In the 1922 case of People of the State of New York ex rel. Clyde v. Gilchrist, President, et al., as Members of the State Tax Commission of the State Of New York, a taxpayer named Clyde challenged an income tax assessment made by New York's state tax commission on his federal salary as a prohibition agent. The U.S Supreme Court ruled in favor of Clyde stating that states cannot impose taxes on salaries paid by the federal government to its employees because it violates intergovernmental tax immunity doctrine which is based on Supremacy Clause and derived from McCulloch v Maryland (1819). This principle prevents one level of government from taxing another level or its instrumentalities unless Congress consents explicitly.

In the dissenting opinion for PEOPLE OF THE STATE OF NEW YORK EX REL. CLYDE v. GILCHRIST, PRESIDENT, et al., Justice Holmes argued that the majority's decision to invalidate New York's income tax law was incorrect and inconsistent with previous rulings of the court. He contended that there was no constitutional basis for striking down a state tax on federal securities held by residents of that state, as long as it did not interfere with any federal function or discriminate against such securities in favor of similar property within the state. Holmes believed this principle had been established in prior cases and saw no reason to deviate from it now. He also disagreed with the majority’s interpretation of certain provisions in New York’s income tax law, arguing they were intended to prevent double taxation rather than exempt federal securities from taxation altogether.