1. A promise on the part of a collector of taxes to repay a tax
illegally collected and paid only under protest cannot be implied
where statute makes it the duty of such officer to pay into the
public treasury without any deduction on account of claims of any
description the gross amount that he receives.
2. The 19th section of the Act of July 13, 1866, which enacts
that no suit shall be maintained in
any court to recover a
tax illegally assessed, except on certain conditions stated in the
section, operates on all suits brought subsequently to the time
fixed by the act for it to take effect, and on suits brought in
state courts as well as in federal.
3. Prior acts giving persons a right to sue, without similar
conditions, did not confer on them any such vested right so to sue,
in regard to transactions which occurred before the passage of the
act of 1866, as that they still could sue irrespective of the
conditions after the time when this act by its terms was to take
effect.
4. Nor had such persons, in such a case as is mentioned in the
first paragraph above, any vested right to sue independently of
statute.
5. The 117th section of the Internal Revenue Act of 1864, which
required a stockholder in companies mentioned in the section to
return as income all gains and profits in them to which be should
be entitled, whether the same were "divided or
otherwise,"
embraces not only dividends declared, but profits not divided and
invested partly in real estate, machinery, and raw material and
partly applied to the payment of debts incurred in previous
years.
The 117th section of the Internal Revenue Act of June 30th,
1864, [
Footnote 1] which laid
what was known as the income tax,
Page 79 U. S. 2
after providing for the collection of an income tax from certain
classes of companies specified, and enacting that "in estimating
the annual gains, profits, or income of any person," revenue from
such and such sources "shall be included and assessed as part of
the income of such person," proceeds:
"And the gains and profits of all companies, whether
incorporated or partnership, other than the companies specified in
this section, shall be included in estimating the annual gains,
profits, or income of any person
entitled to the same,
whether divided or otherwise."
With this enactment in force, one Hubbard owned, A.D. 1864,
certain shares in two manufacturing companies (being companies
other than those previously specified in the section), which in
that year made large profits and made dividends of part of them,
though not of the whole of them. The excess was not divided, nor
had it been apart from the general assets of the respective
corporations, or appropriated for the use or the stockholders,
otherwise than as the law would imply from the existence of them.
On the contrary, it was part of the case as settled and admitted by
the parties:
"That from time to time during said year, and without any
intention to defraud the government, unless the investment
hereinafter named constituted such fraud by implication of law,
said corporations invested said profits in part in real estate,
machinery, and raw material, proper for carrying on their business,
and
in part for the payment of debts incurred in previous
years, and the same remained so invested in 1865."
Hubbard, when making in the year just named his return of income
for the preceding year, returned as part of his income the
dividends which had been made on his stock, but would not return
the undivided profits. The assessor insisted on his returning his
proportion of these also, settling the proportion by a reference to
the number of shares which
Page 79 U. S. 3
he held in the company compared with the whole number into which
its capital stock was divided. Under compulsion from the assessor,
he then did make such return, and under like compulsion did pay, on
the 19th August, 1865, the tax accordingly, protesting in due form
against the collection. The assessor had given Hubbard due notice
of where appeals from the assessment would be held, but Hubbard did
not make any appeal, either to the assessor or to the Commissioner
of Internal Revenue, according to the provisions of law in that
regard, which allowed him to do so, though it did not make his
having done so a condition of his bringing suit. On the contrary,
relying on his simple payment under protest, he brought suit in the
circuit court of the United States to recover the tax. It was not
denied that at the time when he brought that action such a suit
could be maintained to recover such a tax illegally paid under
protest though no such appeal had been made. However, after Hubbard
had thus brought his suit in the circuit court, Congress, on the
13th July, 1866, passed an act [
Footnote 2] whose 19th section was thus
"That no suit shall be maintained in any court for the recovery
of any tax alleged to have been erroneously or illegally assessed
or collected, until appeal shall have been duly made to the
Commissioner of Internal Revenue, according to the provisions of
law in that regard, and the regulations of the Secretary of the
Treasury established in pursuance thereof; and a decision of said
commissioner shall be had thereon, unless such suit shall be
brought within six months from the time of said decision, or within
six months from the time this act takes effect,"
&c.
