South Carolina v. Regan

South Carolina v. Regan

Opinion

 [*370]  [***376]  [**1109]    JUSTICE BRENNAN delivered the opinion of the Court.

 [**1110]  South Carolina invokes the Court's original jurisdiction ² and asks leave to file a complaint against Donald T. Regan, the Secretary of the Treasury of the United States. The State seeks an injunction and other relief, on the ground that § 103(j)(1) of the Internal Revenue Code of 1954, 26 U. S. C. § 103(j)(1) (1982 ed.), as added by § 310(b)(1) of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, 96 [****9]  Stat. 596, is constitutionally invalid as violative of the Tenth Amendment and the doctrine of intergovernmental tax immunity.

The Secretary objects to the motion on the ground that the Anti-Injunction Act, 26 U. S. C. § 7421(a), bars this action ³ and, alternatively, that the Court should exercise its discretion to deny leave to file. We are not persuaded that either is a ground for denying the motion, and therefore grant the motion for leave to file the complaint.

 [****10]  I

 Section 103(a) of the Internal Revenue Code (IRC) exempts from a taxpayer's gross income the interest earned on the obligations of any State. ⁴ [****11]  In 1982, however, as part of  [*371]  TEFRA, Congress amended § 103 to  [***377]  restrict the types of bonds that qualify for the tax exemption granted by that section. Specifically, § 310(b)(1) of TEFRA added a new provision, § 103(j)(1), to the Code. Section 103(j)(1) requires that certain obligations, termed "registration-required [obligations]," be issued in registered, ⁵ rather than bearer, form to qualify for the § 103(a) exemption. ⁶ [****12]  For purposes of § 103(j)(1), registration-required obligations are defined broadly to include most publicly issued obligations with maturities greater than one year. ⁷ If an obligation that is registration-required is issued in bearer, rather than registered, form, then § 103(j)(1) provides that the interest on that obligation is taxable.

Because the imposition of a tax on bearer bonds would require a State to pay its bondholders a higher rate of interest on such bonds, South Carolina argues that the practical effect of § 103(j)(1) is to require it to issue its obligations in registered form. For that reason, South Carolina argues that the  [*372]  section destroys its freedom to issue obligations in the form that it chooses. Viewing its borrowing power as essential to the maintenance of its separate and independent existence, South Carolina contends that the condition imposed by  [**1111]  § 103(j)(1) on the exercise of that power violates the Tenth Amendment. In addition, relying on Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429 (1895), South Carolina argues that Congress may not tax the interest earned on the obligations of a State.  [****13]  Because § 103(j)(1) imposes a tax on the interest earned on state obligations issued in bearer form, the State argues that the section is unconstitutional. Accordingly, South Carolina asks that its motion to file the complaint be granted and that this Court award declaratory, injunctive, and other appropriate relief. ⁸

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