Knowlton v. Moore, ante, 178 U. S. 41,
followed in this case as to the points there decided.
Plummer v. Coler, ante, 178 U. S. 116,
affirmed and followed in this case.
As the parties below proceeded upon a mutual mistake of law in
construing and applying the statute, the Court thinks that the
practical injustice that might result from an affirmance of the
judgment may be avoided by reversing it at the cost of the
plaintiff in error and sending the cause back to the circuit court
with directions to proceed therein according to law.
In October, 1899, George T. Murdock, as executor of the last
will and testament of Jane H. Sherman, brought an action in the
supreme court of the State of New York against John Ward, Collector
of Internal Revenue for the Fourteenth District of the State of New
York, wherein the plaintiff sought to recover the sum of
$36,827.53, which the plaintiff alleged had been unlawfully exacted
from him as executor of said estate.
On petition of the defendant, the cause was removed into the
Circuit Court of the United States for the Southern District on New
York.
The complaint contained the following allegations:
"I. Jane H. Sherman, late of the Village of Port Henry, in the
County of Essex and State of New York, died on about the 30th day
of September, 1898, leaving certain property, and also leaving a
last will and testament, in and by which said will this
Page 178 U. S. 140
plaintiff, George T. Murdock, was appointed to be, and by due
order of the Surrogate of the County of Essex, in the State of New
York, to whom jurisdiction in that behalf pertained, he has become
and is, the sole executor of the said last will and testament of
said Jane H. Sherman."
"II. The plaintiff further alleges and states that the said Jane
H. Sherman, deceased, upon her death left a very considerable
amount of personal property, amounting to upwards of one million of
dollars."
"III. That the defendant, John G. Ward, at all the times
mentioned in this complaint, was and he is Collector of Internal
Revenue for the Fourteenth District of the State of New York,
having his office and official place of residence at the City of
Albany, in the State of New York."
"IV. That said John G. Ward, assuming to act as such collector
and assuming and pretending to act under and by virtue of the laws
of the United States, which he assumed conferred authority upon him
therefor, and particularly under and in pursuance of the provisions
of an act of the Congress of the United States commonly known as
the 'War Revenue Law' of June 13, 1898, and being an act to provide
ways and means to meet war expenditures, and for other purposes,
passed by the Congress of the United States, and becoming a law on
the 13th day of June, 1898, did, on or about the fourth day of
April, 1899, by force and duress, exact, demand, and collect from
this plaintiff and from the estate represented by him as such
executor the sum of thirty-six thousand eight hundred and
twenty-seven dollars and fifty-three cents ($36,827.53) and upon
the claim and under the pretext that the same was a lawful
assessment as an internal revenue tax upon the estate of said
deceased and against this plaintiff, as executor of said deceased,
on account of the legacies or distributive shares arising from
personal property, being in charge or trust of this plaintiff, as
such executor as aforesaid, the properties assumed to be assessed
for such tax being properties passing from the said Jane H.
Sherman."
"V. That on or about the eighth day of April, 1899, this
plaintiff, under protest, and protesting that he was not, nor was
the estate represented by him, liable to pay said tax,
involuntarily
Page 178 U. S. 141
and under duress, because of the illegal demand made upon by
said defendant, did pay to the said defendant as such collector, as
aforesaid, the said sum of $36,827.53."
"VI. That thereafter, believing the imposition of said tax and
its collection to be unlawful, this plaintiff did appeal to the
Commissioner of Internal Revenue and to the Treasury Department of
the United States of America from the action and decision of said
defendant in holding this plaintiff to be liable for the payment of
said tax and in collecting the said tax in manner aforesaid, and
did state and represent to said Commissioner that the collection of
said tax was unlawful, and that the amount thereof should be
refunded for the following reasons:"
" First. The imposition of said tax was unconstitutional,
unlawful, and void."
" Second. The imposition and collection of said tax deprived
this deponent of his property and the estate represented by him of
its property without due process of law."
" Third. That the law imposing said tax is not uniform, and does
not afford equal protection of the laws to persons throughout the
United States."
" Fourth. That the law imposing said tax denied and does deny to
persons throughout the United States and within its jurisdiction
the equal protection of the laws."
" Fifth. That the law under which said tax was imposed denies to
this deponent the equal protection of the laws."
" Sixth. The tax so imposed is a direct tax, and is void because
not apportioned among the states in proportion to their population
and in accordance with the provisions of the Constitution of the
United States."
