1. The power of taxation of a state is limited to persons,
property, and business within her jurisdiction. All taxation must
relate to one of these subjects.
2. Bonds issued by a railroad company are property in the hands
of the holders, and when held by nonresidents of the state in which
the company was incorporated, they are property beyond the
jurisdiction of that state. A law of Pennsylvania, passed on the
1st of May, 1868, which requires the treasurer of a company,
incorporated and doing business in that state to retain five
percent of the interest due on bonds of the company, made and
payable out of the state to nonresidents of the state, citizens of
other states, and held by them, is not, therefore, a legitimate
exercise of the taxing power of the state. It is a law which
interferes between the company and the bondholder, and, under the
pretense of levying a tax, impairs the obligation of the contract
between the parties.
3. The exemption from taxation by the State of Pennsylvania of
bonds thus issued to and held by nonresidents of that state,
citizens of other states, is not affected by the fact that the
bonds are secured by a mortgage, executed simultaneously with them,
upon property situated in that state. A mortgage there, though in
the form of a conveyance, is a mere security for it debt, and
transfers no estate in the mortgaged premises. It simply creates a
lien upon them, and only confers upon the holder, or the party for
whose benefit the mortgage is given, a right to proceed against the
property mortgaged, upon a given contingency, to enforce the
payment of his demand. This right has no locality independent of
the party in whom it resides.
4. The tax laws of it state can have no extraterritorial
operation, nor can any law of it state inconsistent with the terms
of a contract, made with or payable to parties out of the state,
have any effect upon the contract whilst it is in the hands of such
parties or other nonresidents of the state.
The plaintiff in error in this case, the Cleveland, Painesville
& Ashtabula Railroad Company, was incorporated by an act of the
legislature of Ohio passed in 1848, and authorized to construct a
railroad from the City of Cleveland in that state to the line of
the State of Pennsylvania. Under
Page 82 U. S. 301
this act and its supplement, passed in 1850, the road was
constructed. By an act of the Legislature of Pennsylvania passed in
1854, the company was authorized to construct a railroad from the
City of Erie in that state to the state line of Ohio, so as to
connect with this road from Cleveland, and also to purchase a
railroad already constructed between those points. This grant of
authority was subject to various conditions, which the company
accepted, and under its provisions the road between the points
designated was constructed, or the one already constructed was
purchased, and connected with the road from Cleveland, so that the
two roads together formed one continuous line between the Cities of
Cleveland and Erie. The whole road between those places was
ninety-five and a half miles in length, of which twenty-five miles
and a half were situated in the State of Pennsylvania and the rest,
seventy miles, were situated in the State of Ohio. The company, so
far as it acted in Pennsylvania under the authority of the act of
her legislature, has been held by her courts to be a separate
corporation of that state, and as such subject to her laws for the
taxation of incorporated companies. [
Footnote 1] But there was only one board of directors who
managed the affairs of both companies as one company, and had the
entire control of the whole road between Cleveland and Erie.
In 1868, the funded debt of the company amounted to $2,500,000
and was in bonds of the company secured by three mortgages, one for
$500,000, made in 1854, one for $1,000,000, made in 1859, and one
for $1,000,000, made in 1867. Each of the mortgages was executed
upon the entire road, from Erie, in Pennsylvania, to Cleveland, in
Ohio, including the right of way and all the buildings and other
property of every kind connected with the road. The principal and
interest of the bonds first issued were payable in the City of
Philadelphia; the principal and interest of the other bonds were
payable in the City of New York. All the bonds were executed and
delivered in Cleveland, Ohio,
Page 82 U. S. 302
and nearly all of them were issued to, and have been ever since
held and owned by nonresidents of Pennsylvania and citizens of
other states. The interest was at 7 percent
On the 1st of May, 1868, the Legislature of the State of
Pennsylvania passed an act entitled "An act to revise, amend, and
consolidate the several laws taxing corporations, brokers, and
bankers," the eleventh section of which provided as follows:
"The president, treasurer, or cashier of every company, except
banks or savings institutions, incorporated under the laws of this
Commonwealth, doing business in this state, which pays interest to
its bondholders or other creditors, shall, before the payment of
the same, retain from said bondholders or creditors, a tax of five
percentum upon every dollar of interest paid as aforesaid, and
shall pay over the same semiannually, on the first days of July and
January in each and every year, to the state treasurer for the use
of the Commonwealth, and every president, treasurer, or cashier as
aforesaid shall annually, on the thirty-first day of each December,
or within thirty days thereafter, report to the auditor general,
under oath or affirmation, stating the entire amount of interest
paid by said corporation to said creditors during the year ending
on that day, and thereupon the auditor general and state treasurer
shall proceed to settle an account with said corporation as other
accounts are now settled by law."
