Opinion
No. M-106.
June 19, 1933.
J. Robert Sherrod, of Washington, D.C. (George G. Box and Miller Chevalier, all of Washington, D.C., on the brief), for plaintiff.
Fred K. Dyar and W.W. Scott, both of Washington, D.C., for the United States.
Clarence E. Wilcox, Corp. Counsel, of Detroit, Mich. (Walter Barlow, of Detroit, Mich., on the brief), amici curiæ for City of Detroit, Mich.
J.W. Watson, Jr., of Miami, Fla., amicus curiæ for City of Miami, Fla.
Clinton K. Hughes, of Asheville, N.C., amicus curiæ for Buncombe County, N.C.
Thomas H. Remington, of Rochester, N.Y., amicus curiæ for Manuel Faust.
Before GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
Suit by Charles H. Wiltsie against the United States.
Judgment in favor of the defendant.
Plaintiff sues to recover $13,970, income tax paid for 1928, with interest. The income upon which this tax was computed and paid was derived by plaintiff from the purchase by him of delinquent tax sale certificates from counties and municipalities; such income being the interest to which plaintiff became entitled to receive upon the purchase of delinquent taxes allowed by charter or by the laws of a state in which such tax certificates were purchased on the delinquent taxes until paid.
It is contended that the imposition of a tax by the federal government on the income received as a purchaser of delinquent real estate tax certificates sold by municipalities at annual tax sales is unconstitutional for the reason that the purchaser of such delinquent taxes is an instrumentality of the states and their subordinate municipalities; that a federal tax places a burden on such municipalities preventing them from selling all or a greater portion of their delinquent tax certificates, thus impeding the collection of their revenues; that the imposition of the federal tax with its gradually progressive surtax rates on interest received by purchasers of delinquent taxes from municipalities tends to discourage the purchase of such delinquent tax certificates and creates a burden on the counties and municipalities by making it more difficult for them to obtain money for operating expenses; and that, if the interest received by purchasers of such delinquent tax certificates was not subject to federal taxes, they would purchase larger amounts of such certificates, thereby placing more money in the treasuries of the counties and municipalities enabling them to meet their financial needs without resort to the issuance of tax notes or bonds at interest to raise funds to meet the deficiency.
The defendant contends that the plaintiff was not an instrumentality of a state or political subdivisions thereof in his purchases of delinquent tax sale certificates, that the certificates for delinquent taxes sold are not instrumentalities of political subdivisions of states, and that the federal tax on the income received by plaintiff from dealing solely for personal gain in delinquent tax sale certificates does not impose upon the counties or municipalities making the sale such a direct burden upon their strictly governmental functions as is prescribed by the Constitution.
Special findings of fact:
1. Plaintiff, a resident of Rochester, N.Y., is an attorney at law, and a part of his business is that of an investor in delinquent real estate tax sale certificates. March 12, 1929, he filed his income tax return for 1928 with the collector at Buffalo and reported thereon a net taxable income of $50,019.05 on which he paid a tax of $13,997.63 in installments of $3,499.41 each on March 12, June 11, and September 10, 1929, and $3,499.40 on December 11, 1929. The income of plaintiff, the taxability of which is involved in this proceeding, was as follows:
Total interest received on delinquent tax sale certificates in 1928 ......................... $435,652.01 Total interest paid for borrowed money at banks and from others with which to carry said delinquent tax sale certificates, which item is a proper and legal deduction from gross income .................... $287,855.57 Operating costs and expenses in placing and handling these investments, not including rent, clerk hire, and other expenses shown as deductions in schedule A, which item is a proper and legal deduction from gross income .................... 23,291.81 ___________ Total .......................................... 311,147.38 ___________ Net ............................................ $124,504.63
Of the net income of $124,504.63 reported in the return, $7,852.46 represented income received from the purchase by him of delinquent tax sale certificates from the District of Columbia, which income is conceded to be taxable and is not involved in this proceeding. The tax sought to be recovered is that which was paid on $116,652.17 received on delinquent real estate taxes purchased by plaintiff from municipalities other than the District of Columbia.
May 5, 1930, plaintiff filed a claim for refund of the tax paid upon his net income derived from the purchase by him of delinquent real estate tax certificates from municipalities. This claim was rejected by the Commissioner of Internal Revenue March 10, 1931.
