Marquette Law Review

Volume 20 Article 4
Issue 2 February 1936

1935

Constitutional Law - Federal Unemployment Insurance - Social

Security Act
John L. Waddleton

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Repository Citation
John L. Waddleton, Constitutional Law - Federal Unemployment Insurance - Social Security Act, 20 Marq.
L. Rev. 90 (1936).
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 TfIE MARQUETTE LAW REVIEW [Vol. 20

CONSTITUTIONAL LAW-FEDERAL UNEMPLOYMENT INSURANCE-

SOCIAL SECURITY ACT.-Within forty years the population of the
United States has changed from one largely rural to one chiefly urban.
This change has been accompanied by a tremendous growth in indus-
trial activity. All population groups, urban and rural, have felt the
effects of insecurity attendant to industrial changes and ills. The aver-
age man's position in society has become less secure. The family is no
longer a self-sufficing unit. Individuals must live in the present and
either do not or can not plan for the future. Local groups have been
unable to respond to the demands of the indigent, the unfit and the
aged. Single states have been generally unwilling to jeopardize their
own industrial units by subjecting them to social burdens which their
competitors in other states do not have to bear. The Social Security
Act passed by Congress, and signed by the President on August 14,
1935,1 was enacted to bring about nationwide, cooperative efforts
among the states to meet these problems of economic insecurity. That
part of the Act providing an incentive for state unemployment insur-
ance laws will be discussed in this note.
The federal plan for unemployment insurance is contained in Titles
III and IX of the Social Security Act. Title III provides for an annual
appropriation of $49,000,000 after June 30, 1936,2 to be distributed in
such amounts as the Social Security Board sees fit to states having un-
employment insurance plans approved by the Board. 3 Title IX levies
on every employer of eight or more persons an excise tax equal to one
per cent of his payroll during the year 1936, two per cent during the
year 1937, and three per cent for the year 1938 and each year there-
after.4 However, an employer paying into an approved 5 state plan may
1 P.L. No. 271, 74th Congr., 1st Sess. (1935).
2 Section 301.
3 Section 303 allows the Board to approve a state plan if it includes the follow-
ing provisions: (1) such methods of administration as are found by the Board
to be reasonably calculated to insure full payment of unemployment compensa-
tion when due; (2) payment of compensation solely through public employ-
ment offices in the state or such other agencies as the Board may approve;
(3) opportunity for a fair hearing for all individuals whose claims for un-
employment compensation are denied; (4) the payment of all money received
in the unemployment fund of such state, immediately upon such receipt, to
the Secretary of the Treasury and to the credit of the Unemployment Trust
Fund established by Section 904; (5) expenditure of all money requisitioned
by the state agency from the Unemployment Trust Fund, in the payment of
unemployment compensation, exclusive of expenses of administration; (6)
the making of such reports as the Board from time to time may require; and
(7) making available upon request to any agency of the United States the
name, address, etc., of each recipient of unemployment compensation.
4 Section 901.
5 It is interesting to note that the requirements under Section 903 differ from
those set up by Section 303, thus lending an air of independence to each. Sec-
tion 903 provides for approval if, (1) all compensation is paid through a state
agency, (2) no compensation is payable until two years after contributions
are required, (3) all money received is immediately paid over to the Unem-
ployment Trust Fund, (4) compensation is not denied an otherwise eligible
individual for refusing work under any of the following conditions: (a) if
the position offered is vacant because of a labor dispute, (b) if the wages,
hours, or other conditions of the work offered are substantially less favorable
to the individual than those prevailing for similar work in the locality, (c) if,
as a condition of employment, the individual would be required to join a com-
pany uni6n or to resign from or' refrain from joining any bona fide labor
No. 2] NOTES

