Jefferson County, a Political Subdivision of the State Ofalabama, Plaintiff-appellant, v. William M. Acker, Jr., Defendant-appellee.jefferson County, a Political Subdivision of the State Ofalabama, Plaintiff-appellant, v. U.w. Clemon, Defendant-appellee, 61 F.3d 848 (11th Cir. 1995)

In this case, we decide whether a tax, imposed by a county government for the privilege of engaging in any occupation within that county and measured by the taxpayer's gross receipts, can be levied against an Article III judge.¹  The district court held that, as applied to federal judges, such a tax violates the intergovernmental tax immunity doctrine and the Compensation Clause of Article III. We REVERSE and REMAND.

As authorized by the Alabama state legislature, plaintiff-appellant, Jefferson County, Alabama, enacted a tax applicable to all workers who were not already subject to paying license fees at either the county or the state level. Variously styled as an occupational, license or privilege tax, Ordinance 1120 provides:It shall be unlawful for any person to engage in or follow any vocation, occupation, calling or profession ... within [Jefferson] County on and after the 1st day of January, 1988, without paying license fees to the County for the privilege of engaging in or following such vocation, occupation, calling or profession, which license fees shall be measured by one-half percent ( 1/2%) of the gross receipts of each such person.

Jefferson County, Ala., Ordinance 1120, Sec. 2 (Sept. 29, 1987) [hereinafter "Ordinance 1120"].²  When a person subject to the tax works both inside and outside Jefferson County, the ordinance requires the person to compute his or her tax based on the percentage of work performed within the county. Id. Sec. 3. The ordinance directs employers to withhold the license fees, to file returns on behalf of their employees, and to maintain records thereof for five years. Id. Sec. 4. Where an employer has failed to comply with the occupational tax provisions, employees remain responsible for paying the tax and for filing their own returns. Id. Failure to withhold or to pay the occupational tax may result in the assessment of interest and penalties, plus "punishment within the limits of and as provided by law for each offense." Id. Sec. 10.³ 

Defendants-appellees, the Honorable William M. Acker, Jr. and the Honorable U.W. Clemon, are federal district judges in the Northern District of Alabama, which encompasses Jefferson County. Both Judge Acker and Judge Clemon have their principal offices in Jefferson County. With the exception of Judge Acker and Judge Clemon, all active judges in the Northern District of Alabama have paid their occupational taxes based on differing percentages of their salaries⁴ ; additionally, all state district and circuit court judges in the Tenth Judicial Circuit of Alabama and the three Alabama Supreme Court Justices with satellite offices in Jefferson County have paid their occupational taxes based on portions of their salaries. During their tenures as federal judges, both Judge Acker and Judge Clemon have paid their state income taxes. Notwithstanding the frequently articulated boast that they reside in "God's country," the judges have steadfastly refused to "tithe."

When Judge Acker and Judge Clemon failed to pay their occupational taxes pursuant to Ordinance 1120, Jefferson County brought suit in state court to recover the delinquent taxes; Judge Acker and Judge Clemon removed the case to federal court. On cross-motions for summary judgment,⁵  the district court held that the license tax was "imposed directly upon a governmental function--the performance in the federal courthouse in Birmingham, Alabama of federal judicial functions. Those functions are the actual event taxed (the legal incidence of the tax)." Jefferson County v. Acker, 850 F. Supp. 1536, 1543 (N.D. Ala. 1994). Accordingly, the court ruled that the occupational tax, as applied to Article III judges, was a direct tax on the federal judiciary in violation of the intergovernmental tax immunity doctrine. Moreover, because the occupational tax "becomes effective even before the income is earned, and before it is paid, and before it is received," id. at 1546 n. 14, the court also held that the occupational tax diminished rather than taxed the judges' salaries, in violation of the Compensation Clause of Article III.⁶  The court granted summary judgment on behalf of Judge Acker and Judge Clemon. The county appealed.

The parties have not cited, and we have not found, any Supreme Court or Court of Appeals precedents addressing whether an occupational tax levied against Article III judges violates either the intergovernmental tax immunity doctrine or the Compensation Clause.⁷  Consequently, we apply the Supreme Court's general jurisprudence regarding the intergovernmental tax immunity doctrine and the Compensation Clause to the tax in question. We review de novo the district court's grant of summary judgment. Jaques v. Kendrick, 43 F.3d 628, 630 (11th Cir. 1995).

