During the period when sec. 122 of the Act of June 30, 1864, c.
173, as amended by the Act of July 13, 1866, c. 184, was in force,
a railway company paid to alien nonresident holders of its bonds
the entire interest due from time to time thereon.
Held
that the company, no claim Laving been made here against it for any
penalty, is liable to the United states for five percent on the
amount so paid, with interest thereon at the rate of six percent
per annum.
This was an action to recover taxes alleged to be due to the
plaintiff on certain interest coupons paid by the defendant in the
years 1866, 1867, 1868, and 1869, on bonds previously issued by it,
and also certain penalties alleged to be due the plaintiff for
failure of the defendant to make returns of the amount of the
taxes. It was tried in the District Court for the Southern District
of New York upon an agreed statement of facts, of which the
following are all that are deemed material to explain the question
raised and decided. Prior to September 1, 1866, the defendant had
issued sterling coupon bonds to the amount of �800,000, dated
September 1, 1865, the principal of which was payable two years
after date, drawing interest at six percent per annum, payable
semiannually on the first days of March and September of each year,
and the principal and interest of which were payable in London,
England, at the office of Junius S. Morgan & Co., bankers, of
London; after March 1, 1868, and prior to September 1, 1868, the
defendant had issued and sold bonds of the same class amounting to
�200,000, the principal and interest of which were payable at the
same place as the bonds previously issued; that all the bonds with
coupons for interest attached were sold directly to J. S. Morgan
& Co., J. T. Mackenzie, and Stern Brothers, all foreign
bankers, having their places of business in London, and were by
them sold to their customers in England and on the continent of
Europe; that during the years 1866, 1867, 1868, 1869, the bonds and
coupons were all held by nonresident aliens, and not by citizens of
the United States, except bonds to the amount of �20,000, and the
coupons attached, which were held
Page 106 U. S. 328
and owned by a citizen or citizens of the United States residing
in Europe; that the amount of interest on all bonds was provided
for, and sent forward by the defendant, in one sum or block, to J.
S. Morgan & Co., before the dates at which it fell due, and as
it fell due was paid by J. S. Morgan & Co. at their banking
house in London, to the holders of the bonds and coupons; that the
amount of interest paid in the years mentioned on the
above-described bonds was �186,000, of which �4,200 were paid on
the �20,000 held by a citizen or citizens of the United States;
that the defendant made no returns to the assessor, or to any other
officer of the internal revenue of the United States, of the
payment of the interest, or any part thereof, nor did it ever pay
to the United States, or to anyone on their behalf, five percent
tax, or any tax on the interest, or any part thereof; nor did the
defendant withhold the tax or any part thereof from the amount of
the interest, but paid the full amount to the holders of the bonds,
and that no assessment was ever made by the plaintiffs, or by any
officer of the plaintiffs, on the defendant for any portion of the
tax, nor was any demand ever made on the defendant for the payment
of the same to the United States until December 31, 1872.
The court held that the defendant was not liable for a tax on
the �181,800 sterling paid for interest upon coupons and bonds
owned and held by nonresident aliens, but was liable for the tax on
�4,200 sterling paid for interest on coupons and bonds owned and
held by citizens of the United States, and also that it was liable
for only one penalty for failure to make return to the revenue
officer of the amount paid. Judgment was rendered accordingly,
which, on error, was affirmed by the circuit court. This writ of
error was then brought by the United States. No claim for any
penalty was made in the United States. No claim for any penalty was
made in the argument here on behalf of the United States, the only
question presented for determination being whether the court below
erred in holding that the company was not liable for the alleged
tax of five percent on the �181,800 sterling interest which it had
paid to nonresident owners and holders of its coupons and
bonds.