credit his state payments against ninety per cent of his federal payroll
tax. One of the requirements for approval of a state plan under Title
IX is the payment by the state into the national treasury of all state
taxes collected. The treasury will hold these funds in trust for with-
drawal by the state to meet unemployment claims. It is thus to be noted
that the federal government is not expected to distribute the unemploy-
ment benefits, but merely to award grants to states to aid them in the
administration of their approved plans. The divorce of the appropriat-
ing and tax levying sections of the Act into separate titles and the treat-
ment of each as though unrelated is an obvious legislative device to
catalog each section under an undisputed federal power. Until the AAA
decision 6 the effectiveness of this subterfuge was a controversial ques-
tion. The Agricultural Adjustment Act 7 contained a similar division
between tax and appropriation titles, and while the court looks to the
intent of the whole, and does not consider the individual titles as parts
of an omnibus bill, the condemnation of that Act was based on the fact
that the tax was not a tax, but a part of a scheme to regulate agricul-
ture, a purely local activity.8 The purpose of the unemployment insur-
ance titles of the Social Security Act is not to regulate unemployment,
but to guard the national treasury against the demands created by it.
Therefore, the tax and the appropriation titles of the Act may be con-
sidered separately. The wide power of appropriation enjoyed by Con-
gress is admitted.9 That Congress may have a double purpose in levying
a tax does not make that tax invalid. 10 And finally, it has been held
that the set-off device allowing for deductions from federal assessments
to the extent of state taxes paid is valid." However, the controversies
prompting most of these decisions can be fundamentally distinguished
from the attacks on the Social Security Act.
In Massachusettsv. Mellon," generally regarded as the leading case
on the immunity of Congressional appropriations from judicial review,
the appropriation in question was that authorized by the Sixty-seventh
Congress in the popularly described Maternity Act.13 The Act provided
for annual appropriations for five years to be divided by the Board set
up by the Act among states which should submit an approved plan for
spending the money. The characteristics of the Maternity Act were,
first, a temporary underwriting by the federal government of state
efforts to promote maternity welfare, and secondly, no direct loss to
any particular state which should submit no plan for spending the pro-
posed appropriation. On the other hand, the Social Security Act con-
templates (1) perpetual grants, (2) a permanent federal controlling

organization, and (5) all the rights, privileges or immunities conferred by

such law or by acts done pursuant thereto shall exist subject to the power of
the legislature to amend or repeal such law at any time.
6 United States v. Butler, 56 Sup. Ct. 312, 80 L.ed. 287 (1936).
748 STAT. 31 (1933), 7 U.S.C.A. 601 et seq. (1935).
s9 United States v. Butler, 56 Sup. Ct. 312, 320, 80 L.ed. 287, 296 (1936).
Field v. Clark, 143 U.S. 649, 12 Sup. Ct. 495, 36 L.ed. 294 (1892); United
States v. Realty Company, 164 U.S. 427, 16 Sup. Ct. 1120, 41 L.ed. 215 (1896) ;
Massachusetts v. Mellon, 262 U.S. 447, 43 Sup. Ct. 597, 67 L.ed. 1078, (1923).
10 United States v. Doremus, 249 U.S. 86, 39 Sup. Ct. 214, 63 L.ed. 493 (1919).
"Florida v. Mellon, 273 U.S. 12, 47 Sup. Ct. 265, 71 Led. 511 (1927).
2Massachusetts v. Mellon, 262 U.S, 447, 43 Sup. Ct. 597, 67 L.ed., 1078 (1923).
342 STAT. 224 (1921). 1
 THE MARQUETTE LAW REVIEW [Vol. 20

