The $179,000,000 estimate combines all of the conservative assumptions and the $337,000,000 estimate combines the liberal assumptions as to the increased income-tax receipts which the Federal Government might expect to receive. Seventy-two million dollars of the $179,000,000 conservative estimate is expected to be derived from taxing the income from the securities of the Federal Government and its instrumentalities which are now tax-exempt, and $107,000,000 ✓ is expected to be yielded by taxing under the Federal income-tax laws income from the State and local governmental securities. The estimate of $337,000,000 may be correspondingly broken down into an estimate of $139,000,000 from taxing the income received from Federal securities and $198,000,000 from taxing the income received from State and local governmental securities. Of the $337,000,000 estimate, $69,000,000 are expected to come from corporations and. $268,000,000 from individuals. Of the $179,000,000 estimate, corporation income taxes are expected to be increased by $48,000,000 while those of individuals will be increased by $131,000,000.

Senator AUSTIN. Have you figures corresponding to that with respect to salaries and income?

Mr. O'DONNELL. The Federal Government now taxes the salaries of Federal employees so that no additional revenue will accrue from that source. The $16,000,000 estimate which the Under Secretary gave you was the amount of Federal income tax expected to be realized from taxing State and local salaries on which Federal income tax is not now being paid.

We have no knowledge of how much the respective States under the existing State income-tax laws would derive by virtue of their ability to tax the salaries of Federal employees.

Senator LOGAN. It might depend upon the rate?

Mr. O'DONNELL. Depending upon the rate, and what jurisdiction each State would have over the Federal salary of any particular

person.

The CHAIRMAN. Have you made a further break-down as to the ratio between Federal and State employees with respect to the recent decision in the New York-New Jersey case as to what income you would derive if you taxed all classes of State and municipal officers and employees whom you may tax under the authority of that recent decision?

Mr. O'DONNELL. There is some dispute about that. We just do not know who would be covered. That is a matter of controversy. The CHAIRMAN. Do you have any further questions, Senator Logan?

Senator LOGAN. I do not care to ask anything now, but I assume that Mr. Hanes will be available if we desire to obtain additional information. I would like to study his statement, and, if there is anything I do not understand, I would like to ask if he can reappear. Mr. HANES. That is entirely satisfactory. I can appear at any time.

The CHAIRMAN. Is there anyone else from the Treasury that you desire to have heard now?

Mr. HANES. I believe not. We are available at all times.

The CHAIRMAN. It is the plan of the committee that we should now hear from the Assistant Attorney General, Mr. James W. Morris, who has made a legal study respecting this question.

I think that it would be very well that the representatives of the Treasury Department be here while he testifies.

Mr. HANES. I asked that the Chief Counsel of the Bureau of Internal Revenue be here to make a statement, and he is desirous of being heard.

Mr. WENCHEL. It would be satisfactory to me for Mr. Morris to complete his statement.

The CHAIRMAN. We will now hear the statement of Mr. James W. Morris, Assistant Attorney General, who has made an exhaustive investigation of this question from a legal standpoint.

Before Mr. Morris begins his statement, I will state that the committee is agreeable to hearing from those who are in opposition on February 7, 1939, at 10 o'clock. It is our desire to hear the arguments to be presented by the Treasury Department and the Department of Justice and at the conclusion of that testimony we will adjourn to February 7 at 10 o'clock. So, I might say, if it is satisfactory to the committee, that we will try to finish this afternoon, and then we will adjourn until February 7 at 10 o'clock.

We will now hear from Mr. James W. Morris, Assistant Attorney General.

STATEMENT OF HON. JAMES W. MORRIS, ASSISTANT ATTORNEY GENERAL

Mr. MORRIS. Mr. Chairman and members of the committee: Shortly after the President's message to Congress of April 25, 1938, the Department of Justice was requested by the Treasury Department to undertake to bring together for the convenience of the appropriate committees of the Congress, all relevant data on the legal problems affecting the legislation proposed in that message. This study was concluded and a report, together with six volumes of an appendix, transmitted to the Treasury Department on June 24, 1938. Copies of the study and appendix have also been furnished to this committee, to the Senate Finance Committee, the Ways and Means Committee of the House of Representatives, the Joint Committee on Taxation, and to several libraries. Printed copies of the study, without the appendix, have been rather generally distributed to those interested.

The legislation recommended by the President (1) would subject to the Federal income tax the interest paid on future issues of Federal, State, and municipal bonds, and the salaries of State and municipal officers and employees; and (2) would permit State taxation of the interest on future issues of Federal bonds and the salaries of Federal officers and employees within their taxing jurisdiction.