The action was founded on sec. 122 of the Act of June 30, 1864,
c. 173, as amended by the Act of July 13, 1866l mc. 184, which is
as follows:
"That any railroad, canal, turnpike, canal
Page 106 U. S. 329
navigation, or slackwater company indebted for any money for
which bonds or other evidence of indebtedness have been issued,
payable in one or more years 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 percent 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 percent, 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 may have contracted
otherwise. And a list or return shall be made and rendered to the
assessor or assistant assessor on or before the tenth day of the
month following that in which said interest, coupons, or dividends
become due and payable, and as often as every six months, and said
list or return shall contain a true and faithful account of the
amount of tax, and there shall be annexed thereto a declaration of
the president or treasurer of the company, under oath or
affirmation, in form and manner as may be prescribed by the
Commissioner of Internal Revenue, that the same contains a true and
faithful account of said tax. And for any default in making or
rendering such list or return, with the declaration annexed, or of
the payment of the tax as aforesaid, the company making such
default shall forfeit as a penalty the sum of $1,000, and in case
of any default in making or rendering said list or return, or of
the payment of the tax, or any part thereof, as aforesaid,
Page 106 U. S. 330
the assessment and collection of the tax and penalty shall be
made according to the provisions of law in other cases of neglect
or refusal,
provided that whenever any of the companies
mentioned in this section shall be unable to pay the interest on
their indebtedness, and shall in fact fail to pay such interest,
that in such cases the tax levied by this section shall not be paid
to the United States until said companies resume the payment of
interest on their on their indebtedness."
MR. CHIEF JUSTICE WAITE delivered the opinion of the Court.
This judgment is reversed on the authority of
Railroad
Company v. Collector, 100 U. S. 595, and
the cause is remanded with instructions to enter a judgment in
favor of the United States for the equivalent in lawful money of
the United States of the tax of nine thousand three hundred pounds
sterling, with interest at the rate of six percent per annum from
the several times when the same became due and payable, according
to the agreed statement of facts on which the submission was made
below. As no claim was made on the argument in this Court either
for a penalty or for the currency value of the pounds sterling when
the taxes fell due, we have not considered the questions which
would have arisen if such a demand had been made. For these
reasons, the judgment will be without penalties and for the present
value of the pounds sterling in lawful money.
Reversed.
MR. JUSTICE BRADLEY, with whom MR. JUSTICE HARLAN concurred,
delivered the following opinion:
I concur in the judgment of the court in this case, but not for
the reasons given in
Railroad Company v. Collector,
100 U. S. 595. I
concurred in the judgment in that case, as in this, on grounds
essentially different from those given by the Court. I always
regarded the tax which, by the one hundred and twenty-second
section of the Internal Revenue Act of 1864, was laid upon the
interest payable on the bonds and upon the dividends declared on
the stock, of railroad and other corporations, as a tax on the
incomes
pro tanto of the holders of such bonds and stock.
Stockdale v. Insurance
Companies, 20 Wall. 323,
87 U. S. 333;
Railroad Company v. Rose, 95 U. S.
78. The interest payable on bonds was not a tax upon the
companies in respect of a debt owed by them, nor upon the property
represented thereby. The property obtained by the proceeds of the
loans represented by the bonds was taxable (if not taxed) in
another form, and consisted of the railroad tracks or canal, and
other specific property of the companies respectively. If taxed
directly, it was indirectly by means of the duty of two and a half
percent which was laid on their gross earnings. The tax Laid upon
their bonds was intended to affect the owners of them, and whilst
the companies were directed to pay it, they were authorized to
retain the amount from the installments due to the bondholders,
whether citizens or aliens. The objection that Congress had no
power to tax nonresident aliens is met by the fact that the tax was
not assessed against them personally, but against the
rem,
the credit, the debt due to them. Congress has the right to tax all
property within the jurisdiction of the United States, with
certain
Page 106 U. S. 704
exceptions not necessary to be noted. In this case, the money
due to nonresident bondholders was in the United States -- in the
hands of the company -- before it could be transmitted to London or
other place where the bondholders resided.
"While here, it was liable to taxation. Congress, by the
internal revenue law, by way of tax, stopped a part of the money
before its transmission -- namely five percent of it. Plausible
grounds for levying such a tax might be assigned. It might be said
that the creditor is protected by our laws in the enjoyment of the
debt; that the whole machinery of our courts and the physical power
of the government are placed at his disposal for its security and
collection."
