# Popular Science Monthly/Volume 52/April 1898/Principles of Taxation: The Case of Kirtland vs Hotchkiss XXVI

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* PRINCIPLES OF TAXATION.
By DAVID A. WELLS, LL. D., D. C. L.,
CORRESPONDANT DE L'INSTITUT DE FRANCE, ETC.
XVII.—THE CASE OF KIRTLAND VS. HOTCHKISS.
THE above designation has been popularly given to one of the most important questions that has ever come before the legal tribunals of this country, and the record of which has been heretofore so difficult of access that it has not attracted the attention it merits, but which it is to be hoped will prove at no distant period a subject of popular interest and future judicial consideration. The particulars of the case are in the main as follows: In 1869, or previous, Charles W. Kirtland, a citizen of Woodbury, Litchfield County, Connecticut, loaned money, through an agent, a resident and citizen of Illinois, on bonds secured by deeds of trust on real estate in the city of Chicago. Each of these bonds declared that "it was made under and is in all respects to be construed by the laws of the State of Illinois," and that the principal and interest of the obligation were payable in the city of Chicago. The deed of trust also contained a provision that all taxes and assessments on the property conveyed should be paid by the obligor (borrower) without abatement on account of the mortgage lien; that the property might be sold at auction, in Chicago, by the trustee, in case of any default of payment, and that a good title, free from any right of redemption, on the part of the obligor, might in that case be given by the trustee. Another interesting feature of the case not to be overlooked was, that pending the proceedings to be next related, the loans as originally made became due and were paid; when the proceeds, without being removed from Illinois and returned to Mr. Kirtland in Connecticut, were reinvested in Chicago by his agent, under terms and conditions as before.
These facts becoming known to the tax officials of the town of Woodbury, they added in 1869 to the list of property returned by Kirtland for the purpose of taxation, as situated within the State, the sum of eighteen thousand dollars; and in 1870 the sum of twenty thousand dollars, to represent the amount of property owned and ​loaned by Kirtland, in each of these years, as was conceded, without the territory of the State. The sums thus added were subsequently assessed in the town of Woodbury in the same manner and at the same rate as was other property which Mr. Kirtland owned within the State and there situated.
Payment of the taxes thus assessed on the amount of these Illinois loans being refused by Kirtland, the tax collector (Hotchkiss), in April, 1873, levied his tax warrants on the real estate of the alleged delinquent in Woodbury, and advertised the same for sale; and on petition for injunction to restrain the collector from such proceedings, on the ground of the illegality of the tax in question and its assessment, the case came before the court of last appeal in the State, known as the "Supreme Court of Errors"; it being agreed by all parties concerned that the only question in the case was whether the bonds owned by Kirtland, drawn in the form and manner stated, were liable to taxation in Connecticut.
Case for the Respondent.—In the argument before and in the opinion rendered by this court the following were the points mainly relied upon in support of the position that the petition for injunction in restraint of the collection of the tax should not be granted: First, that the statutes of Connecticut explicitly authorized and required the taxation of debts due its citizens from parties out of the State. Second, in respect to the power of the Legislature of Connecticut to authorize and require such form of taxation, it was claimed that there was no provision in the Constitution of the State limiting and defining such power of taxation. Third, the following characterization of the nature of a debt or a chose in action, and its suitability as a subject for taxation for the purpose of obtaining revenue, was put forward by the counsel for the State as a statement of economic conclusions worthy of full acceptance. "It (a chose in action) has not a visible, tangible form. The note, bond, or account even, may be evidence of a debt, but it is not the debt itself. The specific money when loaned, and received by the borrower, is no longer the property of the creditor. It is soon merged in the circulating mass, and the creditor can neither identify and claim it, nor put his hand upon any property purchased with it, and say that that is his. The money may be invested in real estate, or manufacturing, or mechandising, or speculation. It may prove a profitable investment, or it may in a short time prove a total loss. It is all the same to the creditor so long as his debtor's ability to pay is unimpaired. He has simply a right to receive a given sum of money with interest or damages for its detention. It is a personal right, and accompanies the person of the creditor. The debtor is under a corresponding obligation to pay the demand. The right to receive is ​valuable, and through it an income is derived. That right may with propriety be taxed. The obligation to pay is a burden, and has never, to our knowledge, been the subject of taxation. It seems, therefore, that the appropriate place to tax money at interest is where the creditor resides, and that for that purpose it may with propriety be said to be located with the creditor."