board, and (3) a forfeiture by the state of ninety per cent of the fed-
eral tax levied on its own citizens if no state plan is established. 1 Thus
it is not inconceivable that the Supreme Court should find that
Massachusetts v. Mellon does not control it, and for this reason the
Justices are free, for all practical purposes, to decide this feature of
the Act according to their individual sociologic-economic philosophies.
It has been contended that the decisions of the Supreme Court in
the Child Labor Tax Case and the Florida inheritance tax case set the
standards to which the scheme of Title IX must conform. After making
an unsuccessful attempt to bar the products of child labor from inter-
state commerce,' 5 Congress levied an excise tax on employers know-
ingly employing child labor.' 6 This was held invalid on the ground that
it was in fact a penalty' and not a regulatory measure. However, the
inference is most apparent that even if the tax had not been based on
scienter, the measure would have been held invalid as an invasion of
the functions of the state.'" Congressional power over commerce is for
the purpose of regulation only. It is to be noted that both attempts on
the part of Congress to regulate child labor were held invalid because
Congress could not bring them under the commerce clause, and there
was no other means of assuming jurisdiction. In the second child labor
case the Supreme Court distinguishes the tax from a justifiable one,
the latter being within the jurisdiction of Congress both as to the res
and the regulation of the res.19 The question that logically follows is
whether unemployment insurance can be classified under a Congres-
sional power extending both to the res and the regulation thereof, for
example, the credit of the federal government. Should the answer be
in the affirmative we can already hear the court refusing to go behind
' 4 How then can the following language used in the Mellon Case be quoted with
any semblance of finality: "If Congress enacted it (the Maternity Act) with
the ulterior purpose of tempting them (the states) to yield, that purpose may
be frustrated by the simple expedient of not yielding"? Massachusetts v. Mel-
lon, 262 U.S. 447, 482, 43 Sup. Ct. 596, 67 L.ed. 1078 (1923).
25Hanniter v. Dagenhart,247 U.S. 251, 38 Sup. Ct. 529, 62 L.ed. 1101 (1918).
1640 STAT. 1057 (1919).
17 Child Labor Tax Case, 259 U.S. 20, 42 Sup. Ct. 449, 66 L.ed. 817 (1922), in
which the court said, after analyzing the provisions of the Act, "In the light of
these features of the act, a court must be blind not to see that the so-called tax
is imposed to stop the employment of children within the age limits prescribed.
Its prohibitory and regulatory effect and purpose are palpable."
1s Child Labor Tax Case, supra, note 17, at page 39, "The analogy to the Dagen-
hart Case is clear. The congressional power over interstate commerce is, with-
in its proper scope, just as complete and unlimited as the congressional power
to tax, and the legislative motive in its exercise is just as free from judicial
suspicion and inquiry. Yet when Congress threatened to stop interstate com-
merce in ordinary and necessary commodities, unobjectionable as subjects of
transportation, and to deny the same to the people of a state in order to
coerce them into compliance with the Congress' regulation of state concerns,
the court said this was not in fact regulation of interstate commerce, but
rather that of state concerns and was invalid. So here the so-called tax is a
penalty to coerce people of a state to act as Congress wishes them to act in
respect of a matter completely the business of the state government under
the federal constitution."
19 Child Labor Tax Case, supra note 17, at page 41, in speaking of Veazie Bank
v. Fenno, 8 Wall. 533, 19 L.ed. 482 (1869), says, "It will be observed that the
sole objection to the tax here was its excessive character. Nothing else ap-
peared on the face of the act. It was an increase of a tax admittedly legal to
a higher rate and that was all." (Italics author's.)
No. 2] NOTES