" Seventh. If said tax is an impost, excise, or duty, the law
imposing the same is unconstitutional and void because the tax
levied is not uniform throughout the United States, as required by
the Constitution of the United States; and"
" Eighth. It is not within the province of the constitutional
powers of the United States to levy a tax upon a right of
inheritance or disposition by will, provided for by the laws of the
State of New York. "
Page 178 U. S. 142
"And this plaintiff did, in and by such appeal, claim that he
was entitled to have the sum of money so paid and the amount
thereof refunded, and he did then and there ask and demand the
return of the same moneys to him, and did appeal from the act of
said defendant, as such collector, in imposing said tax and
exacting from plaintiff payment of the amount thereof."
"VII. On the 21st day of October, 1899, the said Commissioner of
Internal Revenue, and the Treasury Department of the United States,
represented by the said Commissioner of Internal Revenue, did
disallow the appeal of this plaintiff in the behalf above stated,
and did reject the claim of the plaintiff to have refunded the
amount of the tax paid as aforesaid."
"VII. A very large proportion and at least one-third of the
personal estate upon account of which said tax was exacted from and
paid by this plaintiff consisted in the bonds and interest-bearing
evidences of debt issued by the government of the United States,
and which by contract between the United States and the holders
thereof were and are not subject or liable to assessment or
taxation; nor was or is this plaintiff subject or liable to
assessment or taxation by means of his ownership or holding, as
executor, as aforesaid, or otherwise, of such bonds and
certificates of indebtedness."
"IX. This plaintiff claims and charges that, by reason of the
premises, the amount of said tax has been unlawfully exacted from
him as executor of said estate; that each and every of the grounds
stated by him in the above-mentioned appeal to the said
Commissioner of Internal Revenue states and represents a true and
lawful reason why the imposition of said tax is unlawful, and why
the said tax should be refunded."
"Wherefore this plaintiff demands judgment against the said
defendant for the sum of thirty-six thousand eight hundred and
twenty-seven dollars and fifty-three cents ($36,827.53) with
interest from the 8th day of April, 1899, with the costs of this
action."
The defendant, appearing by Henry L. Burnett, United States
Attorney for the Southern District of New York, demurred to the
complaint upon the ground that the complaint did not state facts to
constitute a cause of action.
Page 178 U. S. 143
On November 14, 1899, after hearing, the circuit court sustained
the demurrer and ordered the complaint to be dismissed, with costs
to the defendant. Thereupon a writ of error was allowed to the
judgment, and the cause was brought to this Court.
MR. JUSTICE SHIRAS delivered the opinion of the Court.
That the tax imposed under the provisions of the Revenue Act of
June 13, 1898, is a direct tax, and therefore void because not
apportioned among the states in proportion to their population;
that, if not a direct tax, but an impost, excise, or duty, it is
void because the tax levied is not uniform throughout the United
States, and that it is not within the province of the
constitutional power of the United States to levy a tax upon a
right of inheritance or disposition by will, provided for by the
laws of the State of New York, are contentions of the plaintiff in
error which have been determined against him in the case of
Knowlton v. Moore, ante, 178 U. S. 41, just
decided by this Court. The opinion in that case so fully discusses
the arguments urged in support of those propositions that their
further consideration is unnecessary.
The remaining question is that presented by the following
assignment of error:
"The court erred in refusing to find that, insofar as the estate
of the deceased consisted of the government bonds of the United
States mentioned in said complaint, the Congress had not right or
authority to impose or assess any tax upon the same, and in
refusing to find that the plaintiff in error was entitled to
recover back from the defendant in error in this action the amount
of the tax mentioned in his complaint, and which was assessed
against the plaintiff in error because of his ownership as
executor, as aforesaid, of such bonds of the government of the
United States. "
Page 178 U. S. 144
The only allegation in the complaint respecting bonds of the
United States is contained in the eighth paragraph, which is as
follows:
"A very large proportion and at least one-third of the personal
estate upon account of which said tax was exacted from and paid by
this plaintiff consisted in the bonds and interest-bearing
evidences of debt issued by the government of the United States,
and which, by contract between the United States and the holders
thereof, were and are not subject or liable to assessment or
taxation; nor was or is this plaintiff subject or liable to
assessment or taxation by means of his ownership or holding as
executor, as aforesaid, or otherwise, of such bonds and
certificates of indebtedness."
The complaint does not set forth the terms of the will, nor
attach a copy of it as an exhibit. And it is suggested in the brief
of the solicitor general, filed on behalf of the United States,
that, as presented by the record, this is not a case where United
States bonds have passed from the testatrix to legatees, but where
a personal estate of a certain value in money has passed to the
executor, to be charged against him as money to be distributed
among the beneficiaries under the will, and that therefore, for
aught that appears, the executor may have sold every bond and
distributed the proceeds in money, and that even if legatees
entitled to certain sums of money shall have accepted United States
bonds in lieu of money, they would take the bonds not under the
will, but as purchasers.