2. There are several methods by which counties and municipalities may raise funds with which to maintain their organizations and carry on their functions, among which are the borrowing of money on long and short term bonds and tax anticipation warrants, and the levying of taxes on real estate and personalty. Municipalities employ various means to collect or realize on such taxes as remain unpaid and delinquent at the end of the fiscal year. Most of them employ the method of selling the delinquent taxes for the amount of the tax which constitutes by law a first lien upon the property of the taxpayer and carries interest from 10 to 12 per cent. until paid, and issuing, upon such sale, a certificate to the purchaser of the delinquent tax under which the lien, and the right to interest until the amount is paid, is transferred to the purchaser.
A second method is foreclosure by municipalities of the tax lien. Many charters provide for both methods. Annual tax sales have proven to be not only a speedy but the most effective aid to the collection of taxes by municipalities. Without the aid of such tax sales the volume of delinquent taxes would constantly increase, making the problem of municipal financing more difficult.
3. A real estate tax levy on a particular piece of property is assessed, levied, and established by assessors and by some enabling, confirming authority, such as a board of aldermen or councilmen. On confirmation of the tax levied by such authority, the tax levied and assessed becomes a complete, absolute, and first lien on the property. If it is not paid to the tax-collecting official during the period allowed for voluntary payment, generally one year, charter provisions and laws provide for an annual sale of the tax, together with first lien and the right to receive interest until paid. Such provisions of law direct the proper official of the municipality, after properly advertising, to sell the tax to any buyer under the terms provided for conducting such sale.
By the process of sale there is no change in the tax and its lien, and the transfer of ownership from the municipality to the buyer is not a process that changes the character of the lien against the property. It is the same after the sale as it was before so far as the property and the owner are concerned. The tax continues to bear the interest provided by law which, after the sale of the delinquent tax, belongs to the purchaser. The amounts of the tax and the nature of the lien continue the same, and the owner and lienors and the uses of the property continue unchanged. In other words, upon the payment by purchaser to municipalities of the amount of the delinquent tax he acquires all rights and privileges of the municipality with respect to the tax, the lien, and the interest. The municipality and its officials are legally obligated to give the purchaser of the delinquent tax a valid contract on a valid and legal tax levy and are legally obligated upon sale to accept the money from the purchaser of the delinquent tax and to pay over to such purchaser such tax and interest thereon provided by law, if paid to the municipality by the person against whom levied during the redemption period. The arrangements under which the municipality sells the delinquent taxes are that its tax collecting officials receive from the taxpayers or property owners payment of the delinquent taxes sold and interest thereon and, in due course, turn same over to the person who has the delinquent tax. There is no other method provided for payment by the property owner during the period of redemption. The municipality acts as the agent of the purchaser in the collection of the tax and interest during the period of redemption. Appropriate entries are made upon the records of the municipality of payments made in respect of taxes which have been sold, and such payments are held by the municipality in a fund designated as "Tax Redemption Fund" until the period of redemption expires, at which time the amount paid is turned over by the city to the purchaser of the delinquent tax. If the entire tax levied and assessed and the interest provided by law is fully paid, the purchaser, upon delivery of the amount by the municipality, surrenders a certificate of sale issued by the municipality and the lien upon the property is canceled upon the records of the municipality. There are certain financial and legal obligations on the part of the municipality in connection with the sale of such delinquent taxes. If the tax is invalid from erroneous assessment or otherwise, the municipality is legally bound to make refund to the purchaser of the delinquent tax of the amount paid. It is also legally bound to pay over to the purchaser of the delinquent tax the amount of payments made to the municipality by the owner or person interested in the property against which levied, even though the tax-collecting official defaults or fails to perform his duties. The municipality is also legally obligated to maintain and defend the validity of the delinquent tax sale certificates.
4. In view of the provisions of law with reference to the collection of taxes by the municipalities through foreclosures, the annual sale of delinquent taxes and the issuance by the municipalities of certificates therefor in the year in which the tax is levied appear to have many advantages in the collection of delinquent real estate taxes. It provides municipalities with immediate funds with which to take care of their budgets. Such sales tend to discourage delinquencies and hasten the taxpayers in making payments of their taxes, inasmuch as foreclosure of the lien and sale of the property are more certain after the tax has been sold if the tax and interest are not fully paid within the statutory redemption period. The purchaser of delinquent taxes is not subject to political influence which may embarrass tax-collecting officials of municipalities in their endeavor to collect taxes which have been levied and assessed.