Rooted in the Supremacy Clause,⁸  the intergovernmental tax immunity doctrine is a core tenet of federalism that prevents either the federal government or the state governments from directly taxing the activities of the other. See generally United States v. New Mexico, 455 U.S. 720, 730-33, 102 S. Ct. 1373, 1380-82, 71 L. Ed. 2d 580 (1982) (describing the history of this " 'much litigated and often confused field' " (quoting United States v. City of Detroit, 355 U.S. 466, 473, 78 S. Ct. 474, 478, 2 L. Ed. 2d 424 (1958))). At the pinnacle of its application, the doctrine was interpreted to exempt federal employees from any state taxation. After its decision in James v. Dravo Contracting Co., 302 U.S. 134, 58 S. Ct. 208, 82 L. Ed. 155 (1937), however, the Supreme Court has upheld state taxation of federal employees except in instances of discriminatory taxes directed against federal employees or direct taxation of the federal government by the states:

" [U]nder current intergovernmental tax immunity doctrine the States can never tax the United States directly but can tax any private parties with whom it does business, even though the financial burden falls on the United States, as long as the tax does not discriminate against the United States or those with whom it deals." Absolute tax immunity is appropriate only when the tax is on the United States itself "or on an agency or instrumentality so closely connected to the Government that the two cannot realistically be viewed as separate entities, at least insofar as the activity being taxed is concerned."

California State Bd. of Equalization v. Sierra Summit, Inc., 490 U.S. 844, 848-49, 109 S. Ct. 2228, 2232, 104 L. Ed. 2d 910 (1989) (alteration in original) (citation omitted) (emphasis added) (quoting South Carolina v. Baker, 485 U.S. 505, 523, 108 S. Ct. 1355, 1366, 99 L. Ed. 2d 592 (1988) and New Mexico, 455 U.S. at 735, 102 S. Ct. at 1383); see also United States v. California, --- U.S. ----, ----, 113 S. Ct. 1784, 1788-89, 123 L. Ed. 2d 528 (1993); Davis v. Michigan Dept. of Treasury, 489 U.S. 803, 811, 109 S. Ct. 1500, 1505, 103 L. Ed. 2d 891 (1989). Thus, under the intergovernmental tax immunity doctrine, we must strike down Ordinance 1120 if it discriminates against federal employees⁹  or if it taxes the federal government directly.

A state tax does not discriminate unconstitutionally against federal employees if the tax is imposed equally upon similarly situated constituents of the state, see United States v. County of Fresno, 429 U.S. 452, 462, 97 S. Ct. 699, 704-05, 50 L. Ed. 2d 683 (1977), particularly, those constituents who are in privity with the state imposing the tax, see Davis, 489 U.S. at 815 n. 4, 109 S. Ct. at 1507 n. 4. The Jefferson County tax expressly includes within its scope elected and appointed officials at the municipal, county, and state levels. See Ordinance 1120, Sec. 1(C).¹⁰  Jefferson County has applied the occupational tax to state district and circuit court judges and to Alabama Supreme Court Justices serving in the county, and all of these state judges and justices have complied with the ordinance.

Significantly, the occupational tax does not discriminate against judges vis-a-vis other professions. The ordinance imposes a general tax, exempting only those workers who already are subject to state or county license fees. Cf. Fresno, 429 U.S. at 464-65, 97 S. Ct. at 705-06 (holding that a state tax imposed solely on lessees of land owned by tax-exempt entities is not discriminatory because the law leaves such lessees "no worse off" than tenants who rent from landowners who are taxed). Although employees subject to the Jefferson County tax in some instances may be taxed more than professionals subject to state professional fees, this slight difference in economic burden does not compel a finding of discrimination. There is no evidence in the ordinance of "crippling obstruction of any of the Government's functions, no sinister effort to hamstring its power, not even the slightest interference with its property." City of Detroit v. Murray Corp. of Am., 355 U.S. 489, 495, 78 S. Ct. 458, 462, 2 L. Ed. 2d 441 (1958). Thus, the occupational tax does not discriminate unconstitutionally against federal employees.