The treasurer of the company, under this act, made a report in
May, 1869, showing that during the previous year the company had
paid interest on its funded debt of $2,500,000, at the rate of 7
percent, amounting to $175,000. Upon this report the auditor
general and state treasurer "settled an account" against the
company, finding that it owed to the state the sum of $2,336.50 for
the tax on the interest which the company had paid.
In reaching this conclusion, these officers apportioned the
interest upon the debt owing by the company according to the length
of the road, assigning to the part in the State of Pennsylvania an
amount in proportion to the whole indebtedness which that part
bears to the whole road. There was
Page 82 U. S. 303
no law, however, in existence at the time directing or
authorizing this proceeding.
From the settlement thus made the company appealed, under the
law of the state, to the court of common pleas of one of her
counties, specifying various objections to the settlement, and
among others substantially the following:
That the greater portion of the bonds of the company having been
issued upon loans made and payable out of the state, to
nonresidents of Pennsylvania, citizens of other states, and being
held by them, the act in question, in authorizing the tax upon the
interest stipulated in the bonds, so far as it applied to the bonds
thus issued and held, impaired the obligation of the contracts
between the bondholders and the company, and is therefore repugnant
to the Constitution of the United States and void.
The contest in the Court of Common Pleas took the form of a
regular judicial proceeding, a declaration having been filed by the
attorney general on behalf of the state against the company as for
a debt and the company having joined issue by a plea of
non-assumpsit and payment. The common pleas sustained the
validity of the alleged tax against the objections of the company,
and verdict and judgment passed in favor of the state. On error to
the supreme court of the state, the judgment was affirmed, and the
case is brought here for review under the second section of the
amendatory Judiciary Act of 1867.
The judgment of the Supreme Court of Pennsylvania in the case
now brought here was rested, it may be well to say, upon a prior
decision of that court -- one made in
Maltby v. Reading &
Columbia Railroad Co. [
Footnote 2] That case was thus: an Act of the Legislature
of Pennsylvania of April 29, 1844, by its 32d section, laid a tax
on "mortgages,
money owing by solvent debtors, whether by
promissory notes, penal or single bill, bond or judgment," and a
following section required the commissioners of the county to
assess
a tax of three mills on every dollar of the value
of property made liable
Page 82 U. S. 304
by the 32d section to taxation. Several years prior to 1864, the
Reading & Columbia Railroad Company, a corporation of
Pennsylvania, issued bonds payable with semiannual interest at 7
percent. On the 30th of April, 1864, the Legislature of
Pennsylvania passed an act which required the president &c., of
any corporation which pays interest on which a state tax is
imposed, "before payment of the same to retain the state tax," and
pay the same to the treasurer of the state. Maltby, a holder of
certain coupons due before 1864, presented them to the railroad
company for payment. The company insisted on retaining the tax of
three mills on each dollar of the bonds. On suit by Maltby, a
nonresident of Pennsylvania, he asserted that the tax on "money
owing by solvent debtors" was a tax on the debt in the hands of its
holder -- in other words, in the hands of the creditor, and not in
the hands of the debtor -- and that he, the holder in this case,
being a nonresident of Pennsylvania, the debt followed his person
and could not be taxed; moreover, that the tax, if it taxed the
debt in the hands of the creditor, impaired the obligation of
contracts. The Supreme Court of Pennsylvania decided all three
points against Maltby, the creditor.