However the complaint does allege that the money which is sought
to be recovered was assessed against the plaintiff as executor of
the deceased
"on account of legacies or distributive shares arising from
personal property being in his charge or trust, as such executor as
aforesaid, the properties assumed to be assessed for such tax being
properties passing from the said Jane H. Sherman,"
and was paid by him under duress. Such allegations, taken in
connection with that contained in the eighth paragraph, above
quoted, to the effect that, of the property taxed, at least
one-third part consisted of United States bonds, makes it to
sufficiently appear that United States bonds in the hands of the
plaintiff as executor or trustee under a will were
Page 178 U. S. 145
included as a portion of the estate passing to the executor, and
were assessed and taxed as such portion. It may also be observed
that it is the executor or trustee who has in charge the legacies
or distributive shares arising from personal property, passing
after the passage of the act, from any person possessed of such
property, who is the person taxed in respect to such property.
Accordingly, we think there is room in this record for the
contention of the plaintiff in error that as matter of fact, bonds
of the United States formed a portion of the property actually
assessed, and that consequently the Court is called upon to
determine whether it was obligatory on the executor of Jane H.
Sherman to include in his statement to the collector bonds of the
United States in his possession and charge as such executor, and
whether it was the right and duty of the collector to demand and
receive from the executor a sum of money measured by the value of
the property in his hands, although composed in part of United
States bonds.
Putting aside, as already disposed of in the case of
Knowlton v. Moore, the claims that inheritance and legacy
taxes imposed by the United Stated in the Act of June 13, 1898, are
invalid because, as direct taxes not apportioned, or, as duties,
for want of uniformity, or because the taxing power of the United
States does not reach such property transmissible under the laws of
the states, it is conceded, as we understand the argument of the
plaintiff in error, that United States bonds would be properly
included in estimating the amount of an inheritance or legacy tax,
were it not for the clauses contained in the United States statutes
exempting such bonds from state and federal taxation. On the other
hand, it is not denied by the counsel for the government that it
was the intention of those clauses to exempt the bonds and interest
thereon from any federal tax, direct or indirect. What is denied is
that there was any intention on the part of Congress, by the
clauses mentioned, to exempt the portion of an estate invested in
United States bonds from either a state or federal inheritance
tax.
It is claimed by the plaintiff in error, and conceded by the
government, that the exemption clause was incorporated into the
bonds, and became a subsisting contract between the government
Page 178 U. S. 146
and the bondholders. It is further contended, on the one side,
and conceded, on the other, that this contract extends to the
assigns of the holders. But a legal issue is joined when it is
affirmed by the plaintiff in error and denied by the government
that assigns must be interpreted to include those whose title is
derived under the inheritance and legacy laws of the states.
It has recently been decided by this Court, in the case of
Plummer v. Coler, ante, 178 U. S. 115,
where the question involved was the validity of the inheritance tax
law of the State of New York when applied to a legacy consisting of
United States bonds containing a clause of exemption from state and
federal taxation, that the conclusion fairly to be drawn from the
state and federal cases is that the right to take property by will
or descent is derived from and regulated by municipal law; that, in
assessing a tax upon such right or privilege, the state may
lawfully measure or fix the amount of the tax by referring to the
value of the property passing, and that the incidental fact that
such property is composed in whole or in part of federal securities
does not invalidate the tax or the law under which it is
imposed.
It may be said that, in that case, we were dealing with the
sovereign power of a state to tax property within her own limits;
but still the contention had to be met that federal bonds were not
within the taxing power of the state not only because they were
declared to be exempt from state taxation in any form, but because
they were means devised by the government to raise money, and that
such a purpose might be defeated if the states were permitted to
tax the bonds in the hands of their holders. The conclusion,
however, was reached, following state and federal cases cited, that
the inheritance or legacy tax law of the State of New York did not
expressly or by necessary implication propose to tax federal
securities; that the tax was not imposed on the property passing
under the state laws, but on the right of transfer by will or under
the intestate law of the state; that, whatever the form of the
property, the right to succeed to it is created by law, and if it
consists of United States bonds, the transferee derives his right
to take them, as
Page 178 U. S. 147
he does his right to take any other property of the decedent,
under the laws of the state, and the state, by its statutes, makes
the right subject to the burden imposed.