The Supreme Court has adopted a number of tests to determine whether a state tax falls upon the federal government directly, rather than upon a private individual dealing with the federal government. An individual's employment with the federal government is insufficient to transform that person into a part of the federal government for the purpose of the intergovernmental tax immunity doctrine. Instead, to qualify for tax immunity, the taxed entity must "actually 'stand in the Government's shoes,' " United States v. New Mexico, 455 U.S. at 736, 102 S. Ct. at 1383 (quoting Murray Corp., 355 U.S. at 503, 78 S. Ct. at 491) (separate opinion of Frankfurter, J., concurring in part and dissenting in part), or be " 'so intimately connected with the exercise of a power or the performance of a duty' by the Government that taxation of it would be ' "a direct interference with the functions of government itself," ' " id. (quoting James, 302 U.S. at 157, 58 S. Ct. at 219) (quoting Metcalf & Eddy v. Mitchell, 269 U.S. 514, 524, 46 S. Ct. 172, 174-75, 70 L. Ed. 384 (1926)).¹¹ 

In this case, the federal judges must pay the occupational tax out of their own resources. If the tax had been imposed upon the Eleventh Circuit or the Northern District of Alabama, then the ordinance would tax directly the federal government. Article III judges, however, are federal officers rather than " 'an arm of the Government,' " id. at 736-37, 102 S. Ct. at 1384 (quoting Department of Employment v. United States, 385 U.S. 355, 359-60, 87 S. Ct. 464, 467, 17 L. Ed. 2d 414 (1966)). The legal incidence of the occupational tax thus falls upon federal employees, not upon the federal government directly. Consequently, because Ordinance 1120 neither discriminates against federal employees nor taxes the United States directly, the county may apply the tax to Article III judges without violating the Supremacy Clause.

While the district court acknowledged that the economic burden of Ordinance 1120 was on the individual judges, it nevertheless concluded that the legal incidence of the tax was on the United States. The district court reasoned that a true income tax is laid upon the privilege of receiving income, which is the property of the taxpayer once it is received as compensation for his services. In contrast, a license or privilege tax is laid upon the privilege of practicing or engaging in one's trade, occupation or profession. Whereas an income tax levied on federal employees burdens the property of those employees, a license tax levied on federal employees burdens the functions of the federal government itself.

The district court concluded that

[t]he tax imposed by Ordinance 1120 is not an income tax as such is generally understood, nor is it any income tax under Alabama law. That is so because it is not, in fact, a tax upon the receipt of income, pay, or compensation ... but rather, is a license or privilege tax which finds its taxable event, or incidence, in the performance of a federal judicial function. Its incidence, thus, is upon the performance of judicial functions by a judicial officer, antecedent to the point that the salary therefor having been paid by the government becomes the property of the individual citizen of Alabama ... subject to the protection and benefits he receives as a citizen of Alabama.

Acker, 850 F. Supp. at 1547-48 (citations omitted). The court acknowledged that the occupational tax was measured by the judges' gross receipts; nevertheless, it held, "the actual event taxed (the legal incidence of the tax)" is the privilege of acting as a federal district judge. Id. at 1543. Hence, the tax constituted a direct tax on the United States, thereby violating the intergovernmental tax immunity doctrine.

Support for the view that Ordinance 1120 imposes a license tax rather than an income tax can be found in the plain language of the ordinance. The ordinance is entitled the "Occupational Tax of Jefferson County Alabama," and its stated purpose is to establish a "license or privilege tax on persons engaged in any vocation, occupation, calling or profession in Jefferson County who is not required by law to pay any license or privilege tax to either the State of Alabama or the County as set out herein." Ordinance 1120. The ordinance requires the payment of "license fees" and makes it "unlawful for any person to engage in or follow any vocation, occupation, calling or profession ... without paying license fees." Ordinance 1120, Sec. 2 (emphasis added).

Additionally, judicial interpretation of Ordinance 1120 and similar occupational taxes by the Alabama Supreme Court supports the claim that the Jefferson County tax is a license tax. The Supreme Court of Alabama has held that Ordinance 1120 was enacted pursuant to a state law "authorizing [counties] to impose a privilege or license tax." Bedingfield v. Jefferson County, 527 So. 2d 1270, 1274 (Ala.1988). The court has also held that a city ordinance similar to the one at bar imposed a license tax rather than an income tax. McPheeter v. City of Auburn, 288 Ala. 286, 259 So. 2d 833, 837 (1972). In McPheeter, the City of Auburn had imposed a tax upon the privilege of engaging in a trade, occupation or profession in the city and upon the privilege of using the city's facilities while so engaged; the tax was measured based on a percentage of each taxpayer's gross salary or wages. Id. 259 So. 2d at 834-35. The court reasoned that

[t]he tax is occasioned when the taxpayer performs services within the Auburn city limits, and not when the taxpayer receives income. Therefore, the ordinance taxes the privilege of working and the engagement of rendering services within the City of Auburn, and it only measures the tax due by the amount of the taxpayers' gross receipts which result from such privilege.... It is evident that the tax is not even measured by a person's income, but only by his salary or wages earned. So in no sense can the Auburn tax be considered an income tax.

