1. The tax on interest paid by corporations under sec. 122 of
the internal revenue law, as amended by the Act of July 13, 1888,
14 Stat. 138, is an excise tax on their business, to be paid by
them out of their earnings, income, and profits.
2. In order that its payment might be secured, this tax was laid
on the subjects to which these earnings were applied in the usual
course of business of such corporations -- namely, dividends,
interest on funded debt, construction, or some reserve fund held by
the company.
3. Such a tax is not invalidated by the provision that the
amount of it may be withheld from the dividend or the interest due
or payable to the stockholder or the bondholder, who is a citizen
or a subject of a foreign government, with no residence in this
country.
This is a suit by the Michigan Central Railroad Company against
Charles W. Slack, collector of internal revenue for the third
collection district of Massachusetts, to recover a tax or duty of
$860.33, paid to him, under protest, on the twenty-eighth day of
February, 1870, which tax was assessed on or about the 19th of that
month on sterling bond interest paid by said company in London in
gold, in the previous month of January, by cashing certain coupons
which then fell due.
The coupons were attached to certain sterling bonds issued by
said company, to the amount of �95,700, and negotiated by their
agents in London in 1852, or early in 1853. The bonds were due in
July, 1872, and paid at maturity, in gold, in London.
So far as the company knows, not one of them was ever held by
any person in the United States, or by other than nonresident
aliens, and the interest accruing was regularly paid in gold in
full in London, without rebate or reservation of the United States
internal revenue tax.
Appeal was duly made to the Commissioner of Internal Revenue
before this suit was brought.
The court below found for the defendant, whereupon the company
brought the case here, and assigns for error that the court below
erred in finding that Congress had power to impose
Page 100 U. S. 596
the tax in controversy, and that, upon the facts, judgment must
be for the defendant.
MR. JUSTICE MILLER delivered the opinion of the Court.
As the sum involved in this suit is small, and the law under
which the tax in question was collected has long since been
repealed, the case is of little consequence as regards any
principle involved in it as a rule of future action.
The tax was assessed under sec. 122 of the internal revenue law,
as amended by the act of 1866. What is pertinent to this case reads
as follows:
"Any railroad, canal, turnpike, canal navigation, or slack water
company indebted for any money for which bonds or other evidence of
indebtedness have been issued payable in one or more years
Page 100 U. S. 597
after date, upon which interest is stipulated to be paid, or
coupons representing the interest, or any such company that may
have declared any dividend in scrip, or money due or payable to its
stockholders, including nonresidents, whether citizens or aliens,
as part of the earnings, profits, income, or gains of such company,
and all profits of such company carried to the account of any fund,
or used for construction, shall be subject to and pay a tax of five
percentum on the amount of all such interest or coupons, dividends
or profits, whenever and wherever the same shall be payable, and to
whatsoever party or person the same may be payable, including
nonresidents, whether citizens or aliens, and said companies are
hereby authorized to deduct and withhold from all payments on
account of any interest, or coupons, and dividends due and payable,
as aforesaid, the tax of five percentum, and the payment of the
amount of said tax so deducted from the interest, or coupons, or
dividends, and certified by the president or treasurer of said
company shall discharge said company from that amount of the
dividend or interest, or coupon on the bonds, or other evidences of
their indebtedness so held by any person or party whatever, except
where said companies have contracted otherwise."
14 Stat. 138.
The agreed statement on which the case was tried shows that the
tax was for interest paid by the company on sterling bonds in
London, which bonds were issued long before the internal revenue
law was enacted, and it is perhaps fairly to be inferred from the
statement that the bonds were held at the time by foreigners.
It is on this latter feature of the case that resistance to the
tax is founded. It is urged that it is a tax on the property -- if
property it may be called -- of persons not subject to the
jurisdiction of this government, and therefore beyond the power of
Congress to levy or enforce.
That the tax was actually collected without resistance, and the
present suit is brought to recover it back, is sufficient answer to
the assertion that it could not be enforced.
Whether Congress, having the power to enforce the law, has the
authority to levy such a tax on the interest due by a citizen of
the United States to one who is not domiciled within our limits and
who owes the government no allegiance is a question which we do not
think necessary to the decision of this case.
Page 100 U. S. 598
The tax, in our opinion, is essentially an excise on the
business of the class of corporations mentioned in the statute. The
section is a part of the system of taxing incomes, earnings, and
profits adopted during the late war, and abandoned as soon after
that war was ended as it could be done safely. The corporations
mentioned in this section are those engaged in furnishing roadways
and waterways for the transportation of persons and property, and
the manifest purpose of the law was to levy the tax on the net
earnings of such companies. How were these "earnings, profits,
incomes, or gains" to be most certainly ascertained? In every well
conducted corporation of this character these profits were disposed
of in one of four methods; namely, distributed to its stockholders
as dividends, used in construction of its roads or canals, paid out
for interest on its funded debts, or carried to a reserve or other
fund remaining in its hands. Looking to these modes of distribution
as the surest evidence of the earnings which Congress intended to
tax, and as less liable to evasion than any other, the tax is
imposed upon all of them. The books and records of the company are
thus made evidence of the profits they have made, and the
corporation itself is made responsible for the payment of the
tax.
Manifestly such a mode of ascertaining the net earnings of the
company would not be complete unless the sums paid as interest on
their bonded debts were taken into the account.
Of course it was competent for Congress to tax only the earnings
after deducting this interest paid on their debt, or to treat the
sum so paid as part of the net earnings, and paid out of them as
dividends were. It adopted the latter policy.
It results from this course of observation that the tax was not
laid on the bondholder who received the interest, but on the
earnings of the corporation which paid the interest.
It is very true that the act went further, and declared that,
except when the company had contracted otherwise, it might deduct
this tax from the amount due the bondholders. And where the
bondholder was subject to congressional legislation, by reason of
citizenship, residence, or situs of the property taxed, it was
within the lawful power of Congress to do so. Whether, as a
question of international law, this declaration
Page 100 U. S. 599
would relieve the corporation from the obligation to pay its
foreign bondholder the full sum for which it contracted, we need
not discuss; for this court, on all such subjects, is bound by the
legislative and political departments of its own government. The
tax is laid by Congress on the net earnings, which are the results
of the business of the corporation, on which Congress had clearly a
right to lay it; and being lawfully assessed and paid, it cannot be
recovered back by reason of any inefficiency or ethical objection
to the remedy over against the bondholder.
Judgment affirmed.