The sale of delinquent real estate tax sale certificates is also of advantage to the municipality in that the money derived therefrom does not carry interest as in the case of direct borrowings and through the reduction of its real estate tax receivable accounts on its books through the medium of sale of delinquent taxes, and the credit standing of the municipality is correspondingly enhanced. The sale of delinquent tax sale certificates to purchasers of delinquent taxes has been an important means by which municipalities have obtained funds to maintain their existence, pay their obligations, and exercise their governmental functions. Except for the sales of certificates for delinquent taxes, municipalities which have this authority and follow this practice would, in many instances, be compelled to increase the amount of their indebtedness through the issuance of interest-bearing obligations.
5. The business of investing in delinquent real estate tax sale certificates is a specialized one and delinquent tax sales ordinarily attract a small group of large investors as opposed to a large number of small investors. The factors entering into the purchase of certificates of municipalities for delinquent taxes are the volume of such delinquent taxes to be sold at any one sale, the rate of interest provided by law, the refund act which will permit the investor to obtain a refund of the amount paid to the municipality in the event of any irregularity or error, the statutory remedy, such as a provision for an ultimate tax deed in the event the property owner should fail to redeem the property by payment of the tax, interest, and costs within the redemption period, the moral tone of the municipality or locality, whether the citizens thereof have a reputation for prompt payment of their taxes, whether they are law abiding, and the responsibility of the owner of the property upon which the first lien for the taxes exists.
6. During the past four or five years, and particularly during the past two years, the amounts of delinquent real estate tax sale certificates available for purchase and offered for sale have greatly increased. If it should be held that interest and income received by purchasers of delinquent taxes to whom certificates of such sales are issued by the municipalities were exempt from federal income taxation, investors in delinquent real estate tax sale certificates would, by reason of the larger yield on their investments, be afforded an inducement to increase the amount of their investments. In so far as the municipalities are concerned, however, the net amount which they would realize on each item included in their respective sales of delinquent taxes would remain unchanged, regardless of whether the interest and the income received by the purchaser of such delinquent taxes therefrom were subjected to or exempt from federal income taxation. The amounts invested by purchasers of delinquent tax sale certificates are naturally influenced by the attractiveness of the investment for any given period, and the present difficulty in selling delinquent real estate taxes is probably in a large measure attributable to the fact that investors consider such investments more hazardous than they did several years ago.
7. In 1928 plaintiff's principal investments in delinquent tax sale certificates were made in the cities of Buffalo and New York and in the counties of Erie, Monroe, Nassau, and Suffolk, in the state of New York, and in the cities of Detroit, Mich., and Washington, D.C., and in various towns in New Jersey. His purchases of delinquent tax sale certificates have varied from year to year, but for many years they have averaged several million dollars annually. In 1927 they mounted to $5,293,234; in 1928, $4,364,189; in 1929, $3,116,720; and in 1930, $4,975,552. The income derived from purchases of delinquent tax sale certificates from these various municipalities is the interest provided by the charters and the laws of the various municipalities to be paid on redemption of such tax sale certificates after they are sold by the municipalities or counties. The average rate of interest allowed is from 10 to 12 per cent. per annum as a running rate.
Plaintiff borrowed considerable sums of money with which to invest in these delinquent tax certificates and paid 6 per cent. interest to banks and others for loans with such tax sale certificates as collateral security. The difference between the interest received, the interest paid, and other allowable deductions constituted his net income.
