MacAllen Co. v. Massachusetts

1929-05-27

Headline: Massachusetts law that counted interest on federal and local bonds in corporate tax calculations is struck down, blocking states from indirectly taxing government securities and protecting federal borrowing.

Holding: The Court held that Massachusetts’s amended law, by using corporate net income to count interest from United States and municipal bonds, in substance imposed a tax on those bonds and therefore was unconstitutional and void.

Real World Impact:

Prevents states from indirectly taxing interest on U.S. government bonds.
Protects municipal bonds issued as tax-exempt from being reached by excise measures.
Invalidates Massachusetts’s amended corporate tax calculation for exempt securities.

Topics: state taxation, federal bonds, municipal bonds, corporate excise tax, federal borrowing power

Summary

Background

A Massachusetts business corporation owned many United States Liberty bonds, Federal Farm Loan bonds, and county and municipal bonds that were exempt from state taxation. The State amended its corporate tax law to count interest from those bonds when calculating a corporate excise based on net income. The company paid the tax under protest and sued for an abatement after state courts treated the assessment as a lawful excise on doing business.

Reasoning

The Court asked whether the law truly taxed the corporate privilege or whether, in substance, it reached tax-exempt securities. The majority looked beyond the statute’s label and considered the amendment, legislative reports, and precedent. It concluded the amendment was aimed at subjecting interest from federal and local bonds to taxation indirectly. Because taxing federal instrumentalities or their income interferes with Congress’s power to borrow and because municipal bonds had been statutorily protected, the Court found the law’s practical effect was to tax those securities and held the amendment unconstitutional and void.

Real world impact

The decision prevents states from using corporate excise measures to reach interest on federally issued or statutorily exempt municipal bonds. Corporations holding such securities cannot be taxed indirectly through net-income calculations that are intended to capture exempt income. The Massachusetts amendment is invalidated and similar state measures face serious constitutional limits.

Dissents or concurrances

A dissent argued the tax was a lawful excise on the corporate privilege and that longstanding practice lets excises be measured by net income, even if that includes tax-exempt securities; two Justices joined that view.