Graves v. New York ex rel. O’Keefe, 306 U.S. 466; 59 S. Ct. 595; 83 L. Ed. 927 (1939)

Facts—The Home Owners’ Loan Corporation (HOLC), a federal government corporation, employed O’Keefe, a resident of New York. He contended that as a federal employee, his salary was exempted from state income tax. The HOLC, as designed by Congress, was completely a federal government project, but the act nowhere evinced any congressional purpose to grant immunity from state taxation of employee salaries. In his income tax return, O’Keefe included his salary as subject to the New York state income tax and sought a tax refund on the basis of his federal employment.

Question—Does a state tax upon the salary of an employee of the federal government impose an unconstitutional burden upon that government?

Decision—No.

Reasons—J. Stone (7–2). The Court ruled that the state income tax is a non- discriminatory tax on income applied to salaries at a specified rate. It is not in form or substance a tax upon the Home Owners’ Loan Corporation or its property or income, nor did the corporation or the government pay the tax from its funds. It was laid directly on the income of the respondent that he received as compensation for his services. These funds were his private funds and not the funds of the government. The only possible basis for implying a constitutional immunity from state income tax of the salary of an employee of the national government or of a governmental agency is that the economic burden of the tax is in some way passed on so as to impose a burden on the national government. Private funds received as compensation for services to the federal government constitute in no way a burden on the federal government when such funds are taxed by the state.

Tax immunity evolves from the premise that there is an implied immunity be- tween the state and federal taxing powers as a limitation to prevent interference each by the other in the exercise of that power where the other government’s activities are concerned. There is no implied restriction, therefore, no burden, on the federal government because the theory that a tax on income is legally a tax on its source is not tenable. The tax here is nondiscriminatory. Any burden that would exist here is one that the Constitution presupposes in a system of dual governments, such as our federal system, and cannot be held to be within the implied taxing restrictions of the state. If such an immunity were implied, it would impose too greatly on the taxing power confirmed to the state.

J. Butler argued in dissent that since the Home Owners’ Loan Corporation was a U.S. entity not subject to state tax, then neither should the salaries of its employees be subject to this tax.

Note—Graves overruled Dobbins v. Erie County, 16 Peters 435 (1842) and Collector v. Day, 11 Wallace 113 (1871). Since McCulloch v. Maryland, 4 Wheaton 316 (1819), the Court moved from reciprocal immunity to reciprocal taxation, subject, though, to the “supremacy clause” of the Constitution (Article VI, Clause 2).