A purchaser of delinquent tax sale certificates is under no obligation to any city and he receives no compensation therefrom. The only function of the counties or municipalities selling such delinquent taxes, as far as the purchaser is concerned, is as a conduit through which such money and interest as may be paid by the taxpayer to the tax-collecting official of such county or municipality during the redemption period comes back to the purchaser. The purchaser of the delinquent taxes pays all of his own expenses. He purchases only those delinquent taxes which appear to him to be an attractive investment. It is not necessary that he appear at any tax sale by any municipality. He was not an officer or employee of any county or municipality and does not claim to have been. The plaintiff did not purchase all items of delinquent taxes but only carefully selected items; such selection being based upon a careful examination previously made of various facts affecting each item. A few days in advance of the announcement of the annual tax sale in each city or town, plaintiff had local experts prepare in tabulated form schedules of unpaid taxes and properties offered for sale; such schedules setting forth assessed values for land and buildings, separately, and all unpaid taxes, whether general, special assessments, or of other character. Such examination work is expensive and requires experience and skill. This work is performed by such examiners from the official records in municipal offices. Assessed valuations are accepted by plaintiff as a conservative appraisal of values. The schedules are carefully examined and studied by experts in plaintiff's office who select items regarded from experience and fixed rules of operation as safe for investment.
In more than thirty years' experience of investing in delinquent tax sale certificates, plaintiff has never refused to sell a certificate for delinquent tax purchased by him back to the property owner, even after the period of redemption had expired. During this period he has never required any person to take an irredeemable tax claim into court for adjudication and has never had a decree rendered against him setting aside or declaring invalid such an irredeemable tax claim. It has been plaintiff's invariable practice to sell and to transfer or quitclaim such irredeemable tax claims for their face amount, charter interest, and small charges to cover incidental expenses and a small profit.
Plaintiff's assistants and clerks had a schedule according to which prices for such sales were computed. There is always included accrued interest from the date of the tax sale through the period of redemption at the rate provided by the charter. Such interest accrues as a running rate. In addition there is charged interest for the elapsed period after expiration of the redemption period and, in addition, a flat charge is made to cover incidental expenses, cost of preparing and transmitting papers, and a small profit proportioned to the amount involved and the attendant circumstances. The difference between the initial purchase price paid by plaintiff and the final selling price comprises the gain derived by him in such cases and reported as income.
There is ordinarily no means for an investor to secure tax sale certificates other than dealing directly with the municipality. They are assignable, but plaintiff has never assigned any of the delinquent tax certificates purchased by him. He uses them as collateral security for bank loans. He transacts business with six different banks in Rochester, N.Y. For many years they have loaned him an average of 80 per cent. on such collateral.
8. In Detroit the rate of interest for the two years allowed for redemption from the date of sale, June 1 each year, is 10 per cent. per annum as a running rate. Real estate taxes of that city are payable July 1, each year. If not paid at the end of eleven months, on June 1 of the following year, the city treasurer, pursuant to the city charter, sells the tax on the specific real estate against which levied after having advertised the sale of the tax as required by the charter. From the date of sale until redemption, interest at the rate of 10 per cent. per annum is charged and collected by the treasurer. On the date of sale the city treasurer issues to the purchaser tax certificates countersigned by the comptroller of the city which are entered in his official records showing the sale. This certificate is transferable by assignment. Property owners and interested parties are not informed of such tax sales except by public advertisement, and, except as shown by the records of the city which are open to the public for examination, the taxpayers or owners of the property know nothing of the sale. During the redemption period of two years after the sale, the property owner pays his tax, interest, and any other charges thereon to the treasurer's office of the city the same as though it had not been sold. Such payments must be for the amount for which the tax was sold, plus interest at the rate provided by law for the elapsed period of time. After official computation of the amount due, an official receipt is given by the city treasurer and such payment is entered in his books of records canceling the sale by the city, redeeming the property, and clearing it on the records of the lien for the tax. The tax and interest paid are credited by the treasurer to a general redemption fund. The redemption period during which the tax and interest may be paid to the city treasurer ends upon the expiration of two years from the date of sale of the delinquent tax by the city. The property owner or party interested therein can then no longer make payment through the office of the city treasurer, but must make payment directly to the purchaser of the delinquent tax certificates under other provisions of the city charter by purchasing the tax certificates by assignment or transfer and returning or surrendering them to the city treasurer for release and cancellation of the lien for the tax upon the books of the municipality. If the taxpayer or the owner of the property, or other interested party, entirely neglects to pay the taxes and interest, the city charter provides for the issuance of a tax deed to the purchaser of the delinquent tax upon notice.
During the past four years, from 1928 to 1931, inclusive, the city of Detroit has offered for sale $33,000,000 in delinquent taxes at the annual sales; delinquent taxes to the amount of $15,000,000 were sold to individual investors, and the balance of about $18,000,000 was purchased by the city. As a result of the inability of the city to sell for cash a greater amount of such delinquent taxes, it became necessary for the city to borrow approximately $8,000,000 by means of a bond issue at a cost of about $1,000,000 for interest.