Woodward, C.J., for the said court, in answering the argument
that the holder of the bond was a nonresident of the state, and the
tax on the debt was therefore illegal, and the other argument,
to-wit, that the retention of the tax out of the coupon violated
the obligation of a contract, said:
"
As to the nonresidence of the holder of the loan. It
is undoubtedly true that the Legislature of Pennsylvania cannot
impose a personal tax upon the citizen of another state, but the
constant practice is to tax property within our jurisdiction which
belongs to nonresidents. Our land taxes have always been imposed
without regard to the domicile of the owner, and so have the taxes
of stocks in banks and other incorporated companies. Stocks and
loans are personal property, and the domicile of the owner
determines the rights of succession to such property, though its
situs at the time of his death determines the right of
administration, but the legislative power of taxation does not
Page 82 U. S. 305
depend upon these distinctions. There must be jurisdiction over
either the property or the person of the owner, else the power
cannot be exercised; but where the property is within our
jurisdiction, and enjoys the protection of our state government, it
is justly taxable, and it is of no moment that the owner who is
required to pay the tax resides elsewhere. The duties of sovereign
and subject are reciprocal, and any person who is protected by
government in his person or property may be compelled to pay for
that protection."
"The principle of taxation as the correlative of protection,
perfectly just in itself, is as applicable to a nonresident as to a
resident owner, because civil government is essential to give value
to any form of property, without regard to the ownership, and
taxation is indispensable to civil government. What would this
plaintiff's loan be worth if it were not for the franchises
conferred upon the company by the Commonwealth, franchises which
are maintained and protected by the civil and military power of the
Commonwealth? Is it not apparent that the intrinsic and ultimate
value of the loan as an investment rests on state authority -- that
it is the state which made it property and preserves it as
property? Then it would seem that this kind of property, more than
any other, ought to contribute to the support of the state
government. And I suppose it is upon this ground that the
legislature discriminates between corporation loans and private
debts as objects of taxation. The artificial debtor, itself a
creature of the legislative power, and all its functions derived
from legislative grant, is so dependent upon the government, it
lives and moves and has its being so entirely by the favor of the
government, that not only what it owns, but what it owes also, is
thought fit to be taxed, whilst only the possessions of the natural
person, and not his debts, are taxed."
"But it may be said, and indeed was urged in argument, that the
plaintiff's loan as personal property follows his person, and is
property for all purposes only in the place where he has his
domicile. For some purposes, as already intimated, it is
undoubtedly subject to the law of the domicile, and yet in a very
high sense it is also property here in Pennsylvania. It was
admitted in argument that corporation stocks are property here
though owned beyond our jurisdiction, and this is a necessary
consequence of the final ruling which a long-vexed question in
the
Page 82 U. S. 306
Supreme Court of the United States received in the case of
Ohio & Mississippi Railroad Company v. Wheeler,
[
Footnote 3] where it was held
that stockholders in railroad companies become presumptively
citizens of the state which creates the corporation. Property has
been defined to be the right or interest which one has in lands or
chattels, and so domestic is this peculiar species of property that
it domesticates the owner. But loans are not stocks, and yet the
loans and stock of a railroad company resemble each other in many
respects. Both are subscribed under the authority of a special law,
and both are so far capital that they are employed for the same
general purposes. The certificate of stock, which the plaintiff as
a citizen of Rhode Island may hold for shares in this company, is
mere paper evidence of property existing here; it is not the thing
signified, it is only evidence of it. Is the bond which the
plaintiff holds anything more? He cannot enforce it where he lives;
he must come here to gather its fruits. It is founded upon and
derives its value from a mortgage, but that mortgage is here, and
the franchises and properties which the mortgage binds are here
within our jurisdiction. The bond signifies his right to receive so
much money out of the mortgaged estate, but that estate not only
belongs to our jurisdiction, but was in part created by our
authority, and the power to raise the mortgage, like all the
franchises of the company, was conferred by state authority."
