## Facts

- Mississippi’s state tax collector sued a national bank in Mississippi state court to recover unpaid state and local taxes allegedly assumed under a contract.
- The respondent bank had acquired the assets of an insolvent national bank in receivership and contractually assumed that bank’s “debts and liabilities.”
- The taxes at issue were imposed under Mississippi law on national bank shares/capital stock, surplus, and undivided profits (excluding real estate value).
- The complaint characterized the taxes as debts owed by shareholders that the bank was obligated to pay as agent from shareholder funds, and alleged the respondent breached its covenant by not paying those taxes.
- The respondent removed the case to federal court, asserting federal-question jurisdiction because federal law permits and limits state taxation of national bank shares.
- The federal district court denied remand and dismissed on the merits; the Fifth Circuit affirmed on the ground that the case arose under federal law due to the federal statute governing state taxation of national banks.

## Issues

1. Whether a state-law suit to enforce a contractual assumption of tax liabilities created by state statute “arises under” federal law when the state tax is authorized and limited by a federal statute governing taxation of national bank shares.
2. Whether removal is proper when the federal element is only collateral to the plaintiff’s contract-and-tax claim as pleaded in the complaint.

## Decision

- The Supreme Court reversed.
- The Court held the case did not “arise under” the Constitution or laws of the United States for purposes of federal-question removal jurisdiction.
- The Court directed the federal courts to remand the case to Mississippi state court for lack of federal jurisdiction.

## Legal Principles

- A case “arises under” federal law only when a federal right or immunity is an essential element of the plaintiff’s cause of action, and the claim will succeed or fail depending on the construction given to federal law.
- The federal controversy must be “genuine and present,” not merely possible or conjectural, and must appear on the face of the well-pleaded complaint rather than by anticipated defenses, a removal petition, or surplus allegations.
- A claim based on a state statute does not arise under federal law merely because federal law permits the state statute or because the state statute’s validity is conditioned by federal limits.
- The presence of a potential federal issue as background to a state-law cause of action is insufficient; not every federal question that may surface in litigation makes federal law the basis of the suit.

## Conclusion

Because the tax collector’s complaint asserted a state-law contract claim predicated on liabilities created by state tax law, and any federal statute concerning taxation of national bank shares operated only as a collateral limit on validity rather than as a source of the cause of action, federal-question jurisdiction was absent and the case had to be remanded to state court.


Gully v. First Nat’l Bank in Meridian, 299 U.S. 109 (1936)