ANIEL WEBSTER, SPEAKING of George Washington's first Secretary of the Treasury, Alexander Hamilton, at a New York dinner 1 in 1831 praised this father of the Federal Government's fiscal strength in these words, "He (Alexander Hamilton) smote the rock of the national resources, and abundant streams of revenue gushed forth. He touched the dead corpse of the Public Credit, and it sprung upon its feet."

One could wish that it were as easy to raise abundant revenues in 1960 as it was in 1831. Today's billion dollar costs of government, however, has made the demand for the tax dollar so strong that there is hardly a source of revenue which remains untapped. Even the Federal Government itself must pay the tax collector. For, unlike the days of tax dollar abundance, tax exemptions for the agencies and instrumentalities of the sovereign have for the most part disappeared. Thus, our modern Navy faces many tax problems which were not problems for those commands of yesterday.

The payroll, social security and the old fashioned income tax are not the only tax concern of those in the Navy who are responsible for fiscal planning. The Federal manufacturer's excise tax, Federal retailer's excise tax, transportation taxes, communication tax and other Federal excise taxes must all be considered. addition to these Federal taxes, moreover, one cannot overlook the many State taxes which must be paid out of the Navy purse.

In

The Federal Manufacturers' Excise Tax. This tax is imposed on items specified in the statute, such as autos, auto parts, tires and tubes, gasoline and oils, cameras, matches, pens, mechanical pencils, lighters, musical instruments, radios, and televisions, refrigerators and air conditioning equipment, and sporting goods. The tax applies when the articles are sold or leased by the manufacturer, producer, or importer and This is one of the "hidden" are paid by him.

*Commander Arnold W. Eggen, USN, received his LLB from the University of Omaha in 1938. Commander Eggen is presently assigned as Head, General Tax Branch, Office of the Judge Advocate General. He is a member of the Nebraska bar, the Nebraska Bar Association and the American Bar Association.

1. Speech at Public Dinner at New York, 10 March 1831.

2. Internal Revenue Code of 1954, Sec. 4061-4226.

taxes of which we are usually unaware; for when we see the article on the shelf, the tax is already included on the price tag.

Of interest to the service is that this tax does not apply on articles which are sold for export nor on fuel supplies, ships' stores, sea stores, or legitimate equipment on naval vessels and military aircraft of the United States or foreign countries.

3

Federal Retailers' Excise Tax. The incidence of this tax attaches when title to the article passes from the retailer to the purchaser. This is the tax we see applied in our Navy Exchanges when we shop for jewelry, cosmetics, and luggage. It also applies to furs and fur articles. The tax is collected by the Exchange as a retailer and remitted to the United States Treasury.

Another application of this tax is to certain diesel and motor fuels. There is an additional provision that when the vehicle is used upon the highways, a higher rate of tax applies. This calls for close and detailed record keeping. As was indicated with respect to the manufacturers' excise tax, sales of special motor fuels for naval vessels and military aircraft are exempt.

toll telephone service from servicemen performing service in a combat zone. Other Federal Excise Taxes. There is a group of items on which a tax is levied which is similar to the Manufacturers' Excise Tax. On these, the tax is levied on the manufacturer and paid by him on products made for use or consumption in the United States. These taxes are on playing cards,10 alcoholic liquors," beer,12 and tobacco.13

Strange as it may seem, there are Federal occupational or licensing tax provisions from which our Exchanges, Clubs, and Messes are not exempt. If there ever was confusion on this point, it was laid to rest in the 1954 Code. The Report of the Senate Finance Committee says: In order to clear up doubts relative to the applicability to agencies and instrumentalities of the United States such as post exchanges, ships' stores, etc., of the occupation taxes imposed by Chapter 27 of the 1939 Internal Revenue Code, this section adds to the Internal Revenue Code a new section designated 3283 which expressly makes such taxes apply to such agencies and instrumentalities which are not specifically exempted therefrom by statute.

