Baltimore v. Baltimore Railroad,
77 U.S. 543 (1870)

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Baltimore v. Baltimore Railroad, 77 U.S. 10 Wall. 543 543 (1870)

Baltimore v. Baltimore Railroad

77 U.S. (10 Wall.) 543


1. A railroad company wanting to borrow $4,500,000 to complete its unfinished railroad, a city, its chief stockholder, and interested in the completion, agreed to lend to it the sum. The arrangement resolved on and carried out was this:

The city was to issue and sell from time to time its the railroad needed the money, its own bonds (having about 35 years to run), for $4,500,000, at a price, however, not below par, and was to issue to the commissioners of its sinking fund similar bends for $500,000, which, with the constant accumulations of interest (to be invested in the purchase of the city debt), were to constitute a sinking fund for payment of the whole debt at maturity. Any premiums which the city might get by the sale of

Page 77 U. S. 544

the loan above par and any excess which, at the maturity of the loan, it might be found that the city had made by its sinking fund operations (above what would be necessary to pay the principal) were to entire to the benefit of the city treasury.

The railroad company, on its part, was to mortgage its road for $5,000,000 and to place in the city treasury, at a specified number of days before each installment of interest fell due, the sum which the city had to pay on its $5,000,000 of bonds, and at a certain date before the maturity of the loan, the amount which should then be clue by the city for the principal not yet bought in. By the terms of its contract, the railroad company was to pay "all and any expense incidental to the issue of any of the bonds."

All this took place in 1854. In 1862, Congress passed an excise law levying an income tax of 3 percent on all sums due for interest by railroad companies, which sum it required the companies to withhold from their creditors and pay to the government, making, by a subsequent act -- one of June, 1864 -- such payment a discharge, in terms, from their creditors for the amount, "except where the companies might have contracted otherwise." But no such tax was laid on the bonds of cities, nor did the act require them to withhold anything from their creditors. The railroad company, to save itself from being distrained upon, and giving notice to the city of all that was done, paid the tax under such protest as by the acts of Congress would authorize a recovery of it by the city if it was illegally exacted

Held that the city did not, under the arrangement between it and the railroad company, stand in the position of it surety in such way as that the company was bound to prevent its being prejudiced by events not anticipated when the arrangement between the parties was entered into.

2. That the contract of the railroad company to pay "all and any expense incidental to the issue of any of the bonds" did not oblige it to pay this tax out of its own money, and so to pay the full interest to the city discharged of the tax.

3. That whether this was a tax laid on the securities of a municipality, and whether, if so, it was lawfully laid, was a question which the city was not in it condition to raise, as the tax having been paid under protest, and she having received notice of all that was done, could, under the statutes of the United States, have stepped in and tested the legality of the assessment and collection by instituting proper proceedings to recover the money.

In 1854, the Baltimore & Ohio Railroad Company being then unfinished and needing money to complete its road, the City of Baltimore, which was a very large stockholder

Page 77 U. S. 545

in the road, and greatly interested to have it completed, agreed, in pursuance of an act of the Legislature of Maryland, which gave it this power, to lend the company $4,500,000, and, in order to raise the money, to issue the bonds of the city for $5,000,000, payable in 1890, with interest payable quarterly, on the first days of certain months named. An ordinance was accordingly passed by the city authorizing the loan. It directed that the commissioners of finance of the city should issue certificates of city debt, or bonds, which they themselves were to sell, not however below par, and pay the proceeds of $4,500,000 to the register of the city. With the money thus put "from time to time" into his hands, the register was to pay the railroad company the amount that might be required by it. The remaining $500,000, and its quarterly interest, as accumulated, were to be reserved as a sinking fund to redeem the principal of the whole loan at maturity. The city at the time owed several other debts incurred in aid of internal improvement, and the ordinance proceeded:

"If, at the maturity of said bonds, the sinking fund shall have accumulated to an amount exceeding the principal sum of the loan authorized of $5,000,000, the said excess shall be paid into the city treasury, for the use of the city, and be applied to the extinguishing the internal improvement debt."

"The premium, if any, that may be received on account of the sale of the said certificates or bonds shall be converted into a sinking fund and invested in the public debt of the City of Baltimore, and so from time to time, with the interest quarterly accruing, to be applied to the payment of the original internal improvement debt of the city."

The railroad company, in fulfillment of its part of the contract, mortgaged its property to the city, the mortgage containing a proviso thus:

"Provided that if the said railroad company do and shall pay to the register of the said city the principal sum of $5,000,000, less the amount of the sinking fund provided for therein, and its accumulations, at least one month before the day on which the bonds

Page 77 U. S. 546

directed by said ordinance to be issued shall become redeemable, and shall also pay to the said register interest at the rate of six percent per annum on the whole amount of said certificates or bonds issued quarterly, and in advance at least ten days previous to the first days of the several months mentioned in said ordinance, which said payment shall commence to be made in advance of the first payments of interest which shall be required to be made by the city, on said certificates or bonds, and shall continue to be made as aforesaid until the repayment by the said company to the city of the principal sums of money which shall or may be issued as aforesaid, and shall well and truly pay all and any expense incidental to the issue of any of the bonds as aforesaid, and shall pay the expense of recording this indenture of mortgage in the proper offices, then these presents shall be null and void, else to remain in full force and effect."

The railroad company having received the money from the city, paid the interest on its mortgage as agreed on and in full until October, 1862.

On the 1st of July in that year, [Footnote 1] Congress passed an excise law levying an income tax of 3 percent on all sums of money due for interest by a railroad company on its bonds or other "evidences of indebtedness," and "authorized and required" such companies to deduct and withhold from all payments made to any party after the said 1st July, 1862, the said duty, thus in effect constituting the company the collector of the tax for the United States. A statute of June 30, 1864, [Footnote 2] enacted that payment over by the railroad companies should discharge them from that amount of interest, "except where said companies may have contracted otherwise."

Neither statute, however, taxed the bonds of municipal corporations. The Commissioner of Internal Revenue now made a demand on the railroad company for 3 percent on its mortgage to the city, insisting that the mortgage was an "evidence of indebtedness" within the meaning of the act of 1862. The company gave notice to the city of this demand, and that if it was enforced by the government, the

Page 77 U. S. 547

company would have to deduct the 3 percent from the interest which it had hitherto paid the city. The city objected to this being done in any event, and the railroad company and city made a joint attempt to persuade the Commissioner of Internal Revenue that the case did not come within the act of 1862. The Commissioner did not accept this view, and to prevent a distress upon it, the company paid the tax, making a protest, however, setting forth fully and specifically the grounds of objection to the demand, "in view," as the protest declared, "of attempting to recover it under the provisions of the act of Congress in this connection" -- provisions which, when protest is properly made, authorized recovery from the government if the tax have been illegally exacted. Having thus paid the tax, the company deducted the amount of it from the payments of interest to the city, and in October, 1864, the city brought this suit to recover the amount thus withheld. Judgment having been given in favor of the railroad company, the city brought the case here.

Page 77 U. S. 550

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