9. The procedure in Buffalo, N.Y., is similar to that in Detroit, though there is no limitation upon the redemption period. Taxes in Buffalo are payable July 1 of each year. The annual tax sale is held eleven months later, at the end of May, after public advertisement. The rate of interest is 12 per cent. per annum. Tax sales are held by assessors instead of by the city treasurer. Tax certificates are issued to the purchaser of the delinquent taxes after sale and are used by plaintiff as collateral for loans from banks.
Property owners and others interested are not advised of such sales except by public advertisement in newspapers and by records in the office of the assessor. Every owner of real estate is presumed to know of the annual tax to be paid. The right to make payment of the tax, plus 12 per cent. interest through the city treasurer's office is perpetual. The city assessor renders tax bills to property owners on request after the tax has been sold in the same manner as such bills are rendered prior to sale. On payment of the tax and interest due, appropriate entry is made in the records of the municipality and the lien is released and canceled. The purchaser of delinquent tax receives the amount paid to the city officials.
10. The procedure in Erie, Monroe, Suffolk, and Nassau counties in New York, and in all other municipalities where the plaintiff invests, is substantially the same. There is always a tax-collecting official of the county or municipality conducting an annual tax sale, followed by the issuance of a delinquent tax sale certificate under his signature and, frequently, that of a comptroller in addition, together with official seals, in the same manner as in the case of a bond. No notice is given to property owners or other interested parties with reference to tax sales except by public advertisement in newspapers and the official records. Payment of the tax can be made at any time during the period of redemption, averaging from two to three years, or perpetually, according to the charter. During the redemption period payment is made directly to the tax collector or treasurer, who keeps all the records. Such payments are placed in a general redemption fund and turned over by that official to the purchaser of the delinquent tax. When the tax and the interest have been paid in full of the sale and the lien, an entry is made upon the official records showing that the tax has been fully paid, and the lien upon the property is canceled. The purchaser of the delinquent tax makes payment to the county or city official at the time of the sale and receives a certificate. In turn he receives from such official all amounts thereafter paid on account of the tax and interest at the time of payment, and, upon satisfaction of the amount due, the purchaser of the delinquent tax surrenders to the county or city official the certificate of sale issued to him.
During the period of redemption the purchaser of the delinquent tax sale certificates does not communicate with or have any relation with the owner or other party interested in the property on which the tax is a first lien. During this period his relations are with the county or municipal tax collector and the official who sold the tax. The duties of these officials are defined by law or by charter. Their books are public records. They make computations of the amount due from the taxpayer on account of the tax and interest, give official receipts on payments, and enter the amounts thereof upon the official records. The purchaser of the tax sale certificates does not take possession of the property at any time or collect rents, profits, or other revenue therefrom.
Whether tax liens in respect of taxes which have become delinquent are purchased by outsiders or by the counties or municipalities for lack of a purchaser, all terms and conditions affecting the delinquent taxes sold and the liens, whether owned by a private purchaser or by a county or municipality as a nominal purchaser, are the same. The tax sale accomplishes a change in ownership of the tax, the interest, and the lien, but it does not change their nature, quality, or character. The owner of the property involving a delinquent tax sale may redeem it at any time in the following year by payment of the amount of tax plus interest for the length of time it has been running. If, however, the property owner does not redeem the property from the tax sale by the payment of tax and interest, the purchaser of the tax sale certificate may purchase it again for the following year. In those jurisdictions having fixed statutory periods of redemption, the purchaser of the delinquent tax sale certificate may, at the expiration of the period, obtain a tax deed covering the property by complying with the requisite statutory formalities.