"Now although loans and stocks are distinguishable for many
purposes, yet the legislature committed no very great solecism in
treating loans as taxable property within our jurisdiction. The tax
may be thought to be extravagant, especially in view of the
taxation to which the owner is exposed in the place of his
residence, but that is a consideration for legislative attention.
The point we rule upon this part of the case is that corporation
loans, though in some sense mere debts, are like moneys at
interest, taxable as property, and moneys at interest have long
been taxed in Pennsylvania."
"
Then has the company the right to deduct the tax from the
coupons? This, it is said, violates the faith of the
obligation, and renders all such legislation void. How far modern
tax laws shall be permitted to impair and alter private contracts
is a great question, which must be decided ultimately by the
Supreme
Page 82 U. S. 307
Court of the United States. I have my own private opinions,
which would probably be found to differ from a majority of this
court. Perhaps the sound conclusion is that governmental taxation,
a thing always to be anticipated when contracts are made, does not
impair the obligation of contracts within the meaning of the
constitutional inhibition. If this be conceded as a principle, then
the mode of collecting the tax, whether by a government agent, a
debtor corporation or manufacturer, is mere machinery, and involves
no principle whatever. For the present, therefore, and speaking for
the court, I lay it down that the acts of assembly to which I have
referred are constitutional and valid; that they tax the loan as
property found here in Pennsylvania, and that they appoint the
debtor corporation the collector of that tax for the benefit of the
state government. "
Page 82 U. S. 317
MR. JUSTICE FIELD, after stating the facts of the case,
delivered the opinion of the Court as follows:
The question presented in this case for our determination is
whether the eleventh section of the act of Pennsylvania of May,
1868, so far as it applies to the interest on bonds of the railroad
company, made and payable out of the state, issued to and held by
nonresidents of the state, citizens of other states, is a valid and
constitutional exercise of the taxing power of the state, or
whether it is an interference, under the name of a tax, with the
obligation of the contracts between the nonresident bondholders and
the corporation. If it be the former, this Court cannot arrest
Page 82 U. S. 318
the judgment of the state court; if it be the latter, the
alleged tax is illegal, and its enforcement can be restrained.
The case before us is similar in its essential particulars to
that of
Railroad Company v. Jackson, reported in 7th
Wallace. There, as here, the company was incorporated by the
legislatures of two states, Pennsylvania and Maryland, under the
same name, and its road extended in a continuous line from
Baltimore in one state to Sunbury in the other. And the company had
issued bonds for a large amount, drawing interest, and executed a
mortgage for their security upon its entire road, its franchises
and fixtures, including the portion lying in both states. Coupons
for the different installments of interest were attached to each
bond. There was no apportionment of the bonds to any part of the
road lying in either state. The whole road was bound for each bond.
The law of Pennsylvania, as it then existed, imposed a tax on money
owing by solvent debtors of three mills on the dollar of the
principal, payable out of interest. An alien resident in Ireland
was the holder of some of the bonds of the railroad company, and
when he presented his coupons for the interest due thereon, the
company claimed the right to deduct the tax imposed by the law of
Pennsylvania, and also an alleged tax to the United States. The
nonresident refused to accept the interest with these deductions,
and brought suit for the whole amount in the Circuit Court of the
United States for the District of Maryland. That court, the chief
justice presiding, instructed the jury that if the plaintiff, when
he purchased the bonds, was a British subject, resident in Ireland,
and still resided there, he was entitled to recover the amount of
the coupons without deduction. The verdict and judgment were in
accordance with this instruction, and the case was brought here for
review.
