1. A state has no power to tax the interest of bonds (secured in
this case by mortgage) given by a railroad corporation, and binding
every part of the road, when the road lies partially in another
state -- one road incorporated by the two states.
2. The Internal Revenue Act of June 30, 1864, does not lay a tax
on the income of a nonresident alien, arising from bonds held by
him of a railroad company incorporated by states of the Union and
situated in them.
The state of Pennsylvania, by certain acts, as expounded by the
supreme court of that state, [
Footnote 1] taxed "money owing by solvent debtors, whether
by promissory note, penal or single bill, bond or judgment,"
imposing three mills on the dollar of the principal, payable out of
the interest. And where the money was due by a railroad
corporation, they made it the duty of the president, or other
officer of the company who paid the coupons or interest to the
holder, to retain the amount of the tax.
The United States, also, by certain acts, laid what is known as
the income tax.
The first tax of this kind was imposed by the act of Congress
passed August 5, 1861. [
Footnote
2] The 49th section of that act directed that there should be
levied and collected upon
Page 74 U. S. 263
the annual income
of every person residing in the United
States, from whatever source derived, a tax of 3 percent on
the amount of the excess of such income over $800; and upon the
income, rents, or dividends, accruing upon property &c., owned
in the United States by any citizen residing abroad, a tax of 5
percent
The next act was passed July 1, 1862, [
Footnote 3] and the 90th section of it directed that
there should be levied and collected a tax of 3 percent on the
annual income of
every person residing in the United
States, over $600 and under $10,000, and when exceeding
$10,000, a tax of 5 percent; and upon the income of citizens
residing abroad, a tax of 5 percent. The next section provided that
the portion of income derived from interest on bonds or other
evidences of indebtedness of any railroad company, which should
have been assessed and paid by said companies, should be deducted
from that prescribed in the previous section; and the 81st section
directed that this tax on the bonds and evidences of indebtedness
should be paid by the companies, and that they might deduct the
same on the payment of interest to the bondholders.
The next act -- one more particularly bearing on one part of
this case -- was that of June 30, 1864. [
Footnote 4] This act directed the levy and collection
of a tax of 5 percent upon the excess of income of
every person
residing in the United States, or of any
citizen
residing abroad, over $600 and under $5,000; 7 1/2 percent over
$5,000 and not exceeding $10,000; and a tax of 10 percent over
$10,000. Subsequent sections [
Footnote 5] provided for the deduction from all payments
on account of interest arising out of bonds of railroad companies,
as in the act of July 1, 1862, and enacted that the payment by the
company of the said duty so deducted from the interest, should
discharge the company from that amount of interest on the bonds "so
held by any person or persons whatever," except where the companies
might have contracted otherwise.
Page 74 U. S. 264
In this state of the statutes of Pennsylvania and of the United
States, Jackson, an alien resident in Ireland, brought suit in the
court below against the Northern Central Railway Company, a company
incorporated by the State of Maryland, to recover the amount of
certain coupons attached to bonds issued by the company and held by
him. The form of them was as follows:
"The Northern Central Railway Company will pay to the bearer,
January 1, 1865, thirty dollars, being a half year's interest on
bond No. 1827, for one thousand dollars."
"J. S. LIEB,
Treasurer"
The plaintiff proved a demand of payment, at the company's
office in Baltimore (where the coupons were payable), and that the
company offered to pay the amount of them, deducting a tax of 5
percent per annum to the United States, under the acts of Congress;
and a further tax of three mills per dollar of the principal of
each bond asserted to be due to the state of Pennsylvania, but
would not pay more. Offer of such payment was refused. He also gave
in evidence charters incorporating the Northern Central Railway
Company by the state of Maryland, and by that of Pennsylvania, and
rested.
The defendant then gave in evidence the articles of
consolidation of four railroad companies, one of which had been
incorporated by the State of Maryland, and the three others by the
State of Pennsylvania, embracing a line of road extending from
Baltimore, in Maryland, to Sunbury, in Pennsylvania, about a third
or fourth of the whole road only being in the former state.
This consolidation was entered into by the respective companies
in pursuance of acts of the legislatures of the two states; and by
means of them the four companies were merged in one, called the
Northern Central Railway Company, and was incorporated by the same
name by the legislature of each state. The stockholders of the old
companies received from the new twice the number of shares held by
them in the old, upon the receipt of which the old shares
Page 74 U. S. 265
were cancelled, after this company was thus organized and the
directors elected. On the 20th of December, 1855, the company
executed a mortgage to a board of trustees upon the entire line of
its road from Baltimore to Sunbury, including all its property and
estate situate within both the states, which mortgage was given to
secure the payment of $2,500,000 in bonds, to be issued in amounts
therein specified. The bonds were issued by the company
accordingly. And it was upon the coupons of a portion of them in
the hands of the plaintiff that this suit was brought.
The court below charged, that if the plaintiff, when he
purchased the bonds, was a British subject resident in Ireland, and
now resided there, he was entitled to recover the amount of the
coupons without deductions. It was the correctness of this charge
which, after verdict and judgment in accordance with it, was the
subject of the question here.
Page 74 U. S. 266
MR. JUSTICE NELSON delivered the opinion of the Court.