11. During the period allowed in the charter for redemption the purchaser of the delinquent tax has no enforceable rights against the property or the owner thereof. He is only entitled to receive the amount sufficient to redeem the property with interest from the tax-collecting official when, as, and if paid by the owner or other interested party. The relations between the tax-collecting official and the party who pays the tax continue the same during the period of redemption as prior to the sale. After the period of redemption allowed by charter and law has expired, the owner of the property or other party interested has no right whatever to make payment of the tax, interest, or other charges in any office or to any official of the county or municipality. The right to pay the tax and other charges to the tax-collecting official terminates upon the expiration of the period of redemption. Thereafter the owner of the property or other interested party must deal with the holder of the delinquent tax sale certificate. From and after the date on which the period of redemption expires, the holder of the delinquent tax sale certificate owns an inchoate or an absolute title to the property according to the provisions of the charter or laws respecting the particular county or municipality. In such cases the only remedy which the owner of the property has is to purchase the tax title or lien, thereby acquiring by purchase the delinquent tax sale certificate or a quitclaim deed from the owner of the delinquent tax sale certificate. The owner of the property, however, may institute suit in equity attacking the validity of the tax claim to have it removed as a cloud on his title.
12. In Buncombe county, N.C., all taxes become first liens against property on June 1 of each year and on the first Monday in June, one year after the tax becomes a lien, all unpaid taxes are sold and tax certificates are issued therefor. The county of Buncombe is usually the purchaser at these sales. There are very few instances where individuals, firms, or corporations purchase these certificates at the first sale.
In 1927, section 8026 of the Code of North Carolina gave the counties and cities of that state the right to transfer delinquent tax sale certificates to any person, firm, or corporation by assignment. Persons purchasing these certificates are governed by chapter 221, Public Laws of 1927, and amendments thereto. They have the same rights that counties and cities have in respect to foreclosures of the lien. The interest rate charged on delinquent taxes is fixed by statute and cannot vary after the certificate of sale of the delinquent tax is made. Purchasers of the certificates are required to hold them sixteen months before they are allowed to foreclose under the lien, and they must foreclose within twenty-four months.
After suit for foreclosure is instituted, any interested party, not being a party to the suit, has six months from the date of the complaint in which to redeem the property or pay the taxes, interest, and charges. After six months from the date of the complaint, judgment is taken and a commissioner is appointed to sell the property after four consecutive public advertisements. Twenty days after the commissioner's sale, a deed is made to the highest bidder, whereupon the sale comes before the court for confirmation. After confirmation there can be no redemption under the laws of the state. Counties and cities in the state of North Carolina have no authority to postpone foreclosures longer than twenty-four months from the date of sale of the delinquent tax or after the tax becomes delinquent. In many cases in Buncombe county, when firms or individuals purchase delinquent tax sale certificates, an agreement is made between the purchaser and the person against whom the certificate is issued to postpone foreclosure proceedings. This gives the taxpayer a longer period within which to raise the necessary funds to pay the tax, interest, and other charges.
The four principal methods by which the county of Buncombe, N.C., finances its activities are (1) assessment and collection of the taxes on property; (2) sales of delinquent tax certificates; (3) collection of court costs in various suits instituted in the county; and (4) the issuance of bonds, notes, or other evidence of indebtedness.
In 1930 the county of Buncombe sold $100,000 of the delinquent tax certificates for 1929. Had it not been for the sales of these tax certificates, the county would have defaulted at that time on its interest payment on its bonds. Since that time the county has been unable to sell these delinquent tax certificates, and is now, in 1933, in default in respect of the interest on its bonds. Unless the county is able to collect the amounts due in respect of the delinquent taxes on the certificates to the county as purchaser or to sell these delinquent tax certificates, it will be necessary for it to incur great expense in prosecuting foreclosure proceedings for collection of the delinquent taxes. During 1928 foreclosure proceedings by the county of Buncombe cost it approximately $5,000 in addition to court costs and sheriff's fees.
13. In March, 1931, the city of Asheville was in financial difficulties. It had a bond indebtedness of $15,700,000 and a note indebtedness of about $7,525,000. It was necessary for the city to raise funds with which to carry on its functions, and a conference was had with its note holders, and the committee thereof assured the city that it could finance itself until June, 1931, and that it would receive the continued co-operation of the committee. In March, 1931, the city arranged to sell at private sale approximately $100,000 of its delinquent 1929 taxes to a private corporation. The proceeds were used to pay salaries of necessary officers and employees and to pay debts and other charges to prevent default. Salaries were more than two months in arrears. At that time there was no other way by which the city could have financed itself. The purchase of the delinquent tax certificates by the private corporations in March, 1931, was of inestimable value to the city, by reason of the fact that, by thus avoiding default at that time, the city was enabled to reach an agreement with the note holders by which they reduced the interest rate from 6 per cent. to 4¼ per cent. and subsequently renewed them for a period of five years.