Whether taxation thus imposed would be respected by foreign
governments if the creditor could bring before their courts the
debtor company or its property, does not concern us in considering
the question now presented. There is nothing in the Constitution
which authorizes this Court or any other court to disaffirm the
power of Congress to lay the tax. Congress is its own judge of the
propriety or expediency of laying it.
Indeed, so far as the power of Congress is concerned regarded in
reference to any power the courts have to limit or restrain it, I
see no reason why Congress may not lay a tax upon any property on
which the government can lay its hands, whether within or without
the jurisdiction of the United States. If, in imitation of the dues
levied by Denmark upon vessels passing through the Cattegat Sound,
Congress should levy a duty upon all vessels passing through the
Strait of Florida, I do not know of any power which the courts
possess to prevent it. It might create complications with foreign
governments, it is true, and involve the country in war, but
Congress has the power, if it chooses to take the responsibility,
of treating or giving occasion to such complications. The
responsibility rests upon it alone.
So if, in taxing money due from citizens of the United States to
foreign citizens, any complications arise with the governments to
which the latter are subject, Congress alone has the
responsibility, and is the only department of our government which
has a right to take such a responsibility. In
State Tax
on Foreign-Held Bonds, 15 Wall. 300, the state
legislature had laid a tax on the interest payable upon the bonds
of all corporations doing business in the state and authorized the
companies to retain the amount out of the interest payable to the
bondholders without regard to their residence or nationality. I
concurred in the judgment rendered in that case on the ground that
the state, in passing such a law, applicable
Page 106 U. S. 705
to preexisting contracts, exceeded its just powers under our
form of government, and that the law, in its effect upon
nonresident bondholders, impaired the obligation of the
contract.
Considering, therefore, that if Congress chooses to take the
responsibility of levying such a tax as the one in question, the
courts have no power to control its action or to give any relief to
parties affected by it, I concur in the judgment of reversal.
NOTE
As this work was ready for the press several months after the
decision in
The North Star, ante, p.
106 U. S. 17, was
pronounced, 7 Appeal Cases was received in this country. It appears
that in
Soonavaart Mattschaphy Nederland v. Peninsular and
Oriental Steam Navigation Company, reported in that volume, p.
795, the House of Lords overruled
Chapman v. Royal Netherlands
Steam Navigation Company, taking the same view as that
contained in the opinion in
The North Star.
MR. JUSTICE FIELD, dissenting.
I am not able to agree with the majority of the Court in the
decision of this case. The tax which is sustained is, in my
judgment, a tax upon the income of nonresident aliens and nothing
else. The 122d section of the Revenue Act of 1864, as amended by
that of 1866, subjects the interest on the bonds of the company to
a tax of five percent,
Page 106 U. S. 331
and authorizes the company to deduct it from the amount payable
to the coupon-holder, whether he be a nonresident alien or a
citizen of the United States. The company is thus made the agent of
the government for the collection of the tax. It pays nothing
itself; the tax is exacted from the creditor -- the party who holds
the coupons for interest. No collocation of words can change this
fact. And so it was expressly adjudged with reference to a similar
tax in the case of
United States v. Railroad
Company, 17 Wall. 322. There a tax under the same
statute was claimed upon the interest of bonds held by the City of
Baltimore. And it was decided that the tax was upon the bondholder
and not upon the corporation which had issued the bonds; that the
corporation was only a convenient means of collecting it, and that
no pecuniary burden was cast upon the corporation. This was the
precise question upon which the decision of that case turned.
A paragraph from the opinion of the Court will show this beyond
controversy.
