they insist, if Your Honor please, that there's an agency relationship there and --

Unknown Speaker: (Inaudible)

Mr. Milton P. Rice: Well, there is a distinct difference, of course, now between the incidents of relationship of agency and that one of the independent contractors.

And a great point --

Unknown Speaker: (Inaudible)

Mr. Milton P. Rice: If Your Honor please, I think we have to go back to the Esso Standard case.

Now, right there, you can say that was just performance of services that --

Unknown Speaker: (Inaudible)

Mr. Milton P. Rice: I don't think you'll get a stronger one than that is though on the point.

Chief Justice Earl Warren: We'll recess now.

Featured:

United States v. Boyd - Oral Argument, Part 2

Wed, 16 Jan 2013 22:48:08 +0000

Case:

United States v. Boyd

Media File:

185_19640421-argument-2

Related Transcript:

185_19640421-argument-2

Transcript:

Argument of Milton P. Rice

Mr. Milton P. Rice: The conventional use tax reaches merely property which is acquired without the state and brought in to the state for use or consumption therein.

Justice Potter Stewart: You also have that conventional use tax (Voice Overlap).

Mr. Milton P. Rice: We do sir.

Justice Potter Stewart: But that's not what's at issue here.

Mr. Milton P. Rice: No this one -- this tax is imposed here.

Justice Potter Stewart: (Voice Overlap) the contractors' use tax regardless of who has the title to (Voice Overlap).

Mr. Milton P. Rice: Yes sir.

The tax that we are talking about here enables us to proceed to the consumer to collect the tax in those instances where can't collect it from the vendor.

Now those instances are numerous.

They're not just what cases like we talked about here where the Government immunity might be ascertained.

They cover also the cases where you have an insolvent or a bankrupt seller.

And for that reason, you are unable to get the tax from him.

If we had only the conventional use tax, we couldn't reach it under that either because that covers only what's brought in from outside the state.

Justice Potter Stewart: Hopefully, a -- a use tax is general imposed on the buyer, isn't it?

Mr. Milton P. Rice: On the buyer, yes sir.

Justice Potter Stewart: Not the seller.

Mr. Milton P. Rice: It maybe collected from a seller as was the case in General Trading Company against Iowa and maybe one or two (Voice Overlap) --

Justice Potter Stewart: But generally, it's on a state purchase and they used it within the state --

Mr. Milton P. Rice: Yes sir.

Justice Potter Stewart: -- and the tax isn't collectable that (Voice Overlap) --

Mr. Milton P. Rice: The taxable end is not even there, however use, -- the use by the buyer within the taxing state.

Chief Justice Earl Warren: So you classify the Government with insolvency?

Mr. Milton P. Rice: No sir.

I don't think so.

I wouldn't go that far at all.

But to dispel any notion that this tax was involved for the purpose of reaching one particular class of user, I would mention these things.

Now, as far as the Government is concern, our pressing problem we've had with our sales in use tax statute from the very start is our political subdivisions, our cities and counties.

They decided after the tax have been in effect for a while that it could be avoided by the simple stratagem of having the city or the county go buy the building materials and then put it in the hands of the contractor and thereby insolate the whole thing from tax.

Oh, I -- because I think I mentioned yesterday I have cases in court right now where that is being resisted.

But on the authority of our Supreme Court's decision in these causes, I don't think they can get anywhere.

As a matter of fact, one that went through the trial court and then abandoned his appeal when he discovered what our court had written in this causes.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Milton P. Rice: No sir, we do not report our nisi prius decisions.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Milton P. Rice: There was a memorandum opinion of some two pages in length delivered in it.

Unknown Speaker: Is that in the record?

Mr. Milton P. Rice: It is available.

I know it's not in the record at present.

I -- I can obtain the copies and we will be glad to do so if the Court would desire.

But it certainly would attest to the fact that our Courts have sustained the taxes against our own contractors with political subdivisions.

Chief Justice Earl Warren: Suppose you do furnish us with that?

Mr. Milton P. Rice: I will and I have in the Court at this moment.

I think -- I think maybe one of them maybe argued today, it's on demurrer involving some state contractors.

Chief Justice Earl Warren: Yes.

Mr. Milton P. Rice: That's being handled by an associate of mine.

Unknown Speaker: (Inaudible)

Mr. Milton P. Rice: But we consider this to be a very necessary adjunct to our sales and use tax.

If we didn't have it, we know that considerable amounts of revenue would -- would escape us.

Justice Potter Stewart: Do you know of any other state that has this?

Is this fairly common or is it quite rare?

Mr. Milton P. Rice: I cannot answer that, if Your Honor please.

We didn't copy any of the state statute when it was drawn, I know that.

The statute was prepared in -- in my office, and we drew it ourselves.

Justice Potter Stewart: When was it enacted, (Inaudible)

Mr. Milton P. Rice: 1955, after our sales tax have been in effect for some eight years.

And it was the product of experience that we had acquired and revenue that we had lost simply through inability for one reason or another to get to the seller.

Now, proceeding to the matter of the relationship between these contractors and the Atomic Energy Commission, it seems to me to be implicit in the decisions of this Court that a tax imposed upon a private person will not be struck down by this Court in the absence of circumstances that we referred to yesterday.

The only way that I can see under the decisions of this Court that this tax can fall is for this Court to find as a matter of fact that they exist between these contractors and the AEC, an agency relationship such as to make these contractors as I think they insist, and was insisted in the South Carolina case, the alter ego of the Commission so as to make them one and inseparable with the Commission.

Now, it is our position that the facts in this record simply do not bear out such a relationship.

In the first place, I think it must be emphasized perhaps the relationship of principle and agent between the Governor -- the Government and a private person is a most unusual thing.

The Federal Government in this country has let tens of thousands of contracts over the years of its history.

Unknown Speaker: (Inaudible)

Mr. Milton P. Rice: It is perhaps a little unusual for the Government to embark upon an undertaking of precisely this nature wherein there exist a Government monopoly, yes sir.

I would concede that it's an unusual thing.

But I don't think the existence of an unusual thing is a sufficient reason to --

Unknown Speaker: (Inaudible)

Mr. Milton P. Rice: There certainly are extensive controls reserved.

I will concede that readily.

Unknown Speaker: (Inaudible)

Mr. Milton P. Rice: There are always controlled reserved, if Your Honor please, there were extensive controls in Alabama versus King & Boozer.

The Government had the very right anyway to control virtually everything that took place down there.

I'd say down to the driving of a nail even if they saw fit to exercise it.

The point is that isn't convenient for the Government to exercise its supervision and they don't expect they're intended to.

But the right is there always.

For a Government, money is involved it's historically true, I think the Government reserves as much control as is necessary to prevent a wastage of Government money and -- and resources and wastage of time.

All of those factors are present when the Government contracts that are not necessarily present when private parties do.

And let's look to these contracts themselves.

Now this to me is something I had great trouble with all along.

We have the insistence made here that there is an agency relationship.

It's been made I might add ever since 1947.

That when we first commenced to assert any right, the taxes with respect to this contractors as soon as our Sales Tax Act was enacted in 1947.

The claim was instantly made that these contractors are agents of the United States Government and for that reason immune.

So, the thought was foremost in the mind of the AEC and -- and those representing it.

But over the course of the existence of this contract, it has been rewritten some 37 times at the outset of this litigation, 37 times.

The last rewrite is stated on the record testimony of their own witnesses was to reflect more accurately the operating relationship between AEC and its contractors, the 37th rewrite then was for that purpose alone according to their testimony.

Yet nowhere, nowhere in this voluminous documents, of these documents because we've got two contractors here, is there any phraseology whatsoever that would import agency.

Now, I realized and I wouldn't insist for a moment that labels are controlling.

But it seems to me that whether that questions has been at issue for as long as it has here and they wanted to spell out that relationship and make it clear if in fact it was a relationship of agents that they would have said so in terms that anybody could've understood.

That is a point I simply can't get away from.

All they had to do is to write that contract and agency terms but they didn't.

These parties are referred to throughout these documents as contractor not agent.

Justice Byron R. White: But do you think -- do you think agency and contractor are inconsistent?

Mr. Milton P. Rice: Not completely, no sir.

Justice Byron R. White: I thought you are -- I thought -- I thought your own court held they were agents?

Mr. Milton P. Rice: For purchasing purposes only.

Justice Byron R. White: No.

Alright, they're agents so we don't need to argue about agency or contractors.

Contractors are agents for all sorts of purposes.

Mr. Milton P. Rice: Our court held only --

Justice Byron R. White: (Voice Overlap) there that the agent here for that kind of a purpose we're talking about, is that it?

Mr. Milton P. Rice: Our court held they were agencies -- agents for the purpose of procurement only but not for the general performance of their contract.

Now, that was -- they recognized the limited agency as could exist anytime even between a contractor and a private party.

We don't dispute that at all.

But the agency for one purpose doesn't mean agency for all purposes.

I think anyone would have to concede that, at least we would certainly so insist.

Justice Hugo L. Black: Well, do you think a constitutional liability could be affected by the skill of the lawyer in what words he used in drawing a contract?

Mr. Milton P. Rice: No sir.

I don't think so but that is fact certainly that bears upon the relationship of what the parties think it is, is always pertinent it seems to me.

If they meant for it to be that, they could use the agents as usually -- as easily as they use contract.

And they knew what they were -- what they were talking about.

They knew what their aim was.

They'd been telling us for many years that they were agents.

Justice Hugo L. Black: Well, what they did was, wasn't it, they hire a well-operating, well-functioning business which was engaged in business (Inaudible) profits to do some work for them whatever name they gave and it continued to do work for its profit which it obtained from the use of material which was supplied to them.

Mr. Milton P. Rice: Yes sir.

In this contract they did, we submit in essence --

Justice Hugo L. Black: What happened in King & Boozer?

Mr. Milton P. Rice: Well that's exactly what it did, if Your Honor please.

Justice Hugo L. Black: What did they do in King & Boozer?

Mr. Milton P. Rice: Well, they took the materials that were acquired in the Government's name or furnished to them by the Government and they applied skill and labor to these materials and --

Justice Hugo L. Black: Can on their business?

Mr. Milton P. Rice: Yes sir, that was their business, contracting.

Justice Hugo L. Black: (Inaudible) to doing any -- less caring on its own business when they hired to carry on assumed business to achieve something for them that it was, that they had to pay having hired it.

Suppose somebody had furnished that material for use and it wasn't doing this contract for the Government.

Could they take tax, the use rather?

Mr. Milton P. Rice: Yes sir, I think the state could.

Whether it chooses to or not is -- is something else.

But I think the idea in (Inaudible) if I understand it correctly these -- you had materials here, property that was escaping the normal ad valorem taxes.

Justice Hugo L. Black: (Voice Overlap) -- the (Inaudible) you say?

Mr. Milton P. Rice: Yes sir.

You had a property that was escaping the normal state ad valorem property tax because the title to it was in the Government.

Even though it was being used by a private person to help him produce profit and carry on his business.

So the State of Michigan, characterized its ad valorem tax as being also upon the privilege of using the property and in that posture, this Court sustained the tax.

That's -- as I read (Inaudible), likewise, the Town of Muskegon in Detroit against U.S. to the companion cases.

Unknown Speaker: (Inaudible)

Mr. Milton P. Rice: Apart from the name given the parties whatever significance that maybe in the contract, we have to look at this contract itself and we see that under these contractors have got broad latitude.

They're expected to exercise their skill and their care and their judgement, in those areas where they weren't given specific directions by AEC.

The record shows that there is a manual put out for the general guidance of the people at Oak Ridge that there was top level consultation between officials of Carbide and officials of AEC.

But the record also shows that all of the thousands of employees of Carbide and Ferguson for that matter were supervised and directed and controlled by their own superiors.

They were not responsible to the Government for the work which they did.

Justice Arthur J. Goldberg: Did the record also (Inaudible)

Mr. Milton P. Rice: Yes sir and something like 12,000 Carbide employees, I believe.

Its varied from time to time depending on the flow of the work there.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Milton P. Rice: There is not detailed supervision if Your Honor please as to the actual day to day performance by the people who are the backbone of the organization, that is the employees.

They look to Carbide for their pay checks, if they have agreements, they go to Carbide to get that worked out.

Carbide carries the Social Security and Workmen's Compensation and that sort of thing.

These people are the -- there is no privity between these Carbide employees and the Government.

Nobody ever goes to a Carbide employee on the job and say, “You do this or you do that.”

Those orders are always transmitted through channels.

So, in essence, even though maybe an extraordinary amount of control is reserve, the basic relationship is disturbed here.

These people are working pursuant to a contact to achieve a desired end.

That end can't be too well defined because we don't know where all these research is going to lead.

We can't know it.

But they weren't engaged to somebody who had experienced in physics and chemistry and who knew something about historically than more over knew something about running a giant industrial complex.

And they expected to utilize that skill in carrying judgment that Carbide had acquired over the years since 1920.

Justice William J. Brennan: Well Mr. Rice, do you go this far -- certainly Carbide has a contract at least to perform services whether it performs in its contract (Inaudible) or anything else.

It's been hired to perform services for the Unites States Government.

Now, does your position that is a constitutionally sufficient basis of Tennessee, the tax, the privilege of preforming those services irrespective whether or not they're preformed under the supervision of representatives with the Unites States on this -- on the site.

Mr. Milton P. Rice: Yes sir.

Justice William J. Brennan: You'd go that far?

Mr. Milton P. Rice: Yes sir, I do.

Justice William J. Brennan: Well then why are you arguing that the chance of what's the relationship between the employees of Carbide -- and Carbide?

Is that material to your position?

Mr. Milton P. Rice: Well, the other side evidently thinks its material to theirs.

Justice William J. Brennan: Oh, I thought (Voice Overlap) --

Mr. Milton P. Rice: I have to meet the --

Justice Byron R. White: I thought they said just the reverse that it was not material.

They didn't care whether their position was -- whether or not that was agency or contractor or servant.

I thought it was in (Inaudible).

Mr. Milton P. Rice: Well, they are relying and have relied consistently upon the Livingston case from South Carolina which the states don't let basis entirely.

I think that far as performing service is concerned, that's what any contractor is engaged to do.

That's what the --

Justice William J. Brennan: Well --

Mr. Milton P. Rice: -- contractors in King & Boozer were engaged to do.

Justice William J. Brennan: And as I understand it --

Unknown Speaker: And there, it was like -- excuse me.

Justice William J. Brennan: All I'm trying to say is (Inaudible) a million, two hundred thousand a year or something like that?

Mr. Milton P. Rice: It's approximately a quarter of a million a month, that figures out 2,751,000 a year I believe.

Justice William J. Brennan: And as usual, my (Inaudible).

That's -- that's close to 2,750,000 a year and I gather your position is that Tennessee constitutionally may had taxed privilege of preforming for that fee or any fee services for the United States Government or anybody else.

Mr. Milton P. Rice: Yes sir, I think so.

Justice Byron R. White: But that isn't what you tax, isn't it?

Mr. Milton P. Rice: No sir.

We have -- what we've taxed is the use of property, the same way we would tax it to anybody else.

Justice Byron R. White: Yes.

Well, you don't comport to be taxed (Inaudible) the privilege of performing services.

Mr. Milton P. Rice: No sir.

Our tax isn't related in -- in those terms at all.

Justice Hugo L. Black: Just (Voice Overlap) --

Justice William J. Brennan: But then you do the -- and then I'm lost.

I must say I thought that your whole position was that you measure the facts on the privilege of performing these services the way you do which relates to (Inaudible, but you are taxing them on those with things, is it, directly, am I wrong about that?

Mr. Milton P. Rice: We lay the tax if Your Honor please upon the privilege of using tangible personal property in the performance of a contract.

We measure the tax.

Justice William J. Brennan: You measured -- you measure the tax by the value of that property --

Mr. Milton P. Rice: The value of --

Justice William J. Brennan: -- but the tax is on the privilege of preforming the services.

Justice Byron R. White: Of using property.

Mr. Milton P. Rice: Of using the property.

Justice William J. Brennan: Alright, using the property then.

Justice Hugo L. Black: What was it in King & Boozer?

Mr. Milton P. Rice: It was essentially the same thing.

I believe part of the King & Boozer taxes were sales taxes, but part of them were conventional use taxes, that's --

Unknown Speaker: (Inaudible) it was a sales tax.

Justice Byron R. White: Sales and use.

Unknown Speaker: (Inaudible) Boozer sold to the contractor and the contractor paid it himself.

He didn't -- it wasn't the purchase by the government.

Mr. Milton P. Rice: The title however, did pass to the Government immediately upon delivery of the goods, to the jobsite and their acceptance by Government inspectors.

Justice Byron R. White: Yes, but that --

Unknown Speaker: (Inaudible) apparently the building was complete but of course the title passed to the Government, the Government (Inaudible) it to the contractor, the contract price which was a cost-plus fee.

Mr. Milton P. Rice: Cost-plus-fixed-fee, yes sir.

Unknown Speaker: But, the transaction of the sales between the contractor and King & Boozer and the contractor paid King & Boozer from its own (Inaudible)

Mr. Milton P. Rice: Well, you have the companion case there if Your Honor please, of Curry against United States which was a use tax.

Now that's where the taxable incident had to be the use by the contractor, so you didn't have a vendor involved in.

Justice Hugo L. Black: As I recall it, it was sustained even though the property that was used was conceded to be the property of the Government.

Mr. Milton P. Rice: Yes sir, that is correct.

Justice Hugo L. Black: And he was using it in making his cost-plus money?

Mr. Milton P. Rice: Yes, sir.

Justice William J. Brennan: But --

Justice Hugo L. Black: What's difference here in the contracts different here, they're doing it for money in the way of a fee, there they were doing in the way of the cost-plus contract.

Mr. Milton P. Rice: Well actually, it was a fixed fee, all they had involved there.

Justice Hugo L. Black: Was it?

Mr. Milton P. Rice: Yes sir, that's all the contractor --

Justice Hugo L. Black: King & Boozer was a cost-plus, was it?

Mr. Milton P. Rice: Well, I think all contracts since -- shortly after World War I had been cost-plus-fixed-fee.

Cost-plus percentage has been out for some time.

Justice Tom C. Clark: That was fixed-fee?

Mr. Milton P. Rice: No, it had had to be fixed-fee under the federal statutes.

Justice Byron R. White: Of course, your court as -- itself has -- your state court has set aside any possibility of applying King & Boozer to this case, it said that Kern applies instead since this was (Inaudible) in behalf of the Government to the purchasing agency here, is that right?

Mr. Milton P. Rice: It would take care of that aspect of it.

I don't think it would take care of the companion use tax situation in Curry.

Justice Byron R. White: All I'm saying is that King & Boozer doesn't cover this case and Kern you say doesn't cover this case.

Mr. Milton P. Rice: That's correct.

Justice Byron R. White: Neither one of them?

Mr. Milton P. Rice: But I think Curry does.

That's the companion case to King & Boozer involving the Alabama use tax decided the same time that King & Boozer was.

Justice Byron R. White: You just told yesterday that this wasn't the -- you weren't applying your ordinary use tax to this case.

And it's (Voice Overlap) --

Mr. Milton P. Rice: It's our ordinary use tax --

Justice Byron R. White: -- and that's Curry.

Alright, that's Curry, ordinary use tax --

Mr. Milton P. Rice: That's the conventional use tax.

Justice Byron R. White: -- is Curry.

But you tell me that you -- you had to amend your statute here.

Had to amend your statute and that create a special type of use tax to cover the situation? What's -- what's -- then so Curry isn't relevant either.

Mr. Milton P. Rice: Well, it wholly analogous, if Your Honor please, to the conventional use tax is simply --

Justice Byron R. White: Well you (Voice Overlap) -- right, so you say it is now?

Mr. Milton P. Rice: It gives a little bit broader reach and that you can get to the property acquired within the state.

Justice Byron R. White: Well then your court -- well, you were certain to suggest in your court below wasn't sound?

Mr. Milton P. Rice: No sir, not at all.

Justice Byron R. White: Well, they said the ordinary use tax could not be applied to this case.

Mr. Milton P. Rice: The ordinary use tax couldn't have been applied so --

Justice Byron R. White: Constitutionally it couldn't be applied to be held.

But that this was not your -- this kind of attack.

(Voice Overlap) --

Mr. Milton P. Rice: No sir.

I think what they held was the ordinary sales tax couldn't be applied to the case and the ordinary use tax to being --

Justice Byron R. White: Or the use tax?

Under Kern, isn't that right?

Mr. Milton P. Rice: I don't recall if Your Honor please, that our court dealt with it in those terms told.

It held that there was.

There couldn't be any tax on procurement because procurement was done as an agent.

That would I suppose, cut out the conventional use tax as readily as it would to conventional sales tax.

Justice Byron R. White: Exactly.

Mr. Milton P. Rice: When you put it on procurement.

But now, when you attach it clearly to a subsequent use without regard to procurement --

Justice Byron R. White: Yes.

Mr. Milton P. Rice: -- well, then you've got a horse with a different color entirely.

Justice Byron R. White: You know, and a -- and a horse -- and a horse of the -- of a color that Curry wasn't dealing with either?

Mr. Milton P. Rice: Perhaps so.

Justice Tom C. Clark: Do you think Curry is controlling (Inaudible)

Mr. Milton P. Rice: I think the reasoning in Curry controls.

It leads --

Justice Tom C. Clark: (Inaudible) -- since it's binding that they were not agents or instrumentalities of the Government.

Here, I understood that they were acting for the Government is buying this property where he got his money.

Mr. Milton P. Rice: Our court so held as far as procurement but not for the general performance of the contract.