The respondent attached much importance to the analogy "between a money demand, evidenced by a note or bond, and shares of stock in a corporation"; and to the fact that the United States Supreme Court had decided that shares of stock in national banks are property, separate and distinct from the property of the corporations which they represent, and are taxable" (National Bank vs. Commonwealth, 9 Wall., 353).
Reference was also made to the case of Minot vs. The Philadelphia, Wilmington & Baltimore Railroad Company, in which the United States Supreme Court was held to have recognized a distinction between shares of railroad stock and the capital (property) of a corporation, and in respect to which it was assumed that the court maintained that the share of a stockholder is something different from the capital stock of a company; the latter being the property of the company only, while the former is the individual interest of the stockholder, constituting his right to a proportional part of the dividends when declared and to a proportional part of the effects of the corporation when dissolved after payment of its debts. Regarded in that aspect, it was held to be an interest or right which accompanies the person of the owner and having no locality independent of its domicile.
But whether, when thus regarded, it can be treated as so far separable from the property to which it relates as to be taxable independent of the locality of the latter, was a question which the counsel of the State did not hold to be decided; but there was a strong intimation that the United States Court intended to decide that shares of railroad stock can only be taxed in the State where the owner resides.
Case for the Petitioners.—On the other hand, the following is a summary of the arguments and reasons advanced (mainly by one of the most learned and distinguished members of the Court of Errors of the State, and of the American Bar, Hon. L. F. S. Foster, formerly president of the United States Senate and acting Vice-President of the United States), in support of the petition for an injunction in restraint of the collection of a tax upon the plaintiff:
​"Taxation and protection are correlative terms. Protection to the person is the ground on which the right to tax the person rests. Protection to the business, protection to that portion of the property not taken by the tax, is the consideration or compensation for all legitimate taxation on business or on property. The person must be domiciled within the State to be subject to a personal or poll tax; the business or the property must also be within the territory of the State to confer jurisdiction over them. That the person of the plaintiff is within the jurisdiction, and subject therefore to the taxing power, is apparent from the record. This tax, however, is not imposed on the person; it is imposed on the property of the plaintiff, and as such it must be sustained, if sustained at all. The case does not require any description of the various species of property, real, personal, etc. Real property has, of course, an immovable situs, and can never be subject to any taxation except that imposed by the government within whose jurisdiction it is situate. The reason is, that that government is the only one that can afford it protection. Personal property, of whatever it may consist, though capable of being transported from place to place, if it be of a visible and tangible kind, would seem, in the nature of things, to follow the same rule and for the same reason—that is, to be subject to taxation by the State within whose jurisdiction it is situate, as that State only has dominion over it, and as that State only can afford it protection.
"Now, if the property in question be considered real property, it being in the State of Illinois, any tax upon it by Connecticut would be extraterritorial and void. If it be considered personal property, of a visible and tangible character, it is still in the State of Illinois, and so just as much out of the dominion and beyond the jurisdiction of the State of Connecticut as though it were real property. If we consider the property to be an interest in real or personal property, or a title, inchoate, equitable, or legal, to such property in Illinois, such interest, or such title, is no legitimate subject of taxation in Connecticut. The corpus and situs of this property being in Illinois, and subject, of course, to taxation there because within her jurisdiction, no interest in it, no title to it, can be taxable in Connecticut. Such a claim involves one of two absurdities: either that the same property may be in two places at the same time, or that two independent governments can have jurisdiction over the same subject-matter at one and the same time.
"But the property of the plaintiff on which this tax has been imposed is not real property, nor is it personal, of the character here considered. It may be well to describe it precisely, that there may be no room for misunderstanding.