14

As a result, our Clubs, Messes, and Exchanges are retail dealers in liquor at $54.00 a year; in beer at $24.00 a year; 15 and have licenses to prove it. They pay $10.00 per year on each coin operated music and amusement (nongambling type) machine,10 and $20.00 each per year on bowling alleys, billiard and pool tables," if a charge is made for their use or money collected to pay pin setters.

There is a Federal Admissions' Tax 18 of $0.01 for each $0.10 or major fraction thereof; but the first $1.00 of any admission price is exempt, so a tax of this nature is not frequently encountered at Naval activities.

ALL OF THE TAXES referred to above emanate from one authority-The Federal Government-so it can be said this is one set of rules and one source of authoritative interpretations. Another set of rules comes from the State tax laws.

This is the situation in part. All 50 of the States have a gasoline tax and alcoholic bev

10. Ibid. Sec. 4451.

11. Ibid. Sec. 5001 et seq.

12. Ibid. Sec. 5041 et seq.

13. Ibid. Sec. 5701 et seq.

14. Ibid Sec. 5121(a).

15. Ibid. Sec. 5121 (b). 16. Ibid. Sec. 4461-4462. 17. Ibid. Sec. 4471-4473. 18. Ibid. Sec. 4231-4234.

erage tax of some sort; 46 of them have a tobacco tax; and 35 have a sales and use tax. In addition to these, there are numerous taxes of other kinds which sometimes touch on military activities. In the administration of all of these, there arises from time to time a question which is referred to the Department for resolution.

Starting with McCulloch v. Maryland,19 the Supreme Court has interpreted the United States Constitution as immunizing the United States, its properties, agencies and instrumentalities from State and local taxation. Since then, however, this basic concept has experienced significant judicial evolution or convolution. In Alabama v. King and Boozer,20 the court sustained a State sales and use tax holding that the legal incidence of the tax was on the "cost plus fixed fee" contractor not on the United States. Shortly thereafter in the KernLimerick case, 21 a contract clause made the contractor the agent of the United States in making purchases under a Government contract so that title vested immediately in the United States upon purchase. Since the State tax on the purchase was held in this case to fall upon the interest of the United States, the tax was held invalid under the McCulloch rule.

Most recently in a series of three cases,22 the Supreme court has permitted a State property tax on the possessory interest of one holding federally owned property for profit in a commercial enterprise; any such tax to be sustained, however, must not be discriminatory against the United States, nor can the legal incidence fall upon the United States. The fact that the United States ultimately bears the economic burden of a tax is of no consequence in this question of constitutional immunity.

CONGRESS CAN, OF course, waive any immunity of the United States through legislation and has done so to a certain extent. The Buck Act of 1947,23 permitted sales and use taxes and income taxes of State or local governments to apply within a Federal area. The United States, its instrumentalities, and authorized purchasers therefrom were, however, excepted from the levy of any such tax. Earlier than that, in 1936, the Lea Act 24-also known as the

19. M'Culloch v. Maryland, 17 U.S. (4 Wheat.) 316 (1819).

20. Alabama v. King and Boozer, 314 U.S. 1 (1941).

21. Kern-Limerick v. Scurlock, 347 U.S. 110 (1953).

22. See City of Detroit v. Murray Corporation of America, 355 U.S. 489. (1958).

23. 4 USCA 105-110.

24. 4 USCA 104.

Hayden-Cartwright Act-permitted the levy of State and local gasoline and motor fuels taxes on sales through Exchange Store filling stations located on Federal reservations, except where the sale was for the exclusive use of the United States.

Non-Appropriated Fund Activities have been held to be instrumentalities of the United States 25 and are, of course, entitled to the same immunities as such appropriated fund activities as commissaries, although their entitlement in this regard is not statutory. The Court in the Johnson case, supra, said that Post Exchanges as now constituted are arms of the Government deemed by it to be essential for the performance of Government functions.26 As will be observed from the citations in the footnote, such status is broadly recognized.