Justice Tom C. Clark: So that it (Inaudible)

Mr. Milton P. Rice: Procurement is only one phase of it.

Justice Tom C. Clark: Procurement is factually (Inaudible)

Mr. Milton P. Rice: Yes sir.

But, even a conventional use tax, the taxable incident is use.

It's imposed as a compliment to a tax on procurement or sale or purchase.

But it's only to enable the State to get the tax on that which is used within the State which was not taxed because it was involved in the State.

Now, this tax we've got enables us to get the property even what -- that was acquired in the State.

But we make the taxable incident its use, without regard to the circumstances of procurement.

Justice Tom C. Clark: I -- I understand your (Inaudible)

Mr. Milton P. Rice: So, I think we come to this.

We have to find here that for the general performance of this contract and in all respects, these persons are indeed agencies of the Federal Government.

If we'd also find, if we find as the Tennessee Supreme Court did that they are private parties, that they are private contractors operating for a profit just like any other, well then, the tax is applicable and is not -- is not boarded by the application of the doctrine of constitutional immunity because we're simply not taxing the Government.

We're taxing a private party who incidentally happens to be dealing with the Government.

It would make no difference at all if we were dealing with the City of Nashville or Shelby County or with any of the other instrumentalities in the State of Tennessee or the State itself.

Justice Hugo L. Black: What tax do they pay (Inaudible)

Mr. Milton P. Rice: Will Carbide and --

Justice Hugo L. Black: Yes.

Mr. Milton P. Rice: -- Ferguson pay?

Justice Hugo L. Black: What tax do they pay with respect to the (Inaudible) what taxes?

Mr. Milton P. Rice: Well, that's difficult to say if Your Honor please, Carbide has a private installation at Columbia which isn't related to this at all.

It's --

Justice Hugo L. Black: Well, I'm talking about -- well, this work that it does in that state (Inaudible)

Mr. Milton P. Rice: If it did this and this alone and had no other connection in the State, I would say unquestionably, it would pay a corporation excise tax which is measured by net income, like every other corporation doing business in the State would pay.

Justice Hugo L. Black: As any other tax they pay?

Justice John M. Harlan: Wholly a franchise tax.

Mr. Milton P. Rice: Well, the franchise and excise tax are blend together in Tennessee --

Justice Potter Stewart: (Inaudible)

Mr. Milton P. Rice: -- as they do in many states.

Franchise is measured by net worth, excise, by net income.

Beyond that, I can think of no taxes that they'd be required to pay at all, unless they're liable for this one.

And others that are laid on what they do in the performance of their contract to Oak Ridge.

Justice Hugo L. Black: May I get it down just precisely what your claim (Inaudible) or the tax is levied on.

Mr. Milton P. Rice: The tax is levied, if Your Honor please --

Justice Hugo L. Black: Levied on the use of what?

Mr. Milton P. Rice: Tangible personal property.

Justice Hugo L. Black: Owned by the Government?

Mr. Milton P. Rice: In this case, owned by the Government, it would --

Justice Hugo L. Black: Well, that's some (Inaudible) --

Mr. Milton P. Rice: -- make no difference.

Justice Hugo L. Black: -- about this case.

Mr. Milton P. Rice: Yes sir.

Justice Hugo L. Black: Tangible personal property owned by the Government which was brought into the State -- was bought in the State?

Mr. Milton P. Rice: Or no matter where it was gotten.

Justice Hugo L. Black: Then make a new (Inaudible)

Mr. Milton P. Rice: Wouldn't make any difference.

If it is used by them in the performance of their contract or the fulfillment of contract obligations, we assert the right to tax them.

That's the essence of our position here.

Justice Hugo L. Black: Because of what?

Essence to your position is what?

Mr. Milton P. Rice: The essence of our position is, if this property is being used by this contractor in the performance of his contract or to fulfill his contract obligations, the State has a right to tax the contractor for the privilege of so using it.

Justice Hugo L. Black: Your -- your tax -- your argument there is that Tennessee has a right to tax any property used by a person from carrying out -- engaged in business, carrying out a contract regardless of who owns the property?

Mr. Milton P. Rice: Yes sir.

Justice Tom C. Clark: Because I understand you to say there always been a tax on the income of the contractor (Inaudible) franchise or excise tax?

Mr. Milton P. Rice: They would as a corporation be required to pay to Tennessee on apportionment basis like every other corporation would a -- what's deemed to be a fair share of its net income or rather a tax based on a fair share apportioned to Tennessee.

Justice Byron R. White: But all of the -- all of the -- all of this amount which it earns in Tennessee is going to be returned to Tennessee, isn't it, in its income tax, in its franchise tax or the excise tax measured by net income?

Mr. Milton P. Rice: If it paid the tax but now I'd have to add this if Your Honor please, if they didn't have this private operation in Tennessee, they might resist the franchise and excise taxes on the same basis, if they resist this one here.

I don't know what they'd do.

Justice Tom C. Clark: (Inaudible)

Mr. Milton P. Rice: Well, if they were able they -- they could argue that they were in fact agents for the Federal Government and that was their sole connection, their sole reason for being in Tennessee.

Justice Byron R. White: Well then a -- the States (Voice Overlap) --

Mr. Milton P. Rice: They might very well try to avoid those taxes, I don't know.

Justice Byron R. White: But -- well, the State still tax the income of the Government employees but they -- I mean, (Inaudible)

Mr. Milton P. Rice: Our tax is laid however, on the privilege of engaging in business in corporate form in Tennessee.

Now, it's not an income tax like most States have.

Justice Byron R. White: That's measured by?

Mr. Milton P. Rice: It's measured by the net income but the taxable privilege is engaging in business in the form of a corporation.

Justice Byron R. White: And the fact that as they are now paying an excise tax on this income (Inaudible) Oak Ridge.

Mr. Milton P. Rice: Yes sir, I assume they are.

I don't have any first hand information about that.

I have no reason to doubt it.

My time is up I believe.

Chief Justice Earl Warren: Mr. Solicitor General.

Argument of Cox

Mr. Cox: Mr. Chief Justice, may it please the Court.

First, may I simply say that there is no claim that Carbide or Ferguson is free of any other taxes on companies doing business in Tennessee, both are clearly doing business there under these activities with the Government regardless of their other -- they would be taxable.

Now this is a case where I think, it's very important to be precise in our use of words in all with it but there are too many slippery words here and I want to try and preserve the same meaning in hitting the high spots of the Government's argument.

First, we do not think that our case turns on the amount of control, the degree of control that the Government has over Carbide through Ferguson's activities.

To say the same thing in other words, we think it is irrelevant whether Carbide is a servant or an independent contractor.

Our first contention is that the beneficial use of this property in the sense that it was that time was used in the City of Detroit and other Michigan cases is wholly that of the United States sort.

To put it as Mr. Justice Harlan suggested yesterday that all these activities in which the property is used are the activities of the United States.

It's perfectly clear that everything that is done here is done with the property of the United States, at the risk of the United States and on behalf of the United State.

And I would say that it was perfectly clear that Carbide is the agent, not the servant, but the agent of the United States because everything it does, it does for the account of the United States in all liabilities of those of the United States, nor profits of those of the United States.

It's just as if I inherited say a retail store and I hired a man or to go down and say, "Now, you run that store.

Do everything in my name.

I will supply all the property.

I will supply all the operating expenses.

I'm not going to butt in with your running in.

I don't know anything about the retail business.

But that would be comparable to this and it would all be done for my account and use and benefit.

So that seems to us that this case is clearly distinguishable from City of Detroit and the other cases which emphasized that the -- a man couldn't get an exemption in carrying on his business for his entrepreneurial profit, not for a fee but for his entrepreneurial profit merely because the United States had the technical title to the property.

And I think that if these Tennessee cases that were mentioned here were examined, of course I'm speculating.

One would find that those contractors like the contractor in King & Boozer, have brought their equipment to the job as if they were in a sense entrepreneurs that they could profit or could lose and that they didn't simply received a salary for performing services.

Then I come to the question which hasn't been decided except as it was decided in Livingston which we think clearly governs this case.

May Tennessee levitate tax as Mr. Justice Brennan put it earlier, on the privilege of rendering services measured by the volume of the property that you handle?

In that sense, use handled in rendering the services.

Because I say use for beneficial use, this just handling, that's all these people do in this property.

And we say that this isn't that kind of tax, that this is a tax on the beneficial use, on the activities and the fellow who gains from it and that that is a tax on the United States.

Now, an effort was made to compare this case yesterday to SO -- Standard Oil Company case which you will recall was a tax on the privilege of storing gasoline.

But that wasn't privilege tax.

That was measured by the volume of the gasoline's store and it didn't matter whose gasoline was stored.

It was the gasoline of anybody including the Government that quite properly it was held to be taxable.

To make that case comparable to this one, one would have to suppose that a tax were levied on a privilege of storing gasoline of where we can't reach the buyer or the seller to collect the sales tax.

And only, where one couldn't reach the buyer or seller to collect the sales tax.

Well in that event, it really isn't on the privilege of the storing.

It's an effort to substitute for the sales tax which is tax exempt or for the genuine use tax, which is tax exempt or if I can put this one other illustration.

This seems to me to be comparable to saying that we're going to lay attack on the privilege of occupying property as the man, “As I occupy my office if the court occupies its chamber.”

We're going to lay the tax and the privilege of occupying property but we will give credit.

We won't collect it at any case where somebody has paid a real estate tax on the ownership for the use of the property.

Well again, that's simply comes down to an attempt to collect the real property tax from the fellow who happens to be there knowing that he will have to pass it under the tax exempt owner.

It's a tax on the property.

Well now here, it's a tax on the use we submit by the United States that I think is a -- just the right case.

Justice Arthur J. Goldberg: General, before you sit down, did you just say (Inaudible)

Mr. Cox: I think that the sole effect of that appeal was to put the Atomic Energy Commission on the same basis as every other Government agency to leave us free to make the arguments that we have made here or -- and to free the State of Tennessee of the arguments that the court made in Ron Anderson, holding that it couldn't tax.

Now, I ought to in candor say that I have not made a quick (Inaudible) check.

As I understand it, we would claim that the tax situation is exactly the same as it was under that statute and that what Commissioner Strauss said was what the Government officials often do when they don't want to lose an advantage.

They argue it trying to do all kinds of terrible things.

Justice Potter Stewart: After that (Voice Overlap) --

Mr. Cox: But the intention -- the intention was to remove the statute and treat the AEC just like all other agencies.

Justice Potter Stewart: Under the statute as it formally was, am I mistaken in thinking that that exempted the Boozer type contract?

Mr. Cox: Well, there's apparently some doubt about that Justice Stewart.

I would have thought that it did too and perhaps it did and I'll be glad to get more accurate information from the Commission but consulting quickly with Mr. Kramer, I must say that he tells me that he thinks that we would claim that the constitutional exemption was the same as the exemptions that were claimed under the statute.

But I would like to emphasize that there must have been many, many people in Congress who voted for the appeal on the theory that this agency should be like other agencies.

However, the chips might fall rather than vote it to subject these operations to pass.

Justice Byron R. White: Which if it -- which the -- might not be able to do?

Mr. Cox: Well, I suppose Mr. Justice White that Congress can waive the constitutional immunity.

That's my recollection of the language in some of the --

Justice Byron R. White: There's no indication they intended to do anything other than put all agencies on the same basis.

Mr. Cox: That's clearly the only thing that was intended.

Justice Byron R. White: And that may or may not have -- that they may or may not have thought that they were -- that they were allowing this particular kind of pacts in that -- in that respect.

Mr. Cox: Quite right.

And I suppose they may have some of each.

I guess the Tennessee representatives thought that they were helping Tennessee.

Justice Byron R. White: That it was the statute rather than the constitution which bars the tax --

Mr. Cox: Right.

Justice Byron R. White: -- and then he probably thought (Inaudible)

Mr. Cox: Some may have, others may not and others may have -- I think the majority probably felt, "Well, let's let them be like everybody else and the chips will fall where they do."

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Fed. Land Bank v. Kiowa County - Oral Argument

Tue, 25 Sep 2012 22:34:20 +0000

Case:

Fed. Land Bank v. Kiowa County

Media File:

25_19611016-argument

Related Transcript:

25_19611016-argument

Transcript:

Argument of J. William Doolittle

Chief Justice Earl Warren: Number 25, Federal Land Bank of Wichita, Petitioner, versus Board of County Commissioners of the County of Kiowa -- Kiowa, State of Kansas, et al.

Mr. Doolittle.

Mr. J. William Doolittle: Mr. Chief Justice, may it please the Court.

This case is here on a writ of certiorari to the Supreme Court of the State of Kansas presents a relatively narrow issue but one of a considerable importance, the administration of the Federal Farm Credit System.

That is whether a certain personal property owned by a Federal Land Bank consisting of a royalty interest in an oil and gas lease is subject to taxation by a state in view of Section 26 of the Federal Farm Loan Act which exempts federal land banks from all taxation by federal, state, local and municipal authorities except for taxations on real estate.

The Kansas Court has upheld that this property may be taxed and the petitioner, Federal Land Bank of Wichita earnestly submits that this was error and that the judgment below should be reversed.

Now, before I reach the facts of this case, I should like to very briefly invite the Court's recollection to the character, the Federal Farm Credit System and particularly the federal land banks.

Under the terms of the Federal Farm Loan Act of 1916 and subsequent legislation, the United States divided into 12 farm credit districts.

In each of these, there is a federal land bank which is one of several types of specialized rural credit institutions all of which are under the direct supervision of the Farm Credit Administration in Washington.

These federal land banks were created by Congress in 1916 for one central purpose and that is to provide farmers with long term loans for agricultural purposes in exchange for mortgages on agricultural land at the lowest possible interest rates.

The whole structure and functioning of these land banks is directed towards that one central purpose.

Now, the United States Government furnished practically all of the capital to get these federal land banks started in 1917.

And then later on, in the depression years, they had to contribute a good bit more capital to keep the banks going.

However, all of this money has been paid back to the Federal Government and at the present there is no Government money in the federal land banks.

All of the stock in the federal land banks is owned by Federal Land Bank Associations which are local cooperative associations owned entirely by borrowers from the Farm Credit System.

Now, for example, there are 77 of these local associations in the Ninth Farm Credit District which is the four state area that your petitioner serves.

A farmer who wishes to borrow from the farm credit system, in other words, who wants a long-term loan for agricultural purposes in exchange for a first mortgage on his farm, joins one of these associations by subscribing to its stock in the amount of 5% of the loan.

In turn, the Association, in order to obtain funds from the Federal Land Bank for the loan subscribes to 5% of the stock with the Federal Land Bank.

Now, in each instance, this stock is retired as soon as the loan to which it relates is repaid so that at all times, the only individuals that have any proprietary interest in the federal land banks are the individual farmer borrowers.

Now, the federal land banks obtain the bulk of the money that they lend through the issuance of federal farm loan bonds either individually or much more frequently in consolidation with all of the other federal land banks.

After they pay the interest on these bonds and retire any of them that may mature, pay their operating expenses and then make the required additions to their reserves, the federal land banks are authorized to declare dividends on their stock of any profits that they may have had with the approval of the Farm Credit Administration.

These are paid of course to the Federal Land Bank Associations who own the stock in the banks themselves and in turn these associations are authorized to declare dividends on their stock and of course these dividends then go to the individual farmer borrowers and have the effect which was specifically contemplated by the framers of this legislation of reducing the rate of interest that they actually have to pay on their loans.

Now, the facts in this case are not at all in dispute.

In 1941, one of the loans for which the petitioner had taken a first mortgage on farm land was in default and the bank instituted foreclosure proceedings required the farm in question at a share of sale and shortly thereafter, sold it to its present owner.

Now, as a result of that sale, the petitioner received a price sufficient to cover its loss on the default and its expenses in connection with the foreclosure.

But in conveying the property, the bank reserved an undivided one-half interest in the minerals underlying the land.

This reservation was for 20 years and for so long thereafter as minerals will be developed on the premises.

Justice Felix Frankfurter: That's on this farm in Kiowa County, Kansas.

Mr. J. William Doolittle: That's right sir.

In 1955, a pool of gas was discovered in this area, and in that same year, the Federal Land Bank granted a 10-year oil and gas lease of their interest in this property to an oil company.

In 1957, the respondent Board of County Commissioners of Kiowa County, Kansas levied a personal property tax on the petitioner's royalty interest in this oil and gas lease.

Now, I want particularly to note that the petitioner does regularly pay real property taxes on this mineral interest, encompassing mineral interests, as would be indicated by its exemption which accepts real property interest.

The tax involved in this case is solely on the royalty interest on which under the law of Kansas is personal property.

The Federal Land Bank brought a suit --

Chief Justice Earl Warren: That is conceded -- that is conceded, is it?

Mr. J. William Doolittle: The Federal Land Bank brought suit against the appropriate county officials in the District Court of Kiowa County for injunction against the levy and assessment of this tax, on the ground that Section 26 of the Federal Farm Loan Act expressly exempts them from such taxation.

The trial court denied the injunction and the Supreme Court of Kansas affirmed.

Your petitioners here today respectfully urging that the judgment below must be reversed if the congressional purpose in enacting the Federal Farm Loan Act is properly to be served.

Now, it's only natural that Congress in establishing instrumentalities through which farmers were to be able to obtain long-term loans at the lowest possible interest rates should exempt these instrumentalities from taxation.

And in point of fact it did so in the most unmistakable and unqualified terms.

Section 26 of the Federal Farm Loan Act which is set fourth in an Appendix to our brief provides that every federal land bank and every Federal Land Bank Association, including the capital and reserve or surplus therein and the income derived there from shall be exempt from federal, state, municipal and local taxation except taxes upon real estate.

As we have discussed in pages 18 and 19 of our brief, the legislative history makes it apparent that Congress regarded this tax exemption as a ce -- as central to the accomplishment of its purposes in enacting this legislation, saw this as the only way of assuring that farmers could be gotten cheaper money than would be available to them through ordinary commercial channels.

Now, in the Bismarck Lumber case, that's Federal Land Bank against Bismarck Lumber Company which is cited and discussed at page 9 of our brief, this Court confirmed this view of the congressional purpose when it said of the tax exemption section, broad construction is indicated by Congress' intention to advance credit to farm borrowers at the lowest possible interest rate.

But Your Honors, I submit, that not even a broad construction is necessary to bring the property involved in this case within the terms of the statutory exemption.

The property is concededly not within the real property exception to the exemption.

It is concededly owned by the bank.

This is not the sort of case where for example the burden of the tax might fall upon purchasers from the bank, vendors to the bank, employees of the bank, contractors with the bank.

There's no question, no doubt at all, but that the bank itself which is concededly a federal instrumentality will have to pay this tax directly out of its own resources.

And by so it -- by so doing, it must pro tanto render itself less able to carry out the congressional function that it has and that is to provide farmers with mortgage money at the lowest possible price.

I suggest that the square applicability of the Section 26 tax exemption could not be more apparent.

But the court below sought to avoid this conclusion by holding that, the Federal Land Bank was not engaged in a governmental function when it retained the mineral interest upon which this tax is based and this, because the bank had fully recouped its loss in the def -- the loan on defaults and it had covered its expenses in the foreclosure when it took this particular interest.

From this, the Court concludes that the bank was therefore not entitled to the tax exemption granted by Congress.

I submit that this argument falls on several grounds.

In the first place, this Court has repeatedly rejected any notion that a distinction between governmental and nongovernmental function is applicable with the activities of the Federal Government or its instrumentalities.

The Federal Government being one of delegated powers, all of its lawful activities are governmental whether they are performed directly or through a corporation.

That doctrine was applied to the federal land banks in Bismarck Lumber case which I've already recited to you.

There, a State sought to apply a sales tax to lumber and other building materials that the Federal Land Bank purchased for necessary repairs and improvements to buildings on property that it acquired through foreclosure.

This Court in holding that the Section 26 exemption was applicable did not concern itself with whether or not the bank had to make these improvements in the buildings on the property in order to get its money back out of the loan.

Since the -- it was plainly a proper function indeed, I submit a duty of the bank to get as much out of the sale of this foreclosed property as possible that this Court had no difficulty at all in finding the statutory tax exemption applicable.

Secondly, I submit that it's plain that the federal land banks' retention of mineral interests such as those involved in this case contribute directly and importantly to their accomplishment of the aims for which Congress established them in 1916.

As we pointed out at pages 17 and 18 of our brief, Congress intended not only that the federal land bank system be self-sustaining but that it would be profitable in order that dividends could be passed on down to the farmer borrowers as effective reductions in their interest rates.

In view of that intention, it's not difficult to perceive why it's appropriate, indeed necessary, that the federal land banks have access to auxiliary sources of income such as the income from these mineral reservations.

Now, in some instances for example, the income from these mineral reservations may wholly or partly offset a loss that the bank might sustain on the particular loan in question and the court below clearly recognizes that in its opinion.

In that event, this would be a proper governmental function on the part of the land bank, or the income from the retention of one of these mineral interests may make up for losses on other pieces of property as to which no such compensating offset was available, and as to that type of thing, the court below seems to indicate that -- that it would regard that as a proper governmental function on the part of the land bank, or such income from mineral reservations might contribute to the reserves of the bank in order to provide an offset to possible future losses as a result of defaults and loans.

Now, the Court did not specifically touch on that nor it was asked to do so, but that is the type of purpose and this value was strikingly illustrated during the depression years when the federal land banks had to look to the United States Government for contributions to its capital in order to maintain their solvency.

Indeed, the Senate hearings that we have cited at pages 24 and 25 of our brief describe an example of the federal land bank that was brought to self-sustaining sufficiency only with the aid of income from such mineral reservations that we're talking about here.

