Mr. Paul Windels, of New York City (Messrs. Oscar S.C.ox and Paxton Blair, both of New York, City, of counsel), argued for the City of New York, as amicus curiae, by special leave of court.
[Argument of Counsel from pages 353-355 intentionally omitted]
Mr. Julius Henry Cohen, of New York City (Mr. John J. Bennett. Jr., Atty. Gen., of New York, and Mr. Henry Epstein, Sol Gen. of New York, of Albany, of counsel), argued for the State of New York, as amicus curiae, by special leave of court.
[Argument of Counsel from Pages 356-358 intentionally omitted]
Mr. J. Joseph Lilly, of New York City, for certain employees of the City of New York, amicus curiae.
Messrs. James H. Howard and Charles C. Cooper, Jr., both of Los Angeles, Cal., for certain employees of the Metropolitan Water District of Southern California, amicu curiae.
Messrs. Stanley Reed, Sol. Gen., of Washington, D.C., Robert H. Jackson, Asst. Atty. Gen., and Sewall Key, John Paul Jackson, and Berryman Green, Sp. Assts. to Atty. Gen., for respondents.
Mr. Justice SUTHERLAND delivered the opinion of the Court.
The question brought here for determination is whether the salary of petitioner as chief engineer of the bureau of water supply of the city of New York is a part of his taxable income for the purposes of the federal income tax law. The answer depends upon whether the water system of the city was created and is conducted in the exercise of the city's governmental functions. If so, its operations are immune from federal taxation and, as a necessary corollary, 'fixed salaries and compensation paid to its officers and employees in their capacity as such are likewise immune.' People of State of New York ex rel. Rogers v. Graves, 299 U.S. 401, 57 S.Ct. 269, 272, 81 L.Ed. 306 (January 4, 1937).
Petitioners holds his office as chief engineer by statutory authority, with a fixed annual salary of $14,000. He exercises supervision over the engineering details connected with the supplying of water for public purposes and for consumption by the inhabitants of the city; supervises the protection of the water supply from pollution; and generally exercises control over the operation of the water system, its personnel, expenditure of money, and other matters relating thereto.
In the early history of the city, water was furnished by private companies; but a century or more ago, the city itself began to take over the development and distribution. In 1831, the board of aldermen declared its dissatisfaction with the private control, and resolved that the powers then vested in private hands should be repealed by the Legislature and vested exclusively in the corporation of the city of New York. This, in effect, was initiated in 1833 (Laws 1833, c. 36); and, soon thereafter, the city constructed municipal waterworks, and, with slight exceptions, private control and operation ceased. The sources of water supply furnished by such companies as remain is approaching exhaustion, and the water furnished is of a quality inferior to that supplied by the municipality. From 1833 to the present time, additions to the water supply and system have been steadily made until the cost has mounted to more than $500,000,000; and it is estimated that additional expenditures of a quarter of a billion dollars will be necessary. The cost of bringing water from the Catskills alone amounted to approximately $200,000,000. The municipal outstanding bonded indebtedness incurred for supplying the city with water amounts to an enormous sum. More than half the entire population of the state is found within the municipal boundaries. The action of the city from the beginning has been taken under legislative authority.
The Commissioner of Internal Revenue having assessed a deficiency tax against petitioner in respect of his salary, petitioner sought a redetermination at the hands of the Board of Tax Appeals. That board sustained the commissioner and decreed a deficiency against petitioner of $256.27 for the year 1931. Upon review, the court below affirmed the decree of the board. (C.C.A.) 85 F.(2d) 32. While the sum involved is small, we granted the writ of certiorari because of the obvious importance of the question involved. 299 U.S. 536, 57 S.Ct. 190, 81 L.Ed. --.