This Court held that the tax under the law of Pennsylvania could
not be sustained, as to permit its deduction from the coupons held
by the plaintiff would be giving effect to the acts of her
legislature upon property and effects lying beyond her
jurisdiction. The reasoning by which the learned
Page 82 U. S. 319
Justice who delivered the opinion of the Court reached this
conclusion may be open, perhaps, to some criticism. It is not
perceived how the fact that the mortgage given for the security of
the bonds in that case covered that portion of the road which
extended into Maryland could affect the liability of the bonds to
taxation. If the entire road upon which the mortgage was given had
been in another state, and the bonds had been held by a resident of
Pennsylvania, they would have been taxable under her laws in that
state. It was the fact that the bonds were held by a nonresident
which justified the language used, that to permit a deduction of
the tax from the interest would be giving effect to the laws of
Pennsylvania upon property beyond her jurisdiction, and not the
fact assigned by the learned Justice. The decision is nevertheless
authority for the doctrine that property lying beyond the
jurisdiction of the state is not a subject upon which her taxing
power can be legitimately exercised. Indeed, it would seem that no
adjudication should be necessary to establish so obvious a
proposition.
The power of taxation, however vast in its character and
searching in its extent, is necessarily limited to subjects within
the jurisdiction of the state. These subjects are persons,
property, and business. Whatever form taxation may assume, whether
as duties, imposts, excises, or licenses, it must relate to one of
these subjects. It is not possible to conceive of any other, though
as applied to them, the taxation may be exercised in a great
variety of ways. It may touch property in every shape, in its
natural condition, in its manufactured form, and in its various
transmutations. And the amount of the taxation may be determined by
the value of the property, or its use, or its capacity, or its
productiveness. It may touch business in the almost infinite forms
in which it is conducted, in professions, in commerce, in
manufactures, and in transportation. Unless restrained by
provisions of the federal Constitution, the power of the state as
to the mode, form, and extent of taxation is unlimited where the
subjects to which it applies are within her jurisdiction.
Corporations may be taxed, like natural persons, upon
Page 82 U. S. 320
their property and business. But debts owing by corporations,
like debts owing by individuals, are not property of the debtors in
any sense; they are obligations of the debtors, and only possess
value in the hands of the creditors. With them they are property,
and in their hands they may be taxed. To call debts property of the
debtors is simply to misuse terms. All the property there can be in
the nature of things in debts of corporations belongs to the
creditors to whom they are payable, and follows their domicile,
wherever that may be. Their debts can have no locality separate
from the parties to whom they are due. This principle might be
stated in many different ways and supported by citations from
numerous adjudications, but no number of authorities, and no forms
of expression could add anything to its obvious truth, which is
recognized upon its simple statement.
The bonds issued by the railroad company in this case are
undoubtedly property, but property in the hands of the holders, not
property of the obligors. So far as they are held by nonresidents
of the state, they are property beyond the jurisdiction of the
state. The law which requires the treasurer of the company to
retain five percent of the interest due to the nonresident
bondholder is not, therefore, a legitimate exercise of the taxing
power. It is a law which interferes between the company and the
bondholder, and under the pretense of levying a tax commands the
company to withhold a portion of the stipulated interest and pay it
over to the state. It is a law which thus impairs the obligation of
the contract between the parties. The obligation of a contract
depends upon its terms and the means which the law in existence at
the time affords for its enforcement. A law which alters the terms
of a contract by imposing new conditions, or dispensing with those
expressed, is a law which impairs its obligation, for, as stated on
another occasion, such a law relieves the parties from the moral
duty of performing the original stipulations of the contract, and
it prevents their legal enforcement. The Act of Pennsylvania of May
1, 1868, falls within this description. It directs the
treasurer
Page 82 U. S. 321
of every incorporated company to retain from the interest
stipulated to its bondholders five percent upon every dollar and
pay it into the Treasury of the Commonwealth. It thus sanctions and
commands a disregard of the express provisions of the contracts
between the company and its creditors. It is only one of many cases
where, under the name of taxation, an oppressive exaction is made
without constitutional warrant, amounting to little less than an
arbitrary seizure of private property. It is in fact a forced
contribution levied upon property held in other states, where it is
subjected, or may be subjected, to taxation upon an estimate of its
full value.
