Chas. C. Steward Machine Co. v. Davis

Brief Fact Summary.

Petitioner, an Alabama corporation, paid a tax in accordance with the statute, filed a claim for refund with the Commissioner of Internal Revenue, and sued to recover the payment, asserting a conflict between the statute and the Constitution of the United States.

Synopsis of Rule of Law.

When tax imposed by act of Congress is laid upon the condition that a state may escape its operation through the adoption of a statute unrelated in subject matter to activities fairly within the scope of national policy and power, the tax is not valid.

Facts.

The statute at issue requires every employer to pay every year “an excise tax, with respect to having individuals in his employ,” the tax to be measured by prescribed percentages of the total wages payable by the employer during the year with respect to such employment. To collected proceeds then go into the Treasury of the United States and are not earmarked in any way. In some instances, however, credits are allowable. If the taxpayer has made contributions to an unemployment fund under a state law, he may credit such contributions against the federal tax provided that the total credit does not exceed 90 percent of the tax and that the state law shall have been certified to the Secretary of the Treasury by the Social Security Board as satisfying certain minimum criteria. This part of the statute was challenged.

Issue.

Can Congress impose taxes under the Social Security Act on employers to fund unemployment compensation?

Held.

Yes, a credit to taxpayers for payments made to a State under a state unemployment law will be futile in the absence of some assurance that the law leading to the credit is in truth what it professes to be. An unemployment law framed in such a way that the unemployed who look to it will be deprived of reasonable protection is one in name only. What is basic and essential may be assured by suitable conditions. The statute at issue seeks to provide taxpayers if they meet certain conditions that are considered suitable. The conditions to be approved by the Board as the basis for a credit are terms of a statute that are valid.

Discussion.

In giving credits and imposing taxes, Congress does not intrude upon fields foreign to its function. The purpose of its intervention in the field of taxation is to safeguard its own treasury and as an incident to that protection to place the states upon a footing of equal opportunity. Congress is responsible for checking drains upon its own resources and obstructions to the freedom of states are to be leveled. It is one thing to impose a tax dependent upon the conduct of the taxpayers where the conduct to be stimulated or discouraged is unrelated to the fiscal need subserved by the tax in its normal operation or to any other national end. Under the current statute, inducement or persuasion does not go beyond the bounds of power of Congress.