Finally, no less legitimately, I submit, mineral reservation income is not needed for any of the purposes that I've indicate -- indicated already.

It would be available for the distribution of dividends to the farmer borrowers, thus, fulfilling the congressional purpose of bringing them mortgage money at the lowest possible interest rates.

Justice Charles E. Whittaker: Mr. Doolittle, I'm a little at loss to understand how any of these questions developed there, because isn't it true under the law of Kansas personal property taxes are assessed against the person?

Mr. J. William Doolittle: That is correct.

Justice Charles E. Whittaker: Now, then how could Kansas -- Kiowa County, Kansas assess this tax against this bank and at the same time deny it owned property?

Mr. J. William Doolittle: Well, Mr. Justice Whittaker that -- the bank does not in fact denying that -- I'm sorry, the State has not denied that the bank owns the property --

Justice Charles E. Whittaker: And how -- how is it relevant to say that it ought not to own it

?That's what they must say if they -- if they say that they have no proper business purpose in owning it.

Aren't they estopped to say that when they've actually assessed the tax against the State --

Mr. J. William Doolittle: I believe --

Justice Charles E. Whittaker: -- as a bank?

Mr. J. William Doolittle: I believe it will be a reasonable argument that they should be, Mr. Justice Whittaker, but in point of fact that is the essence of their argument that because in their opinion, the bank should not own this property under these circumstances.

They say there are some certain instances when it would be profitable, but since they say it -- that the bank should not own the property under these circumstances, then it is not entitled with the taxing -- tax exemptions.

Justice Felix Frankfurter: But what -- what's the source that it should not?

Mr. J. William Doolittle: Well, it is their contention, the contention of the State of Kansas arguing here, although I don't believe that the court below so held that the federal land banks are not authorized to hold this kind of property.

Now, the court -- the court below went no further than to say that since this is a -- not a proper governmental function, that it is not simply entitled to a tax exemption.

Justice Felix Frankfurter: As I understand it, do I understand it when you say not a proper governmental function that they go on to the distinction of the Court at least to make in the vast more than (Inaudible) differentiating between so-called “proprietary function” and “governmental” --

Mr. J. William Doolittle: Indeed so.

Justice Felix Frankfurter: -- or do they suggest this is ultra vires and therefore they can't come in under the umbrella of the Federal Bank Act --

Mr. J. William Doolittle: Well --

Justice Felix Frankfurter: -- Land Bank Act, which is it?

Mr. J. William Doolittle: As I read -- as I read the opinion of the court below, they are relying almost exclusively on the proprietary governmental distinction.

Now, I think that the State as it argues to this Court is going more to the ultra vires point and I would like to deal with that --

Justice Felix Frankfurter: But before you do that, is there a suggestion that although either by explicit authorization or by adminis -- or by interpretation of the scope of the function of these banks practically they may ex -- had been allowed to exercise and therefore presumably, the authorization is to be inferred that Kansas or any State can construe what the statute allows and disallows?

Mr. J. William Doolittle: Well, the -- certainly the effect of the decision below is at least if interpreted as the State of Kansas would have it interpreted, the State is being permitted to determine what kinds of property -- what kinds of activities the -- this federal agency should engage in.

Justice Felix Frankfurter: Without -- without any of reference to what has as a matter of business practice then, the allowable area of activity of these lands.

Mr. J. William Doolittle: Tha -- that's right Mr. Justice Frankfurter.

Justice Felix Frankfurter: Wouldn't this prove that the State of Kansas in frustrating this tax, a principally against the Federal Land Bank?

Mr. J. William Doolittle: Yes sir.

Justice Charles E. Whittaker: Is that it?

Mr. J. William Doolittle: That's right sir.

Justice Charles E. Whittaker: And that's what (Inaudible) once said.

Mr. J. William Doolittle: Expressly.

Justice Charles E. Whittaker: Now then how could the -- what it affords to lose then?

Mr. J. William Doolittle: I submit, Mr. Justice Whittaker, that there really is no other question.

I'd like --

Justice Charles E. Whittaker: I understood you assess these facts that personal property matters without an expert individual or corporation without intervening (Inaudible).

That's the basis of what's like to assess, isn't it?

Mr. J. William Doolittle: That's right, Mr. Justice, but their contention is, and as I say particularly as it is present in this Court is that it was beyond the authority of the bank to hold this kind of property and the -- that the exemption doesn't apply to any property held without authority.

Justice Felix Frankfurter: But if you start with the Kansas Court premise, you'd begin with aiding namely that there isn't a law cleavage between -- in the activity of governmental order.

But there is a cleavage between so-called “governmental function” and so-called “proprietary function” then it doesn't require a great (Inaudible) privilege to argue that the exemption statute is to be construed in that logic, isn't that what they're doing here?

Mr. J. William Doolittle: That exactly is -- yes, Your Honor.

Now, although as I say the court below does not seem to have gone so far, the respondents do argue that even if these mineral reservations do contribute directly and importantly to the achievement of the governmental purposes for which the federal land bank was created, still they are unlawful and not entitled to tax exemption because as they assert, federal land banks are not expressly and by statute authorized to invest in mineral reservations.

Now, at the outset, I should like to emphasize one point and that is, as the respondents recognize in their brief, what we are talking about here is investments on the part of the Federal Land Bank and nothing more.

This case does not involve federal land banks going into different businesses such as business of mineral explore -- exploration, production or marketing.

And so, when the respondents argue that to reverse the decision below will enable federal land banks to operate tax-free filling stations and the like, they are raising a specter that is simply not before this Court.

Similar procession of absurdities was marshaled in the Bismarck Lumber case where it was contended that to sustain the exemption there, it would enable federal land banks to go into the business of operating farms, lumber mills, even manufacturing plants tax-free.

The argument is no more convincing today than it was then when the Court rejected it.

Justice Felix Frankfurter: Mr. Doolittle, have put into your brief, I haven't read it, collected all of which this Court has tried to put an end to this cleavage, to this assumption that the Government of the United States within private business (Inaudible) of the new or heretofore not having been done by the Government?

Mr. J. William Doolittle: Well, I'm not sure --

Justice Felix Frankfurter: There are quite a bunch of them, aren't there?

Mr. J. William Doolittle: There are a great many of them and I would not care to claim that we have assembled all of them.

Justice Felix Frankfurter: But all the modern ones say around --

Mr. J. William Doolittle: For one.

Justice Felix Frankfurter: -- 20 years?

Mr. J. William Doolittle: Well, more particularly because in this one case that I've cited to you several times today, that the Court so clearly stated this with respect to the federal land banks that it seems scarcely necessary to go any further.

Justice Felix Frankfurter: But this is a -- but this is a claim that crops up so often, It reminds of what (Inaudible) said, strange how a theory persists long after it's framed and knocked down.

Mr. J. William Doolittle: Now of course, the statutory scheme contemplates that the great bulk of the federal land banks funds shall be invested in first mortgage loans.

After all that's why the banks were established in the first place.

I don't suppose that it will be sound investment policy for them all to devote all of their funds in that way and Congress plainly intended that the banks should have considerable scope in the investment of their reserves and surplus subject always, and I emphasize this, subject always to the direct supervision of the Farm Credit Administration.

For example, Section 23 of the Act confers general authority on the federal loan -- federal land banks to invest their reserves in accordance with rules and regulations of the Farm Credit Administration.

Section 5 specifies that a quick asset apportion of the capital of the federal land banks is to be invested again in accordance with rules and regulations of the Farm Credit Administration.

Now, there's no specific provision concerning the investment of the banks' surpluses, but I submit the power of the banks to invest their surplus is fairly inferable from the character in the statutory -- from their character and from the statutory context, again, however, only under the direct and continuing supervision of the Farm Credit Administration.

Now, if the statute doesn't make clear that the banks have reasonable free -- freedom to invest their resources, the legislative history certainly does.

The attitude of the framers of this legislation on this point is typified by a statement of Congressman (Inaudible) of Massachusetts who was one of the managers of this Bill in the House who made the statement in opposition to an amendment that he thought would limit the investment powers of the bank.

I'm quoting from 53 Congressional Record 7998 which I regret does not appear on our brief.

“The whole theory of the cooperative plan is that the funds of the bank shall be used to the best advantage so that the farmer will be getting a profit out of the system and not be absolutely obliged to the suffer in lack of profits to the bank because the bank is handicapped, tied hand and foot by explicit provisions of the law from investing its money.”

Justice John M. Harlan: Could you give that citation again?

Mr. J. William Doolittle: Yes, Mr. Justice Harlan.

That's 53 Congressional Record 7998.

Unknown Speaker: (Inaudible)

Mr. J. William Doolittle: Now, I submit that the investment authority of federal land banks is broad enough to comprehend the investments of mineral interests that are involved in this case, subject always to the approval of the Farm Credit Administration.

And in point of fact, the Farm Credit Administration has by regulations specifically approved of the banks retaining these interests and the regulation in question is cited in the Appendix to our brief, as set forth I should say.

Now, as an alternative argument, the respondents contend that the federal land banks' retention of this property violates the specific prohibition in Section 13 Fourth of the Act against holding title and possession of foreclosed real estate for more than five years without the special approval of the federal -- of the Farm Credit Administration.

The court below did not seem to adopt this position wholeheartedly and for the reasons that we have stated on pages 21 to 24 of our brief, we don't believe that there is any substance to them.

But even if the respondent is correct, that there is some colorable question as to the authority of the federal land banks to retain the mineral interests either because of a lack of affirmative authorization or because some negative prohibition, we submit, that there is no basis for the state courts stripping the bank of its statutory exemption in this instance.

The supervision of the federal land banks has been specifically entrusted by Congress to the Farm Credit Administration, United States agency and not to the Courts.

That agency's construction of the federal land banks powers under this complex and comprehensive statute should be given great weight and should not be subject to collateral attack, not at least in the absence of fraud or some comparably great defect when an agency has exercised supervisory responsibility honestly and in the manner that it believes best calculated to carry out the purposes of the legislation.

But we submit that the proper recourse that is for the correction of any alleged errors is to Congress, certainly it is not to the state courts.

I should like to reserve the rest of time for rebuttal.

Chief Justice Earl Warren: You may.

Argument of Robert C. Londerholm

Mr. Robert C. Londerholm: Mr. Chief Justice --

Chief Justice Earl Warren: Mr. Londerholm.

Mr. Robert C. Londerholm: Mr. Chief Justice, may it please the Court.

Before commencing with my argument, I would like to clarify the position that we take on the question of distinction between governmental and proprietary function.

We do not feel that that distinction has any relevance or materiality in this case.

The line of cleavage which we wish to draw here is between the authorized governmental functions of the bank and the functions of holding the property which they may in fact engage in, but which transgresses or goes beyond the bounds of their statutory authority.

The court below discusses --

Justice Felix Frankfurter: (Voice Overlap) -- would you mind clarifying that a little more?

You mean these are activities which are -- that you call them ultra vires to that effect?

Mr. Robert C. Londerholm: That's a --

Justice Felix Frankfurter: Ultra vires but --

Mr. Robert C. Londerholm: -- fair term.

Justice Felix Frankfurter: -- as a business enterprise and engaging in it, is that it?

Mr. Robert C. Londerholm: We -- we sub --

Justice Felix Frankfurter: How their functions -- let me put it affirmatively.

Aren't all that may do delineated by an Act of Congress whatever implementing regulations there may be?

Mr. Robert C. Londerholm: Yes, Your Honor.

Justice Felix Frankfurter: So if they go outside of those, while are those forbidden activities, you said they may engage in them, wouldn't they be forbidden?

If Congress establishes an agency and says your powers are one, two, three, four, they can do six, seven, eight, can they?

Mr. Robert C. Londerholm: That's precisely our argument, Your Honor, and that -- when they do in fact, I mean its human to err.

And when they do in fact do six, seven and eight then it calls into question whether or not the governmental tax immunity which is based on the need to protect governmental functions can be said to apply to them in --

Justice Felix Frankfurter: At all (Voice Overlap) --

Mr. Robert C. Londerholm: -- so the transgressing the bounds of their authority.

Justice Felix Frankfurter: For present purposes, in all events, you're not concerned with what I mean, proprietary consequences may follow.

Mr. Robert C. Londerholm: No.

Justice Felix Frankfurter: Six, seven, eight, the ordinance say, they have immunity only for one, two, three, four.

Mr. Robert C. Londerholm: Yes, Your Honor, and we're fully aware in Kansas of the fact that this Court has long ago rejected the distinction between governmental and proprietary, and I would say in defense with the Kansas Supreme Court, I think counsel is misconstruing the opinion below.

The -- the Kansas Court relied heavily on a Kansas case and it -- in that Kansas case, at that time, the distinction between governmental and proprietary functions was invoked.

Now I think that counsel misconstrues the intent of the court below in their opinion.

They did not mean to say that this was a proprietary function since that distinction is no longer valid.

They were coding from this other case for the purpose of the reasoning that it contain regarding the scope of the tax exemption.

And this was just an incidental aspect, although I think counsel has misconstrued it and felt that they were -- that they misunderstood this distinction.

I don't believe the Court did.

I think they were clearly placing it on the distinction between the governmental functions that are authorized one, two, three, and things they might in fact do that would transgress their bounds.

Justice Felix Frankfurter: Was there any opposition made that whatever the land bank does give insofar as exempt carries any relevance of governmental function.

But what they --

Mr. Robert C. Londerholm: Yes.

Justice Felix Frankfurter: -- said of the governmental function, is this what you question?

Mr. Robert C. Londerholm: Yes.

And we -- we feel this is really a matter of statutory construction construing the Federal Farm Loan Act.

Now, our point of difference then is how far they can go when the ownership of real property in the incidence of it and it is our position on that that the --

Justice Charles E. Whittaker: This loan is real property -- was a real property tax involved here?

Mr. Robert C. Londerholm: Well, Your Honor let me explain how this aspect of it comes into being.

The mineral estate, which the bank retained in 1946 when they conveyed away the surplus estate in half -- and the other half of the mineral estate is, under Kansas property law, real estate.

Justice Charles E. Whittaker: So I'm -- maybe with that, is that --

Mr. Robert C. Londerholm: Yes.

Justice Charles E. Whittaker: We haven't -- is that before us?

Mr. Robert C. Londerholm: Only in that it is a necessary part and parcel of considering whether this leasing of the real property is beyond their power.

We're saying that the holding of the mineral estate was beyond their power and therefore, leasing it to an oil producer for production purposes being simply an incident of the ownership, there -- it was likewise unlawful so that the unlawful holding of the -- the unlawful leasing of the mineral estate for production is part and parcel of the unlawful ownership of the real property mineral estate --

Justice Charles E. Whittaker: But may I ask this --

Mr. Robert C. Londerholm: -- can't separate, in other words.

Justice Charles E. Whittaker: Does not a taxing authority of the county in Kansas by assessing a personal property tax against you, admit you own the property?

Mr. Robert C. Londerholm: Yes Your Honor, most certainly, and we certainly affirm that they have the de facto title to this property.

Justice Charles E. Whittaker: Well --

Mr. Robert C. Londerholm: We're not here asking this Court for the relief that they order the land bank to divest themselves of this property.

The only reason that we question their right under this federal statute to own this property is to determine its status as it pertains to its taxability or immunity from tax under the concept of governmental tax immunity.

It's possible and there are many cases dealing with corporations, for corporation do in fact own and have the de facto title to property even though under its charter it does not have the power to do so.

So we are affirming that the bank owns this property.

They are the owner.

No one else owns it.

No one owns this mineral estate, and they are the owner of the lease that they've given on it, and therefore, they are the proper party subject to the tax.

But we are saying in retaining this mineral estate in 1946 after they had fully recouped their mortgage debt on the property that they exceeded the power granted them under the Federal Farm Loan Act to hold real estate.

And when they stepped beyond the bounds of the functions and the powers granted to them by Congress, they likewise stepped beyond the bounds of governmental tax immunity.

Justice Hugo L. Black: In effect, you are saying that the entire property.

They have a property which is unlawful for them to have and own, if they lose that tax immunity on that property that they own unlawfully, that they own --

Mr. Robert C. Londerholm: Yes.

Justice Hugo L. Black: -- in violation of the statute.

Mr. Robert C. Londerholm: Yes, Mr. Justice Black, and I believe this Court in Bank of Commerce v. Tennessee long ago had occasion to consider a similar situation arising under a state law exempting the property of a state bank where the exemption as here was in its terms absolute and it exempted all real property of the state bank.

However, in another provision of the state law of Tennessee, there was a restriction.

As we say there is a restriction here on the power of the state bank to hold real property.

The state bank did in fact acquire a piece of property.

In that case, it was the building which they operated their bank.

They leased part of that building to another person for revenue purposes.

The state court and this Court affirming wholeheartedly said that in leasing that real estate, even though the -- the use of it for the bank was proper, that in leasing it to others revenue purposes, they stepped beyond the bounds of their authority that that usage of it, that ownership for that purpose was unlawful and encompassed within that finding was the fact that the bank did in fact own it.

And they said therefore, the granting of the tax immunity was never intended to cover property which the bank might in fact acquire, but acquire unlawfully in excess of its delegated powers.

Justice Charles E. Whittaker: I would think that the bank couldn't own the property then someone else owns it and Kansas couldn't therefore assess it to the bank, would have to assess it against the owners or assess it against the bank as a trustee.

Mr. Robert C. Londerholm: Well Your Honor, that would require saying and we feel that the bank does own this property and there are many cases in which corporations for example have purchased property which the charter did not permit them to purchase, and in fact in the Bank of Tennessee that was inherent.

They -- were -- they were owning this property, been part for the purpose they were not entitled to do nevertheless, they are the owner de facto as you please, but not de jure of this property, and the State in looking about at the property within its jurisdiction when it comes across this piece of property, it must determine, is this property taxable?

The fact that the Federal Land Bank has its title on the property and is the de facto owner, we do not think precludes an inquiry into the question of whether they're holding that property within the scope of their lawfully delegated federal authority from Congress.

We do not think they are.

And therefore, we do not feel that the status of this property even though it's owned by them is entitled to be clothed with governmental tax immunity.

This Court has stated many times that the justification and the reason for governmental tax immunity is to protect the functions and property of government that when a federal agency or instrumentality is engaged in furtherance of its lawfully delegated functions it must need to be protected by governmental tax immunity.

We have no question with that doctrine.

We think that inherent in that statement, there's a corollary rule that where an agency in fact exceeds that power and is holding property as the bank as is here in -- in a collateral sideline business activity after its power to hold it has seized and terminated that the reason for the rule of tax immunity fails of application and therefore, the rule itself must fail.

And that is precisely what this Court said in a similar case construing a state statute in a state bank's power.

They said it was never the intention to immunize any more property that a bank could lawfully hold when the State -- in that case, a state legislature gave a tax immunity to real property.

We're saying here that when Congress in Section 26 of the Farm Loan Act of 1916 immunized all personal property that there was an inherent limitation or qualification or intention on their part that they were talking about, only that personal property which the bank might lawfully acquire, own and use in furtherance of the federal functions they were delegating to the bank in other sections of the Act.

We're saying here that upon the examination of the other sections of the Act particularly the consideration, the overall function of the bank in particularly clause five -- of Section 5 which spells out the limit of its authority to hold real property that the ownership in this particular case under these particular facts and circumstances is not authorized in some other section of the Act, and therefore, Section 26 which immunizes personal property being no broader than the Act itself and the powers delegated by the Act does not extend to cover this ownership, this usage of property.

Justice John M. Harlan: The Farm Credit Administration purported at least to approve this acquisition?

Mr. Robert C. Londerholm: Yes, Your Honor and our position on that is that the -- the limitation on the power to hold real property cannot be expanded under this clause relating to the special approval of the Farm Credit Administration.

In fact, we think that section was inserted by Congress to serve as a check on the individual banks out in the field to make sure that they were holding real property -- where they did hold real property at the point of five years there would be caused to be made a review to determine if they were still holding it within the scope of their authority.

And that the special approval was not intended as a backdoor means of blossoming their authority out to hold real property for any purpose so long its pro -- as it is profitable.

Now, in it's -- the fundamental rule applicable to all state -- federal, state and local instrumentalities and agencies that they possess only those powers which are granted them by the statute, and that any power or whatnot expressly granted them by statute is impliedly denied to them.

Now, in this case, we feel that that rule applies.

We also feel that there is a section of the Act which is of application here; Section 14 which in its terms states that the bank is expressly denied the power of engaging in any banking business or any bus -- other business activity not expressly authorized by some other section of the Act.

Now nowhere in the Act is there a statement of the banks' power to hold real property for speculation and profit as the bank has done in this case.

Nowhere in the Act is there an authorization for them to engage in the business activity of leasing mineral estates to others for production purposes and enjoying the royalties from that leasing.

That is not one of the functions of the bank.

The bank was set about by Congress to make loans to the farmers on first mortgage loans on the property as the secondary power to invest in government obligations.

That generally is the scope of their authority in this area.

Now clearly, it was necessary when Congress enacted this law and set up the bank as a specialized form of money lending institution or specialized form of bank, that they have the power upon a foreclosure of the property on which they might have a loan that they would have to take title to it.

But it is our position that that Section 5 which permits them and by its terms, it states they may take property in satisfaction with debts or on judgments and decrees on mortgages held by it that the meaning of that section is that they are to take that property and hold it as an incident to their money lending function and hold it always having regard for the fact that they're holding it to recoup and to protect their -- their loan, their debt on the property, and that they must seek ways and they must -- when they do recoup, they're investments in that property they cannot then hold it -- hold back a part of the property and proceed to deal with it as though they have the independent power to hold it for an independent collateral business purpose or business activity.

And that's what we say they did here.