The study falls into two parts, the first relating to the decisions of the Supreme Court which bear on the pertinent tax immunity problems, irrespective of the sixteenth amendment, and the second exploring the interpretation of that amendment. I shall not, of course, undertake here to discuss these problems with the detail and particularity with which they are examined in the study. I can only hope to point out the various arguments which may be drawn from that study which seem to justify the enactment of the proposed legislation, and which should be urged upon the courts in any judicial examination of such legislation.

Quite apart, then, from the meaning and effect of the sixteenth amendment, it may be well to trace from its origin the doctrine of intergovernmental tax immunity. That doctrine stems from McCulloch v. Maryland. It was fashioned in order to protect an important Federal policy from complete frustration at the hands of dissident States. The Bank of the United States was established in 1816. Within 3 years eight States had enacted laws designed to penalize the bank or expel its branches from their territory. The State of Maryland enacted legislation which provided that if any bank established a branch office in the State without State authority (obviously aimed only at the Bank of the United States) it must issue notes only in specified denominations and only on stamped paper to be purchased at prescribed rates from the treasurer of the western shore alternatively, the branch office could gain exemption from these requirements by the payment in advance of $15,000 a year. In an action against the cashier, the State court rendered judgment for the statutory penalties.

When the matter came before the Supreme Court, a distinguished array of counsel presented the cause. No one questioned Webster's emphatic insistence that the bank could be destroyed if the State were empowered to enact any tax. The Court unanimously declared the tax to be invalid. Chief Justice Marshall stated his famous apothegm that the power to tax involves the power to destroy. It is not conceivable that the result of that case could have been different. Although not pitched on the ground of discrimination, such destructive discrimination was obviously present. It is illuminating that the Chief Justice never departed from the proposition that the Constitution makes the Federal laws supreme. The argument was made that to sustain the right of the General Government to tax banks chartered by the States, equally sustains the right of the States to tax banks chartered by the General Government. To that argument Marshall said:

But the two cases are not on the same reason. The people of all the States have created the General Government, and have conferred upon it the general power of taxation. The people of all the States, and the States themselves, are represented in Congress, and, by their representatives, exercise this power. When they tax the chartered institutions of the States, they tax their constituents; and these taxes must be uniform. But when a State taxes the operations of the Government of the United States, it acts upon institutions created, not by their own constituents, but by people over whom they claim no control. It acts upon the measures of a Government created by others as well as themselves, for the benefit of others in common with themselves. The difference is that which always exists, and always must exist, between the action of the whole on a part, and the action of a part on the whole-between the laws of a government declared to be supreme, and those of a government which, when in opposition to those laws, is not supreme.

In three cases during the next 50 years the Court had occasion to declare State taxes on Federal instrumentalities to be invalid. I shall not undertake to discuss Osborn v. United States Bank, Weston v. City Council of Charleston, and Dobbins v. Commissioners of Erie County. Suffice to say that the ground of each of these decisions was the constitutional supremacy of the Federal Government.

No Federal tax upon a State instrumentality was assailed until 1870 in the case of Collector v. Day. The Income Tax Acts of the Civil War period laid a tax upon the income derived from certain sources "and any other sources whatever." Judge Day, judge of the

Massachusetts Court of Probate and Insolvency, was subjected to the Federal income tax under that provision. Having paid the tax, he brought suit for refund, and the Supreme Court, making a sharp departure from the earlier cases, held that the tax immunity established in McCulloch v. Maryland was reciprocal in its nature. Justice Nelson, speaking for the Court, considered that the power of the Federal Government to tax an officer of a State government might "defeat all the ends of government." Justice Bradley dissented because the State officer was also a citizen of the United States and subject to the constitutionally supreme taxing power of the Central Government. Collector v. Day has never been expressly overruled. I shall presently discuss, however, more recent decisions of the Supreme Court which seem to take from that case much of its supporting reasoning.

The last of the Civil War income-tax acts was made to apply only for the years 1870 and 1871. The next income-tax act passed by the Congress was the act of 1894. The critical language of this act was similar to earlier income-tax provisions. It lay a tax on gains, profits, and income from certain enumerated specific sources and "all other gains, profits, and income derived from any source whatever." Out of deference to Collector v. Day, a proviso was made that "salaries due to State, county, or municipal officers shall be exempt from the income tax herein levied." There was no exemption of the interest from State and municipal bonds.