the tax measure to 2determine

0
whether or not regulation is the primary
purpose of theAct.
Proponents of Title IX quite evidently had in mind the Florida in-
heritance tax case, 2' for the Senate Report says that the tax offset
device is modelled after the provision in the federal estate tax law under
which a credit is allowed up to eighty per cent of the federal tax for
amounts paid under state inheritance tax laws. However, the Florida
case is distinguishable upon two grounds. In the first place, the offset
provision of the federal estate tax law is not conditional upon
the presence in the state inheritance tax law of certain federal require-
ments, whereas Title IX of the Social Security Act sets up criteria for
state unemployment compensation laws.2 2 But in this regard the only
necessary criterion for an inheritance tax offset is the amount of the
state assessment, and that criterion was automatically taken care of by
the eighty per cent offset provision in the federal act, whereas there must
of necessity be at least some criteria set up in addition to the amount
of contributions in order that a state plan actually be what it proports
to be. In the second place, the Florida decision was apparently predi-
cated upon the lack of ulterior motive in the federal estate tax in spite
of the charge made in the brief for the State of Florida 23 that the tax
was not passed for the purpose of raising revenue, but was directed
primarily at the State of Florida. Such direction, however, did not ap-
pear on the fact of the Act, while the ulterior purpose of Title IX is
clearly shown on its face. However, will the Supreme Court reject a
measure (Title IX) productive of great revenue because it is frank in
expressing that it has an additional purpose, namely, to encourage local
legislation, after having sustained an arrant subterfuge (the federal
estate tax). productive of practically no revenue, merely because
it purported on its fact to be a revenue measure? The argument that
Title IX creates no revenue for the support of the government ought
not'be given too much weight, literally, because proceeds from the gen-
eral fund may very probably be available on "constitutional" grounds,
and certainly on moral principles, for the relief of the unemployed.
And,, after all, is it not plausible that the offset provisions of the estate
tax, as sustained in the Florida case, and Title IX of the Social Se-
curity Act be justified as attempts to avoid double taxation?
Speculation as to the Court's reaction to the scheme of Title IX
has been stimulated by the recent decision in the "Triple A" case. There
20 United States v. Doremus, 249 U.S. 86, 39 Sup. Ct. 214, 63 L.ed. 493 (1919).
But 'the real ground of distinction between the child labor tax and that levied
under Title IX appears to be that the child labor tax was an obvious attempt:
by the Congress to legislate directly on a matter on which only the state can
legislate constitutionally, whereas Title IX is merely an attempt by the Con-
gress to make it worth the while of each state to enact effective legislation
in a certain field, the details being left to the state. Or, it may be said that
Title IX rewards states that adopt a genuine unemployment benefit plan by
correspondingly decreasing the levies of the taxpayers of such states.
21 Florida v. Mellon, 273 U.S. 12, 47 Sup. Ct. 265, 71 L.ed. 511 (1927).
22 Section 903.
23 Florida v. Mellon, supra, note 21, the court quotes (p. 14) this charge but
failed to answer it. However the rule that an act cannot be declared invalid
just because another, motive than taxation, not shown on the face of the act,
might have contributed to its passage, can be taken to overrule the charge by
the State of Florida.
 THE MARQUETTE LAW REVIEW [Vol. 20

is language in the opinion which may well be taken to limit the de-
cision to the facts of the case and to reserve the questions that will
undoubtedly be raised under the unemployment insurance titles of
the Social Security Act.2 4 After criticizing the Agricultural Adjust-
ment Act as a measure robbing Peter to pay Paul, the court concedes
that such an imposition is constitutional when imposed to effectuate
regulation of a matter in which both groups are interested and in re-
spect of which there is a power of legislative regulation.2 5 Such lan-
guage brings the Social Security Act squarely under the general wel-
fare clause of the United States Constitution.26 On the ground that the.
Agricultural Adjustment Act invades the powers of the states, the court
in the Butler case avoids the issue of general welfare directly raised
by the government. However, before leaving the subject, the court
quotes from Mr. Justice Story's exposition on the Constitution to show
that the powers of taxation and appropriation extend only to matters of
national, as distinguished from local, welfare.2 7 In the past few years,
all the states have looked to Washington for aid in the handling of
their staggering relief load. The national treasury has undergone an
enormous strain in handling these demands. Can it, under these circum-
stances, be said that the providing for such relief is not identified with
the national welfare? Is not the protection of the national credit from
onslaughts of this type in furtherance of the general welfare? In the
determination of this problem in the future, cannot the court take
judicial notice of the extent of a "depression," whether it is localized
or national, and thus protect the nation from any ill effect that might
arise in the form of precedent if the Act under consideration is upheld?
It is therefore safe to say that: (1) Congressional action to protect
the national treasury against the strain created by unemployment relief
demands may come within the scope of the general welfare clause;
(2) the grant-in-aid (Title III) and the conditions thereto attached
are valid; and (3) the off-set provision is, in itself, defendable. The
Act, as far as it goes, is constitutional, but it does not go far enough.
As has been previously pointed out, unless a state inaugurates a plan
for unemployment insurance that meets the conditions set forth in
Titles III and IX, the entire federal tax paid by its citizens becomes
part of the general fund of the federal government and there is no
assurance that such tax will revert to the state in the form of relief as
does that of the state which passes an approved plan. Furthermore, if
a state adopts a plan that does not meet with the approval of the Social
Security Board, the ninety percent set-off is forfeited even though the
United States v. Butler, 56 Sup. Ct. 312, 322, 80 L.ed. 287, 299 (1936): "We
are not here concerned with a conditional appropriation of money, nor with
a provision that if certain conditions are not complied with the appropriation
shall no longer be available. By the Agricultural Adjustment Act the amount
of the tax is appropriated to be expended only in payment under contracts
whereby the parties bind themselves to regulation by the federal government.
There is an obvious difference between a statute stating the conditions upon
which moneys shall be expended and one effective only upon the assumption
of a contractual obligation to submit to a regulation which otherwise could
not be enforced."
25 United States v. Butler, 56 Sup. Ct. 312, 317, 80 L.ed. 287, 292 (1936).
26 U.S. CONSr. Art. I, § 8.
271 STORY, COMMENTARIES ON THE CONSTITUTION OF THE UNITED STATES (5th
ed.) 673.
No. 21 NOTES