The suit was called for trial in June, 1867, and in consequence
of this enactment and the admitted want of appeal to the
commissioner, the circuit court dismissed the case.
The plaintiff then, on the 9th of August, 1867, sued the
collector in
indebitatus assumpsit in one of the state
courts of Connecticut, a case as above stated being agreed on, and
it
Page 79 U. S. 4
being further admitted that the collector had, prior to the
bringing of the suit, paid over to the Treasury of the United
States the whole amount of the tax collected; a payment over which
was made in pursuance of the act of Congress of March 3, 1865,
[
Footnote 3] by which
collectors were required to pay daily into the treasury the gross
amount of all duties, taxes, and revenue received or collected in
virtue of the internal revenue acts, without any abatement or
deduction on account of compensation, &c., or claims of any
description whatever; the act, however, or other acts containing
provisions authorizing a person from
whom a tax has been
collected to sue the collector for its recovery, and provisions for
repayment by the treasurer to the collector of whatever should be
thus recovered against him.
In the suit in the state court, the collector set up the fact of
his payment over, and more particularly the act of 1866 as a bar to
the suit, maintaining, also, as a second ground, that if the suit
was not thus barred the tax had been rightly assessed and
levied.
The court in which this second suit was brought gave judgment
for the plaintiff, and on error to the supreme court that judgment
was affirmed. The case was now brought here under the 25th section
of the Judiciary Act. The questions being:
"I. Did the act of Congress of 1866 incapacitate Hubbard from
bringing the second suit?"
"II. If not, were the undivided profits, applied as they bad
been, 'income' within the meaning of the act of 1864? "
Page 79 U. S. 8
MR. JUSTICE CLIFFORD delivered the opinion of the Court.
Suits to recover back moneys illegally exacted as internal
revenue duties cannot, under existing laws, be commenced in the
circuit courts, except in cases where the taxpayer and the
defendant, whether the assessor or collector, are citizens of
different states. [
Footnote 4]
Such suits under any other circumstances must be commenced in the
state courts, as the circuit courts have no jurisdiction to hear
and determine the same, except when they are removed from a state
court into the circuit court for the same district, on motion of
the defendant. [
Footnote 5]
Where the parties are citizens of the same state the action must be
brought in the state court, but the defendant, if he sees fit, and
seasonably takes the proper steps, may remove the case into the
circuit court for trial. [
Footnote
6]
Page 79 U. S. 9
Both parties in this case were citizens of the same state, and
the action was accordingly commenced by the plaintiff in the state
court, and the collector, as the defendant, not having taken any
steps to remove the suit into the circuit court, the same was heard
and determined in the state court in which it was commenced.
Taxes were assessed against the plaintiff, under the internal
revenue laws, in the sum of one thousand five hundred and
ninety-seven dollars, and the findings of the court show that the
assessor duly returned his assessment list to the collector; that
the collector demanded of the plaintiff' the amount of the tax
assessed, and that he threatened if the plaintiff' refused to pay
the same that he would coerce the collection of the whole amount;
that the assessor gave due notice to the plaintiff when and where
appeals from the assessment would be heard, but that the plaintiff'
did not appeal from the same, either to the assessor or to the
Commissioner of Internal Revenue, and that he paid the whole amount
of the assessment under protest.
Pursuant to the practice in that jurisdiction, the superior
court reserved the questions of law arising upon the facts found,
and the question what judgment ought to be rendered in the case,
for the opinion and advice of the supreme court of errors, and the
record shows that the supreme court of errors advised the superior
court to render judgment for the plaintiff, as exhibited in the
transcript of the record removed here by the writ of error for
reexamination.
1. Remarks respecting the jurisdiction of the court to reexamine
the judgment rendered by the state court may well be omitted, as
the claim of the plaintiff as set forth in the declaration
necessarily draws in question the acts of Congress imposing
internal revenue duties and the authority exercised by the
defendant in collecting the same, and the decision of the state
court was against the validity of both, if the acts of Congress be
construed as authorizing the assessment and collection of the
duties.
2. Tried as the case was by the judge of the superior court, as
a substitute for a jury, the supreme court of
Page 79 U. S. 10
errors was bound to take the facts as found by that court, and
this court in reexamining the judgment must proceed upon the same
basis, as the finding of facts is made a part of the record.
