ssued
by State banks[225] suggested the possibility of similar attacks upon
the existence of the States themselves. Two years later the Court took
the logical further step of holding that the federal income tax could
not be imposed on income received by a municipal corporation from its
investments.[226] A far-reaching extension of private immunity was
granted in Pollock _v._ Farmers Loan and Trust Co.,[227] where interest
received by a private investor on State or municipal bonds was held to
be exempt from federal taxation. As the apprehensions of this era
subsided, the doctrine of these cases was pushed into the background. It
never received the same wide application as did McCulloch _v._
Maryland[228] in curbing the power of the States to tax operations or
instrumentalities of the Federal Government. Only once since the turn of
the century has the national taxing power been further narrowed in the
name of Dual Federalism. In 1931 the Court held that a federal excise
tax was inapplicable to the manufacture and sale to a municipal
corporation of equipment for its police force.[229] Justices Stone and
Brandeis dissented from this decision and it is doubtful whether it
would be followed today.

FEDERAL TAXATION OF STATE INTERESTS

Within a decade after the Pollock decision the retreat from Collector
_v._ Day began. In 1903, a succession tax upon a bequest to a
municipality for public purposes was upheld on the ground that the tax
was payable out of the estate before distribution to the legatee.
Looking to form and not to substance, in disregard of the mandate of
Brown _v._ Maryland,[230] a closely divided Court declined to "regard it
as a tax upon the municipality, though it might operate incidentally to
reduce the bequest by the amount of the tax."[231] When South Carolina
embarked upon the business of dispensing alcoholic beverages, its agents
were held to be subject to the national internal revenue tax, the ground
of the holding being that in 1787 such a business was not regarded as
one of the ordinary functions of government.[232] Another decision
marking a clear departure from the logic of Collector _v._ Day was Flint
_v._ Stone Tracy Company,[233] where the Court sustained an act of
Congress taxing the privilege of doing business as a corporation, the
tax being measured by the income. The argument that the tax imposed an
unconstitutional burden on the exercise by a State of its reserved power
to create corporate