In the case of Helvering v. Gerhardt, 1937, the U.S Supreme Court was tasked with deciding whether federal income tax on salaries paid to employees of a port authority (a state entity) violated the doctrine of intergovernmental tax immunity. The court ruled that it did not violate this principle and upheld the taxation. It reasoned that while states and their instrumentalities were protected from discriminatory taxes or those which interfered with government functions, they were not completely immune from all forms of federal taxation. The court distinguished between direct taxes on a state itself versus an indirect tax such as one imposed upon salaries earned by individuals employed by a state agency like in this case. This decision marked an important shift in interpretation regarding intergovernmental tax immunity.

In the dissenting opinion for Helvering v. Gerhardt, Justice McReynolds disagreed with the majority's decision to uphold a federal income tax on salaries of employees of port authorities. He argued that this was an infringement upon state sovereignty and violated principles of intergovernmental tax immunity. According to him, taxing these employees' incomes would indirectly affect states' financial operations as they might need to increase wages in response, thereby straining their budgets. Furthermore, he contended that there should be clear boundaries between federal and state taxation powers; allowing such taxes could lead to further encroachments by the federal government into areas traditionally reserved for states under constitutional law.