14. The county of Cook, in the state of Illinois, in which Chicago is located, has a large delinquent tax list. For 1928 and prior years the delinquent taxes amounted to approximately $100,000,000. The amount of $69,000,000 was advertised at the sale of delinquent taxes for 1929. Of this amount objections were raised to the validity to the extent of $54,000,000. Delinquent taxes to the amount of $15,000,000 were offered for sale; only the amount of $72,000 was sold.
Since 1929 there have been no private purchasers of delinquent tax sale certificates in Cook county, due to their inability to obtain funds to finance the purchase of delinquent tax certificates in competition with other securities, particularly tax-exempt securities. It became necessary for the city of Chicago to pay its school teachers in scrip, and most of its employees have been paid only at intervals since January, 1931. On November 17, 1931, the city was delinquent to the extent of at least $170,000,000.
During 1932 the delinquent taxes offered for sale by Cook county were in excess of $150,000,000.
In so far as the question presented in this case is concerned, plaintiff was engaged in the business of purchasing from counties and municipalities delinquent real estate taxes annually advertised and offered for sale by such counties and municipalities; such delinquent taxes constituted under the laws of political subdivisions of states first liens on the real property of the taxpayer and carried legal interest of from 10 to 12 per cent. per annum. Upon such sales the county or municipality making the sale issued, by its authorized official, certificates of such sale and of the lien to the plaintiff. In each instance plaintiff or other persons purchasing such delinquent taxes and liens paid to the county or municipality the amount of the tax and his profit in the transaction, and the income, the taxation of which is involved in this proceeding, consisted of the interest provided by law and received from the taxpayer upon the payment of the tax or upon the foreclosure of the lien. It is earnestly urged by counsel for the plaintiff and by counsel who have filed briefs amicus curiæ that purchasers of delinquent tax sale certificates are instrumentalities of counties or municipalities selling such delinquent taxes; that such sales of delinquent taxes are not only the most speedy but by far the most effective aid to the collection of taxes yet devised in municipal charters; that such sales are strictly a governmental function; and that the only alternative available to the county or municipality to raise funds to carry on its operations would be to issue long or short term bonds or tax anticipation warrants, which would be expensive because of interest obligations incurred and because the issuance of each such issue would weaken the credit of the municipality for future borrowings. It is also earnestly urged upon the court that it is incorrect to refer to the purchase of the delinquent tax and the lien therefor, upon the property of the taxpayer for the payment of the amount of the delinquent tax, as a sale, since, what actually happens is, the city really borrows money on the tax liens created by its assessments and that, in effect and practice, a delinquent real estate tax sale certificate represents a loan by the purchaser of the delinquent tax secured by the lien to the county or municipality for an indefinite period of time with a first lien against specific property, that the imposition of a federal tax upon the gain derived by the purchaser of such delinquent taxes would constitute a direct and substantial burden upon the county or municipality in the collection of revenue, a governmental function of the highest type, and that the plaintiff, in purchasing these delinquent taxes, not only became a means or instrumentality of the municipality, but performed the very important function so intimately connected with the exercise of the power of the municipal government to lay and collect taxes that any taxation of income arising from the transaction is such an interference with the functions of the government as plainly to be beyond the taxing power of the United States.