They loaned money on this property back in 1923.

In 1941, they foreclosed the title to the property, took title under a sheriff's deed in 1943.

In 1946, they had secured a farmer-buyer who agreed to take the property and pay them a consideration which fully recouped to them their investment in this property.

At that time, they conveyed him a surplus estate and one-half of the mineral estate and reserved the other half of the mineral estate.

They reserved a part of the real property even though they could no longer justify that holding on the ground -- on the purpose for which it was originally acquired mainly to protect their debt.

As far as that transaction was concerned, the books were closed.

They had protected their debt.

They had fully recouped their loss.

Now, the bank's position is that from and after that time, the lawful federal purpose that they had in holding this property was that it was a profitable thing and that the obtaining of profits to the form of royalty interest was, in the long run, contributed to the beneficial purposes of the Act.

Now, we think that this so-called power to make a profit from the usages and incidents of real property is not one of the powers enjoyed by the bank.

There is nowhere in the Act a broad delegation of power to hold real property for profit.

The bank was intended by Congress, if you read the Act through, to profit from the interest on its loans to farmers, to profit from its collateral power or its subsidiary power to invest in government obligations and such other incidental profits that might accrue to it upon foreclosure and selling the property for the best possible price it could obtain.

Justice Charles E. Whittaker: Mr. Londerholm, suppose you are right, and one agreed with you on that, what have you to cite about the standing of the taxing entity like accountant to raise the question of ultra vires conduct on behalf of a governmental corporation?

Mr. Robert C. Londerholm: Your Honor, we don't feel that either the county or the State would have the authority to raise the question of ultra vires if the relief sought was to usurp the ownership of that property.

But where the State has a legitimate concern as it does here as to the status of that property and would -- and this action was not brought to upset this property in no time has the relief been asked that the Court order them to divest themselves of that property.

The only reason that their authority to hold it has been called into question is to determine whether or not it can be said to enjoy governmental tax immunities.

So that the status of the property whether it was being held properly within the scope of the petitioner's functions or was being held without the scope of those functions unlawfully was a preliminary question necessary for the tax officials to decide in determining whether the second question which we feel is involved here and that is, is it entitled to do -- to the immunity of governmental -- is entitled to governmental tax immunity either under the provisions of Section 26 of the Act or in -- or the implied tax immunity which goes to all governmental operations under the Constitution.

So that they had to first determine its status whether it was being held properly or improperly before they can reach the question of whether it was immune or not immune from taxation and we fail -- feel that this inquiry is permitted to the county and to the State.

While an -- while an inquiry directed to usurping their title would not be by the State, it would be up to the Federal Government to take the action to divest them -- divide -- divest the bank or the bank itself, to divest itself of the property, but we feel that this property being in the State of Kansas has -- must have a status there either it is taxable or it is not taxable.

And that it is proper for the State to inquire as to whether or not it is immune under the Constitution, under the Federal Farm Loan Act.

That is precisely what we have sought to do here.

Justice Hugo L. Black: (Voice Overlap) treat it as real estate or personal property?

Mr. Robert C. Londerholm: I beg your pardon.

Justice Hugo L. Black: Do you treat it as real estate or personal property?

Mr. Robert C. Londerholm: The tax is levied on the royalty interest in the lease and it is construed as personal property.

We feel that the illegality of their holding goes beyond that leasing and extends to the retention of the mineral estate upon which the lease was based.

Justice Hugo L. Black: Suppose instead of a -- preserving that mineral lease which you say is personal property, they had received a certain amount of money for it for this real estate to put that in the bank, would you say that you could tax that?

Mr. Robert C. Londerholm: No Your Honor, --

Justice Hugo L. Black: Why?

Mr. Robert C. Londerholm: -- definitely not.

Because the -- their power to hold money is not limited by the Act (Voice Overlap) --

Justice Hugo L. Black: Yes, but their power to hold --

Mr. Robert C. Londerholm: -- they might lawfully obtain.

Justice Hugo L. Black: Their power to hold lease -- the lease is limited by the Act?

Mr. Robert C. Londerholm: Well, we feel like --

Justice Hugo L. Black: Is that what you're saying, the power to hold --

Mr. Robert C. Londerholm: Yes, Your Honor.

Justice Hugo L. Black: -- leases or the power to hold the real estate?

Mr. Robert C. Londerholm: Well, the one follows the other we feel, the power --

Justice Hugo L. Black: Does it?

Mr. Robert C. Londerholm: Well, we feel that if it's unlawful --

Justice Hugo L. Black: The -- the tax exemption is on real estate, isn't it?

Or is -- that's the only thing that's not tax exempt?

Mr. Robert C. Londerholm: Under the law, the real estate is taxable.

They must pay the tax.

Justice Hugo L. Black: The real estate is taxed?

Mr. Robert C. Londerholm: Yes.

Justice Hugo L. Black: But what about (Inaudible) -- all the other properties, the personal property?

Mr. Robert C. Londerholm: The personal property is by terms of Section 26 exempt.

Justice Hugo L. Black: And so you say that where they have owned real estate that it's on -- they shouldn't have owned it under the authority and they sell that and gets personal property for it are reserved part of it as personal property, that's --

Mr. Robert C. Londerholm: Well, Your Honor --

Justice Hugo L. Black: (Voice Overlap)

Mr. Robert C. Londerholm: -- they reserved a part of it as real property, and then leased it as -- and the lease became the personal property interest.

Justice Hugo L. Black: The lease is personal property?

Mr. Robert C. Londerholm: Yes, but it's a -- it's an incident of their ownership for the real property.

Justice Charles E. Whittaker: Well, originally it was, but once it took (Inaudible) obtaining the royalty under the lease.

Mr. Robert C. Londerholm: Nothing, Your Honors.

But we feel that the limitation on the ownership for real property is set out in the Act.

And that they -- they may and if they would convert this to cash, there would be no question here, but they are investing in real property for profit by retaining the mineral estate, paying the real property taxes on it.

They're dealing with it just as any other business enterprise might be engaged in by a person in leasing it and drawing from it a royalty interest.

Justice Felix Frankfurter: And Bismarck, as you know it, is covered.

Mr. Robert C. Londerholm: No, Your Honor.

We feel that that's indicative of the scope of their authority in dealing with real property.

Because there, what the bank was doing in point of fact was it foreclosed in its farmland in an order to put it in condition for resale, they purchased lumber and paint and the State said, “You've got to pay a sales tax on that.

”Of course, this was back into the old proprietary governmental distinction and the scope of that holding, I don't think, interjects itself in here other than to show that what the bank was doing in that case was a proper incident of its money lending function.

It was putting the property in shape for resale and seeking to -- it was necessary incident that they paint it up and put some lumber on it and fix it up before they could find a buyer.

We have no -- we raise no question that that would be a proper incidental function.

Justice Felix Frankfurter: In building up -- in building up a reserve as against the rainy day, you think is not a government -- is not an incident.

Mr. Robert C. Londerholm: If that building up with the reserve takes the form --

Justice Felix Frankfurter: In connection with real property.

Mr. Robert C. Londerholm: Holding real property, we do not think it is.

We think that Section 5 of the Act limits the purposes for which they may have hold real property.

Section 14 of the Act says they may not engage in any other business activity not permitted them even though other business activities would be profitable and in that broad sense, contribute to the building up of reserves obviously speculation on mineral estates is an extremely profitable business activity as the facts of his case not mentioned by counsel show.

The original loan was $3000 and they sold it for $3500 fully recouping their loan interest and up to the time of the trial on 1959 they had realized some $3000 more in delay rentals, cash bonuses and royalty.

Justice Felix Frankfurter: Can you draw another distinction between going out and buying a potentially profitable office building in the city and making -- doing this -- being in connection with farmland?

Mr. Robert C. Londerholm: If I may di -- point from that under Section 5, Clause 8, they have the power to hold property for it is necessary to transact their business function and in other words their office basis and that -- that clause goes on to say --

Justice Felix Frankfurter: They might --

Mr. Robert C. Londerholm: -- that they may lease that property in part.

Justice Felix Frankfurter: I don't mean -- I don't mean that they may -- I don't mean that --

Mr. Robert C. Londerholm: Oh, I understand.

Justice Felix Frankfurter: (Voice Overlap) --

Mr. Robert C. Londerholm: Yes.

Justice Felix Frankfurter: Fully extraneous office building that they spot, they could buy cheaply for one reason or other.

Mr. Robert C. Londerholm: We feel that that --

Justice Felix Frankfurter: You make no distinction being that and doing what was done in here?

Mr. Robert C. Londerholm: No, Your Honor.

We feel that they're all of the same category.

They're all unlawfully -- would all -- constitute the unlawful holding and ownership of the real property beyond that scope of their power under the law.

And -- might I say this that although counsel has to sought ridicule the point that we make in our brief, that if this holding is justified solely for the reason that it's profitable, contributes to the beneficial purposes of the Act, there is no material or substantive difference between owning this mineral estate or retaining it.

And you pointed out Your Honor, buying a office building for profit or they themselves turning the thing around and producing the minerals from that property themselves, because that would be profitable and would contribute to the overall purpose of the Act under the extremely broad position taken by counsel.

And the -- once you get over into that saying that they have the power to hold and deal in real property for that unlimited purpose so long as it's profitable and it's hard to imagine the case where the ownership of real property would not be profitable either immediately or prospectively, then you open up the power of the bank.

Whether they'll exercise it or not, we're not here to question, but if you say they have it, and we say they don't, if you say they have it, then you must encompass within that power to hold real property for profit not just this one aspect of it on this one track in Kiowa County, but other profitable uses of real property in many possible uses that we can think of such as developing it themselves for mineral production and refining the oil and on ad infinitum.

So, we think that the power to hold real property is limited by Section 5 of the Act.

The power to engage in business activities not expressly provided for in the Act is denied to the bank by Section 14 of the Act and that applying the fundamental rule that an instrumentality has only those powers which Congress gives it.

That in this case, the bank exceeded its powers in holding on to this real estate from and after 1946.

And that in 1946, when it sold the surplus estate and one-half of the mineral estate, it had fully fulfilled the purpose for which it had acquired the property and that is to protect its debt, and there's no argument on the facts by what they have.

And that what the bank did from and after that time was simply to keep some of their funds invested in real property on the justification that that investment was potentially profitable and 10 years later, it did turn out to be -- was a field of gas was discovered down in Kiowa County.

But they were -- they're engaging in sheer speculation on a possible future profit from the ownership of real property in holding that property in 1946, they can offer no justification for holding it as a nece -- necessity for recouping their loss on the property.

Justice Hugo L. Black: What about holding it up to 1946?

Mr. Robert C. Londerholm: Your Honor, we feel that that -- that was all incidental to recouping their loss.

They -- they --

Justice Hugo L. Black: But your argument boils down to the fact that when they sum it, in fact if they retain something, its personal property they are after which they draw a property --

Mr. Robert C. Londerholm: Well --

Justice Hugo L. Black: -- losses -- causes them to lose their exemption.

Mr. Robert C. Londerholm: Yes, Your Honor.

In that -- where in selling it or selling part of it which is all they actually did.

They sold the surplus and half of the mineral.

I want to make it clear here that in Kansas the mineral estate is real property.

So --

Justice Hugo L. Black: Oh, I thought you said it was per -- you treat the lease as personal property (Voice Overlap) --

Mr. Robert C. Londerholm: But the lease of --

Justice Hugo L. Black: -- well, I didn't quite understand.

Mr. Robert C. Londerholm: I'm sorry, Your Honor.

It's my fault.

The mineral estate in Kansas is looked upon as a subsurface cleavage of the property in this real estate, but when you lease it, your leasehold interest is taxed to you as the royalty (Inaudible).

Justice Hugo L. Black: And that's what you are taxing here.

Mr. Robert C. Londerholm: As personal property, yes and that's why we say that if it's unlawful to hold mineral estate under these circumstances, for these purposes, then the leasing of it in obtaining the royalty is a mere incident to that and therefore must of necessity be unlawful too, unlawful in a sense that is denied to the bank beyond their power.

In conclusion, I will just point out that the decision of the court below squarely rested on these two points: first, from the examination of the Act, the sections relating to the power, in limiting their power to hold real estate and this -- the section which denies them the power to engage in independent business activities not expressly provided for.

And that from an examination of those sections of the Act as related to what the bank was doing here, we reach the preliminary conclusion that the Court -- that the bank was acting beyond their power.

And then the next point of inquiry was, it is tax immune?

And we think they're on all basis of reason and logic that governmental tax immunity only extends to property lawfully held by a government instrumentality within the scope of its delegated powers.

Chief Justice Earl Warren: Mr. Doolittle.

Rebuttal of J. William Doolittle

Mr. J. William Doolittle: If it please the Court, the estate concedes as counsel has said that this property can be held for the purpose of recouping losses and I submit that the state court held it as well that it could be held if it was necessary to recoup the losses on other pieces of property where losses had been sustained.

Counsel also says that he would have no difficulty in saying that the bank could make a profit if it sold these estates.

Theoretically, if for example, the land bank had sold the entire estate including the mineral interest that it in fact retained it would have gotten a little bit more from the sale.

And counsel does not contend that that property then because it was not absolutely necessary to the accomplishment of what he regards as a governmental function would become taxable by mistake.

I submit that those propositions put together add up to the fact that the estate -- that the bank can retain this property, that the two are inconsistent that if they can make a profit on this kind of transaction without being taxed, that the estate is in effect -- in effect conceding that this kind of activity is proper within the tax immunity granted.

Now, I think it's important to recall that the Bismarck case has decided these questions squarely and that the Court found it unnecessary to inquire into whether or not the particular tax exemption that the bank was claiming there was necessary in order to protect a particular loss on a particular loan or even losses on other loans not related to the real estate in question.

The Court was simply not concerned with that problem, and I suggest that that lack of concern stemmed from its recognition that the land banks must be given reasonable latitude in conducting their affairs in order to achieve the purposes decided by Congress.

Justice Felix Frankfurter: Well, there is a difference, isn't there, between spending a little money to prevent -- to correct the dilapidating condition of the farm and the bond on your hands and actually going in for what is a -- in effect an investment?

Mr. J. William Doolittle: Well, Mr. Justice, I suggest that if the per -- if property value had so increased that they didn't need to do anything to this property and still they could get a lot more than they had put into it in the first place, that the reasoning of the state court and the reasoning of counsel would say, “Why of course they can't get an immunity on sales tax when they go in and buy materials with which to improve this property.”

I suggest that there really is no essential distinction for these purposes.

Featured:

Moses Lake Homes v. Grant County - Oral Argument

Tue, 25 Sep 2012 22:33:55 +0000

Case:

Moses Lake Homes v. Grant County

Media File:

212_19610323-argument

Related Transcript:

212_19610323-argument

Transcript:

Argument of Lyle L. Iverson

Chief Justice Earl Warren: Number -- Number 212, Moses Lake Homes, Incorporated, et al., Petitioners, versus Grant County.

Mr. Lyle L. Iverson: May it please the Court.

Chief Justice Earl Warren: Mr. Iverson.

Mr. Lyle L. Iverson: This is an action involving an application by Grant County, Washington to impress upon the deposit of estimated compensation in a condemnation case alleged tax liabilities or taxes against a leasehold.

Now, all that we have in the condemnation case is a condemnation of a leasehold, not a condemnation of buildings.

This case involves what is known as a Wherry housing project.

Justice Felix Frankfurter: What it -- I'm sorry.

Mr. Lyle L. Iverson: A Wherry housing project.

It arises under Title VIII of the Federal Housing Act and a Wherry Housing Act -- Wherry housing project operates this way.

On a military reservation, a lease is given for a period of 75 years and the -- the sponsor that is -- that's the terminology, the sponsor corporation erects the buildings and then leases them to tenants assigned by the military commander for that period of 75 years.

He is financed by an FHA guaranteed loan.

Now, in this case, Grant County levied taxes against this property.

In their listing of the property, they designated it as buildings on the military reservation.

Actually, the Circuit Court of Appeals has had some discussion of this question, and the Court has held that notwithstanding that they designated buildings, that they were really trying to tax the leasehold.

But the Court, the Circuit Court held that this -- some of this --

Justice Felix Frankfurter: Would you mind telling in greater detail the effect, namely, what it is before you get to the holding, what it is and who is -- what it is that was taxed against whom it was taxed?

Mr. Lyle L. Iverson: Yes.

We have --

Justice Felix Frankfurter: Financial relations and so forth.

Have you --

Mr. Lyle L. Iverson: If the Court please.

We have three corporations here, each which has a separate Wherry housing project, and they have these 75-year leases.

Grant County, Washington in -- in which Moses Lake -- Larson Air Force Base is located, undertook to assess personal property taxes against these buildings.

Now, by the terms of the lease, which rendered for 75 years, buildings immediately upon construction became the property of the Federal Government, and Grant County undertook to assess the leasehold upon the basis.

Justice Felix Frankfurter: It's 75-year old --

Mr. Lyle L. Iverson: That's correct, Your Honor --

Justice Felix Frankfurter: -- leasehold.

Mr. Lyle L. Iverson: Upon the basis of the valuation of the buildings.

Now, we have approximately $6 million in mortgages outstanding against the property.

They assessed the property at a figure which if we disregard equalization figures and so forth would -- would put these -- put the market value at approximately $2 million.

Now, the Government, in condemning this property, paid in as estimated compensation, $253,000.

Grant County sought to obtain actually more money than the total amount paid in by the Federal Government.

The lower court, in this case -- the application was made by Grant County to impress their tax lien against this estimated compensation on the ground that the -- that a lien rested against the leasehold, therefore, the estimated compensation being substituted for the lien and became substituted for the estimated compensation.

The lower court found and the Circuit Court of Appeals has concurred in the finding that the proceeding followed by Grant County in this matter was discriminatory against a contractor with the Federal Government.

Now, this is the reason for that holding in Washington.

We have a statute that provides, this is R.C.W. 84.40.030, it's cited in my brief and it's in the appendix, "Taxable leasehold estate shall be valued at such price as they would bring at a fair voluntary sale for cash."

Now, you know of taxable leaseholds.

They're especially -- they're especially covered by statute.

In a long line of cases in Washington known as the Metropolitan Building Company cases, the Washington Supreme Court has construed that statute with respect to all leaseholds held from the State.

And in those cases, which involved state-owned land in the heart of Seattle under 50-year leases, it was sought by the public authorities to tax them upon the basis of the value of the improvements on the property rather than the value of the leasehold as someone would buy it and let someone would pay for it, and that -- those contentions were rejected four times by the Washington Supreme Court.

And I set out the cases in my brief.

And the Court held in that case that in Washington, in taxing a leasehold, the leasehold must be taxed on its -- on a reasonable market value what a willing seller -- what a willing -- what a willing seller could obtain from a willing buyer considering the burdens and benefits.

And the Court said that a purchaser would take it (Inaudible).

And that if there was a large mortgage against the property that that mortgage would be taken into consideration, and the method of taxing all leaseholds in Washington, all other leaseholds in Washington, is well-established and that is what would a willing buyer to take -- pay to a willing seller, considering the encumbrances, the burdens and benefits.

Now, when we got to this matter of the Wherry housing projects, it had considerable litigation over this and the first of these -- these three corporations to be organized were Moses Lake Homes, Inc. and Moses Lake Homes, Inc. obtained, in 1954, an injunction against the efforts of the County to levy upon the buildings as they were -- that's what they were listings, the buildings which were, by the terms of the lease, Government property.

And that injunction remained in effect until 1957.

And so or -- the taxes levied in 1955, 1956, 1957 were all held up the administrative proceedings while that injunction was in effect.

Then about that time, this Court decided a case served as the warehousing case, Offutt Housing Company versus Sarpy County, which is cited -- citations in the brief, in which this Court held that in Nebraska, a Wherry housing project could be taxed at the value of the -- of improvements on the property and the Washington court, having this before it, rather blindly followed that decision of this Court and said that they were bound by the -- for the sake of uniformity and so forth they would follow the decision of this Court and, therefore, a Wherry Act housing project in Washington in this case would be taxed at the basis, that was the leasehold, will be taxed on the basis of the value of the improvements.

Now, that might have been alright in Nebraska, but in Washington, that is precisely what the Washington Supreme Court, in the Metropolitan Building Company cases, had repeatedly held could not be done in one of the cases which we cite, which we quote in it.

The Washington court held in so many words that it was not permissible for the public authorities to take the value of the improvements and use those as the sole basis for determining the tax liability.

Now, in effect, what has happened has been that for Wherry housing projects only, the leasehold is taxed not as the statute says on its market value but it's taxed on the value of the improvements.

Now, you see what kind of difference that makes.

That is the difference between whether we take about $7 million worth of houses here and tax or whether we take our interest in them, which the Government estimated at $253,000.

Now, in counsel's brief, they say they actually did not ignore the burdens on this leasehold.

Now, this is the first time they've said that.

And in the court below, in answer to admissions, which we pointed out in our reply brief, they specifically admitted that they did not take into consideration the $6 million worth of mortgages.

It is the difference between taxing the equity of the lessee and the property and taxing the property itself.

If you count up what they have actually assessed, if we -- I think any court in Washington would take judicial notice of the fact that equalized values are far or less than the 50% they -- that they seek to get at but if we disregard that and get simply to the -- to the value that they have put on it, they have put a value of some $2 million on this property.

Now, we're being condemned.

We'd be awfully happy to get the Government pass $2 million worth.

It just isn't that much but nobody's going to pass that because that just isn't what our -- what our equity is worth but that's what we've taxed for.

Justice Felix Frankfurter: Mr. Iverson, your complaining here that this Wherry's interest attached at -- the base of the rate, the base rate of Wherry property is higher than the base rate of other taxable properties in Washington, isn't it?

