Category Archives: taxes

Shell Oil Co. v. Iowa Dept. of Revenue

488 U. S. 19

November 8, 1988

Shell extracted much of its oil from the outer continental shelf, which is all the land beneath the first three miles of coastal waters. Iowa imposed an income tax on Shell for the business it did in Iowa, but Shell contended that it was partially immune from the tax due to the oil it sold there from the continental shelf. Shell said that the Outer Continental Shelf Lands Act (OCSLA) exempted all oil and gas extracted from state taxation laws.

The Supreme Court unanimously ruled that Iowa’s tax was not preempted by OCSLA. Marshall said that when the text of OCSLA is carefully parsed, it only bans taxation by states adjacent to the continental shelf itself. Marshall showed that this was the correct interpretation through recourse to legislative history. While a state like California could not tax the business activity of extracting oil just off its coast, all states remained free to tax the refined oil and gas that was eventually sold within state lines. Thus, Iowa’s income tax on all the oil and gas sold by Shell within the state was just fine.

While this ruling was pretty trivial, the day it was announced was momentous. That evening, Bush slaughtered Dukakis in the Electoral College. Reportedly, Brennan, Marshall, and Blackmun watched stonily as the election results rolled in. They had all stubbornly stayed on the Court throughout the eight Reagan years, but now they faced either four or eight years from the Bush-Quayle team. The future of the liberal bloc looked grim indeed.


D. H. Holmes Co. v. McNamara

486 U. S. 24

May 16, 1988

A Louisiana company called D. H. Holmes had catalogs designed and printed outside of Louisiana. It then mailed these catalogs to potential customers, most of which lived in Louisiana. The state tried to collect a ‘use’ tax on the catalogs. In a use tax, a tax is levied on material purchased out-of-state, but used in-state, as the catalogs were. D. H. Holmes argued, among other things, that such a use tax on the catalogs violated the Interstate Commerce Clause.

Rehnquist wrote for the Court, which ruled unanimously that the tax was just fine. The legal test for use taxes, from a case called Complete Auto, said that use taxes were constitutional if: 1. The tax was levied on an entity with a substantial nexus to the state levying the tax. 2. The tax was fairly apportioned. 3. The tax did not discriminate against interstate commerce. 4. The tax was related to benefits provided by the state. As Rehnquist demonstrated, the Louisiana tax inarguably met all four conditions.

Rehnquist slapped down a few other arguments. Because the catalogs alerted Louisiana residents about the store, the catalogs were certainly being “used,” contrary to the assertions of D. H. Holmes. And even though catalogs from out-of-state companies had been held exempt from use taxes, there was no reason to extend this exemption to in-state companies. Even though I think this decision was legally correct, I also think ‘creative’ taxes like the use tax are awful, and ought to be scrapped.

South Carolina v. Baker

485 U. S. 505

April 20, 1988

Because unregistered bonds were often used for tax evasion, Congress imposed a heavy tax on income from unregistered bonds. This made unregistered bonds so unattractive that it no longer seemed reasonable for several states to even issue them. South Carolina said this squelching of unregistered bonds violated the Tenth Amendment, as well as the historic intergovernmental tax immunity given to state-issued bonds.

Nonetheless, the Court upheld the new tax law 7-1 (Kennedy did not participate). Brennan reminded poor South Carolina that, under the Garcia case from 1985, the Tenth Amendment was all but eviscerated. Moving on to a more specific claim of commandeering – that states were being conscripted to pass new laws on bonds – he said that as long as the states passed the new laws out of indirect coercion rather than direct forcing, there was no Tenth Amendment problem. Finally, Brennan faced the bond tax immunity argument from the 1895 case Pollock v. Farmers’ Loan & Trust Co., and simply overruled Pollock. It used to be that every tax on a contract with the government was thought immune, but that doctrine had faded away decades ago, and bonds were the last surviving vestige of it.

Stevens said in a brief concurrence that even without Garcia, the Tenth Amendment argument still would have failed. Scalia joined the majority opinion except for the Tenth Amendment part. He wrote that he agreed with the conclusion, but disagreed with the majority’s almost gleeful minimizing of the Amendment. Rehnquist concurred in judgment. A Special Master had concluded that the bond tax would not be a big burden on states, and that essentially concluded the case for him.

O’Connor dissented sharply. She would not tolerate the continued evisceration of the Tenth Amendment, and also objected to overruling Pollock. The erosion of the doctrine underlying Pollock was based on the non-burdensome nature of the tax on government contracts. Contra Rehnquist, she interpreted the Special Master to conclude that the bond tax would indeed be burdensome to states. Thus, state issued bonds still deserved immunity. This is one of those odd cases where O’Connor was substantially more ‘conservative’ than Scalia and Rehnquist. Whatever else might be said about her, she truly was possibly the best federalist the Court has ever had in the post-Four Horsemen era.

United States v. Wells Fargo Bank

485 U. S. 351

March 23, 1988

A 1930s housing act allowed ‘Project Notes’ to be exempt from “all taxation.” For half a century, this tax-free perk was understood to not include estate taxes, but then a District Court ruled otherwise, setting off a rush by taxpayers to get estate taxes paid on Project Notes refunded. It was now up to the Supreme Court to decide whether or not the housing act really included estate taxes in its exemption of “all taxation.”