"It is not taxation," said the Court,
"that government should take from one the profits and gains of
another. That is taxation which compels one to pay for the support
of the government from his own gains and of his own property. In
the cases we are considering, the corporation parts not with a
farthing of its own property. Whatever sum it pays to the
government is the property of another. Whether the tax is five
percent on the dividend or interest or whether it be fifty percent,
the corporation is neither richer nor poorer. Whatever it thus pays
to the government it by law withholds from the creditor. If no tax
exists, it pays seven percent, or whatever be its rate of interest,
to its creditor in one unbroken sum. If there be a tax, it pays
exactly the same sum to its creditors, less five percent thereof,
and this five percent it pays to the government. The receivers may
be two or the receiver may be one, but the payer pays the same
amount in either event. It is no pecuniary burden upon the
corporation and no taxation of the corporation. The burden falls on
the creditor. He is the party taxed. In the case before us, this
question controls its decision. If the tax were upon the railroad,
there is no defense; it must be paid. But we hold that the tax
imposed by the 122d section is in substance and in law a tax upon
the
Page 106 U. S. 332
income of the creditor or stockholder, and not a tax upon the
corporation."
See also Haight v. Railroad
Company, 6 Wall. 15, and
Railroad
Company v. Jackson, 7 Wall. 262,
74 U. S.
269.
The bonds upon the interest of which the tax in this case was
laid are held in Europe, principally in England; they were
negotiated there; the principal and interest are payable there;
they are held by aliens there, and the interest on them has always
been paid there. The money which paid the interest was, until paid,
the property of the company; when it became the property of the
bondholders, it was outside of the jurisdiction of the United
States.
Where is the authority for this tax? It was said by counsel on
the argument of the case -- somewhat facetiously, I thought at the
time -- that Congress might impose a tax upon property anywhere in
the world, and this Court could not question the validity of the
law, though the collection of the tax might be impossible, unless
perchance the owner of the property should at some time visit this
country or have means in it which could be reached. This Court
will, of course, never in terms announce or accept any such
doctrine as this. And yet it is not perceived wherein the
substantial difference lies between that doctrine and the one which
asserts a power to tax, in any case, aliens who are beyond the
limits of the country. The debts of the company, owing for
interest, are not property of the company, although counsel
contended they were, and would thus make the wealth of the country
increase by the augmentation of the debts of its corporations.
Debts, being obligations of the debtors, are the property of the
creditors so far as they have any commercial value, and it is a
misuse of terms to call them anything else; they accompany the
creditors wherever the latter go; their situs is with the latter. I
have supposed heretofore that this was common learning, requiring
no argument for its support, being in fact a self-evident truth, a
recognition of which followed its statement. Nor is this the less
so because the interest may be called in the statute a part of the
gains and profits of the company. Words cannot change the fact,
though they may mislead and bewilder. The thing remains through all
disguises of terms. If the company makes no gains or profits on its
business and borrows the money to
Page 106 U. S. 333
meet its interest, though it be in the markets abroad, it is
still required under the statute to withhold from it the amount of
the taxes. If it pays the interest, though it be with funds which
were never in the United States, it must deduct the taxes. The
government thus lays a tax through the instrumentality of the
company upon the income of a nonresident alien over whom it cannot
justly exercise any control, nor upon whom can it justly lay any
burden.
THE CHIEF JUSTICE, in his opinion in this case, when affirming
the judgment of the district court, happily condensed the whole
matter into a few words. "The tax," he says,
"for which the suit was brought was the tax upon the owner of
the bond, and not upon the defendant. It was not a tax in the
nature of a tax
in rem upon the bond itself, but upon the
income of the owner of the bond, derived from that particular piece
of property. The foreign owner of these bonds was not in any
respect subject to the jurisdiction of the United States; neither
was this portion of his income. His debtor was, and so was the
money of his debtor; but the money of his debtor did not become a
part of his income until it was paid to him, and in this case the
payment was outside of the United States, in accordance with the
obligations of the contract which he held. The power of the United
States to tax is limited to persons, property, and business within
their jurisdiction, as much as that of a state is limited to the
same subjects within its jurisdiction.
State Tax on
Foreign-Held Bonds, 15 Wall. 300."