"The plaintiff loaned money in the city of Chicago, in the State ​of Illinois, on bonds conditioned for its repayment, and secured by deeds of trust. One of said bonds, and one of said deeds, as a specimen of all, is made part of the record. This bond declares 'that it is made under, and is in all respects to be construed, by the laws of the State of Illinois, and is given for an actual loan of money [$3,000] made at Chicago, by Charles W. Kirtland [the plaintiff], to Edmund A. Cummings [the obligor] on the day of the date hereof' [July 17, 1869]. The deed of the same date is a conveyance in fee, by Cummings and his wife, of a lot of land in Chicago, to Norman C. Perkins, of said city, to be held by him in trust, as security for the payment of said loan, with power to sell and convey the same, and apply the proceeds in payment of the loan, in case of default on the part of said Cummings to perform the stipulations of said bond. It is quite obvious that Cummings has incurred a debt to Kirtland, and that Kirtland has a claim against Cummings. Cummings is the debtor, Kirtland the creditor. Has this debt a situs? If it has, where is it? In Illinois, or in Connecticut? The contract to loan was made in Illinois, there the creditor parted with his money, there is the property pledged for its repayment, there the debtor is domiciled, there the trustee.
"This seems to indicate Illinois as the situs of this debt. So far as it is a thing having a substantial existence, it is there, and not elsewhere. The Connecticut statute provides in terms, 'that money secured by mortgages upon real estate in this State shall be set in the list and taxed only in the town where said real estate is situated.' This manifestly recognizes the situs of the property pledged as security for a debt, as the situs of the debt. But a debt has no situs. Only a material thing can have a corpus, and only a corpus can have a situs, for it is the location of the corpus that constitutes a situs. A debt is neither visible, tangible, nor ponderable; it has no situs, no corpus. It is a misnomer to call it property. In legal phrase it is but a chose in action, a jus incorporate. It is an equitable title in the property of the debtor, and it adheres, as a title, in the property it represents. It does not follow the person of the owner in his domicile, though he may transfer it there.
"These views are fully sustained by the United States Supreme Court, in the case of Brown vs. Kennedy, 15 Wall., 591.
​"The same court also held to similar conclusions in a number of other cases. Thus, in the case of Pelham vs. Rose, 9 Wall., 103, a note, the evidence of the credit, not the credit itself, was the thing proceeded against. In the case of Pelham vs. Way, 15 Wall., 196, where the court also held that the proceedings, not having been against either the debt or credit, but only against the material evidence of it, and that material evidence having been out of the marshal's jurisdiction, no confiscation had been effected.
"Now, if these decisions," said Judge Foster to his colleagues in the Court of Errors, "are to be recognized as law, how can it be claimed that on this credit, given by Kirtland to Cummings in the State of Illinois, secured by a deed of real estate there situate, held by a trustee resident there, the debtor being domiciled there, the debt made payable there, the laws of Illinois by express agreement to govern the contract; how (for the question bears repeating) can it be claimed that there is any subject-matter within the jurisdiction of Connecticut on which to impose a tax?
"That the land in Illinois which is the security for this debt, and of which this debt is the representative, has borne its full share of taxes without diminution on account of this debt is not denied. If the land were in Connecticut, this would suffice; no tax could be collected on the debt. That the land is in Illinois can not affect the principle. If each State has dominion over the property, real and personal, within its territory for the purposes of taxation—and he must be a bold man who denies it—that dominion must, from its nature, be exclusive. No other State can have concurrent jurisdiction. Nor does any other State become invested with the power to tax, if the State in which the power is vested omits to exercise that power. Should a State exempt the property, real or personal, within its limits, belonging to non-residents, from taxation, by what authority could any foreign State impose taxes on such property? The question is purely jurisdictional, and the matter of double taxation is not involved. The point is not whether the State may tax a thing
​twice, but whether there is anything within its jurisdiction that it can tax at all.
"Resort must be had to a legal fiction to draw this debt into Connecticut. It does not appear from the record that even the eviences of the debt, the bond and deed, were held in Connecticut."