Unanimously, the Court ruled that Project Notes were not exempt from estate taxes (Kennedy did not participate). Brennan said that “all taxation” does not really mean ‘all’ in many statutes. Estate tax is a type of excise tax, and a long line of cases had held that excise tax exemptions needed to be specifically spelled out, and were not deemed included in statutory exemptions from ‘all’ taxation. An unrelated part of the housing act appeared to imply that estate taxes were part of “all taxation,” but Brennan further showed that a close textual parsing proved the opposite. Finally, Brennan gave little weight to the fact that one Senator had said during debate that estate taxes would be exempted. Half a century of unbroken understanding weighed far more heavily.

And we have yet another unanimous tax case! Brennan’s analysis is probably sound, but it sure leaves a sour taste in one’s mouth. “All taxation” really ought to mean all taxation.

Commissioner v. Bollinger

485 U. S. 340

March 22, 1988

Jesse Bollinger operated a bunch of apartments in Lexington, Kentucky. To get around some weird lending laws, he set up a corporation, owned entirely by him, which would have title to the properties. However, virtually all other business involving the properties would be carried on by Bollinger’s various partnerships. The corporation was explicitly described as an agent of the partnerships, and many other businesses which dealt with Bollinger’s partnerships didn’t even know about the corporation. The question was whether Bollinger or the corporation owned the properties for tax purposes.

Unanimously, the Court said that Bollinger did (Kennedy did not participate). Usually, a corporation that holds property as an agent for someone else is not considered the owner for tax purposes. The IRS contended that this rule did not apply given that Bollinger was the sole stockholder of the corporation, and that agency could legally be doubted in such situations. Scalia dug through some boring cases from the 1940s which suggested as much. But Scalia cared more about the facts of the instant case, and factually, the corporation’s nature as a total agent was crystal clear. He thus declined to find the rigid and overbroad tests from the old cases to be controlling law.

Once again, an IRS case ended up unanimous. The Supreme Court really does seem to hate tax law as much as many law students do. In a complicated case, they tend to say “yeah, we’ll just go with whatever the lower court thought.” In any event, I kind of liked this ruling. Between it handing the IRS a loss, and it privileging the facts over arbitrary judicial tests, it was a good one.

Arkansas Best Corp. v. Commissioner

485 U. S. 212

March 7, 1988

A stock buying company (Arkansas Best) bought lots of stock from a successful bank. Later, that bank encountered troubled waters, and the company bought a lot more stock to help the bank stabilize. Finally, the company gave up, and sold most of the bank’s stock. Arkansas Best claimed this selling off was an ordinary loss rather than a capital loss for tax purposes. The IRS disagreed, citing the tax code’s definition of capital assets, and that definition’s short and exhaustive list of exceptions (none of which applied to the stock at issue).

The Supreme Court unanimously backed the IRS (Kennedy did not participate). Marshall rejected the company’s silly attempt to invent a distinction where property acquired for ‘investment’ purposes would be sold for capital loss, but property acquired for ‘business’ purposes would be sold for ordinary loss. The tax code recognized no such distinction. Undaunted, Arkansas Best cited a 1955 decision where corn futures were ruled not a capital asset, even though they fell within none of the statutory exceptions to the general rule. Marshall replied that corn futures were so close to being ‘inventory’ that they fell within the inventory exception, and that, in contrast, the stock was nowhere near any of the exceptions.

I took a course in tax law, and in all honesty, it’s still practically a realm of mystical voodoo to me. It’s comforting that the Supreme Court seems to feel the same way. Their tax cases tend to be unanimous, and very accepting of the lower courts’ logic. While I wish Arkansas Best the best (haha, funny pun, huh?), I can’t really muster an informed opinion about their unanimous loss.

Church of Scientology of Cal. v. IRS

484 U. S. 9

November 10, 1987

As part of its decades long war with the IRS, the Church of Scientology filed a Freedom of Information request for a broad swath of IRS returns relating to the church. Under law, many IRS documents, including returns, could not be released if they contained personal identifying information. The Scientologists claimed that these documents could still be turned over so long as the private identifying information was redacted.

In a 6-0 ruling (with Brennan and Scalia not voting), Rehnquist held that the IRS was not required to turn over any of the private documents, with or without redaction. The law at issue said that IRS documents could not be released “in a form” that allowed for identification of individual taxpayers. Rehnquist said this meant that a completely new kind of document would have to be created to release the information. Redaction would still leave the information “in a form” that was supposed to be private. Recourse to the original Congressional debates bolstered his conclusion.

Commissioner v. McCoy

484 U. S. 3

October 19, 1987

After Robert McCoy’s father died, there was a tax form that Robert could fill out, which would result in his dad’s farm being taxed by over $20,000 less. Sadly, he missed the filing deadline by a few weeks. Because the higher amount of taxes was not paid, the IRS slapped the McCoy’s with a penalty tax (and accruing interest). There was legal wrangling, and an Appeals Court sided with the IRS on the farm tax, but unilaterally decreed that the penalty tax and interest would be forgiven. The IRS appealed, claiming the judges had no authority to make such a decree.