Mr. Lyle L. Iverson: Different and higher.

Yes, sir.

Justice Felix Frankfurter: Now, since your Supreme Court interpreted the Offutt decisions the way it did, has there been any decision by your court that they wouldn't be equally applied at measuring throughout the non-Wherry interests?

Mr. Lyle L. Iverson: No, there has not, Your Honor.

Justice Felix Frankfurter: Well, how can we tell that they haven't changed their mind and therefore, you've been treated, and tomorrow they (Inaudible)

Mr. Lyle L. Iverson: We have --

Justice Felix Frankfurter: What you're saying is that judged by the prior rulings of your statement reenforce the application for the -- the basis of taxation in this assessment of this case operates discriminatorily.

Is that what you say?

Mr. Lyle L. Iverson: The Court did not --

Justice Felix Frankfurter: But non (Inaudible) that today, they wouldn't measure it by the same equal hand as non-Wherry property?

Mr. Lyle L. Iverson: The Court did not undertake to reverse any of those cases.

Justice Felix Frankfurter: But it doesn't have to.

Mr. Lyle L. Iverson: The Court has, in fairly recent times, reaffirmed that long line of decisions.

Justice Felix Frankfurter: What did they do with that in the case in which they applied Offutt?

They say as to we now have the green light from the Supreme Court but as to Wherry taxation, we can -- we can dodge them all or we can in local taxation.

Did they say that?

Mr. Lyle L. Iverson: Well, I think those aren't exactly the words, Your Honor, but I think that's the effect of it.

Justice Felix Frankfurter: Well, I don't mean the effect.

Mr. Lyle L. Iverson: I think what --

Justice Felix Frankfurter: But that maybe --

Mr. Lyle L. Iverson: About what they said was that we are going to make this uniform throughout the country, and we feel that we are guided by the United States Supreme Court on this.

Now, what they've failed to do was to compare it with what they were doing to everything else and in addition to that case, to -- to all that long line of cases, we also have a statute in Washington which has not been repealed or modified, and that statute says that the leasehold shall be at its reasonable -- at its market value on a fair sale for cash.

Justice Felix Frankfurter: But you -- you candidly said a minute ago that it's applied to the same standard for non-Wherry property you couldn't make a claim of discrimination.

Mr. Lyle L. Iverson: I think that's right but I don't think there's any question in the world that they never have and that nobody has contended that they're going to.

But --

Justice Hugo L. Black: Did they here?

Mr. Lyle L. Iverson: Here, they certainly did.

Here, they applied a wholly different standard in -- in a Wherry Act case which has come since this one.

Since -- the Moses Lake case was there, second case involving Spokane County Air Base housing, the Air Base Housing case which is cited in the briefs here.

They again applied this discriminatory method insofar as Wherry Housing Act cases.

Justice Felix Frankfurter: But this isn't -- this isn't (Inaudible)

Mr. Lyle L. Iverson: The ruling of our --

Justice Felix Frankfurter: What we have here is the Ninth Circuit case, haven't we?

Mr. Lyle L. Iverson: That's what we've taken in this effort.

Now, both the Ninth Circuit, Your Honor, and the -- the lower court found, as a matter of fact, that Washington did in fact discriminate against the Wherry Act projects.

Now, you got two courts below have decided that and under ordinary rules, where two courts below have conferred in that.

Justice Felix Frankfurter: Where is that?

Where is that, Mr. Iverson?

Where do they say that?

And do they justify it on the ground you can do this to Wherry but not to other people?

Mr. Lyle L. Iverson: That's right.

Those are the findings.

Those are the specific findings --

Justice Felix Frankfurter: Where are they?

Mr. Lyle L. Iverson: -- Your Honor.

The -- the -- let's see if I can get the -- the reference here immediately.

Justice Felix Frankfurter: What you're saying is that this decision said in the light of Offutt, each State -- that the interest of national uniformity that the Wherry Act permits this discrimination.

And that's what you're saying.

That's what you say the Court held, is that it?

Mr. Lyle L. Iverson: Well, I don't think the Court ever said that.

The Court didn't quite come to that point.

The Court just said that in this case because of the -- of the Offutt case, we're going to hold it that way.

And it violated -- it's contrary to the Washington statute which has been uniformally applied and all other cases and it's contrary to all of the decisions of our Court --

Justice Felix Frankfurter: I'm going to give you -- I've --

Mr. Lyle L. Iverson: -- in all of the cases.

Justice Felix Frankfurter: -- I've said what I said to give you a time to point us to that finding.

(Voice Overlap) --

Justice John M. Harlan: I would like to ask you a question.

Do you think any of those questions are here under the limitations of the Wherry Act?

Mr. Lyle L. Iverson: Well, I think it is a matter --

Justice John M. Harlan: It's limited to one question.

Mr. Lyle L. Iverson: -- I think it is -- as the matter comes up on the -- on the writ, it is assumed that the Circuit Court of Appeals was correct in making its finding that the -- that the discrimination did exist.

Justice Felix Frankfurter: Well, but if we -- it turns out that the --

Justice John M. Harlan: Page 370 of the record.

Justice Felix Frankfurter: -- if we made -- if we brought in a question that turns out to be abstract, you don't have to decide that aspect, don't you?

Mr. Lyle L. Iverson: No.

I think we don't have an abstract question here.

The --

Justice Felix Frankfurter: well, I didn't say we have, I say if we have brought in abstract questions which we don't have to decide in this (Inaudible).

Mr. Lyle L. Iverson: The -- the -- on page 354 of the record, the Court said, this is the Circuit Court, the trial court's further finding that a different method was used in (Inaudible) the Wherry Act leaseholds here and question is also correct likewise to be sustained as the Court's finding that the method used in assessing the Moses Lake leasehold resulted in a higher tax and would have been true in the case of a non-Wherry Act leasehold.

And then they go on in the footnote to say the Moses Lake leasehold was heavily encumbered by a mortgage.

Amortization of this indebtedness was not taken into account in assessing the leasehold.

It was only the value of the physical improvement was considered but has the valuation of the leasehold been measured by its market value considered in the lights of its burdens and benefits, the necessity of amortizing the mortgage would have been taken into account, citing some cases, had been taken into account the assessed value for 1958 and therefore, the levied tax would have been substantially lower, but we do not know how much lower.

So both the District Court and the Circuit Court has specifically found the question of -- of discrimination.

Now, that leads us to -- to where we are.

Here, for the first time --

Justice John M. Harlan: May I interrupt you again?

What do you consider under this question, it appears on 370 -- page 370 of the record which the only thing we brought out what do you consider was involved in the issue that we have to decide?

Mr. Lyle L. Iverson: The fact that now, an application has made to a federal court -- to -- and its processes to collect a discriminatory tax which discriminates against the Federal Government.

Now, this is a matter which is just inherit in courts, but they do not assist the violation of the laws of their own sovereignty.

This Court in that case, Philips Chemical Company versus Dumas School District, which is cited here, has not too long ago, very explicitly reaffirm the long-standing rule that a State, in taxing those who deal with the Federal Government, may not discriminate against them and pick them out for special adverse treatment.

And that is what has occurred here.

So that the -- this Court is now being -- the -- the federal courts are now being called upon in this condemnation procedure to assist the County in collecting from the -- from this estimated compensation, this discriminatory tax.

Now, it had the theory upon which -- the County proceedings, apparently is that because of the fact that the leaseholds are for a period of 75 years, they will outlast the -- the leaseholds will outlast the buildings.

In other words, there was no such findings that, in this case, as a matter of fact, the Court in its -- in its oral opinion indicated that since the -- the contract called for this maintenance reserves and replacements that this would be maintained on to the end of the term.

So that there has -- there has been no decision that there is any conversion of this property from a leasehold to ownership.

And in Washington, we have a case which we've cited in here which holds that even a lease for 999 years doesn't constitute ownership.

And if it be considered that the County is claiming this tax against the physical buildings, then I don't think they have any claim against the -- the positive estimated compensation because it is not the physical buildings that the Government is condemning.

What the Government is condemning here is the leasehold, and this is compensation for the leasehold.

So --

Justice Hugo L. Black: May I ask you if you could state very briefly what would happen to your client if this case is dismissed?

Mr. Lyle L. Iverson: Well --

Justice Hugo L. Black: The question whether it's raised.

What I want to know, what happens to your client in this case?

Mr. Lyle L. Iverson: What happens to my client?

Well, I suppose that if it were dismissed, the County would start over in trying to collect these taxes but they would have to do it on a basis that would be the same as they would collect other tax -- taxes on other leaseholds in the State.

They would -- other words -- in other words, they would have to follow the statute and assess and -- and determine this on the basis of what the lease could be sold for.

Justice Hugo L. Black: You mean that this case was decided against it?

Mr. Lyle L. Iverson: Oh, no.

This case was decided against us, then we pay the taxes.

Justice Hugo L. Black: What tax now do you pay?

Mr. Lyle L. Iverson: We -- we would pay the taxes for 1955, 1956 and 1957.

Justice Hugo L. Black: How much is this?

Mr. Lyle L. Iverson: That runs to about $90,000 roughly, yes.

Justice Hugo L. Black: What -- what would it be if they had assessed you on the basis that they assess other people who do not apply leaseholds (Voice Overlap) --

Mr. Lyle L. Iverson: Had they assessed us on that basis it, probably, would -- would not run over about $10,000 because our -- our property, our actual value, our actual equity is -- is pretty small in here.

Justice Hugo L. Black: If I understand your claim, is it this, that in -- in the State of Washington, they assess only the equitable value to some --

Mr. Lyle L. Iverson: Of a leasehold.

Justice Hugo L. Black: Yes, of a leasehold.

Mr. Lyle L. Iverson: That's -- that's correct.

Of a leasehold.

Justice Hugo L. Black: I understood.

Mr. Lyle L. Iverson: Everyone else besides Wherry households -- Wherry leaseholders in assessing a lease.

They assess the lease with its burdens and benefits, that is what a reasonable buyer would pay to a reasonable seller considering the mortgage.

Justice Hugo L. Black: That is the value less the mortgage.

Mr. Lyle L. Iverson: That's right.

Justice Hugo L. Black: What is the mortgage?

Mr. Lyle L. Iverson: The value?

Justice Hugo L. Black: Yes.

Mr. Lyle L. Iverson: About $6 million.

Justice Hugo L. Black: How much?

Mr. Lyle L. Iverson: About $6 million.

Justice Hugo L. Black: And what's the --

Mr. Lyle L. Iverson: It's about --

Justice Hugo L. Black: -- what's the assess valuation that Washington (Voice Overlap) --

Mr. Lyle L. Iverson: The assessed valuation that they've actually put on here is about, you see, they assessed a 50% evaluation, so that would make about $2 million of what they have actually put on here.

I want to save about five minutes of my time.

Chief Justice Earl Warren: Mr. Klasen.

Argument of Paul A. Klasen

Mr. Paul A. Klasen: Mr. Chief Justice and members of the --

Justice Felix Frankfurter: If you please, would you mind stating at the outset whether you challenge or agree with Mr. Iverson that this one non-Wherry property, exactly the same situation, there would be a different standard, a different basis on ratings against (Inaudible)

Mr. Paul A. Klasen: I disagree with Mr. Iverson.

And the -- a -- a different standard is not applied in the State of Washington and the general rule was announced by the Moses Lake Homes versus Grant County at 51 Wash.2d.

The --

Justice Hugo L. Black: Was that the position you took in the Court of Appeals?

Mr. Paul A. Klasen: Yes, Your Honor.

Justice Hugo L. Black: In other words, you deny that they decided this on the right bench.

You denied that there's a discrimination which they said there was.

Mr. Paul A. Klasen: That's right, Your Honor.

We denied there was any discrimination --

Justice Hugo L. Black: I'm not talking about that the -- I hardly said there was.

You deny that the -- there was a discrimination which the Court of Appeals approved.

Do you not or do you now?

Did they not say that there was this discrimination?

Mr. Paul A. Klasen: The court below merely stated that a different method of valuation was used for Wherry housing, and that they did not say that in such in dollars and cents, there was any discrimination.

Justice Hugo L. Black: I'm not talking about dollars and cents but didn't they say that the one you took account of the equitable ownership and the other you didn't?

Mr. Paul A. Klasen: That's right.

I did.

Justice Hugo L. Black: Is that true?

Did you say it was truth before -- in the Court of Appeals?

Mr. Paul A. Klasen: No, we did not.

Justice Hugo L. Black: You did not.

Mr. Paul A. Klasen: Well --

Justice Hugo L. Black: But why did they decide it this way if you deny that and the others asserted it?

Mr. Paul A. Klasen: I cannot explain the reasoning of the Circuit Court --

Justice Felix Frankfurter: That is you --

Mr. Paul A. Klasen: -- under the --

Justice Felix Frankfurter: -- you want to -- of course, you got a judgment in your favor.

And I am answering to your answer to Justice Black's question to mean that you're going to defend this judgment on grounds other than those on which the Court gave you the judgment.

Mr. Paul A. Klasen: Yes, Your Honor.

Justice Felix Frankfurter: Alright.

Justice Hugo L. Black: Well, are you going to defend it on the ground as different to those you stated to that Court?

Mr. Paul A. Klasen: No.

Justice Hugo L. Black: You have your briefs here that you had in that court?

Mr. Paul A. Klasen: They're very similar, the same articles -- I -- I don't (Voice Overlap) --

Justice Hugo L. Black: Can you -- can you get the briefs that were in the Court of Appeals?

Mr. Paul A. Klasen: Yes, we can.

Justice Hugo L. Black: I cannot understand how they possibly could decide this case if they did, if you had presented the argument you're now presenting.

Mr. Paul A. Klasen: Well, it appears to Grant County that the Court merely on its -- had so to speak on -- on the res judicata issue and since that would apply, they went on to the other matter.

They did not discuss the arguments that we raised that the same arguments that were used in the Offutt Housing cases that you can carry, at least, a part to look at the practical effect of the lease rather than follow the mere designation of lessee or lessor.

Justice Hugo L. Black: Was there any --

Justice Felix Frankfurter: Were --

Justice Hugo L. Black: Excuse me.

Justice Felix Frankfurter: I beg your pardon.

Justice Hugo L. Black: Was there any evidence for them in any court to show what was the basis on which you imposed this in connection with Wherry housing? What was the basis on which you imposed if you claim this tax?

Are you assessing the entire, so far as they're concerned, are you assessing as though there were -- as they own that, which they have conveyed by mortgage interest to somebody else?

Mr. Paul A. Klasen: Generally speaking, that is right, Your Honor.

The -- under the --

Justice Hugo L. Black: You do that for homeowners?

Mr. Paul A. Klasen: Yes.

Justice Hugo L. Black: You do it for everybody.

Mr. Paul A. Klasen: Yes.

Justice Hugo L. Black: Of course, if that's -- that's true I'm wondering why the Court decided this.

Mr. Paul A. Klasen: That's what I don't understand.

Justice Charles E. Whittaker: Do you mean -- do you mean to say, if I own a house in a lot in your State, then it's subject to mortgage now in fee that your assessor will deduct an amount of the outstanding mortgage in the assessment?

Mr. Paul A. Klasen: No, he will not.

Justice Charles E. Whittaker: Well, in that, what Mr. Justice Black was asking you.

I don't think you understood his question.

Mr. Paul A. Klasen: I -- I did not.

That was the question that -- though the assessments are never made on real property in my home on the basis of the mortgage so on the valuation of the home as if the mortgage did not exist.

Justice Felix Frankfurter: You mean for non-Wherry people?

Mr. Paul A. Klasen: Yes, from my house, that's -- that's the way --

Justice Felix Frankfurter: Well now, let me ask you this question.

Justice Black, that he wasn't interested in dollars and cents.

I like to be interested.

He had some other purpose.

Let me ask you this question.

Suppose you had the identical situation you have here, the exact interest created, the same 75-year term, the same mortgage, everything the same, except the financing was not done through the -- through the Government, it was done through private lease.

Would the assessment be the same for my -- the case that I put you, the hypothetical case as it was in this case.

Mr. Paul A. Klasen: It would be.

Justice Hugo L. Black: As an insurance company or bank would be precisely the same.

Mr. Paul A. Klasen: Yes.

Justice Charles E. Whittaker: Now, are you -- I don't know what you mean.

Isn't it true that one thing is that (Inaudible) mortgages are not ordinarily deducted in determining the asset value yet because of the Offutt case, it's -- no, no, but if this were only done with respect to leasings but because of the Offutt case, we will not do it in a Wherry Act situation, isn't that what you said?

Mr. Paul A. Klasen: Not exactly, Your Honor.

In the Washington case where they decided the -- the leasehold or the valuation, the Court said that because the improvements did not last the link of the term of the lease and other factors that -- for that -- on that basis, the rule in the State of Washington is that you do not have to take into consideration the mortgage value, the mortgage against the property.

Justice Charles E. Whittaker: Let's just take A, B, C.

You did have a lease, a normal lease in your State, do you ordinarily permit deduction of the mortgage against it in determining assessed valuation of it?

Mr. Paul A. Klasen: A normal lease, yes, where the improvements would last --

Justice Charles E. Whittaker: Yes.

Mr. Paul A. Klasen: -- beyond the link of the term of the lease.

Justice Charles E. Whittaker: Now, do you do that in a Wherry Act situation that the Ninth Circuit distinguished?

Mr. Paul A. Klasen: We do not want to do that in a Wherry housing because the improvements do not last in term of the lease.

The Court did not go into the distinctions at all in the Ninth Circuit.

Justice Felix Frankfurter: What you're saying is the practical differences, the nature of the lease in a Wherry situation is different from the case in which your state court applied the doctrine that it applies, is that it?

Mr. Paul A. Klasen: That's right.

Our State Supreme Court --

Justice Felix Frankfurter: I don't know if that's so but that's what you're saying, is it?

Mr. Paul A. Klasen: Yes, that's right, Your Honor.

Justice Felix Frankfurter: That the practical difference, you're dealing with different interest, if an incident of -- of value, is that right?

Mr. Paul A. Klasen: That's right, Your Honor.

Justice William J. Brennan: Mr. Klasen, may I get your (Inaudible) and the judgment was to remand the District Court where we set (Inaudible)

Mr. Paul A. Klasen: Yes, in order to determine actually the value for (Voice Overlap) --

Justice William J. Brennan: It was a -- it was a remand to the United States District Court not show the taxes (Inaudible)

Mr. Paul A. Klasen: That's right.

Justice William J. Brennan: (Inaudible) nobody could save the opposition, of course they can --

Mr. Paul A. Klasen: Well -- Grant County isn't really too much concern with it because of a new section of -- Section 511 of the Housing Act is going to, probably, for all practical purpose, wipe out the taxes.

Justice William J. Brennan: (Inaudible)

Mr. Paul A. Klasen: In addition, Your Honor, the -- the Court awarded Grant County some $90,000 in taxes, irrespective of -- of the remand, for three years 1955, 1956 and 1957.

Justice William J. Brennan: (Inaudible)

Mr. Paul A. Klasen: The -- the Ninth -- Court -- Circuit Court of Appeals said that the -- a different method was used but on -- on the basis of res judicata that the matter was foreclosed to them.

That this --

Justice William J. Brennan: (Inaudible)

Mr. Paul A. Klasen: Yes, Your Honor.

Justice William J. Brennan: (Inaudible)

Mr. Paul A. Klasen: Well, it had to be for 1958 and for 1956 and 1957 for Larsonaire -- Larsonaire Homes and I think 1957 for Larson Heights.

Justice William J. Brennan: Do you want the United States District Court to make a valuation of property for tax purposes for the State of Washington?

Mr. Paul A. Klasen: I don't know how they're going to do it, but I would imagine they're going to have to -- go into some --

Justice William J. Brennan: My question is (Inaudible)

Mr. Paul A. Klasen: None in particular.

No.

If the Court please, the reason we're not objecting to it is because of the law.

The final result will mean nothing to Grant County probably.

Justice Charles E. Whittaker: I didn't understand.

Mr. Paul A. Klasen: Well, the reason we are not objecting to the -- the remanding back is because of Section 511 of the -- amended the Wherry Housing Act.

Grant County probably will realize little or nothing when the case is, in fact, in the District Court for reevaluation.

Justice Hugo L. Black: Why?

Mr. Paul A. Klasen: Well, because the Secretary of the Air Force, under Section 511, has claimed that they have offset the taxes by granting services which be -- would be covered under the taxes.

And therefore, since the services will exceed the taxes under the amendment of Congress, they can offset services against the tax and the Air Force comes up with services overweighed when above the tax.

Justice Hugo L. Black: Well, would you think it's a moot case?

You say Grant County doesn't expect to get a dollar because of the new statute which allows the Government to offset for services against your tax.

Mr. Paul A. Klasen: Well, whenever we're optimistic, I'll put it that way to mean but we're not very hopeful.

Chief Justice Earl Warren: Well, they didn't offset this -- this amount that you -- that you've been awarded, then you would still owe them that much money, wouldn't you, if --

Mr. Paul A. Klasen: That's right.

The off --

Chief Justice Earl Warren: -- if you're lost.

Mr. Paul A. Klasen: Well, the outset applied only to taxes that came on lien after 1956.

These taxes here are for taxes before the offset provision came applicable of that amount Grant County has received from the depository, I think, $50,000, and we have not yet collected the amount awarded to us in addition by the Ninth -- Ninth Circuit.

Chief Justice Earl Warren: But my point is, we don't -- if you don't get credit for -- for this on the -- on the services that the -- the Air Force has rendered to you, you'll have to pay them in some other way, won't you, for the same amount.