Under such circumstances, it is curious to note, as Judge Foster especially pointed out, to what a singular and absurd hypothesis and procedure the Connecticut authorities, as if conscious that they had abandoned reason and were dealing with sentiment, had recourse in order to get a basis and a warrant for their action. They first assumed that there was an imaginary property, separate and distinct from the material property; and then gave to such imaginary property an imaginary situs, thus "going far into the domain of the sentimental and spiritual for the purpose of taxation." Bishop Berkeley, it will be remembered, held to the opinion that matter does not exist, and that we only imagine that it exists; but it is not at all probable that he ever hoped, when alive, that his views would be so practically indorsed, and at so early a day, in the State of his literary adoption. He would have made, moreover, a desirable tax assessor and tax collector under the present Connecticut tax laws; for being logical, even if he was sentimental, he would doubtless have been willing to take the taxes in the pure product of the imagination. His successors, however, were not only sentimental but illogical; for, not content with assuming that the imaginary is the real, they tried to do what the good bishop never would have sanctioned—namely, take something out of nothing.
But apart from these curious and novel politico-economic and legal features, this Kirtland case involves constitutional questions of the highest interest and importance—as much so, perhaps, as any case ever brought to judicial arbitrament since the formation of the Federal Constitution.
The power of the State to tax the business of loaning money, like the power to tax any business transacted within its limits, by way of license or otherwise, whether the money be loaned to parties within or without the State, is unquestionable.
But this, however, can not be exercised by a State when the business is done without the State, though it be done by citizens of the State. Citizens of Connecticut transacting business in Illinois must, therefore, be subject to the laws of Illinois, and not to the laws of Connecticut. Again, if each State of the Federal Union has dominion over the property and business transacted within its territory for the purpose of taxation, that dominion must from its very nature be absolute and exclude the dominion of any other State over the same property and business. Again, the sovereignty of coequal ​States involves a full recognition of the dominion and sovereignty of all sister States; and hence section one, Article IV, of the Federal Constitution requires that "full faith and credit shall be given to the public acts, records, and judicial proceedings of other States." Each State, then, in entering the Federal Union, entered into a contract of non-interference with the dominion and prerogatives of other States; and it will not be disputed that the power of taxation is an incident of sovereignty or dominion. The dominion, therefore, of one State for the purpose of taxation over persons, property, business, or the incidents of business, must exclude the dominion of other States over the same persons, property, business, and incidents of business at the same time. Neither in constitutional law in the United States nor in mathematics can the same property, persons, business, or incidents of business occupy two places and two sovereignties at the same time. Hence, the taxation by Connecticut of credits, choses in action, bonds, notes, book accounts, verbal and other contracts, the incidents of actual business transacted in Illinois, must be in legal effect extraterritorial taxation of such business, and so an infringement and violation of the sovereignty of Illinois; or else it must be assumed that business does not include its incidents, or the whole its parts.
Furthermore, if Connecticut has the power of taxing extraterritorial contracts for the loan of money, she has the power to fix any rate and to discriminate as to the States upon whose citizens the burden shall fall; or she may adopt a rate that shall be prohibitory on contracts made by her citizens with citizens of designated States, or citizens of all the States, as her caprice may dictate.
And in this way she may obstruct and to a great extent prevent interstate commerce, which the United States Supreme Court in repeated instances (since the Kirtland case) has decided that the separate State governments can not under the Federal Constitution do either directly or indirectly.
From these considerations, reasoning, and precedents the conclusions of Judge Foster would seem to have been incontrovertible—namely, that "the plaintiff," Kirtland, "was not liable to taxation" in Connecticut "for debts owing to him in Illinois"; and inferentially that, although possibly warranted by the letter of the statute, the act was an attempt on the part of Connecticut to exercise extraterritorial dominion over persons, contracts, or business, and was, therefore, unconstitutional and void. It would also seem to be clear that if property in action (choses in action) is made by fiction of law an entity, having a situs in one State separate from the property which it represents in another State, an opportunity for the grossest inconsistencies will be perpetrated, and the most ​inharmonious, arbitrary, and capricious tax laws and other laws will be enforced by conflicting legislation of States, required by constitutional obligations to "give full faith and credit to the public acts of other States."
