games at the State universities on the basis that this was imposing an unconstitutional burden on education which is a recognized essential governmental function. The Court reversed the circuit court of appeals, which had held the injunction valid. In the opinion of the majority, written by Mr. Justice Roberts, the Court assumed as true the fact that public education was a governmental function and that athletic programs were a part of the program of education, that the activity does not cease to be governmental because it produces income, and that the tax is imposed directly on the State activity and directly burdens that activity. The Court said that the question was "whether, by electing to support a governmental activity through the conduct of a business comparable in all essentials to those usually conducted by private owners, a State may withdraw the business from the field of taxation." It held that though education might be just as essential a governmental function as the maintenance of the executive, legislative, ard judicial branches, "it does not follow that if a State elects to provide funds for any of these purposes by conducting a business, the application of the avails-in-aid of necessary governmental functions withdraws the business from the field of taxation."

In South Carolina v. United States, supra, and Helvering v. Powers, supra, the court not only considered the effect of exemptions on Federal revenues but apparently made this the basis of its decisions as to the asserted governmental character of the activity involved. In South Carolina v. United States, supra, at page 455, the court summarized its earlier analysis by saying, "Indeed, if all the States should concur in exercising their powers to the full extent, it would be almost impossible for the Nation to collect any revenues." And in Helvering v. Powers, supra, at page 225, the court defined a limitation upon the doctrine of intergovernmental tax immunity as the principle that "the State cannot withdraw sources of revenue from the Federal taxing power by engaging in businesses which constitute a departure from usual governmental functions and to which, by reason of their nature, the Federal taxing power would normally extend." (See also United States v. California, supra, at p. 184.)

Unfortunately a governmental function is not a constant product. What may be a usual governmental function today may be taken over by private business tomorrow and thus fall into the "proprietary" class when a government engages in it. What may be a proprietary function today may in the future become such a "usual," "ordinary," or "essential" governmental enterprise that it may be classed as a "governmental" function intsead of a "proprietary" function. There will be, and have been constant changes in the fields of enterprise which we as a people properly look to the various State governments and the Federal Government to administer.

In conclusion I would like to summarize the principal points to which my discussion has been directed. First, I have given you the view that the Supreme Court has shown every evidence of a willingness and readiness to reexamine arguments and precedents in cases where important constitutional issues are involved, and I have illustrated this attitude on the part of the Court with respect to the field of taxation by several very recent decisions. Next, I presented to you the view that when the Court is requested to reexamine arguments and precedents in connection with the problem of intergovernmental immunities in taxation there will be at least two very persuasive, if not conclusive, grounds which will impel the Court to sustain the constitutionality of that legislation for which we are contending. The first of these is the language of the sixteenth amendment properly construed in the light of the events which led to its adoption, while the second is the broader but now equally well established proposition that any implied constitutional immunities from Federal taxation which may be enjoyed by the States do not extend to a nondiscriminatory income tax upon the salaries of State employees or the interest received by holders of State obligations when such a tax imposes no unreasonable burden upon the States.

The CHAIRMAN. Thank you, Mr. Wenchel.

Now, is there someone from your office ready to testify or someone from the Attorney General's office?

Mr. WENCHEL. Mr. Gardner, of the Department of Justice.

The CHAIRMAN. You are through, are you?

Mr. WENCHEL. I am through. All right, Mr. Gardner.

Mr. MORRIS. We have Mr. Gardner from the Attorney General's staff, if there is no one else from Mr. Wenchel's staff.

STATEMENT OF WARNER W. GARDNER, SPECIAL ASSISTANT TO THE ATTORNEY GENERAL, DEPARTMENT OF JUSTICE

Mr. GARDNER. I have only a very few general comments to offer, Senator, and a few specific things that have been raised in the course of the discussion.

Among the general comments there are only two of importance, and I would like to emphasize a little bit one factor. Mr. Morris has discussed and our study takes up in great detail the fact that the Pollock case and Collector v. Day, which are the only two cases which definitely bar this legislation, have no authority at the present time, measured by the customary legal tests. Their reasoning has been rejected, the results of the decisions are to a greater or a lesser degree incompatible with the decisions in other fields. The other reasons which have been offered from time to time by the Supreme Court for tax immunity are either inapplicable or have in later decisions been rejected by the Court. These are in a sense legal dialectics breaking down the opinions into their reasons, attempting to square them with other decisions. Out of that stuff the law is made, of course. However, they do not necessarily reach into the living life of the Court. If in addition to breaking them down in that fashion we measured them against the current trends in tax immunity, we get a result which is more authoritative, I think, that can be gained by merely an abstract legal analysis of the opinions and their present authority. In the last term the Court opened up with the Dravo case, in which the gross-receipts tax on a Government contractor was sustained. The Government argued for that result but was unable to distinguish three earlier cases, the sales-tax cases. The Court did not distinguish those cases but merely confined them to their facts and said that is not the situation here. So far as I know, no one ever offered a distinction between selling goods and selling a combination of goods and services, which is the contractor's function.