plan may adequately satisfy the needs of the state. The net result is
that every state is compelled to adopt a plan modelled along the lines
set forth in Titles III and IX and Congress is in effect legislating by
remote control. It is suggested, however, that an amendment providing
for the earmarking of the tax collected in states having no approved
plan for general relief of unemployment hardships in those states be
added to the Act. The grant-in-aid title would still be an effective in-
ducement for state plans of the type desired and no state could protest
on the ground of discrimination or compulsion.
JoHN L. WADDLETON.

CORPORATIONS-COMPENSATION OF PROAOTERs-FRAUD.-The prob-

lem of promoters is one which has long perplexed the courts of this
country. There has been little uniformity of opinion on the matter, as
is illustrated by the contrary decisions prevalent among the many exist-
ing cases. The controversy embraces a wide field of promotional and
corporate problems, and though the issue can seldom be determined
concerning a specific case without first reviewing the particular circum-
stances of the case in question, several broad principles have evolved
which may serve to enlighten somewhat a consideration of the numer-
ous difficulties which involve this problem.
It is now undisputed that the promoter performs a valuable service
in the field of corporate finance. Possessed of a peculiar knowledge of
industrial affairs he is able to judge with a fair degree of accuracy the
potential possibilities of a proposed venture. He is acquainted with the
materials required and their relative value. He is aware of the proper
ratio which operating capital must bear to total assets. In these and
numerous other matters he supplies the expert advice necessary to the
organization of a well planned corporation.' That he is entitled to a
fair compensation for this service is beyond dispute. 2 The problem is-
How may this compensation be made legally? Under what plan may
he be compensated, and what assurance is there that the selected ar-
rangement will not be upset by the courts? If the compensation were a
cash payment of an amount fairly estimated as the reasonable value
of his services, there could be no question concerning its legality. 3 But,
as the newly formed corporation seldom has adequate cash resources
to meet other than the urgent requirements of the business, the prob-
lem is rarely settled in so simple a manner. The device generally
adopted has been one of awarding compensation by giving the pro-
moter an interest in the corporation, either by way of par value stock,
no par value stock, or stock purchase
4
warrants. And this is where the
parties run afoul of the law.
'GERSTENERG, FINANCIAL ORGANIZATION AND MANAGEMENT (1924) 415; LoUGH,
2 CORPORATION FINANCE (1909) 156.
Mason v. Carrothers, 105 Me. 392, 74 AtI. 1030 (1909); Fitzpatrick v. O'Neil,
43 Mont. 552, 118 Pac. 273 (1911); United German Silver Co. v. Bronson, 92
Conn. 266, 102 At. 647 (1917).
3 Southern Hardwood Lumber Co. v. Scott, 46 Il1. App. 285 (1892).
'Hebgen v. Koeffer, 97 Wis. 313, 72 N. W. 745 (1897) ; Franey v. Wauwnatosa
Park Co., 99 Wis. 40, 74 N.W. 548 (1898) ; Pietsch v. Milbrath, 123 Wis. 647,
101 N.W. 338 (1904); Richland Oil Co. v. Morriss, 108 Va. 288, 61 S.E. 762
(1908) ; Mason v. Carrothers, 105 Me. 392, 74 At. 1030 (1909).