It was this situation that gave rise to the case of Pollock v. Farmers' Loan & Trust Company, decided by the Supreme Court in 1895. Although the Court had held in Springer v. United States in 1880, that the general income tax imposed by the act of 1864, as amended by the act of 1865 was "within the category of an excise or duty," that it was not a direct tax, and was not subject to the rule of apportionment, the contention was made in the Pollock case that the income tax there involved was a direct tax and therefore could not be laid unless apportioned, in accordance with clause 3 of section 1 of article I of the Constitution, "among the several States * * * according to their respective numbers," and clause 4 of section 9 of article I, which provides that no direct tax shall be laid "unless in proportion to the census or enumeration hereinbefore directed to be taken."

Rather sketchily, the facts in the Pollock case were these: Pollock, a citizen of Massachusetts, was a stockholder in the Trust Co., a New York corporation. He filed a bill for an injunction to prevent the Trust Co. from paying the income tax. The bill alleged that the Trust Co.'s capital was $5,000,000, of which $1,000,000 was invested in real estate, $2,000,000 in bonds issued by the city of New York, and $1,000,000 invested in corporate bonds. The total income for the year 1894 was alleged to be $300,000 of which $50,000 was derived from the real estate, and $60,000 from the municipal bonds. It was also alleged that the Trust Co. held as trust property real estate of the value of $5.000 000 from which it received trust income in the amount of $200,000 per annum. The defendants demurred, the demurrer was

sustained and the bill dismissed.

Thereupon an appeal was allowed to the Supreme Court. Mr. Chief Justice Fuller wrote the majority opinion which was first handed down. In this it was held: (1) The tax on income from real estate was a direct tax on such realty and void for lack of apportion

ment; and (2) the tax on income from State and municipal bonds was a tax on the power of the States and their instrumentalities to borrow money and consequently repugnant to the Constitution. The Court being equally divided on all other questions, they were left undecided. Mr. Justice Field delivered a specially concurring opinion. Mr. Justice White and Mr. Justice Harlan dissented on the first question decided, but agreed on the second.

A rehearing was granted in the case, and the opinion of the majority on rehearing, among other things stated:

We are now permitted to broaden the field of inquiry, and to determine to which of the two great classes a tax upon a person's entire income, whether derived from rents, or products, or otherwise, of real estate, or from bonds, stocks, or other forms of personal property, belongs; and we are unable to conclude that * * [it] is so different from a tax upon the property itself that it is not a direct, but an indirect tax, in the meaning of the Constitution.

The Chief Justice mentioned the argument (and rejected it) "that income is taxable irrespective of the source from whence it is derived." It will be observed that here there was not the difference made-I speak now of the last opinion in that case-between income from municipal bonds and income from other personal property. On the other hand, the opinion states:

* it follows that if the revenue derived from municipal bonds cannot be taxed because the source cannot be, the same rule applies to revenue from any other source not subject to the tax; and the lack of power to levy any but an apportioned tax on real and personal property equally exists as to the revenue therefrom.

It will thus be seen, I think, rather clearly, that the Pollock case is grounded upon a refusal to recognize income, without regard to its source, as the subject matter of the tax. On the contrary, the burden of the tax was considered as falling upon the source. The Court clearly considered that income should be broken down into its constituent items and each traced to its source to determine the liability for income tax. It was not then recognized, as it has been since by the Supreme Court in the Cohn case, that the tax is "a necessary payment for the privilege of living in organized society" and "neither the privilege nor the burden is affected by the character of the source from which the income is derived. For that reason income is not necessarily clothed with the tax immunity enjoyed by its source.' Nor, was it then recognized, as it has been since by the Supreme Court in the Hale case, that

*

the tax complained of

* *

*

is not laid upon the obligation

*

[but]

***

to pay the principal or interest created by the bands is laid upon the net results of a bundle or aggregate of occupations and investments.

As I have said, McCulloch v. Maryland was not grounded upon the discriminatory nature of the tax there involved, although it was a discriminatory tax. Indeed, the Court sanctioned certain nondiscriminatory taxes on the land owned by the bank and shares of the bank owned by the citizens of Maryland. Subsequently, however, in Dobbins v. Commissioner of Erie County, the Court held a Pennsylvania State tax to be invalid when applied to a captain of a United States revenue cutter, even though the argument was made and not disputed that the tax there was nondiscriminatory. And, in Bank of Commerce v. New York City, the Court expressly rejected the argument that the earlier cases protected Federal instrumentalities only