Mr. Paul A. Klasen: No, the --

Chief Justice Earl Warren: (Voice Overlap) --

Mr. Paul A. Klasen: -- no, we will not, Your Honor.

The --

Chief Justice Earl Warren: Go ahead.

Justice Hugo L. Black: The statute simply provides that so far as taxes are concerned, as I gather your statute, as far as taxes are concerned, the Government can offset certain services.

Mr. Paul A. Klasen: That's -- United States said to Congress.

Justice Hugo L. Black: But they can't collect from here except as an offset against taxes.

Mr. Paul A. Klasen: No, no, no, they can't -- no, they cannot go back against the County.

Justice Hugo L. Black: (Inaudible) with a basis fee, I think, they don't want you to keep any taxes.

Mr. Paul A. Klasen: That's right.

Justice Hugo L. Black: But they are not willing to make you pay for those services.

Mr. Paul A. Klasen: No.

Justice Hugo L. Black: Is that statute cited there in your brief?

Mr. Paul A. Klasen: The Section is 511.

It's cited in the -- in the record at Section 511 of the -- it's in the Circuit Court's opinion, I guess, opinion to the --

Justice Hugo L. Black: That's the one related to the services?

Mr. Paul A. Klasen: Yes, Your Honor.

It's on the record, page 349.

Grant County's position is based on the Offutt Housing cases.

In addition, the statute to which Circuit Court of Appeals didn't pay too much attention to it at least as far as we can see is that personal property includes all improvements upon lands, the fee of which is vested in the United States or in the State.

And that's the basis upon which the property was assessed as improvements upon land, the fee which is -- is vested in the United States or the State of Washington.

Now, in the Offutt Housing cases, the Court has ruled that you can go be -- look as to the substance, not really is the form of the lease, you can go behind the terms and look as the practical aspect and the cases of which the Wherry housing cases can be distinguished from the Metropolitan Building cases because in those cases, one, there is no -- that the improvements, last way beyond the term of the lease.

The amount of compensation is entirely different.

Justice Charles E. Whittaker: Is it not true that the Offutt case did not involve a question of discrimination which is the attack of petitioner here?

Mr. Paul A. Klasen: Not -- not precisely.

There was a question whether the -- the taxes could be levied.

But the Nebraska tax law are similar to this Washington tax law and the very same issues are raised.

The Metropolitan Building cases were cited in briefs presented in the Offutt Housing cases.

Justice Charles E. Whittaker: I thought it was true that in the Offutt case, Nebraska assessed all personal property at the same basis, namely, its fair value, and it treated this Wherry Act leasehold as personal property, and there was no element of discrimination involved in that case.

Mr. Paul A. Klasen: It wasn't argued as such, Your Honor.

Justice Charles E. Whittaker: What is res judicata in this instance?

Mr. Paul A. Klasen: The manner of the taxes has been determined in Moses Lake Homes versus Grant County in 51 Wash. 2d 285 in which these very taxes were upheld and the petitioner here did not see fit to seek review from this Court.

And the -- as stated in Grubb versus Ohio Public Utilities that the state court, the highest court of the state land having determined the issue that they are not entitled to raise the matter.

Petitioner is not entitled to raise it again in -- in another federal court.

The same question as to res judicata was in the Grubb versus Public Service of Ohio.

Justice Charles E. Whittaker: It will also make some questions if you raise some questions upon failure of the petitioner to exhaust his state permit with relevance to valuation, do you?

Mr. Paul A. Klasen: That's right, Your Honor.

The petitioner has done nothing in relying on these taxes.

He has never listed his property as the law requires him to do.

He's never done as in the Metropolitan cases come in and shown what the value of the property is.

In other words, he says, "You might be $10,000" but they have never said what the valuation of the property should be as --

Justice Charles E. Whittaker: And what does your law require to me if I owned a leasehold in your State to do with respect to taxes if an assessment was made of X dollars and I don't like it, what do I do?

Mr. Paul A. Klasen: You go before the County Board of Equalization.

They have a hearing every year when the assessments were equalized.

If you don't like the decision of the County Board, you can appeal to the State Board.

And if you don't like the decision of the State Board, the law says, “You had to pay the tax under protest and sue to be covered.”

Justice Charles E. Whittaker: May I bypass those procedures?

Mr. Paul A. Klasen: I don't see -- those are the remedies as prescribed by law.

I know of no way in the State of Washington where it can be done.

Thank you.

Chief Justice Earl Warren: Thank you.

Rebuttal of Lyle L. Iverson

Mr. Lyle L. Iverson: If the Court please.

In State of Washington, there were taxes invalid, it maybe enjoined and attacked directly by statute.

Now, insofar as counsel's argument that there was --

Justice Charles E. Whittaker: To be invalid simply because the valuation maybe accessible?

Mr. Lyle L. Iverson: To be invalid, I don't know, to be invalid only because it is discriminatory.

That's the basis of the invalidity and the decision of the Washington Supreme Court in the Moses Lake Homes case did not involve any taxes.

That was an injunction case.

It was a preliminary matter.

And we never got down to any figures.

There were never any ascertain taxes.

This case is the first time that anybody has actually attempted to collect any taxes, so that the decision of the state court did nothing but to declare what the State voids.

And the state law as it declared it was that for Wherry housing projects in Washington, the -- the -- they will be taxed at the base -- at the value of the improvements and for all other -- all other property.

Now, I'd like to get one matter straight.

Well, some of Your Honors were -- were asking about the case of a person buying property and whether his equity would take into consideration the mortgage.

We are not in that situation here.

We're talking about a leasehold.

And in Washington, the cases are uniform and the statute has been construed and the statute has not been changed that a leasehold must be valued (Inaudible) with its burdens and benefits and that is the universal way.

There are just no -- there are just no exceptions to it, and that's why this -- in the both courts below found that there was a discrimination in this case.

Now --

Justice William O. Douglas: Are petitioners in bankruptcy?

Mr. Lyle L. Iverson: Oh, no.

The petitions are -- they're -- they're fully solved, and there were not many -- many matter of that kind.

The -- the property is simply being condemned under a general --

Justice William O. Douglas: I understand.

Mr. Lyle L. Iverson: -- program that the -- that the Government carries on for condemnation of the -- of condemning this -- this Wherry Act leaseholds.

So our -- our story is simply that we have not been treated as anybody else in the State is treated, and we have not been treated as anybody leasing similar properties from the State would be treated, and there are just no exceptions to that situation, and they pick out these -- these people but a blind following of the -- of the Offutt Housing case, which didn't take into consideration at all the fact of discrimination.

Now, counsel says that they wouldn't get anything if this went back.

Actually, what we're concerned with is taxes on Moses Lake for three years which has been allowed in the sum of about $90,000, and the Court has allowed those discriminatory taxes, although finding they were discriminatory, on the basis that Section 511, which is in one of the appendixes of my brief, did not become effective until June 16th, 1956.

And the -- and that -- that statute said that they could not -- that the State could not discriminate.

It said it had to tax on the same basis as all other taxes.

Now, it is our position that the Circuit Court was wrong because that was only declaratory of constitutional law as it already existed.

And it didn't take any statute to say that the State couldn't discriminate against the -- against the Government's contractors.

But even without the statute ever since McCulloch versus Maryland, it has been ruled that a State must tax those who deal with the Federal Government on the same basis of the tax (Voice Overlap) --

Justice Hugo L. Black: How did claim get into federal court?

Mr. Lyle L. Iverson: The County filed a claim against the estimated compensation which --

Justice Hugo L. Black: County filed it in the federal court?

Mr. Lyle L. Iverson: In the federal court, that's correct.

Justice Hugo L. Black: Did they ask the Court to pass on them?

Mr. Lyle L. Iverson: Yes, and that matter was passed upon and then under the Rule 54 (b), that matter was especially appealed.

The condemnation has not actually -- the -- the main condemnation has not actually been determined yet.

This is a -- a side issue in the condemnation case.

And --

Justice Charles E. Whittaker: Mr. Iverson, is it not true that the discrimination of which you complained relates not to rate of tax but to value?

Mr. Lyle L. Iverson: It rates -- it relates to method -- to method of taxation.

It isn't a matter that we can take up before the Equalization Board because the -- it has nothing to do with how they would look at it and use their judgment but it has to do with the law of Washington as interpreted by its highest court which is said that in determining this kind of a -- of a tax that they shall appraise it on the basis of the -- of the buildings.

And they left no room for the burdens and benefits theory, and they left no room for the application of the statutory test as to what a buyer would pay to a willing seller of the leasehold, and there has never been any determination in any Washington case to the effect that a long term lease converts the property into ownership in the Government.

Justice Hugo L. Black: They say -- they say that you have had this adjudicated against you in the state court.

Is that true?

Mr. Lyle L. Iverson: No, Your Honor.

That was this matter where the court or in the state court, they held that under the law of Washington, the method of determining -- the method of taxing is to tax the leasehold, and they used the word “leasehold” on the basis of the value of the buildings.

That's -- that's the very decision that brought about the discrimination.

Chief Justice Earl Warren: There was some -- some question about what was argued below.

Do you have the briefs?

Mr. Lyle L. Iverson: I have our brief below.

Chief Justice Earl Warren: You don't have the other one.

You don't have this.

Mr. Lyle L. Iverson: I don't.

I didn't bring it definitely with me, Your Honor.

Chief Justice Earl Warren: You -- you don't have yours?

Justice Hugo L. Black: I understood you to say they took a different position.

I thought your brief statute --

Mr. Lyle L. Iverson: Well, what -- what they -- what they did for the first time here was to advance the proposition that there was no discrimination.

Justice Hugo L. Black: That was I understood.

Mr. Lyle L. Iverson: That was admitted below, and it's even in their -- in their request for admission.

They admitted that they didn't take into consideration the burdens and benefits.

Chief Justice Earl Warren: Would you both submit your briefs, please, to the Court?

Mr. Lyle L. Iverson: I'll have to wait until I get back home and --

Chief Justice Earl Warren: That's alright.

Mr. Lyle L. Iverson: -- mail them.

Yes, Your Honor.

Chief Justice Earl Warren: Yes.

Chief Justice Earl Warren: You would.

Mr. Lyle L. Iverson: I'll be glad to.

Chief Justice Earl Warren: Yes.

Very well.

We'll adjourn.

Featured:

Rohr Corp. v. San Diego County - Oral Argument

Thu, 29 Nov 2012 22:23:17 +0000

Case:

Rohr Corp. v. San Diego County

Media File:

295_19600330-argument

Related Transcript:

295_19600330-argument

Transcript:

Argument of Leroy A. Wright

Chief Justice Earl Warren: Number 295, Rohr Aircraft Corporation, a California Corporation, Appellant, versus County of San Diego and City of Chula Vista.

Mr. Wright.

Mr. Leroy A. Wright: Mr. Chief Justice and members of the Court.

This case involves an area of intergovernmental tax immunity and submission through taxation which is not heretofore been determined by this Court.

Briefly, the salient facts are, in 1942 and 1943, the Defense Plant Corporation, a subsidiary of RFC acquired and improved certain property in the San Diego County.

That property was leased to a war contractor, the predecessor of this appellant.

It was used during the war and the manufacture of war material.On October 15th of 1945, the lessee contractor terminated the links.

On May 29th, 1946, Reconstruction Finance Corporation declared the property surplus under the provisions of the Surplus Property Act of 1944.

From 1947 to 1948, the property was taken over by War Assets Administration.

It was actually used, as appears from testimony, herein the record at page 45.

It was actually used by the United States as a depot for the storage and sale of surplus war material.

The former lessee had vacated the property.

In 1948, there commenced an interim occupancy by the former lessee who owned property immediately adjacent to the area.

This interim occupancy resulted in the lease of September 1, 1949.

This lease is set forth in the record and appears -- commencing at page 9.

The lease required the lessee to pay taxes that were roughly assessed against the premises or against the lessor or lessee.

Now, let us go back for a moment.

Here is government property admittedly owned by a governmental agency, the Defense Plant Corporation, a subsidiary of RFC.

This being so, how come any taxes?

In 1932 with the enactment of the Reconstruction Finance Corporation Act, the Congress concerted a provision which it drew from the old National Bank Act, first enacted in 18th -- in the 19th century.

Under which, real property of the Corporation or was subjected to tax to the same extent as any other property was taxed and expressed waiver applicable to real property of the Corporation.

Therein lay the basis for the tax.

In the interim however by the enactment of the Surplus Property Act of 1944, mechanics were created by which an owning agency defined in the acts in terms to encompass RFC would declare that the -- the property was surplus to its needs and would execute a declaration of surplus property which would be transmitted to the War Assets Administration.

The War Assets Administration would then have the responsibility for the control, management, maintenance with all of the various attributes which the Surplus Property Act gave to the United States as a result of the declaration.

The provisions of the Surplus Property Act insofar as here applicable are contained in Appendix A to appellant's opening brief at pages 1 to 8 and regulations which were issued thereunder are further contained in the that appendix.

The case thus involves the question of whether or not the failure of RFC to execute a deed to the property at the time that it issued its declaration of the surplus to its needs.

The failure of RFC to execute that deed --

Justice Felix Frankfurter: A deed --

Mr. Leroy A. Wright: -- still --

Justice Felix Frankfurter: -- a deed from RFC?

Mr. Leroy A. Wright: To the United States.

Justice Felix Frankfurter: You mean --

Mr. Leroy A. Wright: There was no deed, formal deed under the --

Justice Felix Frankfurter: From whom to whom?

Mr. Leroy A. Wright: From RFC to the United States of America, such a deed was subsequently issued and recorded in 1955 but not at the time.

Justice Felix Frankfurter: It went from RFC to War Assets Corporation, is it?

Mr. Leroy A. Wright: By virtue of the declaration that it was surplus.

Justice Felix Frankfurter: And it -- I'm not interested, not in words, not to known but is the deed a formal deed the way one agency of government transfers to another?

Mr. Leroy A. Wright: We think not, sir.

That is our position that the transfer was fully into war intention purposes accomplished by the declaration made by RFC that the property was surplus to its needs.

Justice Felix Frankfurter: I didn't mean to stumble on the issue in the case by an innocent question.

Mr. Leroy A. Wright: You did, sir.[Laughter]

Justice Charles E. Whittaker: That might raise questions, might it not, as to whether or not the RFC is an agency in the sense used here?

Mr. Leroy A. Wright: I think not, sir, under the decision.

I'm thinking now of decision in Graves against New York involving the Home Owners' Loan Corporation and various other decisions involving the nature of governmental activities or governmental corporations.

They exist only for the performance of a true governmental function, and would it not for the expressed waiver of proper -- relating to property of the Corporation which is contained in the RFC Act.

I think it is admitted by all where any property by own -- by any governmental corporation which those not have in its an enacting statute that expressed congressional waiver to tax is, as to its property, immune from local tax.

It has long been held that government corporations have no independent existence that they are used and are utilized by our National Government for the purpose of carrying on governmental functions.

This case then presents an issue of whether or not constitutional immunity from tax will rest on formalisms as this Court has said recently in United States against Muskegon through Justice Black, constitutional immunity does not rest on such insubstantial formalities as whether the party using government property is formally designated as a lessee, otherwise immunity can be conferred by simple stroke of the draftsman's pen.

Justice John M. Harlan: Could I ask you a question?

Mr. Leroy A. Wright: Yes, sir.

Justice John M. Harlan: Was -- what was done in this case different from other?

I suppose the RFC has turned over other properties, do they?

Mr. Leroy A. Wright: No, what was done here was -- was typical -- typical.

In this case, at the outset, I want to point out that we are not here concerned with complete escape from tax.

We are not here concerned with the type of tax involved in the so-called Michigan cases recently decided by this Court.

Here, the tax was a straight ad valorem property tax levied upon the property of the United States enforceable and intended to be enforced to the lien process if unpaid.

Justice Charles E. Whittaker: Well, doesn't that assume the question -- one of the questions in issue, namely, that this is property of the United States?

Mr. Leroy A. Wright: Whether -- you mean as distinguished from property of RFC?

Justice Charles E. Whittaker: Of the Corporation --

Mr. Leroy A. Wright: Of the Corporation.

Justice Charles E. Whittaker: -- to use the words of the Act.

Mr. Leroy A. Wright: That is correct, sir.

There is a crucial point here gives this property of the Corporation since and after RFC, by its own voluntary act, executed the declaration of surplus.

And we have to examine --

Justice Potter Stewart: Well, now by the Corporation, you mean the Reconstruction Finance Corporation?

Mr. Leroy A. Wright: Yes, sir.

Justice Potter Stewart: There's no claim that this is the property of the Rohr Aircraft Corporation --

Mr. Leroy A. Wright: No, none of which --

Justice Potter Stewart: -- (Voice Overlap) to that?

Mr. Leroy A. Wright: No.

Justice Potter Stewart: Nor as to -- as to the taxability of Rohr Aircraft's --

Mr. Leroy A. Wright: Possessory interest.

Justice Potter Stewart: Possessory interest.

Mr. Leroy A. Wright: No.

That has been stipulated.

As I was pointing out --

Justice Potter Stewart: Yes, I understood.

Mr. Leroy A. Wright: -- that throughout this case, there has been stipulated that there may -- maybe retained by local tax authorities.

Justice William J. Brennan: Well, Mr.-- Mr. Wright --

Mr. Leroy A. Wright: Yes.

Justice William J. Brennan: -- is the -- is the question as simple as whether the 1932 statute is to be interpreted as raising this property, that this the 1932 statute which permits a local taxation?

Mr. Leroy A. Wright: Those -- that statute embrace these properties --

Justice William J. Brennan: Yes.

Mr. Leroy A. Wright: -- after --

Justice William J. Brennan: Yes.

Mr. Leroy A. Wright: -- RFC has declared its surplus to its needs --

Justice William J. Brennan: Is that --

Mr. Leroy A. Wright: -- and transferred it to War Assets.

That is the question.

Justice William J. Brennan: That's the issue.

Mr. Leroy A. Wright: That is the issue.

Justice Charles E. Whittaker: Well, and -- I don't understand what you mean by transferred to RFC.

You mean by the declaration?

Is that what you used as synonymous with transfer?

Mr. Leroy A. Wright: Transfer here, I think to get the true meaning of, you have to determine and examine the consequences which flowed from the execution by RFC of the declaration that this property was surplus to its needs.

Those consequences are detailed in the provisions of the Surplus Property Act and the regulations issued by the Surplus Property Board.

Possessions, control, responsibility for repair and maintenance, ability, indeed without participation of RFC, to convey to others, to lease to others full dominion and control and as one court after another have said that bare and legal title only remained in RFC after this declaration.

That is what I mean by transfer, and that is what the Congress when it enacted Public Law 388 in 1955 expressly identified transfer as including such a change and responsibility, control and supervision over government properties as would flow from a declaration that it was surplus to the needs of a government corporation.

Justice Charles E. Whittaker: That was the definition, was it not, that was promulgated by Congress to avoid the effects of the Court of Claims decision?

Mr. Leroy A. Wright: We think it's not to avoid the effects of, but rather to identify what had happened.

Justice Charles E. Whittaker: I see.

Mr. Leroy A. Wright: In -- for recognition of the consequences which flowed --

Justice Charles E. Whittaker: I see.

Mr. Leroy A. Wright: -- from the Court of Claims decision.

I must perforce under the rules of this Court, first, to address myself, if I may, to the question of jurisdiction.

This case came up here by appeal.

Jurisdiction under the problems in the way this case arose is a difficult one.

It's appellant's position that there has here been drawn the question of validity of a statute of a State.

Those statutes being, the statutes under which taxes are levied on all property by local governments within California.

It cannot be questioned here that a federal question has been raised from the very inception of this case.

It is appellant's contention that the statute has applied on the tax resulting, was attacked on federal grounds.

The fact that we are seeking recoupment rather resist -- resisting the imposition of the tax, it makes no difference.

We point to the Court the case of Beaver County and Allegheny County, all of which are cited in the briefs, that there is here as in both Beaver County and in the County of Allegheny been drawn in to the question the validity of a tax, the argument that could be made on whether in attacking to that tax, we are attacking the statute under which it was levied for merely the tax.

It seems to be detailing with the distinctions which have no realism.

In the last analysis, the statute has in existence and purpose only insofar as the results of the levy.

We are attacking that levy and in so doing must perforce to be attacking the statute.

Be that as it may, it is appellant's position here that the issues of this case clearly demonstrated that it is one which presents a very substantial federal question.

One that has wider application than might have first appeared and one which has been decided by the Court below in a manner probably not in the Court with other decisions of this Court, as we shall point out in an argument.

And that appeal lies or if not this Court as admonished by the statute, we should take the papers as a petition for certiorari and grant certiorari.

I think this, when we come down to the issue of jurisdiction, either this Court wants to hear it on the merits before it does.

It has the mechanics in either one.

(Inaudible) to you that it's a case which should be heard on the merits to resolve a conflict which exist between the Court of Claims, the Supreme Court of Michigan and there are other cases as will be discussed by the Government which -- with which the Government is presently concerned.

We see then that under the Surplus Property Act, it is -- it has been provided a complete mechanics by which property owned by the government corporation is administered, used, cared for, controlled, sold, leased and in deed.

The proceeds from leasing whole sale do not go back to our suit, if having declared the property surplus.

They are covered into the general treasury of the United States.

If something happened to the property during it's controlled by War Assets, that risk of lost lives not for -- on RFC but on the United States.

It is our position that the Congress in enacting the Surplus Property Act was utilizing the powers expressly conferred upon it by the Constitution that the Congress shall have the power to dispose of and make all read for rules and regulations respect to the territory or other property belonging to the United States.

In furtherance to that power, the Congress enacted the Surplus Property Act.