A similar distinction has been recognized by several of the
state courts, which have held that, while a tax imposed on United
States bonds by a state statute would be invalid because beyond the
reach of the state's power to tax, yet that a tax upon the
franchises or capital stock of a state corporation, measured by the
value of its entire property, would be valid, even if the property
was composed in whole or in part of federal securities, because the
tax can be regarded as imposed not on specific property, but on the
rights and privileges bestowed by the state.
Commonwealth v.
Provident Institution, 12 Allen 312;
Commonwealth v.
Hamilton Manufacturing Company, 12 Allen 298;
Coite v.
Society for Savings, 32 Conn. 173.
The judgments in those cases, holding that state taxes may be
lawfully imposed, the amount of which may be determined by the
aggregate amount of the property or capital stock of banking or
manufacturing companies, even if such property or capital stock
includes United States bonds issued under a statute declaring them
exempt from taxation under state authority, were affirmed by this
Court.
Society for Savings v.
Coite, 6 Wall. 594;
Insurance
Co. v. Massachusetts, 6 Wall. 611;
Hamilton
Manufacturing Co. v. Massachusetts, 6 Wall.
632.
Without repeating the discussion in the opinion in
Plummer
v. Coler, and following the conclusion there reached, we are
unable to distinguish that case from the present one.
If a state inheritance law can validly impose a tax measured by
the amount or value of the legacy, even if that amount includes
United States bonds, the reasoning that justifies such a conclusion
must, when applied to the case of a federal inheritance law taxing
the very same legacy, bring us to the same conclusion. We must
therefore hold that if, as held in
Knowlton v. Moore, the
tax imposed under the Act of June 13, 1898, is not invalid as a
direct unapportioned tax, nor for want of uniformity, nor as an
infringement upon the laws of the states regulating wills and
descents, then the tax upon legacies or bequests
Page 178 U. S. 148
descendible under and regulated by state laws is valid even if
such legacies incidentally are composed of federal bonds.
It cannot be denied that the government of the United States
has, and has heretofore exercised, the power to tax its own bonds.
By the Act of July 1, 1862, 12 Stat. 474, there was imposed a tax
upon the interest on United States bonds at one-half the rate of
the tax imposed upon the income of other property, and by the Act
of June 30, 1864, 13 Stat. 281 and 479, the discrimination in favor
of the holders of United States bonds was abandoned, and the
interest on them was taxed at the like rates as other income.
The argument in this case turns at last upon the proposition
that, by the exempting clauses in the statutes and on the face of
the bonds, the United States entered into a contract with those who
should buy and hold the bonds that neither principal nor interest
should be taxed.
Whether the United States, in the exercise of the power of
taxation, can be estopped by a contract that such power shall not
be exercised we need not consider, because the contract in this
case does not, as we view it, mean that a state may not, or the
United States may not, tax inheritances and legacies, regardless of
the character of the property of which they are composed. That some
of the holders of United States bonds may have paid franchise taxes
to the states, and others may have paid state or federal
inheritance and legacy taxes, has nothing to do with the contract
between the United States and the bondholders. The United States
will have complied with their contract when they pay to the
original holders of their bonds, or to their assigns, the interest,
when due, in full, and the principal, when due, in full.
These views demand an affirmance of the judgment of the circuit
court sustaining the defendant's demurrer to the complaint.
We observe that it appears in the schedule of legacies prepared
by the executor in this case, on a form apparently furnished by the
collector of internal revenue, that several of the legacies under
Mrs. Sherman's will were for sums under $10,000, and which were
therefore, under the construction
Page 178 U. S. 149
put by this Court on the statute in
Knowlton v. Moore,
not taxable. It also appears that the theory on which the taxes
were computed in respect to legacies over $10,000 was by measuring
the tax by the amount of the entire estate, instead of by the
amount of each legacy. This method of construing and applying the
statute we have held, in
Knowlton v. Moore, to be
erroneous. Therefore the executor, representing the respective
legatees, is entitled to recover back the amount of taxes paid on
legacies under $10,000 and likewise such excess of taxes as was
paid by reason of the erroneous interpretation of the statute.
We here meet the formal difficulty that neither the complaint in
the circuit court nor the assignments in error in this Court
apparently questioned the correctness of the construction put upon
the statute by the collector. The questions raised and considered
only involved the validity of the act, and not its construction if
valid.
As, however, the parties proceeded on a mutual mistake of law,
we think the practical injustice that might result from an
affirmance of the judgment may be avoided by reversing the judgment
at the cost of the plaintiff in error and sending the cause back to
the circuit court, with directions to proceed therein according to
law.
And accordingly it so ordered.
MR. JUSTICE WHITE dissents in respect to the taxability of the
bonds.
MR. JUSTICE PECKHAM took no part in the decision of the
case.