[
Footnote 7]
By the finding, it appears that at the time of the assessment
the plaintiff owned a majority of the stock in two certain
manufacturing corporations, whose affairs respectively were managed
by three or more directors, of which the plaintiff was one; that
the profits realized by the respective companies the year preceding
the assessment was greater than the dividends which they made
within the same period; that the profits at the time of the
assessment had not been divided nor had they been in any way set
apart from the general assets of the respective corporations, nor
had they been appropriated for the use of the stockholders,
otherwise than the law will imply from the fact of the existence of
such profits; that the profits made by the respective corporations
during that year were to such all amount that if the interest of
the plaintiff therein was legally subject to the assessment the
amount assessed and collected was the proper amount; that the
plaintiff delivered, under oath, his list to the assistant assessor
on the day of its date, omitting the amount now in controversy from
the list; that the assessor required him to add the same to the
list, which he declined to do, and that the same was then added to
the list by the assessor; and the court also found that the
assessment was legally made, if such profits were in law liable to
such an assessment.
3. Such an amount of profits was made by the two corporations
during that year that if the interest of the plaintiff therein was
legally subject to any assessment it is conceded that the amount
assessed and collected was correct, but the proposition is that the
interest of the plaintiff in such profits was not legally subject
to any such assessment, as it appears that the corporations
invested the profits in part in real estate, machinery, and raw
material proper for carrying on their
Page 79 U. S. 11
business, and in part for the payment of debts incurred in
previous years, and that the same remained so invested at the time
the duties were assessed and collected. Part only of the profits of
that year was so invested, and it was that part of the same which
was not included in the dividends of the year, and which the
plaintiff refused to add to the list he delivered to the assistant
assessor, and which is now the subject of controversy.
4. Intention to defraud the government is not imputed, either to
the corporations or to the plaintiff, unless the investment, in
view of the circumstances, and the refusal of the plaintiff to add
the proportional amount of the same to his list of annual gains and
profits, constitute such fraud by implication of law; but the
defendant contends that the plaintiff' was required by law to pay
the regular income tax on such proportion of the entire net profits
made by the two companies as his stock bore to the whole stock of
the corporations.
Apart from the defense to the merits of the claim, that the tax
was lawfully assessed and collected, the defendant also set up in
his notice of special matters to be given in evidence under the
general issue that he paid over the amount to the Treasury of the
United States before the suit was brought, and that the suit was
barred by the nineteenth section of the act of Congress, entitled
an act to reduce internal taxation, which provides, among other
things, that no suit except under certain conditions not existing
in the case before the court, shall be maintained
in any
court for the recovery of any tax alleged to have been
erroneously or illegally assessed or collected until appeal shall
have been duly made to the Commissioner of Internal Revenue, and a
decision shall be had thereon, except in certain cases not material
to be noticed in this investigation, as the case, if affected at
all by the provision, falls within the rule and not within either
of the exceptions. [
Footnote
8]
5. Payment of the amount into the public treasury before
Page 79 U. S. 12
the suit was brought would be a good defense to the action if
the right of the plaintiff depended solely upon an implied promise
at common law, as the payment was made in pursuance of the
requirement of an act of Congress, and the rule is well settled
that the law will not imply a promise by a public officer to pay
money in his hands as such officer twice, nor to pay it to a
private party in a case where the law requires him to pay it into
the public treasury, and he has complied with that requirement.