After that enactment, Reconstruction Finance Corporation by its own voluntary act executed a document which under the framework of the Surplus Property Act transferred out of RFC all incidence and all intendments of ownership.

Indeed, there was no deed in a formal sense of the word on any of the property of the Defense Plant Corporation.

This property, bear in mind, was acquired by the Defense Plant Corporation by a Joint Resolution of Congress.

There was transfer from the Defense Plant Corporation to RFC all property of the Defense Plant Corporation.

No deed was ever executed by Defense Plant Corporation to RFC covering any items of property.

All of this was accomplished by the Joint Resolution of Congress.

Here, the Administrator of War Assets, after this declaration, could, by his owner act, give and execute a conveyance without participation in any degree of Reconstruction Finance Corporation.

I should like, if I might, to reserve a balance of my time for rebuttal.

But before closing, I would like to call attention to a statement made by Mr.Justice Frankfurter in the Detroit-Murray cases on the question of intergovernmental submission to taxation.

Since intergovernmental submission to taxation is primarily a problem of finance and legislation, it is immaterial that contracts by Government have been purposefully drawn so as to vest title to the property that is subject to the tax in the Government and thereby withdrawn from the taxing power of the States.

We feel that this is so here.

Now, what we are dealing with is the true ownership of the property, not the fact that for chance, no deed was executed or none was necessary.

There was a complete and effectual transfer out of RFC to War Assets and there was no waiver with respect to property of the United States.

Chief Justice Earl Warren: Mr. Baum.

Argument of Myron C. Baum

Mr. Myron C. Baum: Mr. Chief Justice, and may it please the Court.

If I may, on behalf of the United States, phrase the issue just likely differently.

The real issue here is whether the absence of a deed from the RFC to the United States was the event which made this property taxable by the State of California or the County of San Diego.

The appellees admit that this is the only issue for they state in their brief that if a deed had been executed, they would not contest the immunity of this property from local taxation.

So as I say, in phrasing the question, we focus immediately upon the sole and single issue was a deed required in order to render this property no longer property of the Reconstruction Finance Corporation.

And I submit that I can show to the Court very briefly that the statutes involved as well decisions which we rely on make it plain that no deed was required.

As counsel has already pointed out, Section 8 of the Reconstruction Finance Corporation Act of 1932 provided for the exception of property of the Reconstruction Finance Corporation from state and local taxation but it saves from that exemption real property and made it expressly subject to such taxation.

It is perfectly obvious that the reason for that subjection of real property of RFC, the local taxation was that in 1930s, the RFC was engaged in essentially commercial activity.

We submit here that once this property was no longer being used for any form of commercial or industrial activity of RFC but had been declared surplus and was transferred to another agency of the Government to fulfill regular governmental purposes, that the reason for this so-called waiver of immunity collapsed.

This is made patently obvious when we look at the provisions of the Surplus Property Act of 1944.

That Act provides that the owning agency, in this case the RFC, may declare property surplus when it determines that it is surplus to its needs.

That is not some oral statement, it is a formal declaration, a copy of it is printed in the record before Your Honors.

Upon that declaration of surplus, the War Assets Administration took over the property.

It took it over in this case in the sense of utilizing it for a storage depot.

By statute, it was given the duty of caring for and handling the property to control it's disposal to dispose of it by sale, lease, exchange or transfer and under Section 15 (b) of the Surplus Property Act of 1944, the War Assets Administration was expressly empowered by Congress to execute any documents of title which were necessary to effectuate the purposes of the statute.

Now, I submit to Your Honors that if a deed was necessary to transfer title to this property from the RFC to the United States or to the War Assets Administration, it could not have been empowered to execute a deed to a purchaser whereas Congress has expressly said that by statute, that -- the War Assets Administration may execute such a deed.

The same result follows if we look at the Federal Property and Administrative Services Act of 1949 which repeal the Surplus Property Act of 1944.

In that Act, we are now dealing with the General Services Administrator who succeeded to the War Assets Administration.

He is given supervision, direction over disposition of surplus property, the care and handling.

And any agency authorized by the General Service -- General Services Administrator to dispose of surplus property may do so by sale, exchange, lease or transfer and may execute a deed.

Here again, we have an expressed statutory provision for a deed to be executed where if we follow appellees reasoning in that of the Court below, there has been a gap in the chain of title.

Obviously, no gap exists.

Finally, we come to the statute referred to as Public Law 388 which was a 1955 amendment to the Federal Property and Administrative Services Act.

That was adverted to by Mr. Justice Whittaker a moment ago.

That Act, however, was not a recognition or an avoidance of the decision of the Court of Claims.

That Act made provision for payments in lieu of taxes to the locality because as a result of the decision of the Court of Claims and of the Comptroller General of the United States, these properties had been rendered non-taxable.

And so it was provided that Congress would voluntarily make payments in lieu of taxes in order to alleviate the hardships which would be imposed.

In fact, the legislative history of that statute indicates that Congress far from repudiating the decision of the Court of Claims or of the Comptroller General was giving express recognition to it and was recognizing that something had to be done.

And so what it did was, as the Committee Reports themselves state, it may temporary provision for payments in lieu of taxes and Congressman Meader, the sponsor of the bill, himself, said this is not taxation.

This or these are payments in lieu of taxes.

So if we have any indication of what Congress thought of this in terms of expressed legislation, we have it there.

Justice John M. Harlan: Actually this municipality didn't get that to hand out, did it?

Mr. Myron C. Baum: This municipality did for the year 1955 and that's the statute begin, it comes effective in 1955.

We are here dealing with tax years preceding 1955 and that is why 1955 is no longer before us.

Justice Charles E. Whittaker: It is -- it is true, is it not, Mr. Baum, that this statute permits the same taxation in lieu of taxes rather which the Court of Claims held could not be imposed as taxes?

Mr. Myron C. Baum: That is true, Your Honor.

Justice Charles E. Whittaker: Yes.

Mr. Myron C. Baum: That is true.

And even more significantly, I would like to point out that at the end of the Committee Report of the House Committee on Government operations which reported this bill, that's House Report Number 1453, I regret that this report came to our attention after the brief was written and so it is not cited.

Justice William J. Brennan: What's the number of this again?

Mr. Myron C. Baum: Number 1453, 84th Congress, First Session House Report.

I might say parenthetically that the Senate Report is a direct quotation of the House Report.

Justice Felix Frankfurter: What Congress and what session?

Mr. Myron C. Baum: 84th Congress, First Session, Your Honor.

Justice Felix Frankfurter: 84th?

Mr. Myron C. Baum: 84th.

Justice Felix Frankfurter: First Session.

1453, is that right?

Mr. Myron C. Baum: 1453.

Justice Felix Frankfurter: Thank you.

Mr. Myron C. Baum: At the end of that report, there appears a table which has the following caption at the top, "Properties on which payments would be made if the legislation were enacted," and Item 5 on that table is Rohr Aircraft Chula Vista.

If we need anymore demonstration as to what was intended here, here is Congress itself saying that we need this legislation in order to make payments to the localities and Chula Vista in the County of San Diego and we do it through this legislation.

This is legislation which is in lieu of taxes and not a -- a subjection to taxation.

In fact, the report goes on and it says, "Because of a ruling by the United States Court of Claims in 1952 and a subsequent ruling by the Comptroller General in the same year, certain real properties that had formally been subject to local taxation have now been rendered non-taxable by the local authorities."

And then comes this illuminating sentence, "This is true whether complete legal title to real property has been transferred from a government corporation to another government department or whether the government corporation retained legal title and transfers custody, control or accountability for the real property to another government department."

And then it goes on -- it's a -- three sentences later and says, “It therefore appeared just and necessary.”

Justice Charles E. Whittaker: May I stop you right there?

Mr. Myron C. Baum: Yes, sure, certainly.

Justice Charles E. Whittaker: That precisely gives what was held by a claim.

Mr. Myron C. Baum: Well, in saying this is true.

Now, I don't know whether you can interpret that either way, I think, Mr. Justice Whittaker.

I think -- I -- I construe it in saying the Committee is recognizing its truth as well.

And I think that is -- it -- illustrated by the sentence I was about to read --

Justice Charles E. Whittaker: Yes.

Mr. Myron C. Baum: -- which says, “It therefore appeared just and necessary that provisions be made as in this bill at least on a temporary basis to make payments in lieu of taxes until a comprehensive policy with regard to payments in lieu of taxes shall have been enacted by the Congress.”

In fact, Congressman Meader's statement is to the same effect.

He says, “But my bill does not subject the Federal -- Federal Government to taxation but provides for payments in lieu of taxes voluntarily undertaken by the Federal Government subject to repeal by the Federal Government at any time and thus, it would seem to me to avoid any difficulty about one unit of Government taxing another."

Justice Felix Frankfurter: May I ask you, Mr. Baum --

Mr. Myron C. Baum: Certainly, sir.

Justice Felix Frankfurter: -- just to satisfy curiosity -- about transfer for properties to one agency of Government (Inaudible) Reconstruction Finance (Inaudible)?

There's been a good -- there have been a good many of this certainly since the recent reorganization acts beginning (Inaudible) property may lease etcetera, etcetera all over the place when -- when the things are merged over Department of Health, Welfare and Education was created.

There was a great deal of transfer of real estate, wasn't it?

Mr. Myron C. Baum: Yes, yes, Your Honor.

Justice Felix Frankfurter: Now, what is the practice of the Government it effectuated?

What is the mechanism for the -- the (Inaudible) for effectuating your (Inaudible)

Mr. Myron C. Baum: As far as I'm informed --

Justice Felix Frankfurter: By deed?

Mr. Myron C. Baum: No, Your Honor.

As far as I am informed, Mr.Justice Frankfurter, those transfers are in effect transferred by the necessary operation of law, for example here, as the counsel said, this was -- this property -- the title to this property was held by Defense Plant Corporation.

Defense Plant Corporation was dissolved and was -- and its property was taken over by RFC.

It became property of RFC.

In fact, the court below relies on legal title in RFC yet there was no deed.

It was transferred from War Assets to General Services Administrator, again no deed.

Property has been transferred by various government agency, either by reorganization plans, executive orders or as a result of statutes transferring functions --

Justice Felix Frankfurter: I --

Mr. Myron C. Baum: -- and it has never been transferred.

Justice Felix Frankfurter: We're with the answer -- I mean a statutory situation may make a -- produce a different result?

I don't think that answer is properly (Inaudible), but I just want to know what the -- what the routine way of doing business --

Mr. Myron C. Baum: The routine --

Justice Felix Frankfurter: -- of inter-department for years.

Mr. Myron C. Baum: The routine --

Justice Felix Frankfurter: There are a lot of (Inaudible) but then I don't know how many executive orders making all sorts of transfers from one department to another, from one bureau to another, from one agency to another, and I -- I -- that's why my initial question of surprise, I suspect, there are seldom deeds, are they?

Mr. Myron C. Baum: There are seldom deeds and it is a source of some concern to us that a deed is being insisted upon in this case to have legal effect in performing the governmental function here involved.

Justice William J. Brennan: Well, may I ask --

Mr. Myron C. Baum: The true government -- I'm sorry.

Justice William J. Brennan: Is -- are these particular properties somehow recorded as title in the RFC on the local state records?

Mr. Myron C. Baum: I assume it is, Your Honor.

I think the tax bills were sent to the RFC during the years in question.

Justice William J. Brennan: Well, I just -- but the title records themselves in that county?

Mr. Myron C. Baum: I couldn't be wholly certain.

And I would have to defer to counsel on that but I believe that's true or probably in Defense Plant Corporation.

I believe that's the last record of transfer.

This property was formally owned by the predecessor of this Rohr Aircraft Corporation and was transferred by it to Defense Plant Corporation.

That's the last transfer on record until as I'm advised recently which is not in the record here, Rohr Aircraft has since purchased its property after the years in -- in suit.

Justice Charles E. Whittaker: Mr. Baum, may I ask you?

Is any light shed on this problem by the quitclaim deed made by RFC to the United States shown at Record 105 under date of March 17, 1955?

Mr. Myron C. Baum: I think not, Your Honor.

I was going to come to this problem of why someone thought that a deed was necessary just at the moment.

Chief Justice Earl Warren: May I ask question before you get --

Mr. Myron C. Baum: Yes, Mr.Chief Justice.

Chief Justice Earl Warren: -- to that in -- in transferring of property so far as deeds are concerned.

Is there any distinction been made -- been made between transfers between departments of the Government and transfer between government corporations such as the RFC and -- and others?

Mr. Myron C. Baum: To -- none to my knowledge, Your Honor.

Chief Justice Earl Warren: (Voice Overlap) --

Mr. Myron C. Baum: Coming to this question of a deed, if I may, Mr. Justice Whittaker.

First, I would like to point out, as the Court seems to be aware, the decision of the Court of Claims in Board of County Commissioners versus Sedgwick County which involved an exact, exactly similar factual pattern in which the Court of Claims came to the conclusion correctly, we think, that no deed was necessary, the title, beneficial title was in the United States and the property was not taxable by the State of Kansas in that case or the County of Sedgwick in Kansas.

I would like to point out one very illuminating feature of the Board of County Commissioners case, which does not appear from the quotations normally found, that there, as in this case, somebody thought that a deed had better be executed to clear up the chain of title.

And I think it is a source of some remarkable surprise.

This -- I am not going into the record in this case.

This appears in the opinion as officially reported that the deed executed to the United States in that case was executed by the War Assets Administrator.

This, it seems to me, comes full circle.

We have the owning agency never -- never executing a deed, never, according to the law of conveyancing at least, divesting itself of title but the -- the transferee agency, the War Assets Administrator executes a deed to the United States which renders the whole business of a deed to me meaningless.

Justice Felix Frankfurter: Who -- who got that deed?

Who was -- what first -- who was the United States, who was the --

Mr. Myron C. Baum: I have no idea --

Justice Felix Frankfurter: -- grantee?

Mr. Myron C. Baum: -- who receive the deed, Your Honor.

Justice Felix Frankfurter: You think the President of the United States?

Mr. Myron C. Baum: I doubt it very much.

I assumed it was given to the War Assets Administrator himself and ultimately to the General Services Administrator.

Justice Felix Frankfurter: Was that recorded in the Registry of Deed here in the district?

Mr. Myron C. Baum: It was not property in the district, it was property in Kansas.

Justice Felix Frankfurter: Oh, I mean in Kansas.

Do you think it's recorded in the Registry?

Mr. Myron C. Baum: I assume it was sent out for recording.

I was just relying on what I read from the opinion that -- it seems to me to illustrate the whole mockery of the emphasis --

Justice Felix Frankfurter: I think (Voice Overlap) --

Mr. Myron C. Baum: -- on a deed.

Justice Felix Frankfurter: -- a registration fee?

Mr. Myron C. Baum: I think the United States is subject to local [Laughs] registration fee in that case.

Justice Hugo L. Black: Was the Government ever (Voice Overlap) of the United States?

Mr. Myron C. Baum: Yes, it does.

Yes, it does.

Justice Hugo L. Black: Who gets that deed?

Mr. Myron C. Baum: I didn't hear your, Mr. Justice Black,

Justice Hugo L. Black: Who gets that deed?

Who gets the deed when it (Voice Overlap) --

Mr. Myron C. Baum: The agency involved in the -- in the handling of the property receives the deed but it's the property is sometimes held directly in the name of the United States.

Justice William J. Brennan: I wonder if he was even in the liberty of it, but suppose he signed it to the order of the United States and then stuck it and they don't say it?

Mr. Myron C. Baum: It could be done.

But that's what happened in that case.

He was almost executing a deed to himself.

Now, much is made of the fact.

Oh, in that case, counsel has drawn my attention to the Board of County Commissioners.

The property was transferred to the Department of the Air Force so presumably, the deed went to the Air Force instead of -- to the -- that is -- the deed was to the United States but physically may have been delivered to the Air Force instead of some other agency.

But I think that's all irrelevant.

Much is sought to be made of the fact.

It's made by the court below, and it's made much here by appellees.

The fact that Mr. Larson, the one time General Services Administrator, stated before a Congress -- congressional committee that he had withheld execution of deeds because he was of the belief that by failing to execute a deed, the property would remain taxable, and they didn't want to disturb these localities by taking these properties off the tax rolls in a -- in -- all of a sudden and therefore, disrupting their sources of revenues.

Frankly, the best I can say to -- to what Mr. Larson said is what he said himself.

He said, “I was wrong.”

Mr. Larson, as General Services Administrator, was in no position to interpret the law of the United States as Congress has enacted it.

This is not a case as we have referred for several hours in the cases preceding where the Administrator concerned is empowered to issue regulations to interpret the statute.

Here, we have statutes would say which property may be taxable on which property may not be or rather the Constitution which says which property may not be taxed.

Justice Felix Frankfurter: But -- but humanly speaking, this is the first tree of light I have without any innuendo against counsel's argument, this is the first tree of light I have on meaning of this case, namely, the human desire of Mr. Larson that this should not be withdrawn from the taxing power of California.

Mr. Myron C. Baum: That -- the whole explanation, I think, if -- if Your Honor please, is that he was of the belief that he should -- he is -- he is the impact so to speak.

And of course, the deeds, the execution of deeds were executed at various times.

Now, in Board of County Commissioners, the deed was executed one year after the declaration of surplus.

In this case, it was not executed until nine years later.

In other cases, it runs for other periods of years without any rhyme or reason.

In fact, in this case, the deed was not even executed until the very same year when Congress was making provision for payments in lieu of taxes.

Justice John M. Harlan: This property went back ultimately, as I understand it.

It was leased again by the War Assets Administration to the petitioner.

Mr. Myron C. Baum: That's correct, Your Honor.

Justice John M. Harlan: Does that have any connection with the withholding of the deed?

Mr. Myron C. Baum: No, Your Honor.

That had no connection whatever.

The only significance to that fact has is that it serves to demonstrate, if the Court please, that this case, if anything is likely an a -- a fortiori situation to that presented in Board of County Commissioners because as the court below sought to say in Board of County Commissioners, the lessee remained continuously in possession during this surplus declaration for process whereas here, the lessee vacated the premises.

It was used by the Government itself for two years and then was again leased to the former lessee all over again under a five-year lease.

Now, it is a basic fact which we cannot escape that in tax law, and we have cited numerous decisions in our brief, we do not levy the tax according to the incidence of bare and legal title.

And the most that can be said here is that the RFC retained bear and legal type.

I doubt if that can even be justified in view of the statute which I have referred to.

I think that legal title had passed to the United States by the declaration of surplus because the transferer -- transferee agency had all the powers of ownership including the power to execute a deed to a private person or whom you're with.

And in similar situations, that result has been followed.

Justice Hugo L. Black: I don't understand that argument.

You say that taxes are not laid just -- where the person has bare legal tittle?

Mr. Myron C. Baum: It's -- they look to the beneficial ownership.

We have had cases which I have referred to in the brief, Mr. Justice Black, where the United States had retained a bare legal title and in claim of immunity was asserted.

For example, there's one case where a -- the land patent had not yet been delivered and the courts held that that was of no significance that the private person had all incidence of beneficial ownership and therefore, the property was not immune from state and local taxation.

Justice Hugo L. Black: I thought you were -- I misunderstood you.

I thought you were saying as a matter of general tax -- taxing practice.

Mr. Myron C. Baum: I meant in --

Justice Hugo L. Black: The taxes were not imposed on real estate simply because a person had the bare legal title.

Mr. Myron C. Baum: I was -- I was -- I'm -- I'm sorry I didn't finish my sentence, I should have said bare legal title as opposed to the person holding the beneficial ownership, that is immunity does not rest on any concept of --

Justice Hugo L. Black: (Voice Overlap) immunity.

Mr. Myron C. Baum: Yes.

In Continental Motors versus Township of Muskegon, which is a decision in the Court with the decision below.

We have exactly the same reasoning as adopted by the Supreme Court of California.

They relied on the statement of -- of General Services Administrator Larson that the property was not to be removed from the tax rolls and they said that's the result we should reach.

But it is not the result which should be reached in accordance with law as Mr. Larson himself recognized.

In fact, the ridiculous absurdity to which this decision has led is illustrated by a case now pending in the Court of Appeals for the Third Circuit referred to in our brief under the name of United States versus County of Lawrence.

That case also involved the disposal of surplus property.

And in that case the Court, the District Court in the Western District of Pennsylvania has held that even though a deed has been delivered, the property remains taxable to the RFC.

So we are taking this one step at a time until we find that once Congress has enacted a waiver of immunity with respect to RFC property, it seems to attach to the property forever and can never be removed.

That certainly is not a result which is in accordance with logic and reason.

I think the error of all these decisions in Continental and in County of Lawrence and at the court below is that it fails to recognize that this property has been effectively removed from the control, custody, operation, responsibility of RFC.

It is now fully under the control of the United States.

And that even if it be held that bare and legal title has some significance in this context, taxation should not be held dependant upon.

The decision below failed to recognize that the waiver of immunity from local taxation enacted by Congress in 1932 with respect to property of RFC, has lost all reason for existence as applied to this property which has become intermingled with general property of the United States to be disposed of as part of the Surplus Property Disposal Program.

Upon such transfer to a disposal agency and upon such intermingling of the property with other property of the United States, it should be treated in the same fashion.

The waiver of immunity enacted by Congress falls and the governmental immunity regularly attaching to real property of the United States becomes applicable.

For these reasons, we urge that the judgment should be reversed.

Chief Justice Earl Warren: Mr. Kugler.

Argument of Manuel L. Kugler

Mr. Manuel L. Kugler: Mr. Chief Justice, and if the Court pleases.

I will confine my remarks, with the Court's permission, merely to the question of jurisdiction.

