In the 1941 case Graves et al., Constituting The State Tax Commission of New York, v. Schmidlapp et al., Executor, the U.S. Supreme Court ruled on an issue regarding state taxation powers and federal immunity from such taxes. The court was asked to decide whether a New York estate tax could be levied on securities owned by a resident but kept in another state as part of a trust managed by out-of-state trustees. These securities were issued by corporations incorporated under federal law or other states' laws and thus claimed exemption based on intergovernmental tax immunity doctrine. The court held that these assets were not exempt from state taxation simply because they originated from federally-incorporated entities or entities outside of New York State's jurisdiction. It reasoned that allowing such exemptions would unduly limit states' abilities to levy necessary taxes within their borders while providing no clear benefit for federal operations or interstate commerce. This decision marked an important shift in interpretation of the intergovernmental tax immunity doctrine, moving away from broad interpretations favoring widespread immunities towards more limited views recognizing states' needs for fiscal autonomy.

In the dissenting opinion for Graves et al., Constituting The State Tax Commission Of New York, v. Schmidlapp et al., Executor, Justice Frankfurter argued that the majority's decision to uphold a state tax on federal securities was inconsistent with previous rulings and threatened to undermine national economic policy. He contended that such taxes could potentially interfere with the federal government's ability to manage its finances effectively. Furthermore, he expressed concern about potential conflicts between states over taxation rights if each were allowed to impose their own taxes on federally issued bonds held by residents within their borders. Ultimately, he believed this ruling would lead to uncertainty and instability in financial markets as investors attempted to navigate varying state tax laws.