The case of
Maltby v. Reading & Columbia Railroad
Company, decided by the Supreme Court of Pennsylvania in 1866,
was referred to by the common pleas in support of its ruling, and
is relied upon by counsel in support of the tax in question. The
decision in that case does go to the full extent claimed, and holds
that bonds of corporations held by nonresidents are taxable in that
state. But it is evident from a perusal of the opinion of the court
that the decision proceeded upon the idea that the bond of the
nonresident was itself property in the state because secured by a
mortgage on property there. "It is undoubtedly true," said the
court,
"that the Legislature of Pennsylvania cannot impose a personal
tax upon the citizen of another state, but the constant practice is
to tax property within our jurisdiction which belongs to
nonresidents."
And again:
"There must be jurisdiction over either the property or the
person of the owner, else the power cannot be exercised; but when
the property is within our jurisdiction and enjoys the protection
of our state government, it is justly taxable, and it is of no
moment that the owner, who is required to pay the tax, resides
elsewhere."
There is no doubt of the correctness of these views. But the
court then proceeds to state that the principle of taxation as the
correlative of protection is as applicable to a nonresident as to a
resident; that the loan to the nonresident is made valuable by the
franchises which the company derived from the Commonwealth, and
Page 82 U. S. 322
as an investment rests upon state authority, and therefore ought
to contribute to the support of the state government. It also adds
that though the loan is for some purposes subject to the law of the
domicile of the holder, "yet, in a very high sense," it is also
property in Pennsylvania, observing, in support of this position,
that the holder of a bond of the company could not enforce it
except in that state, and that the mortgage given for its security
was upon property and franchises within her jurisdiction. The
amount of all which is this: that the state which creates and
protects a corporation ought to have the right to tax the loans
negotiated by it, though taken and held by nonresidents, a
proposition which it is unnecessary to controvert. The legality of
a tax of that kind would not be questioned if in the charter of the
company the imposition of the tax were authorized, and in the bonds
of the company, or its certificates of loan, the liability of the
loan to taxation were stated. The tax in that case would be in the
nature of a license tax for negotiating the loan, for in whatever
manner made payable, it would ultimately fall on the company as a
condition of effecting the loan, and parties contracting with the
company would provide for it by proper stipulations. But there is
nothing in the observations of the court, nor is there anything in
the opinion, which shows that the bond of the nonresident was
property in the state or that the nonresident had any property in
the state which was subject to taxation within the principles laid
down by the court itself, which we have cited.
The property mortgaged belonged entirely to the company, and so
far as it was situated in Pennsylvania was taxable there. If
taxation is the correlative of protection, the taxes which it there
paid were the correlative for the protection which it there
received. And neither the taxation of the property nor its
protection was augmented or diminished by the fact that the
corporation was in debt or free from debt. The property in no sense
belonged to the nonresident bondholder or to the mortgagee of the
company. The mortgage transferred no title; it created only a lien
upon the property. Though in form a conveyance, it was
Page 82 U. S. 323
both at law and in equity a mere security for the debt. That
such is the nature of a mortgage in Pennsylvania has been
frequently ruled by her highest court. In
Witmer's Appeal,
[
Footnote 4] the court said:
"The mortgagee has no estate in the land, any more than the
judgment creditor. Both have liens upon it, and no more than
liens." And in that state, all possible interests in lands, whether
vested or contingent, are subject to levy and sale on execution,
yet it has been held, on the ground that a mortgagee has no estate
in the lands, that the mortgaged premises cannot be taken in
execution for his debt. In
Rickert v. Madeira, [
Footnote 5] the court said:
"A mortgage must be considered either as a chose in action or as
giving title to the land and vesting a real interest in the
mortgagee. In the latter case, it would be liable to execution; in
the former it would not, as it would fall within the same reason as
a judgment bond or simple contract. If we should consider the
interest of the mortgagee as a real interest, we must carry the
principle out and subject it to a dower and to the lien of a
judgment, and that it is but a chose in action, a mere evidence of
debt, is apparent from the whole current of decisions. [
Footnote 6]"
Such being the character of a mortgage in Pennsylvania, it
cannot be said, as was justly observed by counsel, that the
nonresident holder and owner of a bond secured by a mortgage in
that state owns any real estate there. A mortgage being there a
mere chose in action, it only confers upon the holder or the party
for whose benefit the mortgage is given a right to proceed against
the property mortgaged upon a given contingency to enforce, by its
sale, the payment of his demand. This right has no locality
independent of the party in whom it resides. It may undoubtedly be
taxed by the state when held by a resident therein, but when held
by a nonresident, it is as much beyond the jurisdiction of the
state as the person of the owner.
