In the case of Board of Trustees of the University of Illinois v. United States, 1932, the U.S Supreme Court ruled that a state university could not claim immunity from federal taxation on income derived from its commercial activities. The University had argued that as an arm of the state government it was immune to such taxes under the doctrine of intergovernmental tax immunity. However, this argument was rejected by Justice Benjamin Cardozo who wrote for a unanimous court stating that while states and their instrumentalities were indeed protected against direct taxation by Congress, they were not shielded from all forms and degrees of federal taxation. He further clarified that when a state enters into marketplaces or performs functions which are non-governmental in nature (in this case operating coal mines), it becomes subject to tax just like any private citizen or corporation would be.

In the dissenting opinion for the case of Board of Trustees of the University of Illinois v. United States, Justice McReynolds argued that a state university should not be subject to federal taxation. He contended that it was an integral part of the state government and thus immune from such taxes under constitutional principles. The majority's decision, he believed, undermined states' rights by allowing federal intrusion into their affairs through taxation. This could potentially lead to a situation where states are taxed out of existence or forced into financial hardship due to excessive tax burdens imposed by the federal government. Furthermore, he expressed concern about potential future implications if other governmental entities were also subjected to similar treatment.