State Sales and Use Taxes. Such taxes are generally levied upon the retailer, and the tax attaches on the retail sale of a commodity. Here is an example which would not burden the instrumentality, itself, economically since it would in fact be passed on to the consumer. However, it is one that cannot be levied since the taxable incident is the sale by the Exchange and this being a Federal function is immune from such a levy.

An argument can be made for those States having a compensating use tax that the Government instrumentality should collect such tax from individual purchasers. Whether a retail sales tax law would permit this or whether the United States would tolerate the burden of reporting to and audit by the State, if such collection were demanded, is very moot, and the question has so far been avoided.

What has been said here may not be true of a concessionaire who is under contract for services with a Navy Exchange. The sales and use tax would ordinarily apply to him unless his contract provided that title to the merchandise sold passed to the Exchange and other contractual provisions supported the position that the Exchange, and not the concessionaire, was making the sale.

State Gasoline Tax. This tax, depending on State statute, can be levied either against the distributor or the retailer. In the first instance, the tax could, of course, easily be passed on to the United States. In the latter case, if

25. Standard Oil of California v. Johnson, 316 U.S. 481 (1942) (Army Post Exchanges).

26. Edelstein v. South Post Officers' Club, 118 F. Supp. 40. Nimro v. Davis, 204 F. 2d 734 (Civilian Cafeterias). Also Gen. 309 of 11 October 1956.

an Exchange Store filling station made the sale, there could be no tax except as was stated above. Congress waived the immunity of the United States in the Hayden-Cartwright Act so that sales through such outlets are taxable except when the fuel is used in official vehicles. Some States grant an exemption from local motor fuels' taxes on fuels used in United States-owned vehicles, and others grant the exemption only on nonpublic highway use. This latter exemption also involves a great deal of administrative detail. Generally, the tax is paid, but close records of mileage must be kept so at the end of the period a refund may be claimed for on-station use.

The

Intoxicating Beverages Tax. In most of the States, Clubs and Messes have an exemption from applicable liquor taxes. In approximately a dozen States, however, the tax is levied, and Clubs and Messes have been required to purchase the liquors in the particular State where the activity is located, subject to the tax. dozen States referred to include three where the most favorable terms which could be worked out resulted in the State applying the tax but granting a discount on the military purchases. In several others, a handling charge is levied which is less than the tax would be. This is an area where the local command is not free to negotiate with State authorities. DOD Instruction 4175.2 of 19 April 1956 reserves to Department of Defense representatives the authority to negotiate with monopoly States.

State beer taxes are generally levied on the brewer, wholesaler, or distributor; and the tax attaches either upon release from a brewery within a State, importation therein with intent to distribute, or upon distribution to the retailer which for purposes of this discussion would be the military activity. This is the type of tax which can usually be passed on to the military activity in the form of an increased price.

Through negotiation with authorities of almost all of the States, there has resulted an

27. Mayo v. U.S., 319 U.S. 441 (1943).

exemption from State taxes on beer sold to military activities. Either the beer is sold tax-free or the distributor pays the tax on all beer sold and files a claim for refund of taxes on that beer sold to military outlets. In this connection, it is quite proper for Navy Clubs and Messes to purchase beer from a Navy Exchange (Navy Exchange Manual, Para. 4144.2).

Cigarettes, Tobacco Products, and Soft Drinks Tax. State taxes on these items, as on beer, are imposed on the distributor and may as easily be passed on to the military consumer. Again, because of negotiations, there is no State in which such taxes are presently required. Due to the efforts of military representatives and of interested civilian friends of the services, an exemption has been obtained from those States adopting tobacco taxes for the first time; and where bills have been introduced in local legislatures to repeal such exemptions in other States, such measures have failed of adoption.

Perhaps contributing to such continuing success is the fact that by policy only tax-paid cigarettes are sold through vending machines; it being considered that identity of authorized purchasers cannot be controlled. Equally important is prompt handling of any reported abuse of the privilege of buying tax-free cigarettes whether by Reserve personnel on active duty or by authorized patrons and their dependents. Our position in this situation is particularly vulnerable, and it requires no particular proficiency in comprehension to appreciate the importance of complying with all established rules so as to preserve the privilege for all hands, for every year that legislatures meet the question is raised in two or three of them.