The CHAIRMAN. Is that a specific tax?

Mr. GARDNER. It is a gross-receipts tax.

The CHAIRMAN. That applies only to Government contracts? Mr. GARDNER. Oh, heavens; no. Generally, any tax involved by the Federal or State Government which was directed only at people who deal with other governments, would be, of course, invalid under the implications of our Federal system.

The next decision was the Therrell case, which pushed the solution of tax immunity just a little further. In that case the bank liquidators and persons employed in banking departments and engaged in the liquidation of banks and insurance companies were held subject to the Federal income taxes.

The CHAIRMAN. That is the State banks?

Mr. GARDNER. That is the State banks; yes.

The CHAIRMAN. And the State trust companies, and so on?

Mr. GARDNER. The opinion is not particularly illuminating, so we can extract very little from it.

After this decision, the next decision which the Court took up dealt with immunity from income taxes which was claimed by lessees of State school lands. They had been held exempt from the Federal income tax in the Coronado case, which in turn followed the Gillespie

case, dealing with the converse situation of a State tax upon Federal lessees. Those two cases were expressly overruled.

Next in the order of delivery was the case of Allen v. The Regents, in which the Court assumed that education was an essential governmental function of the State. But it held that the receipts realized from holding football contests could be subjected to Federal taxation even though it formed a part of the educational curriculum, because the Court said it was analogous in almost every respect to commercial exhibits.

Finally, there was the Gerhardt case, which has been sufficiently discussed this morning, I think. Comparing this uniform record of extending taxation and contracting immunity, which the Court made last term, with the analysis of Assistant Attorney General Morris, and which our study explains, the conclusion emerges with considerable clarity that although the Pollock and Day cases stand unreversed, they have not the authority which ordinarily attaches to an unreversed decision in the Supreme Court.

The CHAIRMAN. I did not hear you say anything about Evans v. Gore. It seems to me that that case should be included with the Collector v. Day and the Pollock case, because while the Court could have decided it on the basis of the provision in the original Constitution it did use the other ground in that case.

Mr. GARDNER. I did not mention Evans and Gore for the reason that I am directing my remarks only to the tax-immunity problem, distinguished from the effect of the sixteenth amendment. I am unfortunately not sufficiently familiar with the sixteenth-amendement problem to be able to lend a great deal of enlightenment to the committee. And they considered the express provision of the Constitution that the salary of the judge should not be diminished during his term of office.

The second general comment grows out of this trend of decisions which has apparently been inaugurated by the Supreme Court during this past term.

With respect to the taxation of employees, both Federal and State, there is bound to be a continuing stream of litigation. If the trend of the Court is continued, the decisions more probably than not will be in favor of taxing employees and officers, who formerly, and I think with good cause under the existing decisions, had considered themselves to be immune from taxation.

The problems of retroactivity which are thus raised need little amplification except it is a danger which every employee of the State now faces, if we press the Gerhardt decision as far as seems likely, and which will perhaps have some bearing upon many Federal employees, if, indeed, not all of them.

The specific questions which were raised during the testimony of Mr. Morris, and to some extent Mr. Wenchel, include, first, the extent to which there has been a waiver of Federal taxation.

There was prepared a few months ago a compilation of such statutes of the last two and a half Congresses, the sessions which have appeared in printed form in the regular Statutes at Large, gathered by thumbing through the pages, and they number some 37 or so. Broken down there are about a dozen in which Congress has stated that the specific Federal instrumentality under question shall be exempt from all taxation.

There are nine, according to the count that I have here, in which Congress expressly waived immunity from taxation.

The CHAIRMAN. What are they? Do you happen to have them there?

Mr. GARDNER. I could give them to you by going through them. The Federal Savings Loan Association is the first one to which I come. The provision of section 5 (h) of that act is that these associations, including their franchise, reserves, and surplus shall be taxable. The CHAIRMAN. I was on the House committee and I remember that provision.

Mr. GARDNER. It is analogous to the national bank provision. The next one deals with liquidators, referees, trustees, and other officers appointed by the United States.