"A personal tax," says the Supreme Court of New Jersey,
"is the burden imposed by government on its own citizens for the
benefits which that government affords by its protection and its
laws, and any government which would attempt to impose such a tax
on citizens of other states would justly incur the rebuke of the
intelligent sentiment of the civilized world."
State v. Ross, 23 N.J. 517, 521.
In imposing a tax, says Chief Justice Marshall, the legislature
acts upon its constituents. "All subjects," he adds,
"over which the power of a state extends are objects of
taxation, but those over which it does not extend are, upon the
soundest principles, exempt from taxation. This proposition
Page 106 U. S. 334
may almost be pronounced self-evident."
McCulloch v.
Maryland, 4 Wheat. 316,
17 U. S.
428.
There are limitations upon the powers of all governments without
any express designation of them in their organic law -- limitations
which inhere in their very nature and structure -- and this is one
of them: that no rightful authority can be exercised by them over
alien subjects, or citizens resident abroad, or over their property
there situated. This doctrine may be said to be axiomatic, and
courts in England have felt it so obligatory upon them that where
general terms, used in acts of Parliament, seem to contravene it,
they have narrowed the construction to avoid that conclusion. In a
memorable case decided by Lord Stowell which involved the legality
of the seizure and condemnation of a French vessel engaged in the
slave trade, which was in terms within an act of Parliament, that
distinguished judge said:
"That neither this British act of Parliament nor any commission
founded on it can affect any right or interest of foreigners unless
they are founded upon principles and impose regulations that are
consistent with the law of nations. That is the only law which
Great Britain can apply to them, and the generality of any terms
employed in an act of Parliament must be narrowed in construction
by a religious adherence thereto."
The Le Louis, 2 Dod. 210, 239.
Similar language was used by Mr. Justice Bailey of the King's
Bench where the question was whether the act of Parliament which
declared the slave trade and all dealings therewith unlawful
justified the seizure of a Spanish vessel, with a cargo of slaves
on board, by the captain of an English naval vessel, and it was
held that it did not. The odiousness of the trade would have
carried the justice to another conclusion if the public law would
have permitted it, but he said,
"That although the language used by the legislature in the
statute referred to is undoubtedly very strong, yet it can only
apply to British subjects, and can only render the slave trade
unlawful if carried on by them; it cannot apply in any way to a
foreigner. It is true that if this were a trade contrary to the law
of nations, a foreigner could not maintain this action. But it is
not, and as a Spaniard could not be considered as bound by the acts
of the British legislature prohibiting this trade, it would be
unjust to deprive
Page 106 U. S. 335
him of a remedy for the heavy damage he has sustained."
Madrazo v. Willes, 3 Barn. & Ald. 353.
In the case of
The Appollon, a libel was filed against
the collector of the District of St. Mary's for damages occasioned
by the seizure of the ship and cargo while lying in a river within
the territory of the King of Spain, and Mr. Justice Story said,
speaking for the Court, that
"The laws of no nation can justly extend beyond its own
jurisdiction except so far as regards its own citizens. They can
have no force to control the sovereignty or rights of any other
nation within its own jurisdiction. And however general and
comprehensive the phraseology used in our municipal laws may be,
they must always be restricted in construction to places and
persons upon whom the legislatures have authority and
jurisdiction."
9 Wheat.
22 U. S. 362.
When the United States became a separate and independent nation,
they became, as said by Chancellor Kent, "subject to that system of
rules which reason, morality, and custom had established among the
enlightened nations of Europe as their public law," and by the
light of that law must their dealings with persons of a foreign
jurisdiction be considered, and according to that law there could
be no debatable question that the jurisdiction of the United States
over persons and property ends where the foreign jurisdiction
begins.
