In the case of Graves et al., Commissioners Constituting the State Tax Commission of New York, v. New York ex rel. O'Keefe (1938), the U.S Supreme Court ruled that a state could tax income received by its residents from federal government employment without violating constitutional principles of intergovernmental tax immunity. The court held that such taxation did not interfere with federal sovereignty or operations and was therefore permissible under the Constitution's Supremacy Clause. This decision overturned previous rulings which had established a doctrine of reciprocal tax immunities between states and federal government employees, thereby allowing for broader state taxing powers over federally-sourced income.

In the dissenting opinion for Graves v. New York ex rel. O'Keefe, Justice McReynolds argued that the majority's decision to uphold a state tax on federal employees was inconsistent with previous Supreme Court rulings and threatened the separation of powers between federal and state governments. He contended that this ruling could potentially lead to states imposing burdensome taxes on federal operations within their borders, thereby undermining national sovereignty. Furthermore, he disagreed with the majority's interpretation of constitutional immunity as reciprocal between states and the federal government; instead, he believed it should be unilateral in favor of protecting federal interests from potential interference by individual states.