The Connecticut Court of Errors, however, dissolved the injunction and dismissed the petition, Judge Foster alone out of a full bench of five dissenting. An appeal being next taken to the United States Supreme Court, the latter (in 1879) affirmed the judgment of the Connecticut court, the essential points of the opinion rendered by Mr. Justice Harlan being as follows: "The debt which the plaintiff, a citizen of Connecticut, holds against the resident of Illinois is property in his hands. The debt, then, having its situs at the creditor's residence, and constituting a portion of his estate there, both he and the debt are, for purposes of taxation, within the jurisdiction of the State. It is, consequently, for the State to determine, consistently with its own fundamental law, whether such property owned by one of its residents shall contribute, by way of taxation, to maintain its government, and 'its discretion in that regard is beyond the power of the Federal Government to supervise or control, for the reason that such taxation violates no provision of the Federal Constitution'; as manifestly it does not, as supposed by counsel, interfere in any true sense with the exercise by Congress of the power to regulate commerce among the several States; nor does it, as is further supposed, abridge the privileges or immunities of citizens of the United States, or deprive the citizen of property without due process of law, or violate the constitutional guaranty that the citizens of each State shall be entitled to all the privileges of citizens in the several States.
" Whether the State of Connecticut shall measure the contribution which persons resident within its jurisdiction shall make by way of taxes in return for the protection it affords them, by the value of the credits, choses in action, bonds or stocks which they may own (other than such as are exempted or protected from taxation under the Constitution and laws of the Unted States) is a matter which concerns only the people of that State, and with which the Federal Government can not rightfully interfere."
It remains but to indicate the legitimate deductions and consequences of this decision, and point out some of the circumstances pertinent to the treatment of the case when it was before the United States Court.
In the first place, it decided that debts are property; a legitimate deduction from which is that the creation of debts creates property, and the extinguishment or payment of debts annihilates property; a conclusion which has not received the sanction of the judiciary, or ​found a place in the tax system of any country other than the United States. Second, the decision next gave a miraculous power to residence, by making it: capable of producing property out of nothing. Third, it sanctioned the right of a State to subject its citizens to double taxation in respect to one and the same property, and indorsed the justice and morality of the act. If the situs of the property—in the sense of an actuality—and the owner of a mortgage upon it, are within the territory of one and the same State, and the actuality is fully taxed by it, the separate and duplicate taxation of the mortgage would not be sanctioned except at the demand of the debtor, and which, as equivalent to his asking that the burden of his debt be augmented, he would be not likely to make. But when the actuality and the mortgage are in different States of one and the same nation, as was the situation in the Kirtland case, a different rule is held to prevail, whereby that which in one State was regarded as an incident of property, and as such properly exempt from taxation, becomes by mere transference to another State actual property, and so rightfully subject to taxation.
Fourth. If debts are property, and rightful subjects for taxation, the sphere of the application of this principle should not be restricted to debts created by a mortgage, but should embrace every form of indebtedness created by the loan of capital—as promissory notes, book credits, and policies of life insurance—which are valuable to just the extent that they represent the indebtedness of the company issuing them to the holder of the policy. But if all the forty-four States of the Federal Union or the different countries of the rest of the world were to undertake to pursue capital in the form of debts due their respective citizens for the purpose of taxation, the resulting inextricable and disastrous confusion would be almost beyond the power of imagination.
Fifth. The United States Supreme Court held that there was nothing in the form of taxation involved in this case that interfered with the power of the Federal Government to regulate interstate commerce; but if, as was further held, there was no constitutional limitation on the exercise of the power of taxation by the State of Connecticut, and that the Federal Government can not rightfully interfere with the measure of taxes that a State may impose on credits and choses in action that its citizens may own, it is difficult to see why Connecticut might not impose such taxes on all extraterritorial contracts of pecuniary value as would greatly impair or altogether prevent the commercial intercourse of her citizens with, the citizens of other States. Finally, nothing more clearly exhibits the anomalous issues involved in this case than the fact that it could not have come up before any of the courts of England, France, ​Belgium, Germany, Switzerland, Italy, or Lower Canada; for in none of these countries are debts regarded in the light of property, subject to taxation.
