In the case of Graves et al. v. Elliott et al., 1938, the U.S Supreme Court ruled on a dispute concerning taxation and federal employees' salaries. The State Tax Commission of New York had imposed an income tax on a federal employee's salary, which was challenged as unconstitutional under the doctrine of intergovernmental tax immunity - arguing that state taxes could not be levied on federally derived income. However, in this case, the court upheld New York’s right to impose its income tax on a federal employee's salary by reversing its previous stance regarding intergovernmental tax immunity established in Collector v Day (1871). The court held that national and state governments have reciprocal "tax immunities," meaning each level can levy taxes upon officers or employees of another without violating constitutional principles.

In the dissenting opinion for Graves et al. v. Elliott et al., Justice Butler argued that the majority's decision to allow states to tax federal employees' salaries was a violation of intergovernmental tax immunity, which he believed should be upheld as an essential principle of federalism and separation of powers. He contended that this ruling could potentially lead to excessive taxation by either level of government, thereby disrupting their respective functions and causing undue burden on public servants. Furthermore, he expressed concern about potential retaliation between state and federal governments in terms of taxation policies if such practices were allowed to continue unchecked. In his view, allowing states to impose taxes on federally sourced income would create a dangerous precedent where both levels could interfere with each other’s operations through fiscal means.