Another one is with respect to national mortgage associations authorized to be established by the National Housing Act. I do not have them conveniently gathered here, but that perhaps will serve as a random sample.

The CHAIRMAN. I really would like to know what they are.

Mr. GARDNER. They are from the Seventy-third and Seventy-fourth and the first half of the Seventy-fifth sessions.

The CHAIRMAN. All right. You say there are nine?

Mr. GARDNER. There are nine in which they have waived all tax exemption. There are another seven in which they provide some tax exemption and some waiver of tax exemption and then there are another seven which provide for payments by the Federal Government or its instrumentalities to the States in lieu of taxes, an amount which I take it is estimated as the probable tax yield had they been subject to taxation.

This shows a consistent effort of the Congress, I submit, to deal with this difficult problem, it shows very plainly the extent to which it should be a problem for Congress rather than the courts, who can Ideal only in terms of black and white. Congress on the other hand can make quantitative as well as qualitative estimates.

There was one part during Mr. Morris' testimony where the Senator questioned the degree to which the Flint v. Stone Tracy Co. case can be reconciled with the Pollock case, and we of course believe that it cannot be so reconciled. I am pointing out here the dissenting opinion of Justice Brandeis in the National Life Insurance case, joined by Justices Holmes and Stone, who said they thought since Flint against Stone Tracy, the Pollock case in that part had been overruled.

I am responsible, Senator, for three mistakes in the dates of cases which were given you this morning. I thought I remembered them. In checking I discovered I did not. If you would like to have the correct dates of the Coronado case, the Gillespie case, the Evans and Gore case, I can give them to you.

The CHAIRMAN. All right.

Mr. GARDNER. The Coronado case was not, as I said, in 1925, but 1932; it was reported in volume 285.

The CHAIRMAN. And the Gillespie case?

Mr. GARDNER. The Gillespie case was decided in 1922, or the 1921 term in the spring.

And Evans v. Gore, which we speculated, was decided in 1923, was in fact decided in 1920.

That concludes all the things which I have in my mind to say, and I should be very happy to answer any questions which you might have.

The CHAIRMAN. I do not think I have any now, because it seems to me we will want to ask representatives of the Department questions which will be based upon what we learn from the opposition when they appear.

Mr. GARDNER. Yes.

The CHAIRMAN. And at that time I suppose the committee will want to ask quite a few questions.

Is there anyone else from the Attorney General's Department?
Mr. MORRIS. There is no one else here now.

The CHAIRMAN. Is there anyone else from the Treasury?
Mr. WENCHEL. No, sir; no further statement.

The CHAIRMAN. I thought I followed Mr. Hanes fairly closely this morning, but I do not know as there was a clear-cut discussion of this situation, and I really believe we ought to have something on it; that is, that if we pass and the courts approve of legislation such as the President has advocated, that there will be very little present effect upon either the revenues, or very little adverse effect upon the States. Did Mr. Hanes go into that question?

Mr. WENCHEL. I think he gave some figures. I think they amounted to something like $16,000,000, was it not?

The CHAIRMAN. That $16,000,000, as I remember it, was the amount of taxes that Government employees paid now.

Mr. WENCHEL. The increase, was it not?

The CHAIRMAN. The amount they would pay; yes, my point being that until new bond issues were made there would be very little that could be taxed by the Federal Government.

Mr. WENCHEL, Mr. Hanes stated:

It is clear that in the next few years neither the additional tax revenue nor the additional interest cost will be considerable.

The CHAIRMAN. Perhaps that is what I had in mind. He did cover it.

Mr. WENCHEL. There is another place where he said something to the effect that it would not wash itself out in 50 years, some sort of expression like that.

The CHAIRMAN. As I remember it-and perhaps you would know— we shifted last year to what was known as the partition between long-time and short-time Government securities, which I believe the Treasury wanted to eliminate altogether. Was not that it? And we shifted that up so that there are now authorizations, as I recall it, for 30 billion in long-term securities and a total of 45 billion in securities of the Federal Government. Does anyone here know?

Mr. WENCHEL. I think your figures are correct.

The CHAIRMAN. I think so. I know I objected when the original matter was presented, and we did refuse to move the bars entirely because of this impending legislation.

Mr. WENCHEL. We can supply the exact figures, Senator, if you wish.

The CHAIRMAN. What I want to get at is-I think we should have, for the benefit of the States, an analysis of the outstanding Federal issues, so that we would know what were short term and what were