The following facts pertinent to the history of this case are also worthy of record: When the appeal from the decision of the Connecticut Court of Errors was made to the United States Supreme Court, one of the most distinguished members of the bar of the State of New York, and who in repeated instances had commanded the respect and attention of the former court, was moved, through his abstract interest in the legal and economic principles involved in the case, to volunteer his services for its future argument and presentation to this high and final tribunal. But on the day assigned for its hearing, serious illness prevented his attendance on the court, and the case in question went before it practically without verbal argument, and mainly on the presentation of a brief. Some years after the decision was rendered, the then chief justice of the court (the late Morrison R. Waite) told the writer, in a familiar interview, that he had no recollection of the case, and expressed much interest in a presentation of the economic points involved in it.
Another fact especially worthy of the consideration of those who have been instrumental in enacting and defending statutes in respect to taxation in the United States which find no justification in economic principles, or any parallel in the laws or fiscal systems of other countries of high civilization, is, that since the final decision in the Kirtland case, the State of Connecticut, where it originated, has derived no material advantage from it. Nay more, a somewhat extensive inquiry made of its tax officials renders it doubtful if a single extraterritorial mortgage has since been made subject to taxation as property in the form of a debt in the State of Connecticut. And the same is generally believed to be true of a vast number of mortgages of real estate—especially of farming lands of the Western States of the Federal Union—which in recent years have been negotiated and sold by the large number of the so-called "loan and trust companies "in the Eastern States. The fact is, the American people, whose interests have called their attention to this form of taxation, regard it as unequal and unjust, and so clearly in the nature of double taxation on one and the same person and property, and an exaction, that evasion of it is clearly warranted; the whole record of experience under it constituting another demonstration of the fact that under a popular form of government any law regarded as unjust or unnecessary can not be efficiently executed; and to avoid the necessity of evasion it has now become almost the universal practice, in executing mortgages in the United States, that if the mortgage is made subject to taxation the mortgagee shall pay the taxes in ​addition to the interest on the loan of capital represented by the mortgage.
No. 1. This case seems from its very nature to involve questions of conflict of State dominion. It is admitted that Mr. Kirtland, the plaintiff, so far as the question of taxation at issue is concerned, has not been assessed and taxed upon his body, person, poll, or head, or for any substance, the embodiment of labor, and which alone constitutes property, owned or possessed by him within the territory of Connecticut; nor for any business transacted by him within the State. The plaintiff has, however, been assessed and taxed for dealing in money or doing the business of loaning money, by an assessment and taxation of bonds and mortgages made in Illinois—the necessary incidents and evidence of the business of money lending, performed by himself or through a resident agent in the State of Illinois. It is conceded that the loans were actually made at Chicago in the State of Illinois, as the bonds and mortgages taken state that all the business and acts connected with the loaning and reloaning were actually done, from time to time, there, that the obligations were payable there, and that the contracts of loan were strictly Illinois contracts, to be interpreted as valid or invalid and as to their force and effect according to the laws of that State.