The Supreme Court agreed in a 7-1 per curiam ruling. The question of the penalty was not properly before the court, and the court had no jurisdiction or business independently ordering an agency to forgive a debt. Marshall wrote a dissenting opinion, which predictably focused on the Court’s summary disposition of the case. The ruling was legally correct. Morally, it was atrocious. What kind of douchey, heartless agency goes after a grieving child over $20,000 in taxes, and then takes it all the way to the Supreme Court? Of all the cases for the Court to summarily reverse, why this one? My guess is that the Appeals Court knew they were acting beyond their authority, and hoped the Court wouldn’t bother to overrule in the interest of greater moral justice. Too bad it didn’t work.

American Trucking Assns., Inc. v. Scheiner

483 U. S. 266

June 23, 1987

To pay for the cost of highway maintenance, Pennsylvania imposed a flat tax of $36 per axle on all trucks that used Pennsylvania roads, whether registered in or out of state (there was also a $5 tax for vehicle identification). Trucks registered in-state paid registration taxes which were correspondingly reduced to offset these flat taxes. Out-of-state truckers pointed out that they used Pennsylvania roads far less than in-state truckers, and therefore paid a much higher cost per mile through this tax scheme. They sued, claiming a Commerce Clause violation.

The Court ruled 5-4 that the flat taxes did violate the Commerce Clause. Justice Stevens, writing for the majority, found the cost per mile disparity highly significant, and detrimental to interstate commerce. The majority said state taxes must conform to an “internal consistency” test, meaning that taxes are invalid if commerce would be negatively affected should all 50 states impose the same tax. Simply put, the tax was too much of a barrier to interstate trade. Stevens was forced to admit that several old cases approved of facially neutral taxes for use of state roads. These were unceremoniously overruled on the plea that the earlier Justices insufficiency valued form over substance. As in the other tax case decided the same day, the question of remedy was remanded.

O’Connor’s dissent was joined by Rehnquist and Powell. She didn’t like the casual obliteration of a long line of precedent, and pointed out that Congress had never seen fit to challenge those precedents in spite of political pressure to do so. She showed that the “internal consistency” test was a misreading of prior cases, and made the general observation that the Court had rendered it far too difficult to states to raise revenues for highway maintenance. Scalia’s dissent, joined by Rehnquist, likewise affirmed that the “internal consistency” test was an invention, and also refuted the potential contention that the axle and vehicle identification taxes were in fact facially discriminatory.

I’m genuinely surprised by how merciless the Court is toward state taxes. I would have expected far more deference, especially from the more liberal Justices. Certainly, you’ll never see them strike down a national tax on such feeble grounds.

Tyler Pipe Industries, Inc. v. Washington State Dept. of Revenue

483 U. S. 232

June 23, 1987

In 1984, the Supreme Court held a West Virginia tax scheme unconstitutional under the Commerce Clause. West Virginia exempted goods manufactured in the state from sales tax, reasoning that the state’s tax on manufacturing was an effective substitute. The Supreme Court, however, said that subjecting only out-of-state goods to the sales tax was discriminatory, and hampered interstate commerce. The State of Washington had a tax scheme which was sort of the inverse: all goods were subject to the sales tax, but goods sold in-state were exempted from the manufacturing tax.

The Supreme Court ruled 6-2 that Washington’s law was also unconstitutional (Powell did not participate). Stevens, writing for the Court, said that the law was still discriminatory on its face against interstate commerce, because only goods sold across state lines were subjected to the manufacturing tax. He rejected any argument that the two taxes could be viewed as offsetting, and claimed that the issue was squarely controlled by the earlier 1984 ruling. With regard to the question of remedy (i.e., whether any taxes would have to be refunded), Stevens remanded. In a unanimous section, the Court quickly shot down a separate legal challenge by an out-of-state manufacturer which objected to having to pay Washington’s sales tax. The court ruled that the company had enough contact with Washington to render it subject to the tax.

O’Connor’s concurrence stated that she agreed only because Washington’s scheme was facially discriminatory. Scalia filed a dissent joined by Rehnquist. He did not feel the West Virginia case controlled, and pointed out that the majority’s gloss on it ran counter to many decades worth of precedents. He saw no discrimination in the tax system at all: all it did was ensure that no good sold inside or outside of the state was taxed twice. It certainly had neither the goal or effect of weakening interstate commerce. Finally, in a section not joined by Rehnquist, Scalia gloriously attacked the entire doctrine of the ‘Dormant Commerce Clause,’ which the Court had long used to strike down state attempts to regulate commerce. It’s yet another brilliant display of originalism from the then-newest Justice.

To me, tax law is the most intimidating domain of our legal system. The last thing it needs is the Supreme Court making it more complex still, and on highly specious grounds at that. Sadly, the companion case decided the same day is an even more headache-inducing ruling. If I never come across another tax case, it will be too soon.