[
Footnote 9]
Indebitatus
assumpsit is founded upon what the law terms an implied
promise on the part of the defendant to pay what in good conscience
he is bound to pay to the plaintiff. Where the case shows that it
is the duty of the defendant to pay, the law imputes to him a
promise to fulfill that obligation. Such a promise to pay, however,
will never be implied unless some duty creates such an obligation,
nor will the law ever imply a promise to do an act contrary to law
or in violation of a public duty. [
Footnote 10] Collectors of internal revenue, as well as
collectors of import duties, are required to pay all moneys by them
collected into the Treasury of the United States, and where such
moneys have been collected and the payment has been made into the
treasury as required by the act of Congress, the law, in the
absence of any other statutory regulations upon the subject, would
not imply any promise Oil the part of the collector to pay back the
amount to the taxpayer, even if it appeared that the assessment was
erroneous or illegal, as he could not, in such a case, be under any
obligation to pay the money twice, and to have paid it back to the
taxpayer in the first place would have been contrary to his
official duty as prescribed by an act of Congress. But the right of
the plaintiff to recover in such a case, if the tax is illegal and
lie is not otherwise in fault, does not depend alone upon an
implied promise as at common law, as the same act of Congress which
requires the collector to collect the tax and pay the money into
the public treasury, contains
Page 79 U. S. 13
other provisions from which the implication necessarily arises
that the taxpayer in such a case, if the tax is illegal, may
maintain an action against the collector to recover back the
amount. Much examination of that question, however, is unnecessary
at this time, as the rule upon the subject is definitely settled by
prior decisions of this court. [
Footnote 11]
Such a defense, therefore, cannot avail the defendant in this
cause, as the right of action, though in form an action of
assumpsit, is grounded upon the act of Congress providing for the
assessment and collection of taxes, which will sufficiently appear
from a single suggestion. None of the internal revenue acts
contemplates that the collectors shall reimburse themselves for the
amount of any judgment recovered against them on account of duties
illegally or erroneously assessed and collected. On the contrary,
the act of Congress expressly provides that the Commissioner of
Internal Revenue shall repay to collectors or deputy collectors the
full amount of such sums of money as shall or may be recovered
against them in any court for any internal duties or licenses
collected by them, with the costs and expenses of suit. [
Footnote 12]
6. Prior to the passage of the act of the 13th of July, 1866, it
is quite clear that the taxpayer, if he was illegally assessed,
might maintain an action of assumpsit against a collector to
recover back the amount if he paid it under protest, although he
had not taken any appeal to the Commissioner of Internal Revenue.
[
Footnote 13] Such were the
views of this Court in the case of
Philadelphia v. The
Collector, [
Footnote
14] and no doubt is entertained that the decision was entirely
correct, but it is a great mistake to suppose that the right to
maintain the action, as there conceded, was founded in the theory
that the collector held money in his hands belonging to the
plaintiff which he was bound to refund, as the
Page 79 U. S. 14
decision was placed expressly upon the ground that the several
provisions in the internal revenue acts, before referred to,
warranted the conclusion as a necessary implication that Congress
intended to give the taxpayer such remedy.
Remedies of the kind, given by Congress, may be changed or
modified, or they may be withdrawn altogether at the pleasure of
the lawmaker, as the taxpayer cannot have any vested right in the
remedy granted by Congress for the correction of an error in
taxation. [
Footnote 15]
Suits for such causes of action are absolutely prohibited until
the taxpayer shall appeal to the Commissioner of Internal Revenue,
and until the appeal has been decided, unless the decision is
postponed longer than six months, in which case he is at liberty to
sue within one year from the time when his appeal was taken.
[
Footnote 16]
Three answers are made by the plaintiff to that defense, as
presented in the record:
(1) He contends that the provision is prospective, and that
Congress did not intend that it should retroact so as to affect a
vested right.
(2) That the act of Congress in question, even if it is a bar to
such a suit in a federal court, is inoperative as such in a state
court.
(3) That the money paid for the taxes, inasmuch as it was paid
under protest, must be considered as money in the hands of the
defendant belonging to the plaintiff, and that the plaintiff in
that view of the case has a vested right at common law to his
remedy to recover it back.