The State of Illinois imposes a tax on resident agents making loans in that State; but it is not important to inquire whether in this instance the business of loaning was done through a resident agent or what that State does actually tax, but what she can constitutionally tax by virtue of her dominion and sovereignty. Illinois can undoubtedly tax, if the tax is not discriminating but uniform on residents and nonresidents, all occupations and also all business transacted within her borders. She can tax money dealers or money lenders by license or otherwise, and she can impose stamp or other taxes and to any degree, in her discretion, on all contracts at the time when made within her jurisdiction. No other State has concurrent jurisdiction over any legitimate subject of taxation within her jurisdiction. Her sovereignty in taxation is absolute except as limited by the national Constitution. But the sovereignty of coequal States involves a full recognition of the dominion and sovereignty of all sister States, and hence section 1, Article IV, of the United States Constitution requires that "full faith and credit shall be given to the public acts, records, and judicial proceedings of other States." This is a compact of noninterference in the dominion of other States in matters of taxation or in reference to other subjects of State dominion. The power of taxation is an incident of sovereignty or of dominion. The dominion, therefore, of one State for the purpose of taxation over persons, property, or business, or the incidents of business, must exclude the dominion of other States over the same persons, property, business, and incidents of business at the same time. Neither in constitutional law in this country nor in mathematics can the same persons, property, business, and incidents of business occupy two places or sovereignties at the same time. The taxation by Connecticut of credits, choses in action, bonds, notes, book accounts, verbal and other contracts, the incidents of actual business transacted in Illinois, must be in legal effect extraterritorial taxation of a part of such business, or otherwise it must be assumed that the incident is not a part of the principal. The making of contracts is of itself a business in the strictest sense, nor can any business exist without the power to make contracts written or verbal. Money can not be loaned unless there is a business of lending money, and for the time being the vocation of a money lender. The amount or duration of a business in a State can have no influence on the question of the jurisdiction of the State over the business or the transaction. A State can tax all sales at auction, including the sales of goods in unbroken packages owned by nonresidents and just brought into the State and sold by nonresidents or by resident agents (Woodruff vs. Perham, 8 Wallace 123). In New York mere wandering peddlers are taxable on money invested in business in every town in which they peddle. If actually assessed in more than one town the same year the remedy is to appeal to the ​assessors (Hill vs. Crosby, 26 Howard, par. 413). It would seem that business, occasional, transient, or permanent, transacted in a State by a resident or nonresident, by the force of State sovereignty, may be made subject to a uniform rule of taxation.
Extraterritorial taxation can have no force in American jurisprudence. Protection and taxation are correlative terms. Protection to that portion of property not taken or absorbed by the tax is the consideration or compensation for all legitimate taxation, and extraterritorial taxation is therefore a mere arbitrary "taking of private property without due process of law." When property is not protected by the law of a country or of a State and beyond the process of its courts, there can be no power to tax it (this principle is manifestly as applicable to business as to property—Rice vs. the United States, 4 Wheaton 246). In the foreign-held bond case, 15 Wallace 319, the United States Supreme Court said 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."
Effect of the Fourteenth Amendment of the Constitution of the United States in Respect to the Arbitrary Appropriation of Property by Taxation or Otherwise.—Another point preliminary to reform, and in respect to which it is important that there should be a clear understanding on the part of the people, is that there is a broad and philosophical distinction between "taxation" and "arbitrary" taking. It is often assumed that a State, because of its sovereignty, may, through form of law and delegated authority, deal with the persons and property of its subjects as it may see fit; and, repugnant as this assumption is to the principles which are assumed to constitute the foundation of all free government, it is not to be denied that previous to the adoption of the fourteenth amendment of the Constitution of the United States in 1868, it would be difficult to show that restraint existed upon the complete sovereignty of the States of the Federal Union over persons and property within their unquestioned jurisdiction; the right to hold a certain class of their population in slavery, and the right to take private property for public purposes without making any compensation, being illustrative of the exercise of such arbitrary powers in the utmost extreme. But since the decision of the United States Court in the Kirtland case, the same court has for the first time given a decided opinion on this subject, unmistakably as follows: "There is no such thing in the theory of our Government—State or national—as unlimited power in any of these branches. The executive, the legislative, and the judicial departments are all of limited and defined powers. There are limitations of power which arise out of the essential nature of all free governments, implied reservations of ​individual rights, without which the social compact could not exist, and which are respected by all free governments entitled to the name. Among these is the limitation of the right of taxation." (Loan Association vs. Topeka, 20 Wallace, 658).
In connection with this general subject, the opinion expressed by Chief-Justice Marshall is also historically worthy of notice. It had its origin in the case of Baron vs. The Mayor of Baltimore, in which the city of Baltimore, in the exercise of its corporate authority over the harbor, etc., so diverted certain streams of water that they made deposits of sand and gravel near the plaintiff's wharf, and thereby prevented the access of vessels to it. A writ of error was taken from the judgment of the Maryland Court of Appeals, refusing damages, to the Supreme Court of the United States, on the ground that this decision was in violation of the fifth amendment to the Constitution of the United States, which prohibits the taking of public property for private use without just compensation; the plaintiff contending further, "that this amendment, being in favor of the liberty of the citizens, ought to be so construed as to restrain the legislative power of a State, as well as that of the United States." The court, however, by Chief-Justice Marshall, held that this amendment of the Constitution "is intended solely as a limitation on the exercise of power by the Government of the United States, and is not applicable to the legislation of the States"; which was equivalent to saying, viz., that if the several States choose to arbitrarily take or confiscate the property of any of its citizens, there was no higher sovereignty to restrain them.