Id. 259 So. 2d at 837 (citation omitted) (emphasis added).¹² 

Nevertheless, in deciding whether Ordinance 1120 taxes the judges' income or the federal judicial function itself, we are not constrained by the formal phrasing of the Jefferson County Commission or the labels assigned by state courts.

[I]n passing on the constitutionality of a state tax "we are concerned only with its practical operation, not its definition or the precise form of descriptive words which may be applied to it." Lawrence v. State Tax Comm'n, 286 U.S. 276, 280, 52 S. Ct. 556, 557, 76 L. Ed. 1102. Consequently in determining whether these taxes violate the Government's constitutional immunity we must look through form and behind labels to substance.

Murray Corp., 355 U.S. at 492, 78 S. Ct. at 460 (emphasis added); cf. Railway Express Agency v. Virginia, 347 U.S. 359, 363, 74 S. Ct. 558, 561, 98 L. Ed. 757 (1954) (stating in the context of the Commerce Clause that " 'neither the state courts nor the legislatures, by giving the tax a particular name or by the use of some form of words, can take away our duty to consider its nature and effect,' in which inquiry 'we are concerned only with its practical operation' " (citations omitted)).

The critical question, therefore, is whether the practical effect of Ordinance 1120 is to tax the income that federal judges derive from the performance of their judicial functions or to impose a license tax as a precondition to the performance of those functions.¹³  Viewed in this light, the practical effect of Ordinance 1120 is that of an income tax, rather than a license tax. The ordinance does not impose a flat fee on those performing federal functions, nor does it create a condition precedent to the performance of those functions.¹⁴  By the terms of the ordinance, the required license fees "shall be measured by one-half percent ( 1/2%) of the gross receipts" of each person subject to the tax. Ordinance 1120, Sec. 2. Thus, it is only if a federal employee is compensated that he or she becomes liable to Jefferson County for the occupational tax. A federal employee in Jefferson County could refuse to pay any license fees and still lawfully perform his or her federal duties under the ordinance so long as that employee received no income from performing those duties. Consequently, the occupational tax is not a precondition to the performance of any federal government functions but a consequence of receiving any compensation therefor.¹⁵ 

As suggested by the Alabama Supreme Court in McPheeter, it may be argued that Ordinance 1120 directly taxes the performance of government functions and is only measured by the income which results from the exercise of that privilege. The Supreme Court, however, repeatedly has distinguished between the taxation of a constitutional right and the taxation of receipts flowing from the exercise of a constitutional right; it has held that the latter is permissible. See, e.g., Jimmy Swaggart Ministries v. Board of Equalization, 493 U.S. 378, 390-92, 110 S. Ct. 688, 696-97, 107 L. Ed. 2d 796 (1990) (holding that a state sales tax based on a taxpayer's realized revenues constitutionally may be imposed on religious activity); Arkansas Writers' Project, Inc. v. Ragland, 481 U.S. 221, 229, 107 S. Ct. 1722, 1727, 95 L. Ed. 2d 209 (1987) (noting that "a genuinely nondiscriminatory tax on the receipts of newspapers would be constitutionally permissible"). Because Ordinance 1120 imposes not even a nominal burden on the uncompensated practice of any vocation, occupation, calling or profession, no matter how extensive, we conclude that the tax is not merely measured by but actually laid upon the taxpayer's receipts. Accordingly, the practical effect of the ordinance is that of an income tax; the ordinance does not directly tax the operations of the federal government.

The Compensation Clause provides that the compensation of Article III judges shall not be diminished during their tenure in office. U.S. Const. art. III, Sec. 1; see supra note 6. In order to prevail on a Compensation Clause claim, the judges must show a "direct, discriminatory assault on judicial independence, [a] 'plan fashioned by the political branches ... ineluctably operating to punish the judges qua judges....' " Duplantier v. United States, 606 F.2d 654, 669 (5th Cir. 1979) (quoting Atkins v. United States, 556 F.2d 1028, 1054, 214 Ct. Cl. 186, cert. denied, 434 U.S. 1009, 98 S. Ct. 718, 54 L. Ed. 2d 751 (1978)) (second and third alterations in original), cert. denied, 449 U.S. 1076, 101 S. Ct. 854, 66 L. Ed. 2d 798 (1981). " 'Indirect, nondiscriminatory diminishments of judicial compensation, those which do not amount to an assault upon the independence of the third branch or any of its members, fall outside the protection of the Compensation Clause....' " Id. (quoting Atkins, 556 F.2d at 1045).

