City of Philadelphia v. The Collector - 72 U.S. 720 (1866)
U.S. Supreme Court
City of Philadelphia v. The Collector, 72 U.S. 5 Wall. 720 720 (1866)
City of Philadelphia v. The Collector
72 U.S. (5 Wall.) 720
1. The jurisdiction of the circuit court in a case between citizens of he same state, under the internal revenue laws of July 1, 1862, and March 3, 1863, removed thereto from a state court under the Act of March 2, 1833 (the Force Bill), and before the passage of the Internal Revenue Act of June 30, 1864, is saved by the sixty-eighth section of the Internal Revenue Act of July 13, 1866, if the justice of said circuit court is of opinion that the case would be removable from the state court to the circuit court under the sixty-seventh section of the said Act of July 13, 1866.
2. Where a case, removed from a state court to a circuit court under the act of 1833, above mentioned, would be clearly removable under the provisions of the act of 1866, directing such circuit court to remand removed cases unless the circuit judge should be of opinion that the same, if pending in the state court, would be removable under a provision which the last-named act made, the fact that the case was in the circuit court when the new act passed, and that it never was remanded, is a fact from which it may be inferred as a conclusion of law that it was the opinion of the circuit judge that the case was one that ought to be retained.
3. Where an article (as illuminating gas) which, under the internal revenue acts, is taxable when made and "sold," but is not taxable when made by the party "for his own use," is made by trustees appointed by the party using it under obligatory and fixed arrangements with such party's creditors, at an establishment of which the party using the article has apparently the ultimate ownership, but which, till certain debts due by him and contracted in order to build and enlarge the establishment are paid is held and managed exclusively by the trustees under an arrangement that the party using may have the article at a certain price and that all clear profits shall be set aside as a sinking fund for the payment of the principal due the creditors, such article, when furnished to the debtor at a price fixed, is "sold" and taxable, though apparently the sale is chiefly for the purpose of providing, in the manner agreed on, a sinking fund to pay the debts of the party using it.
4. The trustees of the Philadelphia Gas Works, by the law and ordinances creating and constituting them, and by reason of the several loans created for the support and management of the said gas works, hold such
a relation to the private consumer, the loanholder, and the City of Philadelphia, that all illuminating gas manufactured by the said trustees and
furnished by them to the city to be used in her public lamps is liable to, and chargeable with, the internal revenue duty imposed by the Act of July 1, 1862, and the supplement thereto of March 3, 1863.
The Judiciary Act of 1789 limits the jurisdiction of the federal courts, so far as determined by citizenship, to "suits between a citizen of the state in which the suit is brought and a citizen of another state."
An act of 1833, [Footnote 1] "to provide further for the collection of duties on imports," extended the jurisdiction to cases arising under "the revenue laws of the United States" where other provision had not been made. And it authorized any person injured in person or property on account of any act done "under any law of the United States for the protection of the revenue or the collection of duties on imports" to maintain suit in the circuit court. It also allowed any person sued in a state court on account of any act done "under the revenue laws of the United States" to remove the cause by a mode which the act itself set forth into the circuit court of the United States.
With the passage of the internal revenue laws made necessary by the late rebellion, it was doubted by some persons whether this act of 1833 extended to cases under the new enactments. And the internal revenue act of 1864, [Footnote 2] by its fiftieth section extended in general words "the provisions" of the act of 1833 to cases arising under the internal revenue acts.
By an internal revenue act of 1866, [Footnote 3] however (§ 67), Congress made provision for removing cases from state courts to the circuit court, authorizing such removal in a way which it particularized,
"in any case, civil or criminal, where suit or prosecution shall be commenced in any court of any state against any officer of the United States, . . . or against any person acting under or by authority of any such
officer, on account of any act done under color of his office,"
And by the sixty-eighth section, immediately following, it "repealed" the fiftieth section of the act of 1864, with, however, this proviso:
"Provided that any case which may have been removed from the courts of any state under said fiftieth section to the courts of the United States shall be remanded to the state court from which it was so removed, with all the records relating to such cases, unless the justice of the circuit court of the United States in which such suit or prosecution is pending shall be of opinion that said case would be removable from the court of the state to the circuit court under and by virtue of the provisions of this act."