MILITARY PERSONNEL-Retired-Re-Retirement-Inactive Service Credits

The re-retirement concept as applied to retired members of the uniformed services by the Court of Claims (Bailey v. United States, 134 C. Cls. 471, Travis v. United States, 137 C. Cls. 148, and Seliga v. United States, 137 C. Cls. 710) to permit additional retired pay rights based on inactive time on a retired list or in the Fleet Reserve under Section 402 (D) of the Career Compensation Act of 1949, will be followed in similar cases involving re-retirements before October 1, 1949 (the effective date of the Career Compensation Act of 1949), where the members have elected to qualify for retired pay under Section 411 of the 1949 Act. 37 Comp. Gen. 31, modified. Comp. Gen. decision B-131700 of 3 September 1959.

MILITARY PERSONNEL-Navy Officers-Voluntary Retirement Under Public Law 86-155-Annuity Elections for Dependents-Changes and Revocations

The purpose of Section 3 of the Act of August 11, 1959, Public Law 86-155, concerning the effect of survivorship annuity option election changes or revocations by officers of the regular Navy or Marine Corps who are voluntarily retired under the 1959 Act was not to permit elections after retirement but was merely to change the 5-year limitation period in 10 USC 1431 (C). Therefore, Navy officers who are retired pursuant to the Act of August 11, 1959, may not after retirement change their survivorship annuity option elections.

A Navy officer who is retired for physical disability, although he might otherwise be eligible for voluntary retirement under the Act of August 11, 1959, Public Law 86-155, may not be regarded as having been voluntarily retired under the 1959 Act to come within the purview of Section 3 of the 1959 Act so as to change or revoke a survivorship annuity option election without regard to the time limitations in 10 USC 1431. Comp. Gen. decision B-140593 of 25 September 1959.

MILITARY PERSONNEL-Record Correction-Retirement-Effective Date for Retired Pay Purposes

The correction of records of an Army enlisted member to show the effective date of placement on the retired list as January 3, 1958, and continuation in an active duty status until such date because of failure to timely process the member's application for retirement does not change or abrogate the laws relating to retired pay. This is particularly true in the case of the uniform retirement date Act of April 23, 1930, 5 USC 47A, which requires that retirements take effect on the first day of the month following the month in which the retirement is effective. Therefore, the member must be regarded as being in a nonpay status for the period January 4, 1958 to the end of the month, and retired pay for that period is required to be refunded. Comp. Gen. decision B-139857 of 28 September 1959.

MILITARY PERSONNEL-Fleet Reservists-Active Duty After Retirement Training Duty

The provision in Section 208 of the Naval Reserve Act of 1938, as amended, which excluded the two months of obligated active duty in each 4-year period which Navy enlisted members were required to perform after transfer to the Fleet Reserve or Marine Corps Reserve for the purpose of recomputing retainer and retired pay based on active service after retirement or transfer, was effective until the repeal of Section 208 by the Act of August 10, 1956, so that such active duty performed prior to August 10, 1956, is not creditable to increase retired pay. However, in view of the definition of active duty in 10 USC 101 (22), as including "training duty" and "annual training duty," such training duty performed after August 10, 1956, by enlisted members after transfer to the Fleet Reserve or Marine Corps Reserve is to be regarded as active duty for increasing retainer or retired pay under 10 USC 1402 (A). Comp. Gen. decision B-139990 of 24 September 1959.

IN THE
THE years preceding World War II taxpayers were

able to invest in tax-free obligations of the United States, which included Federal savings bonds, United States Treasury bonds, Liberty bonds, and obligations issued by instrumentalities of the United States. Only the interest on up to $5,000 principal amount of United States Treasury bonds issued prior to 1 March 1941 was wholly exempt. Where husband and wife owned such bonds, both could claim the exemption. The interest on the principal amount over $5,000 was partially tax exempt in an amount equal to 3% of that interest, and it still is on these old bonds if a taxpayer does not use the tax table or claim the standard deduction. In addition to bonds, taxpayers could make deposits in Postal Savings and realize tax-free interest on the savings.