It is undoubtedly true that the actual situs of personal
Page 82 U. S. 324
property which has a visible and tangible existence, and not the
domicile of its owner, will in many cases determine the state in
which it may be taxed. The same thing is true of public securities
consisting of state bonds and bonds of municipal bodies, and
circulating notes of banking institutions; the former, by general
usage, have acquired the character of, and are treated as, property
in the place where they are found, though removed from the domicile
of the owner; the latter are treated and pass as money wherever
they are. But other personal property, consisting of bonds,
mortgages, and debts generally, has no situs independent of the
domicile of the owner, and certainly can have none where the
instruments, as in the present case, constituting the evidences of
debt, are not separated from the possession of the owners.
Cases were cited by counsel on the argument from the decisions
of the highest courts of several states which accord with the views
we have expressed. In
Davenport v. Mississippi & Missouri
Railroad Company, [
Footnote
7] the question arose before the Supreme Court of Iowa whether
mortgages on property in that state held by nonresidents could be
taxed under a law which provided that all property, real and
personal, within the state, with certain exceptions not material to
the present case, should be subject to taxation, and the court
said:
"Both in law and equity the mortgagee has only a chattel
interest. It is true that the situs of the property mortgaged is
within the jurisdiction of the state, but, the mortgage itself
being personal property, a chose in action, attaches to the person
of the owner. It is agreed by the parties that the owners and
holders of the mortgages are nonresidents of the state. If so, and
the property of the mortgage attaches to the person of the owner,
it follows that these mortgages are not property within the state,
and if not, they are not the subject of taxation."
In
People v. Eastman, [
Footnote 8] the question arose before the Supreme Court of
California whether a judgment of record in
Page 82 U. S. 325
Mariposa County upon the foreclosure of a mortgage upon property
situated in that county could be taxed there, the owner of the
judgment being a resident of San Francisco, and the law of
California requiring all property to be taxed in the county where
situated; and it was held that it was not taxable there. "The
mortgage," said the court,
"has no existence independent of the thing secured by it; a
payment of the debt discharges the mortgage. The thing secured is
intangible, and has no situs distinct and apart from the residence
of the holder. It pertains to and follows the person. The same debt
may at the same time be secured by a mortgage upon land in every
county in the state, and if the mere fact that the mortgage exists
in a particular county gives the property in the mortgage a situs
subjecting it to taxation in that county, a party, without further
legislation, might be called upon to pay the tax several times, for
the lien for taxes attaches at the same time in every county in the
state, and the mortgage in one county may be a different one from
that in another, although the debt secured is the same."
Some adjudications in the Supreme Court of Pennsylvania were
also cited on the argument, which appear to recognize doctrines
inconsistent with that announced in
Maltby v. Reading &
Columbia Railroad Company, particularly the case of
McKeen
v. County of Northampton, [
Footnote 9] and the case of
Short's Estate,
[
Footnote 10] but we do not
deem it necessary to pursue the matter further. We are clear that
the tax cannot be sustained; that the bonds, being held by
nonresidents of the state, are only property in their hands, and
that they are thus beyond the jurisdiction of the taxing power of
the state. Even where the bonds are held by residents of the state,
the retention by the company of a portion of the stipulated
interest can only be sustained as a mode of collecting a tax upon
that species of property in the state. When the property is out of
the state, there can then be no tax upon it for which the interest
can be retained. The tax laws of Pennsylvania
Page 82 U. S. 326
can have no extraterritorial operation; nor can any law of that
state inconsistent with the terms of a contract, made with or
payable to parties out of the state, have any effect upon the
contract whilst it is in the hands of such parties or other
nonresidents. The extraterritorial invalidity of state laws
discharging a debtor from his contracts with citizens of other
states, even though made and payable in the state after the passage
of such laws, has been judicially determined by this Court.