Upon a careful consideration of the facts and circumstances disclosed by this case, we are of opinion that the imposition of a federal tax upon the income derived by plaintiff through the purchase of such delinquent taxes does not result in a direct burden upon a governmental instrumentality, and that there is only a remote, if any, influence upon the exercise of the functions of the government. The federal tax in question on the income received by plaintiff from dealing solely for personal gain in delinquent tax sale certificates purchased from counties and municipalities does not, we think, impose such a burden on any subdivision of a state as falls within the implied constitutional prohibition against taxation by the federal government of agencies or instrumentalities of a state or political subdivision thereof. Metcalf Eddy v. Mitchell, 269 U.S. 514, 523, 524, 46 S. Ct. 172, 70 L. Ed. 384; Willcuts v. Bunn, 282 U.S. 216, 51 S. Ct. 125, 130, 75 L. Ed. 304; Group No. 1 Oil Corp. v. Bass, 283 U.S. 279, 51 S. Ct. 432, 75 L. Ed. 1032; Indian Motorcycle Co. v. United States, 283 U.S. 570, 51 S. Ct. 601, 75 L. Ed. 1277; Marland v. United States (Ct.Cl.) 3 F. Supp. 611, decided June 5, 1933. It is firmly established that the federal government cannot impose a tax which directly burdens the operation of governmental functions within the degree which the decided cases have established, and the present case calls for a consideration merely of whether the facts in this case show that the tax in question is upon a governmental means or instrumentality, or imposes a direct and substantial burden upon a governmental function which falls within the prohibitive class. The implied constitutional prohibition against taxation by the federal government of agencies or instrumentalities of a state or its political subdivisions is limited to protecting the states, their agencies and instrumentalities, in the performance of their strictly governmental functions against substantial interference through taxation. All of the decided cases, and particularly those of recent date, make it clear that a tax offends the implied constitutional prohibition only if it is imposed directly upon a government instrumentality, or, even though not so imposed, its effect is to place a substantial burden upon the exercise of a governmental function. Metcalf Eddy v. Mitchell, supra; Willcuts v. Bunn, supra; Indian Motorcycle Co. v. United States, supra; Group No. 1 Oil Corp. v. Bass, supra.
In the present case the plaintiff made an outright purchase of the delinquent tax which carried with it a first lien upon real property of the taxpayer and also interest at a high rate from which he derived his gain. After the purchase he was the owner of the tax claim and the lien and entitled to the interest. He realized his profit at no cost to the municipality. Upon sale by the municipality it simply received the amount of the delinquent tax at an earlier date than it would otherwise have received it, but its direct interest there ceased. The purchaser of the delinquent tax, with the view of thereafter deriving a gain from the collection of such tax and interest thereon secured by a first lien upon real estate, is, we think, in no different position as concerns the municipality than a purchaser of any other character of property from a municipality. In Group No. 1 Oil Corp. v. Bass, supra, a lessee of oil lands belonging to the state of Texas was held taxable upon income derived from the oil extracted from the lands so leased on the ground that the lease under the law of that state constituted a sale of the oil in place. In Willcuts v. Bunn, supra, the court held that a federal tax imposed upon the profit derived by a purchaser of municipal securities did not result in a direct burden upon a governmental instrumentality and that there was only a remote, if any, influence upon the exercise of the functions of the government. We are unable to discover any distinction in principle between those cases and the instant case. In Marland v. United States, supra, we held that a gain derived through dealing in property or an interest therein acquired from a state, whether acquired in the form of a lease or by purchase, does not fall within the implied constitutional prohibition against taxation. The purchaser of a delinquent tax secured by a first lien on real estate is not, in our opinion, more intimately connected with the municipality than was the lessee from the state of Texas. Group No. 1 Oil Corp. v. Bass, supra.
It is insisted that the sales of delinquent taxes are conducted for the benefit of municipalities and not for the benefit of the investor in such delinquent taxes, and that, when the municipality discovers a marked decline in revenues from such tax sales, particularly in times like the present, the burden is "real, not imaginary; substantial, not negligible," as was said by the court in Willcuts v. Bunn, supra. But this decline in the amount of revenue coming in to the treasury of the municipality and the resulting burden might equally result from the imposition by the federal government of a tax on the general income of taxpayers who are citizens of the various counties and municipalities concerned. It may be that, if the profits derived from the purchase of delinquent tax sale certificates were exempt from federal taxation, purchasers might purchase a larger proportion of the delinquent taxes annually offered for sale by counties and municipalities, but, in view of the nature of the transaction from which the purchaser of delinquent taxes derives his income, we think that fact would not render the federal tax upon the income of such purchaser invalid under the implied constitutional prohibition. In our opinion the burden complained of in this case on the county or municipality is too remote and indirect to render the tax invalid. The taxing power of either government, even when exercised in a manner admittedly necessary and proper, unavoidably has some effect upon the other.
Upon the whole, we are of opinion that the income of plaintiff was not exempt from taxation by the federal government, and the petition must therefore be dismissed. It is so ordered.
BOOTH, Chief Justice, did not hear this case on account of illness and took no part in its decision.