This did not particularly affect the Federal income tax of the ordinary wage earner, however, since personal exemptions were so high ($2,500 for husband and wife from 1933 to 1941) that he might not have a tax liability even if the interest were taxable. Because of the high rate of exemptions, generally low incomes, and very low tax rates, it can be said that for all practical purposes the interest income of the majority of inhabitants derived from notes, mortgages, and savings accounts escaped taxation.

The tax-free status of Postal Savings and Treasury bonds made them very attractive as incomes rose rapidly in the period just preceding the entry of the United States into World War II, but this status was to be short-lived for most Federal obligations. The Public Debt Act of 1941 made interest on United States obligations issued on and after 1 March 1941 includible in gross income. Interest on Postal Savings deposited before 1 March 1941 and United States Treasury bonds issued prior to that date retained their wholly or partially tax-exempt status. No change was made in the taxability of bonds issued by a State, Territory, or political subdivision thereof, and the interest on them has continued to be wholly tax exempt for Federal income tax purposes. This includes bonds issued by such Stateowned bodies as Port Authorities, Industrial Development Boards, Toll Road and Bridge Commissions, Utility Services Authorities, and other similar bodies created for furthering public functions.

Even though the interest of the United States Treasury bonds issued on or after 1 March 1941 became taxable, the bonds paid a rate of interest which, after deducting the Federal income tax, yielded as much or more as municipal bonds for taxpayers in the lowest tax-rate brackets. The reverse was true for individuals in the higher tax-rate brackets. The income tax burden on the small taxpayer did not assume too much importance while he remained in the lowest or lower income tax rates, but the income taxes on his bonds became a matter of real concern as incomes and tax rates increased.

IN ORDER to minimize the ultimate Federal income tax load, he began to look around for ways to defer or spread the tax burden. Several opportunities were available for this; some worked, but some did not. For example, a cash basis taxpayer could elect to report the interest each year. The redemption value was increased by the amount of interest so included and no interest income would be realized at maturity. An election once made applies to all bonds owned and to those subsequently acquired. This method was troublesome, it made the increment taxable at the high rates prevalent since the early World War II years, and completely defeated any hoped for plan of reporting the interest at a time when rates came down or income was low. As a consequence, the vast majority of Federal bond owners elected to use the more convenient method of reporting the entire increase as income at maturity.

Or, and this is true today, if the taxpayer has young children he can avoid all tax on the bonds by registering them in the name of a minor child at the time of purchase. By the time the child is ready for college, he can redeem them by signing his own name to the request for redemption. Any child who is old enough to understand the nature of what he is doing can sign the request. The income belongs to the child and, unless he elects to treat the annual increment as current income, it will be taxable when the bonds are redeemed. Therefore, the child should file a return and elect to report the interest each year. If the interest increment plus other income each year is less than $675, he will have no tax liability. Upon redeeming the bonds the entire increase in value. is received tax free. The family, as a unit, has thus derived tax-free benefit since the father, had he held the bonds and redeemed them for the child's education, would have been taxed on the interest.

Some taxpayers hoped to achieve this tax-free result by having the bonds issued to two persons, such as the taxpayer and his child, as co-owners and have the coowner with little or no income report the increment increase annually. This idea did not work, however, as each co-owner is taxable in proportion to the amount of purchase price contributed by each.

PARTICULARLY HARD hit has been the cash-basis

taxpayer who held his bonds in anticipation of cashing them at some future date, such as after retirement, when he might have little or no gross income and the income tax consequences on the savings bond interest which accrued through the years would be negligible or possibly nil. However, a number of events, such as inheritances, large retirement income, good fortune in investments, and success in the business world may have changed his future economic picture considerably-the bond interest might be taxed at a very high rate. He could have avoided this result by reporting his Federal savings