[
Footnote 11] A like
invalidity must, on similar grounds, attend state legislation which
seeks to change the obligation of such contracts in any particular,
and on stronger grounds where the contracts are made and payable
out of the state.
Judgment reversed and the cause remanded for further
proceedings in conformity with this opinion.
MR. JUSTICE DAVIS, with whom concurred JUSTICES CLIFFORD,
MILLER, and HUNT, dissenting. [
Footnote 12]
[
Footnote 1]
29 Pa.St. 781.
[
Footnote 2]
52 Pa.St. 140.
[
Footnote 3]
66 U. S. 1 Black
286.
[
Footnote 4]
45 Pa.St. 463.
[
Footnote 5]
1 Rawle 329.
[
Footnote 6]
Wilson v. Shoenberger's Executors, 31 Pa.St. 295.
[
Footnote 7]
12 Ia, 539.
[
Footnote 8]
25 Cal. 603.
[
Footnote 9]
49 Pa.St. 519.
[
Footnote 10]
16
id. 63.
[
Footnote 11]
Ogden v.
Saunders, 12 Wheat. 214;
Baldwin v.
Hale, 1 Wall. 223.
[
Footnote 12]
See their opinion,
infra, note following, pp.
82 U. S.
327-328.
NOTE
At the same time with the adjudication as to the tax in the
preceding case was adjudged the validity of the tax in the cases of
two other railroad companies, to-wit, the Pittsburg, Fort Wayne,
& Chicago and the Delaware, Lackawanna & Western, both
writs of error against the State of Pennsylvania, and to judgments
of the supreme court of that state. The tax levied in these last
two cases upon the bonds of nonresidents of the state was three
mills on the dollar of capital, to be paid out of the interest, and
the law laying the tax, a law of 1844, was in existence when the
bonds were issued. In the previous case, it will be remembered that
the tax levied was five percent upon the interest of the bonds, and
the law levying it was not in such existence. The last two cases,
therefore, resembled the case of
Page 82 U. S. 327
Maltby v. Reading and Columbia Railroad, the particulars of
which are stated supra.
*
MR. JUSTICE FIELD, who delivered the judgment of the Court, in
the additional two cases now mentioned, as in the first one, said
that the cases involved the same questions that had been considered
and decided in the previous case, that of the Cleveland,
Painesville & Ashtabula Railroad, and that "the difference in
the mode of the assessment of the tax did not affect the principle
decided."
Upon the authority of the case cited, the judgments in these two
cases, now mentioned, were accordingly reversed and the causes
remanded for further proceedings, JUSTICES CLIFFORD, MILLER, DAVIS,
and HUNT dissenting; and MR. JUSTICE DAVIS saying, for himself and
them, in all the cases, as follows:
"I cannot agree to the opinion of a majority of my brethren in
these cases. That the tax in question is valid and binding, both on
the corporation and its creditor, is clearly settled in
Maltby
v. Philadelphia & Reading Railroad Company, and that too
whether the creditor resides in Pennsylvania or elsewhere. As the
highest court of the state has decided that the act of 1844
authorized the imposition of the tax in controversy, and as that
act was in force when the bonds and mortgages were issued, I cannot
see how any principle of the federal Constitution is violated, nor
can I see how this Court can reach the conclusion it does in these
cases without denying to the state government the right to construe
its own local laws. This right has been recognized so often and in
such a variety of ways that it is no longer an open question.
Indeed, this Court, in
Railroad Company v. Jackson, has
expressly recognized the binding force of the construction which
the Supreme Court in Pennsylvania has put on the act of 1844. Mr.
Justice Nelson, delivering the opinion of the Court, said:"
" 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 authorized the
deduction, and, if no other objection existed against the tax, the
defense would fail. "
Page 82 U. S. 328
"I am also of opinion that a state legislature is not restrained
by anything in the federal Constitution nor by any principle which
this Court can enforce against the state court from taxing the
property of persons which it can reach and lay its hands on,
whether these persons reside within or without the state."
* Pp.
82 U. S.
303-307.