It has been argued for the plaintiff, that the acts of the
Legislature of Pennsylvania, when properly interpreted, do not
embrace the bonds or coupons in question; but it is not important
to examine the subject, for, it is not to be denied, as the courts
of the state have expounded these laws, that they authorize the
deduction, and, if no other objection existed
Page 74 U. S. 267
against the tax, the defense would fail. If this was an open
question we should have concurred with the interpretation of the
court below, which concurred with the views of the plaintiff's
counsel. Nor shall we inquire into the competency of the
Legislature of Pennsylvania to impose this tax, upon general
principles, as we shall place the objection upon other and distinct
grounds, though we must say, that the tax upon the promissory note
or bond, given by the resident debtor, and the withholding of the
amount from the interest due to the nonresident holder, would seem
to be a tax upon such nonresident. It is not a tax of the money
lent, because that belongs to the resident debtor, for which he is
taxable; it is a tax on the security, the bond, which is in the
hands of the nonresident holder.
The ground upon which we place the objection in this case, to
the tax is, in brief, that the bonds, amounting to $2,500,000, of
which those in question are a part, were issued by this company
upon the credit of the line of road, its franchises and fixtures,
extending from Baltimore to Sunbury, a given portion of which line
lies within the jurisdiction of the State of Maryland. The old
company, to which this line belonged, by the act of consolidation,
transferred it, with its fixtures and all other interests connected
therewith, including their stock, to the new organization which
have issued these bonds. The security therefore pledged and bound
for the payment of them and of the interest embraces this Maryland
portion of the road; and in case of a failure to pay the principal
or interest, this portion with its franchises and fixtures would be
liable to sale in satisfaction of the bonds and interest.
Now, it is apparent, if the State of Pennsylvania is at liberty
to tax these bonds, that, to the extent of this Maryland portion of
the road, she is taxing property and interests beyond her
jurisdiction. This portion avails her tax roll as effectually as if
it was situate within her own limits. The Maryland portion is not
liable for the payment of any specified part, or quantity of these
bonds thus taxed, but is liable, with all its interests, for the
whole amount, the same as that
Page 74 U. S. 268
portion of the road within the State of Pennsylvania. The bonds
were an issue, in the usual way, by this Northern Central Railway
Company, and the security given by mortgage on the entire line of
the road. No portion of the bonds belong to one part more than to
another. No severance was made of the bonds, and therefore none can
be made, in the taxation, with reference to the line within the
respective jurisdictions of the states. If the tax is permitted as
it respects one bond, it must be as it respects all.
Again, if Pennsylvania can tax these bonds, upon the same
principle, Maryland can tax them. This is too apparent to require
argument. The only difference in the two cases is, that the line of
road is longer within the limits of the former than within the
latter. Her tax would be a more marked one beyond the jurisdiction
of the state, as the property and interest outside of its limits
would be larger.
The consequence of this tax of three mills on the dollar, if
permitted, would be double taxation of the bondholder. Each state
could tax the entire issue of bonds, amounting, as we have seen, to
$2,500,000.
The effect of this taxation upon the bondholder is readily seen.
A tax of three mills per dollar of the principal, at an interest of
six percentum, payable semiannually, is ten percentum per annum of
the interest. A tax, therefore, by each state, at this rate,
amounts to an annual deduction from the coupons of twenty
percentum; and if this consolidation of the line of road had
extended into New York or Ohio, or into both, the deduction would
have been thirty or forty. If Pennsylvania must tax bonds of this
description, she must confine it to bonds issued exclusively by her
own corporations.
Our conclusion on this branch of the case is, that to permit the
deduction of the tax from the coupons in question, would be giving
effect to the acts of the Legislature of Pennsylvania upon property
and interests lying beyond her jurisdiction.
The next question is, whether or not the coupons were
Page 74 U. S. 269
subject to a tax of five percentum per annum to the United
States on the 1st of July, 1865, when they became due?
The act in force when the coupons in question fell due, was the
Act of June 30, 1864, [
Footnote
6] and is the one by which the tax of five percentum claimed on
the bonds of the plaintiff must be determined. The court below held
that the act did not include a nonresident alien, and directed a
verdict and judgment for the whole amount of interest. The decision
was placed mainly on the ground that, looking at the several
provisions bearing upon the question, and giving to them a
reasonable construction, it was believed not to be the intent of
Congress to impose an income tax on nonresident aliens; that they
were not only not included in the description of persons upon whom
the tax was imposed, but were impliedly excluded by confining it to
residents of the United States and citizens residing abroad, and
that the deduction from the prescribed income of the interest on
these railroad bonds, when paid by the companies, was regarded as
simply a mode of collecting this part of the income tax. We concur
in this view. It is not important, however, to pursue the argument,
as Congress has since, in express terms, by the Acts of March 10
and July 13, 1866, imposed a tax on alien nonresident bondholders.
The question hereafter will be not whether the laws embrace the
alien nonresident holder, but whether it is competent for Congress
to impose it, upon which we express no opinion.
Judgment affirmed.
[
Footnote 1]
Maltby v. Railroad Company, 52 Pa.St. 140.
[
Footnote 2]
12 Stat. at Large 309.
[
Footnote 3]
12 Stat. at Large 473.
[
Footnote 4]
13
ib., 281, § 116.
[
Footnote 5]
§§ 117, 122.
[
Footnote 6]
See supra, <|74 U.S. 263|>263.
MR. JUSTICE CLIFFORD (with whom concurred MR. JUSTICE SWAYNE),
dissenting:
I dissent from the opinion and judgment of the court in this
case, because I think the taxes in question, both state and
federal, were legally assessed, and that the officers of the
railway company properly deducted the same from the amount of the
coupons described in the declaration.