With the act of 1833 in force, but before the passage of any of the others, the City of Philadelphia, in October, 1863, sued in a state court the collector of internal revenue of the collection district to which the city belongs for a return of certain internal revenue taxes paid under protest, the city corporation (constructively) and the collector being citizens of the same state.
The collector assuming that the case was one arising "under the revenue laws of the United States" and that it was therefore within the act of 1833, removed it by the mode prescribed in that act of 1833 into the circuit court. This was in November, 1863. And the circuit court having been apparently of the same opinion as to the extent of operation of the act of 1833, tried the case twice, the first trial beginning in December, 1863 -- therefore, before the internal revenue act of 1864, having its fiftieth section, was passed. A new trial was had in October, 1864, and final judgment then given.
The suit thus brought in the state court and removed was to recover internal revenue taxes accrued under the internal revenue acts of 1862 and 1863, demanded by the collector and paid under protest by the "Trustees of the Philadelphia Gas
Works," for gas used by the city for its public lamps. Supposing jurisdiction to have existed in the circuit court, the question was whether this gas had been "made and sold" by the trustees to the city, or whether it had been made by the city through its appointees, the trustees, for itself. If the former, it was taxable under the provisions of the revenue acts, which taxed all gas "made and sold;" if the latter, it came within an exception which exempted articles made by any person "not for sale, but for his or their own use," and was not taxable.
The history of "the Philadelphia Gas Works," where the gas was made, and their relation to the City of Philadelphia, was this:
They originated in a city ordinance passed in 1835, and which seems to have contemplated the temporary establishment of a quasi-corporation which might yet be, or be ultimately, a department of the city government. The works were to be and were constructed by means of money subscribed by private individuals, for which they received certificates of stock entitling them to the profits arising from the manufacture and sale of gas. The ordinance provided that the works should be under the exclusive management of trustees elected by the councils of the city; also that the public lamps should be supplied at half the price paid by private consumers. It provided, above all, that the city corporation should have a right to take possession on certain conditions. The original capital was limited to $100,000. The works, with the increase of the city, not being found large enough and needing to be extended, subsequent ordinances were passed authorizing loans and providing that the money should be borrowed by the city on the requisition of the trustees and that obligations of the city should be issued to the loanholders. A sinking fund, as security for the loanholders, was created out of the proceeds of sale of gas before any profits were distributable to the stockholders. The interest on the certificates of loan was declared payable at the office of the gas works. In 1841, under the original ordinance of 1835, reserving to the city the right to take
possession, the city did take possession in their own right, and the stock was converted into a "gas loan" in which the city was the debtor, and whose interest was in fact paid at the city treasury. But the works were continued under the superintendence of the existing trustees; that only change in the relation of the trustees being that they thenceforth were trustees for the city and loanholders, instead of for the stockholders. Several ordinances were subsequently passed authorizing further loans. They stipulated that for the further security of the loanholders, the works should be controlled and managed by a board of trustees, elected and constituted as theretofore, who should have the whole control of the works, and of all the funds belonging to them, and that the trustees should pay no part of the funds, nor any of the profits of the works, into the city treasury, but should apply the same in payment of the interest and principal of the loans, a stipulation whose primary design was declared by the Supreme Court of Pennsylvania -- on a controversy between some of the holders of the gas loans and the city corporation, which last wished to take into its own control the property, held by the trustees under the various city ordinances, out of their hands, and to elect other trustees, in addition to the number provided by the original ordinance of 1835 [Footnote 4] -- to have been
"to keep the pledge entirely out of the hands of the borrowers (the city), and prevent the funds from being intermingled with other property of the city, and thus exposed to the hazards of expenditure for other objects than those to which it was exclusively designated."
The gas used by the city for its public lamps was manufactured at these works, and under different ordinances, specifically providing for the price payable for gas supplied to the public lamps, a process of payment was regularly gone through with at stated intervals, though practically the matter was, in a good degree, a provision by the city
for the support of works whose income paid the interest on, and provided a sinking fund for final redemption of its own "gas loans" held by various creditors.
The court below was of opinion that the gas was "made and sold," and that it was taxable.