Pending suits, it may be conceded, are not affected by that
provision, but it is impossible to say that any suit subsequently
commenced for such a cause of action is not embraced within its
scope and meaning, as the language is,
"No suit shall be maintained in any court for the recovery of
any tax alleged to have been erroneously or illegally assessed or
collected, until appeal shall have been duly made to the
Commissioner of Internal Revenue,"
&c., as more fully set forth in the section. Authority was
vested in the commissioner
Page 79 U. S. 15
by the prior act to remit, refund, and pay back,
"on appeal
to him made," all duties erroneously or illegally assessed or
collected, and all duties that appeared to be unjustly assessed or
excessive in amount. [
Footnote
17]
Appeals were permitted by that act, though not required as a
condition to a right of action, but inasmuch as the right of appeal
and the right of action were conferred by the same act, the Court
is of the opinion that it was entirely competent for Congress to
add new conditions to the exercise of that right whenever in its
discretion the public interest might require such additional
regulation. Unless the meaning of the section can be restrained by
construction it is quite clear that it includes the state courts as
well as the federal courts, as the language is that no suit shall
be maintained
in any court to recover any tax alleged to
have been erroneously or illegally assessed or collected, and there
is not a word in the section tending to show that the words "in any
court" are not used in their ordinary sense. Unquestionably if the
provision is a good bar in the federal courts, it is a good bar in
all courts acting under the same act of Congress, and furnishes the
rule of decision for all. [
Footnote 18]
Special reference is made to the fact that a prior suit was
commenced by the plaintiff, which was pending in the circuit court
at the time the act was passed taking away the original
jurisdiction of the circuit courts in all such cases, except where
the parties are citizens of different states, but the only answer
which need be made to that suggestion is that the present suit is
wholly unaffected by that circumstance.
Regulations exist in some of the states that where the first
suit is abated and a second suit is brought within a prescribed
time the statute of limitations shall cease to run from the date of
the first suit, but Congress has not passed any law to that effect,
and it is conceded that none such exists in the state where the
suit was commenced.
Sufficient has already been remarked to show that the
Page 79 U. S. 16
third proposition of the plaintiff cannot be sustained, as a
party cannot have any vested right in a remedy conferred by an act
of Congress to prevent Congress from modifying it or adding new
conditions to its exercise.
7. Suppose, however, that the rule is otherwise, that the
provision in question is not a bar to the present suit, still the
Court is of the opinion that the addition made to the list rendered
by the plaintiff was proper, that the tax was lawfully assessed,
and that the plaintiff is not entitled to recover in this case.
Assessed as the duties in this case were under the Act of the
thirtieth of June, 1864, attention will be called chiefly to the
provisions of that act. Congress evidently intended by that act, as
appears by the one hundred and sixteenth and the six following
sections, to tax all the annual gains, profits, and income of every
person residing here and of every citizen residing abroad, whether
derived from any kind of property, rents, interests, dividends,
salaries, or from any profession, trade, employment, or vocation,
or from any other source whatever except as therein mentioned if
such annual gains, profits, or income exceed six hundred dollars.
Section one hundred and seventeen declares what shall be included
in estimating the annual gains, profits, or income of any person,
and, among other things, expressly provides that the gains and
profits of all companies, whether incorporated or partnership,
other than the companies specified in that section, shall be
included in estimating the annual gains, profits, or income of any
person, entitled to the same,
whether divided or
otherwise.* [
Footnote
19]
Manufacturing companies are not mentioned in that section, and
of course they fall within that clause of the section which in
terms applies to all companies, whether incorporated or
partnership, not specified in that section. Lists or returns of the
amount of income are required by section one hundred and eighteen,
and section one hundred and nineteen prescribes the time of payment
and defines the penalty in case of neglect and refusal.
Page 79 U. S. 17
Support to the view that the list of an individual should
include undivided as well as divided profits is derived from the
requirements of the one hundred and twentieth section, which levies
a duty of five percentum on all dividends in scrip or money
thereafter declared due whenever the same shall be payable to
stockholders, policyholders, or depositors, as part of the
earnings, income, or gains of certain described companies, not
including manufacturing companies, and on all undistributed sums or
sums made or added during the year to their surplus or contingent
funds. Strong confirmation of that view is also derived from
section one hundred and twenty-one of the same act, which requires
banks of circulation, if they neglect to make dividends or
additions to their surplus or contingent fund as often as once in
six months, to make a list or return in duplicate of the amount of
profits which have accrued or been earned within that period, and
to present the list or return to the collector of the district and
pay to him five percent on such profits. [
Footnote 20]
Substantially the same requirement is made of every railroad,
canal, turnpike, canal navigation and slack water company, and the
provision is that all profits of such a company carried to the
account of any fund or used for construction shall be subject to
and pay a duty of five percentum on the amount of all such profits.