What urgent reasons press upon us to hold that this doctrine of
public law may be set aside, and that the United States, in
disregard of it, may lawfully treat as subject to their taxing
power the income of nonresident aliens, derived from the interest
received abroad on bonds of corporations of this country negotiable
and payable there? If, in the form of taxes, the United States may
authorize the withholding of a portion of such interest, the amount
will be a matter in their discretion; they may authorize the whole
to be withheld. And if they can do this, why may not the states do
the same thing with reference to the bonds issued by corporations
created under their laws. They will not be slow to act upon the
example set. If such a tax may be levied by the United States in
the rightful exercise of their taxing power, why may not a similar
tax be levied upon the interest on bonds of the same corporations
by the states within their respective jurisdictions in the
rightful
Page 106 U. S. 336
exercise of their taxing power? What is sound law for one
sovereignty ought to be sound law for another.
It is said in answer to these views that the governments of
Europe -- or at least some of them where a tax is laid on incomes
-- deduct from the interest on their public debts the tax due on
the amount as income, whether payable to a nonresident alien or a
subject of the country. This is true in some instances, and it has
been suggested in justification of it that the interest, being
payable at their treasuries, is under their control, the money
designated for it being within their jurisdiction when set apart
for the debtor, who must in person or by agent enter the country to
receive it. That presents a case different from the one before us
in this, that here the interest is payable abroad, and the money
never becomes the property of the debtor until actually paid to him
there. So whether we speak of the obligation of the company to the
holder of the coupons or the money paid in its fulfillment, it is
held abroad, not being in either case within the jurisdiction of
the United States. And with reference to the taxation of the
interest on public debts, Mr. Phillimore, in his Treatise on
International Laws, says:
"It may be quite right that a person having an income accruing
from money lent to a foreign state should be taxed by his own
country on his income derived from this source, and if his own
country impose an income tax, it is, of course, a convenience to
all parties that the government which is to receive the tax should
deduct it from the debt which, in this instance, that government
owes to the payer of the tax, and thus avoid a double process;
but a foreigner, not resident in the state, is not liable
to be taxed by the state, and it seems unjust to a foreign creditor
to make use of the machinery which, on the ground of convenience,
is applied in the cases of domestic creditors in order to subject
him to a tax to which he is not on principle liable."
Vol. ii, pp. 14-15.
Here also is a further difference: the tax here is laid upon the
interest due on private contracts. As observed by counsel, no other
government has ever undertaken to tax the income of subjects of
another nation accruing to them at their own domicile upon property
held there and arising out of ordinary business or contracts
between individuals.
Page 106 U. S. 337
This case is decided upon the authority of
Railroad Co. v.
Collector, 100 U. S. 595, and
the doctrines from which I dissent necessarily flow from that
decision. When that decision was announced, I was apprehensive that
the conclusions would follow which I now see to be inevitable. It
matters not what the interest may be called -- whether classed
among gains and profits or covered up by other forms of expression
-- the fact remains, the tax is laid upon it, and that is a tax
which comes from the party entitled to the interest -- here, a
nonresident alien in England who is not and never has been subject
to the jurisdiction of this country.
In that case, the tax is called an excise on the business of the
class of corporations mentioned, and is held to be laid not on the
bondholder who receives the interest, but upon the earnings of the
corporations which pay it. How can a tax on the interest to be paid
be called a tax on the earnings of the corporation if it earns
nothing -- if it borrows the money to pay the interest? How can it
be said not to be a tax upon the income of the bondholder when out
of his interest the tax is deducted? That case was not treated as
one the disposition of which was considered important as settling a
rule of action. The opening language of the opinion is:
"As the sum in this suit is small and the law under which the
tax in question has long since been repealed, the case is of little
consequence as regards any principle involved in it as a future
rule of action."
But now it is invoked in a case of great magnitude, and many
other similar cases, as we are informed, are likely soon to be
before us, and though it overrules repeated and solemn
adjudications rendered after full argument and mature deliberation,
though it is opposed to one of the most important and salutary
principles of public law, it is to be received as conclusive, and
no further word from the Court, either in explanation or
justification of it, is to be heard. I cannot believe that a
principle so important as the one announced here and so injurious
in its tendencies, so well calculated to elicit unfavorable comment
from the enlightened sentiment of the civilized world, will be
allowed to pass unchallenged, though the Court is silent upon
it.
I think the judgment should be affirmed.