The district court concluded that the Jefferson County occupational tax constitutes a diminishment of the judges' salaries. The court relied upon its earlier conclusion that Ordinance 1120 "is not, in fact, a tax upon the receipt of income, pay, or compensation, (the taxable event held in O'Malley to be constitutionally permissible), but rather is a license or privilege tax which finds its taxable event, or incidence, in the performance of a federal judicial function." Acker, 850 F. Supp. at 1547. Because the incidence of the tax is thus "antecedent to the point that the salary therefor having been paid by the government becomes the property of the [judges]," the court reasoned, the ordinance diminished rather than taxed the judges' salaries.

As we have discussed, however, the practical effect of Ordinance 1120 is that of an income tax. It is well established that the Compensation Clause does not forbid the federal government from levying an income tax on federal judges. O'Malley v. Woodrough, 307 U.S. 277, 282, 59 S. Ct. 838, 840, 83 L. Ed. 1289 (1939). Moreover, Judge Acker and Judge Clemon have failed to show that they are being taxed purely for their judicial function. By its terms, Ordinance 1120 taxes persons "holding ... any kind of office or position either by election or appointment, by any federal, state, county or city officer or employee," Ordinance 1120, Sec. 1(C) (emphasis added); this provision applies equally to the executive and legislative branches as well as to the judicial branch. Consequently, the Jefferson County occupational tax " 'do [es] not amount to an assault upon the independence of the third branch or any of its members,' " Duplantier, 606 F.2d at 669 (quoting Atkins, 556 F.2d at 1045), and as such its application to Article III judges is not barred by the Compensation Clause.

The district court held that the intergovernmental tax immunity doctrine and the Compensation Clause exempt federal judges from Jefferson County's occupational tax.¹⁶  The occupational tax neither discriminates against federal judges, nor does it impede the operation of the federal judiciary. Additionally, the tax does not punish judges qua judges. Therefore, the Jefferson County tax, as applied to Article III judges, is valid. We REVERSE the district court's opinion and REMAND for a determination of the taxes owed.

TJOFLAT, Chief Judge, dissenting:

I respectfully dissent.

The main issue to be decided in this case "is whether the Jefferson County tax is 'imposed directly on' the federal government." Jefferson County v. Acker, 850 F. Supp. 1536, 1541 (N.D. Ala. 1994). I agree with the district court's reasoning and its conclusion that "the Jefferson County occupational tax is imposed directly upon a governmental function--the performance in the federal courthouse in Birmingham, Alabama of federal judicial functions. Those functions are the actual event taxed (the legal incidence of the tax)." Id. at 1543.

This is not a question of the taxation of an independent contractor or agency official (parties in other cases challenging taxes). See, e.g., James v. Dravo Contracting Co., 302 U.S. 134, 58 S. Ct. 208, 82 L. Ed. 155 (1937). The federal judiciary is surely "so assimilated by the Government as to become one of its constituent parts." Ante at 3160 n. 11 (quoting cases). "Here, the tax is on the privilege of performing the federal judicial function itself--one of the three grand (Legislative; Executive; Judicial) federal functions." Acker, 850 F. Supp. at 1542. Article III judges are not independent contractors. The judiciary is not merely a building or an administrative organizational body--it is "an arm of the Government." Ante at 3160 (quoting cases). The individual judges who administer justice are the judicial branch of government. Taxation (based on income or an alternative measure) of the performance of federal judges is, therefore, taxation of the federal government.

Additionally, I would find for the judges on the Compensation Clause claim because the Jefferson County occupational tax is a "direct, discriminatory assault on judicial independence." Ante at 3163 (quoting cases). The court's opinion does not address the onerous recordkeeping and reporting requirements imposed by Ordinance 1120. The ordinance requires every judge to divide his or her performance¹  within Jefferson County from those functions performed outside the county and to allocate compensation earned only within Jefferson County for tax assessment. Thirty-one counties comprise the Northern District of Alabama. 28 U.S.C. § 81(a).²  Although Judge Acker and Judge Clemon maintain chambers in Jefferson County, they routinely perform judicial functions in other counties³  and their decisions affect citizens of other counties. Ordinance 1120 creates an administrative nightmare that "impede [s] the operation of the federal judiciary." Ante at 3164.

Because this tax is a direct assault on the administration of justice, I dissent.