[
Footnote 21] Other
references to the same effect might be made, but it is believed
that these are sufficient to show that the policy of Congress in
that act was to tax all gains and profits, whether divided or
undivided, and that the construction that the undivided gains and
profits of manufacturing companies are properly included in that
rule is just and reasonable.
Decided cases are referred to, [
Footnote 22] in which it is held that a stockholder has
no title for certain purposes to the earnings, net or otherwise, of
a railroad prior to the dividend being
Page 79 U. S. 18
declared, and it cannot be doubted that those decisions are
correct as applied to the respective subject matters involved in
the controversies. Grant all that, still it is true that the owner
of a share of stock in a corporation holds the share with all its
incidents, and that among those incidents is the right to receive
all future dividends -- that is, his proportional share of all
profits not then divided. Profits are incident to the share to
which the owner at once becomes entitled provided he remains a
member of the corporation until a dividend is made. [
Footnote 23] Regarded as an incident to the
shares, undivided profits are property of the shareholder, and as
such are the proper subject of sale, gift, or devise. Undivided
profits invested in real estate, machinery, or raw material for the
purpose of being manufactured are investments in which the
stockholders are interested, and when such profits are actually
appropriated to the payment of the debts of the corporation they
serve to increase the market value of the shares, whether held by
the original subscribers or by assignees. But the decisive answer
to the proposition is that Congress possesses the power to lay and
collect taxes, duties, imposts, and excises, and it is as competent
for Congress to tax annual gains and profits before they are
divided among the holders of the stock as afterwards, and it is
clear that Congress did direct that all such gains and profits,
whether
divided or otherwise, should be included in
estimating the annual gains, profits, or income liable to taxation
under the provisions of that act. Annual gains and profits, whether
divided or not, are property, and, therefore, are taxable.
Judgment reversed with costs and the cause remanded for
further proceedings in conformity to the opinion of this
court.
[
Footnote 1]
13 Stat. at Large 281.
[
Footnote 2]
14 Stat. at Large 152.
[
Footnote 3]
13 Stat. at Large 483.
[
Footnote 4]
<|5 Wall. 728|>Philadelphia v. The Collector, 5
Wall. 728.
[
Footnote 5]
<|9 Wall. 564|>Hornthall v. The Collector, 9
Wall. 564.
[
Footnote 6]
<|9 Wall. 572|>The Assessor v. Osbornes, 9 Wall.
572.
[
Footnote 7]
Tancred v. Christy, 12 Meeson & Welsby 323.
[
Footnote 8]
Stat. at Large 152;
<|10 Wall. 218|>Braun v.
Sauerwein, 10 Wall. 218.
[
Footnote 9]
13 Stat. at Large 236; 13
id. 485;
<|3 How.
250|>Cary v. Curtis, 3 How. 250.
[
Footnote 10]
<|2 Black 478|>Curtis v. Fiedler, 2 Black
478.
[
Footnote 11]
<|5 Wall. 731|>Philadelphia v. Collector, 5 Wall.
731;
<|2 Black 479|>Curtis v. Fiedler, 2 Black 479,
13 Stat. at Large 236, 239.
[
Footnote 12]
13 Stat. at Large 239.
[
Footnote 13]
<|5 Wall. 730|>Philadelphia v. Collector, 5 Wall.
730; 14 Stat. at Large 152.
[
Footnote 14]
<|5 Wall. 730|>5 Wall. 730.
[
Footnote 15]
<|2 Black 473|>Curtis v. Fiedler, 2 Black
479.
[
Footnote 16]
<|7 Wall. 130|>Nichols V. United States, 7 Wall.
130;
<|10 Wall. 218|>Braun v. Sauerwein, 10 Wall.
218.
[
Footnote 17]
13 Stat. at Large 239.
[
Footnote 18]
<|3 How. 254|>Cary v. Curtis, 3 Howard, 254.
[
Footnote 19]
13 Stat. at Large 282.
[
Footnote 20]
13 Stat. at Large 284.
[
Footnote 21]
13
id. 284, ยง 122.
[
Footnote 22]
Minot v. Paine, 99 Mass. 106;
Goodwin v.
Hardy, 57 Me. 145.
[
Footnote 23]
March v. Railroad, 43 N.H. 520.