The appellant has come before this Court on the basis of subsection (2) of the code in which he states that there has -- that there is present here and that he has drawn in to question the validity of a statute of the State on the ground that it is repugnant to the Constitution, treaties and laws of the United States and that the decision a -- there's a decision in favor of the validity.

This is the burden of the appellant to -- to prove this that he has met these conditions where the Court has previously said that these conditions must be complied with closely because this is a limit on the Court's jurisdiction under an appeal.

He has made a broad reference in the courts below to our taxing statutes.

He has cited no specific statute or statutes.

The Court has said that in prior occasion that it is not enough to say that the tax infringes on a federal right or immunity but that he -- he must be specific.

He must make a substantial effort to point out where there is a state law involved or state laws so that in fact, the highest court of the State may have had the opportunity to have reviewed the constitutionality of the state law against federal laws and statutes.

And this, he has failed to do.

I would observe to Your Honors that the -- Mr. Leroy Wright has observed that this -- and as he said it in effect that the law, he spoke of attacking the tax and that this, in effect, wasn't attacked on the statutes.

But the Court in the Wilson case, Wilson versus Cook, which is in the briefs, 327 U.S., has stated in so many words that it is not enough to attack the tax but he must attack the statutes and this, he has failed to do.

And so this I don't believe as he has stated as a detailing without realism.

The -- the state court has never nor have the state courts ever passed upon the -- any particular statute.

Our -- our laws regarding taxes are on harmony with the federal laws and Constitution, nor do I believe that this Court is being asked to overturn any particular state statute.

The only issue here, as I see it, and the only issue raised by the appellant in the courts below and ruled on and passed upon by the California courts has merely been the interpretation of the federal laws we are faced with, the Reconstruction Finance Act, the Surplus Property Act of 1944.

The California court if it had decided that there was -- that this property was not taxable under federal law and that's all it directed its attention to is federal law and the interpretation of it and what was constitution -- the congressional intent, then the California laws would have followed naturally and there would not have been a tax or the tax would not have been sustained.

On the other hand, the -- the courts below decided that the federal congressional intent was to -- to allow this property to be taxed and thus, the California laws followed in natural sequence.

I would say further that the Beaver case and the Allegheny case cited by council are not in support of his position in the least.

In both cases, we have writ of error and writ of appeal to this Court.

In each instance, we had an instance where there was a specific state statute involving the interpretation and meaning of what constituted real property.

In the Allegheny case, it was having machinery and the case of the Beaver case, it involved the definition of fixtures as being real property.

And the courts -- the lower courts had to pass upon this.

This was a main argument and subsequently, of course, the United States allowed writs of appeal in these cases because down below, there had been great emphasis placed upon the interpretation of state laws as applied and the validity of those state laws was drawn in to the question and the question of whether it is repugnant or not to the Federal Constitution was dealt with.

We have no situation here.

Counsel has not carried the burden which his was -- his responsibility.

And in our opinion, this writ does not lie.

Thank you.

Justice Charles E. Whittaker: Mr. Kugler, may I --

Mr. Manuel L. Kugler: Yes --

Justice Charles E. Whittaker: -- ask you a question about --

Mr. Manuel L. Kugler: -- Justice Whittaker.

Justice Charles E. Whittaker: -- please?

In the Beacon and Allegheny cases, was not the question a little bit more than further this was real property, was it not, is this real property of the United States?

Mr. Manuel L. Kugler: Well, Your Honor, I think that was what they were -- were aiming to determine that they were -- they had to go through the vehicle of determining what the state statute meant, whether the state statute applied, whether the definition in the state statute would control and there was this interpretation of local law which was present -- which has never been present in this case.

Justice Charles E. Whittaker: Now, what have you to say of this?

The challenge here of lawfulness of the tax is upon the ground that the State has no power to impose it, isn't that true?

Mr. Manuel L. Kugler: That -- that certainly is a question which I think raised by appellant.

Justice Charles E. Whittaker: Now, then, implicitly, doesn't that raise some question why and namely, that the state statute, as applied, violates the Federal Constitution without -- without saying it in words isn't that inherently and implicitly and necessarily involved?

Mr. Manuel L. Kugler: Perhaps, you're correct but --

Justice Charles E. Whittaker: I -- I don't know -- I'd like (Voice Overlap)

Mr. Manuel L. Kugler: Yes, yes, I -- I think -- I think that we -- we must concede there's a merit to that but that the issue is this that under -- under the -- the rules of this Court and the decisions of this Court, including the Wilson case, as I observed, Wilson versus Cook, 327 U.S. 474, the Court observed that the -- the record in this case does not disclosed at anytime in the course of proceedings.

In the state court, plaintiff asserted the invalidity of a state statute on any federal ground.

The -- the Court considered only the validity of the tax not that of the statute.

As I see it, Your Honor, it isn't a question of what appellant could have done in the courts below, it's a question of what he did do and then he placed any emphasis upon this down below and was there a state statute or state court which passed upon the validity of the -- the particular state statute which was raised, in this case, wasn't as being repugnant to the Federal Constitution.

It's not what he could have done but what he did do.

And objecting to the tax is not objecting to a statute according to the Wilson versus Cook case.

Justice Charles E. Whittaker: Well, if you say, you have no right to assess the tax because to do so would violate the Constitution of the United States, aren't you saying that to apply your state statute to effect collection of the tax is what violates this -- the Federal Constitution and therefore, the state statute, when so applied, violates the Constitution?

Mr. Manuel L. Kugler: Well --

Justice Felix Frankfurter: Of course, you -- you wouldn't have the problem if you didn't have a state statute --

Mr. Manuel L. Kugler: No, that's true, Mr. --

Justice Felix Frankfurter: -- and because the --

Mr. Manuel L. Kugler: -- Justice Frankfurter.

Justice Felix Frankfurter: -- the State couldn't levy it.

But otherwise than that, the state statute doesn't make itself (Inaudible) in any immediate sense or even its application to property that's immune from taxation.

They don't -- the answer to that question turns on federal materials and now in state materials, doesn't it?

Mr. Manuel L. Kugler: Of course, that's our position that these -- these courts below and certainly the California Supreme Court know where they ask to, did they spend any time in discussing the validity of California statute.

They were concerned only with congressional intent in the RFC law and in the 1944 Surplus Property Act.

That's -- that's --

Justice Felix Frankfurter: The question of how far back you go, I'm saying that you really implicate a matter of validity of the state statute either directly or -- or either on its face by implication.

Mr. Manuel L. Kugler: Yes.

Justice Felix Frankfurter: Didn't the state statute has entangled this?

You said otherwise it be no proper, you didn't have a state statute, a question could never arise.

Mr. Manuel L. Kugler: Well, that -- that's true.

Justice Felix Frankfurter: But -- but all the -- all the shooting is about not the state statute but things outside of it.

Mr. Manuel L. Kugler: That's precisely true.

And of course, as I said, the -- the -- this Court before on prior occasions has made the point that -- that challenging the tax is not enough under this rule.

Chief Justice Earl Warren: -- what -- what you've said, Mr. Kugler, is there any reason why the certiorari jurisdiction the Court should not be exercised?

Mr. Manuel L. Kugler: Oh, no, Your Honor.

But we -- we would concede that certainly its within the power of the Court to go to that if it wishes but, of course, we were making the point in -- because a right of appeal -- because of error which counsel has taken course to this Court as a matter of -- of right as opposed to a matter of discretion --

Chief Justice Earl Warren: Yes.

Mr. Manuel L. Kugler: -- in the court of certiorari and --

Chief Justice Earl Warren: You -- you --

Mr. Manuel L. Kugler: -- give you more chance to adopt (Voice Overlap) --

Chief Justice Earl Warren: -- make no contention that there's not a federal question involved here.

Mr. Manuel L. Kugler: I'm sorry, I didn't hear.

Chief Justice Earl Warren: You make no contention that there's not a federal question involved.

Mr. Manuel L. Kugler: No, no, Your Honor.

No.

Chief Justice Earl Warren: Yes.

Mr. Manuel L. Kugler: Thank you very much.

Chief Justice Earl Warren: Mr. Dietz.

Argument of Henry A. Dietz

Mr. Henry A. Dietz: Mr. Chief Justice Warren, Mr. Justices of the Supreme Court.

First, might I state that I regret very much that the Chief Trial Deputy in County Counsel of San Diego County did not or is not able to be here to argue his own case.

He tried this matter from the trial courts through the Supreme Court of the State of California and unforeseeably, he had a heart attack and has had to retire.

So, in effect, I am pinch-hitting for him.

I hope I will be able to do him justice.

We have some rather interesting questions here with respect to passage of title and with respect to whether a deed is needed and whether this is a question that should be determined of this issue.

The Supreme Court of California expressed itself as this is being the sole question, whether the land seized to be real property of the RFC when control and responsibility was subsequently transferred to the War Assets Administration.

Michigan, on the other hand, expresses the question as being in the final analysis the question at issue was whether Congress clearly manifested an intent in the enactment of the Surplus Property Act of 1944 or otherwise that property of the RFC declared surplus without a transfer of the legal title should thereupon become immune from taxation, not withstanding, the waiver in the Act creating said corporation.

The first point that I wish to make is that we are attempting to determine this question on a matter of what was the intent of Congress.

In 1932, when the original Act was passed, a provision stated any real property of the Corporation, any real property of the Corporation indicating a predecessor to RFC shall be subject to state, territorial, county, municipal or local taxation to the same extent and according to its value as other real property.

Here, we have an expressed waiver of immunity but not only that, we have an expressed consent for the State to tax as such.

It's not merely aware of immunity but a statement that the State shall tax.

These taxes have to do with the years 1951 to 1952, fiscal years through 1954, 1955.

The taxes in this case are not particularly in dispute, and I think that we are faced with three separate cases which involved the identical issue or the identical principle.

So far as I have been able to recall, and I'm sorry that I can't prove to you by a way of the record which is before you, it is my understanding that RFC is, at the present time, the record owner of this property on the tax rolls of the County of San Diego.

Now, let's go in to the intent of Congress in passing this so-called waiver or giving this expressed consent to tax.

It was done for one purpose only, and I think that it generally recognized and that was during the depression years that there were properties being transferred and difficulties going on with respect to taxes to the extent that local taxation was in really a pretty sad situation if it was going to be necessary for the Government to take over various properties, and also to take care of that situation of the need for the local communities to be able to run themselves by the use of taxes.

In 1944, when the so-called Surplus Property Act was passed, the -- I'm trying to find the exact statement as to what was said in the preamble of the 1944 (Inaudible)

Congress, after the determination by the Court of Claims and after the determination by the Comptroller General in his opinion, came to the conclusion in Section 701 and stated that a declaration of policy was this, "The Congress recognizes that the transfer of real property having a taxable status from the Reconstruction Finance Corporation or any of its subsidiaries to another government department is often operated to remove such property from the tax rolls of states and local taxing authorities, thereby creating an undue and an unexpected burden upon such states and local taxing authorities and causing disruption of their operations.

It is the purpose of this title to furnish temporary measures of relive for such states and local taxing authorities by providing that payments in lieu of taxes shall be made with respect to the real property so transferred on or after January 1st, 1946."

Apparent to that time and for a period of eight years and so far as the Reconstruction Finance Corporation was concerned and the General Services Administration was concerned, it was the interpretation of the administrative agency that was given the duty of handling this property that it was necessary to pass a deed or pass a title for the purpose of determining whether there should be an immunity from taxation.

The basic reason that they did not desire to tax or did not desire to transfer title on these cases was because they said some 1500 plants would be taken off of the local tax rolls.

Likewise, they thought that they were interpreting what was the true intent of Congress and after all, this Honorable Court is to determine one thing, what was the intent of Congress with respect to taxability insofar as local communities were concerned where property has been declared surplus and where it has been accepted by War Assets Administration?

Even the case upon which counsel so heavily relies, the Sedgwick County case is very cautious, that being a Court of Claims case, to say that insofar as a mere declaration of surplus, this does not relieve immunity.

It is necessary that there be an acceptance on the part of one of the corporations.

But what was the intent of Congress in passing the Surplus Property Act of 1944?

Was it for the purpose of disposing a property and relieving itself of immunity from taxation, which is granted by the original Act?

Or was it for the purpose of orderly transfer of properties of the United States either to some other governmental activity, at which time we would claim, of course, there would be no tax by way of passage of legal title or it was to be placed in the hands of some private individual whereby would again be placed back on the tax rolls?

It is my contention that the purpose of it was that, in effect, all these disposal agencies were doing was to dispose of property for the purpose of an orderly disposition.

And if they were not in fact the owners of the real property as it's indicated in the original statement of the exemption from tax.

Well, let's see if we can cover this point with respect to the passage of a deed.

There's only one way that I know of that property is taxed -- real property is taxed in the original instance in a State, and that is when the property is placed upon the tax rolls as such.

This is the only notification that they have and under -- under Revenue and Taxation Code 611 of our State, the assessor is required.

It is a mandatory duty upon him to assess property to the record owner, the legal record owner.

Could it not be that insofar as we are concern that this particular property as such that the passage of title or the indication of passage of title on those records of the local authorities who had been given the power of tax was for the purpose of assuring the local taxing authorities what they could attack or what they could tax?

It might well be that we should consider another thing, and that is the fact that even in the Beaver County case, it has been determined that it is necessary for the courts to consider, the fact that there will be a great disruption of the -- of the taxing authorities in particular cases if it is not considered that where expressed taxation authority is given, then the State should have the right to have notice of it.

I believe that I have covered pretty thoroughly in our brief the various questions that have been propounded to us.

We are going very definitely upon the question of the intent of Congress.

I believe that the Supreme Court of the State of California, in its expression of what was the intent of Congress, the intent of Congress being not to disrupt taxation but to have a fair share passed on to the local communities.

And likewise, of -- this one factor, which I think should be particularly known.

Number one, Rohr Aircraft's predecessor sold this property to the Federal Government in the first instance.

Number two, it again went back in to possess -- possession in 1944.

Number three, during this period of time, it was required by the Federal Government to pay the tax by its very lease.

This is not a case where the Federal Government property is being taxed, Rohr Aircraft is being taxed and the Federal Government has recognized it by a way of a lease.

It has stated in the lease, and I hope I can find it, in the Tax Provision Number 13, "Lessee agrees to pay to the proper authority when and as the same becomes due and payable, all taxes, assessments and similar charges which at anytime during the term of this lease maybe taxed, assessed or imposed upon a lessor or a lessee with respect to or upon the leased premises and personal property," and so forth.

And it even goes to the extent of stating that in the event a lessee fails to pay when due any taxes, assessments, utility bills or similar charges is about set forth then lessor may, at its option, face such taxes, assessments, bills or other charges that require lessee to immediately reimburse it for such cost which the amount is hereby declared to be additional rental and to become immediately due and payable.

Lessor reserves the right to contest the validity or amount of any tax assessment which, of course, we do not dispute.

In view of this fact that I have just stated that this tax is to go back to Rohr Aircraft and not to the Federal Government, they now seek to come in and obtain this tax back for the purpose of their own profits for the purpose of the funds going in to their coverage, rightful taxes on property, and if Rohr owned this property, it would be so taxed.

I think, perhaps, there is no need for me to go further in this case with exception of making one further statement, that is, that the lease in this case was entered into by Reconstruction Finance Corporation in 1949.

And in 1954, Reconstruction Finance Corporation by and through General Services Administrator made an additional years leased on this same property, if this is an indicia of RFC having no interest, no ability or no control over this property, then I am sadly mistaken.

And I thank you extremely for your wonderful courtesy.

Rebuttal of Leroy A. Wright

Mr. Leroy A. Wright: May I --

Chief Justice Earl Warren: Mr. Wright --

Mr. Leroy A. Wright: Mr. Chief Justice --

Chief Justice Earl Warren: -- you may continue.

Mr. Leroy A. Wright: -- members of the Court, with your permission.

But briefly cover a few other points which have been raised by appellees, first, on the question of jurisdiction.

This is a question which frankly has troubled me as one coming before you to seek the proper remedy.

I was puzzled by two cases which are cited and referred to on page 3 of our reply brief.

They are old ones but they eliminate -- eliminate the problem for us.

One is the Indian Territory Illuminating Oil Company and the other Jaybird Mining Company against Weir.

At least these two cases are remarkable because they arose within a remarkably short time with each other.

In the Illuminating Oil Company, oils were withdrawn from Indian lands in Oklahoma and had been mingled with other quarreled concededly taxable.

And this case arose under the early concept of intergovernmental tax immunity when anything that was taken from the Government by a private contractor, was covered with the governmental immunity.

In the Jaybird case, we had ore which was mined on Indian lands and in the bin on the tax tally.

In both cases, the same statutes of Oklahoma were involved.

In both cases, the same assessment procedures and levying those taxes were involved.

In both cases, the same frame of immunity was raised and yet, in the Jaybird case, the writ of error or an appeal was allowed while in the Indian Territory case.

The appeal was dismissed, although the Court granted certiorari.

Here, as in Wilson versus Cook, how do we distinguish an attack on statute which counsel says we must from an attack upon a tax which is the product of the statute?

I think that an explanation of Wilson against Cook is the statement of Court which is contained on page 4 of our reply brief.

As the record does not show, the plaintiffs presented for decision to the State Supreme Court any federal question.

They have no appeal to this Court.

I would refer the Court to the opinion of a District Court of Appeal, which appears both in the jurisdictional statement and in our opening brief.

In the jurisdictional statement, that opinion appears and attempted to be, and I am referring expressly to page 28, the District Court of Appeals in the Fourth Appellate District.

Appellant contends that the taxes in question were illegal and void under the general -- the rule that lands on by the United States of America or its corporate instrumentalities are immune from state or local taxes cited McCulloch against Maryland and other cases.

This question was also raised in the pleadings.

It was expressly recognized in the findings of fact made by the trial court.

All of which are in the record.

But so much for this, I think the claim that the question of jurisdiction is under some of the language which this Court has used in dealing with other cases, a close one.

I think it equally claim that this does present a substantial federal question which has not heretofore been resolved by this Court.

And certainly, one on which a guidance it needs.

Counsel has laid to execrable stress upon administrative policy, a policy adopted by the Administrator of War Asset, Mr. Larson.

It's interesting to note however that this policy is one which Mr. Larson abandoned and counsel is here urging that an abandoned policy be adopted as a rule of this Court on a theory that administrative policy, an interpretation that's been long in effect serves as a guide for statutory interpretation.

True, this is the -- the rule but it involves a -- an administrative policy which has long been in effect and which has been followed.

This can then become a guide.

But certainly, no such administrative policy has here been shown by a mere statement in a letter from Mr. Larson that he used to do it this way but he stopped doing in that way.

Counsel has a statement that it is Rohr Aircraft that has been taxed.

This statement is not so find.

The entire record demonstrates that the tax filled the assessments, the levies were made upon property of the United States and upon that property, not upon Rohr Aircraft.

Tax bills were issued in the name of Reconstruction Finance Corporation.

They were sent and it is demonstrated by testimony in the record.

Presumably, to General Services Administration, at least the lessee got from GSA during the tax years here involved, they were forwarded to the lessee from GSA along with the request that they be paid in accordance with the provisions of the lease.

This, they worked.

But these taxes are ad valorem taxes levied upon property of the United States drew.

It may be a property of one its governmental instrumentalities but it's nonetheless property of the United States.

And it subjects the property of the United States to seizure, to levy in the event the Rohr Aircraft Corporation did not comply with the provisions of its lease.

What would happen?

These properties of the United States would have been sold under the mechanics provided by the Revenue and Taxation Code where the seizure in sale of delinquent taxes.

They could have been.

Justice Charles E. Whittaker: Do you -- do you, by that argument, sustain this right that all property, whether owned by the RFC or if not by its name is property of the United States not subject therefore to taxation?

Mr. Leroy A. Wright: I -- I'm not talking about the waiver.

The property -- any property owned by the United States or by the United States to any of its corporate instrumentalities with respect to which there has been no waiver and if the waiver is not applicable, I think it's a matter of general law which had been recognized takes with it the constitutional immunity of the Federal Government from a tax which is levied upon the property as such.

To distinguish the taxes, which were involved in the Detroit and Murray case which were levied upon the rights and interests of the lessee, the privilege tax, this tax is not such a case.

This tax is levied upon the property of the United States.

If it's permitted, it's permitted at all solely because the Congress has waived its immunity and that waiver is still applicable.

We contend that after the declaration of surplus, waiver is no longer applicable that it seizes then to be property of the RFC.

Just the same as though, for example, a similar language is contained in the statute creating the Federal Farm Mortgage Corporation.

Suppose the Congress transferred the activities and functions of the Federal Farm Mortgage Corporation to the Department of Agriculture by legislative enactment, what would happen to the waiver?

We contend that it would fall.

Comment has been here made, again, that Rohr is being taxed, the appellant is here being taxed.

This ignores the fact as pointed out in our reply brief that California has a very specific and express system for the taxation of possessory interest in tax and in properties.

We make no complaint about that tax.

That is a tax which has been set up by the stipulations entered into in the court below as an equitable concept of any recovery which we might obtain here if our contention is sustained.

But that is a tax which would put us in a power with other lessees of other exempt properties within the State of California.

This tax is levied upon the Government's property as a tax upon that property and not upon this lessee.

This Court has stated in recent cases that a State may not constitutionally taxed property owned by the Federal Government even though the property is in private hands and the taxes to be collected upon the private taxpayer.

That statement and that language is called from this Court's various opinions in the Michigan cases recently decided.

And we believe that here, the State has been attempted to constitutionally tax property (Inaudible) by the United States.

We, therefore, submit that the case should be reversed.

Thank you.

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