At the close of the late civil war, however, when it was deemed desirable by Congress to impose some restrictions on the reconstructed States, so as to prevent the former disloyal element of their population, in the event of the contingency of regaining legislative power, from dealing arbitrarily or unjustly with any class of their fellow-citizens who might happen to be obnoxious, the following clause was made a part of the fourteenth amendment, and through its adoption has become the supreme law of the land: "Nor shall any State deprive any person of life, liberty, or property without due process of law."
Now, the force of this amendment obviously depends upon the meaning of the last clause, "due process of law"; and it is also clear that "due process of law" does not mean a procedure in conformity with any law which a State legislature might enact, or with any provision which the people of a State might put in their Constitution; for if such be the interpretation of this phrase, then this clause of the fourteenth amendment referred to would practically read as follows: "Nor shall any State deprive any person of life, ​liberty, or property, except in conformity with such laws as it may enact."
The general meaning of the phrase "due process of law," and of the synonymous expression "law of the land," has, however, been made so often the subject of discussion and legal decision as to be in no sense a matter of doubt. Mr. Webster, in the Dartmouth College case, defined these terms as follows: "By the law of the land is most clearly intended the general law, which hears before it condemns, which proceeds upon inquiry, and renders judgment only after trial. The meaning is that every citizen shall hold his life, liberty, property, and immunities under the protection of the general rules which govern society. Everything which may pass under the form of an enactment is not the law of the land." And in commenting on this definition, Justice Cooley, in his treatise on Constitutional Limitations, uses this language: "This definition of Mr. Webster is apt and suitable as applied to judicial proceedings, which can not be valid unless they proceed upon inquiry, and render judgment only after trial. It is entirely correct, also, in assuming that a legislative enactment is not necessarily the law of the land. The words 'by the law of the land,' as used in the Constitution, do not mean a statute passed for the purpose of working wrong. That construction would render the restriction absolutely nugatory, and turn this part of the Constitution into mere nonsense. Due process of law," therefore, continues Judge Cooley, after reviewing the interpretations of various other authorities, means "such an exertion of the powers of the Government as the settled maxims of law sanction, and under such safeguards for the protection of individual rights as these maxims prescribe."
"The very idea of taxation, the very elements of the terms tax—taxation—implies that it is an imposition or levy upon persons or property in due course or order, treating all alike in the same condition and circumstances. The burden of taxation must be equalized by this mode in order to preserve its character. It is in any view taking private property for public use; and it can not be so taken without an equivalent both as to the Government or the citizens. It is not competent for the Government to convert private property to public use, by way of taxation and without compensation, any more than by any other mode."—Redfield.
Now, the exact applicability of the fourteenth amendment in restraining the several States in the exercise of their so-called "taxing powers" would appear to be this:
Taxation implies protection. It is held by every authority to be the equivalent for the protection which the Government affords to the property of its citizens. When, therefore, a State (like ​Connecticut) taxes property, either directly or indirectly, out of its territory and jurisdiction, which it can not protect, and which its processes can not reach, the act is not taxation, but a mere arbitrary exercise of power; not in accordance with any "process of law," and forbidden by the Constitution of the United States, and as involving a principle under the Constitution. Furthermore, the question of restraining a State from the exercise of such arbitrary powers would seem to be one legally within the right of any citizen aggrieved, in virtue of the fourteenth amendment, to carry from the courts of his own State to the Supreme Court of the United States. As another method by which a citizen of a State aggrieved by the imposition of an ex-territorial tax might test the constitutionality of the same, the following is also worthy of consideration:
A citizen of Connecticut, for example, taxed on personal property in Illinois, might obtain a writ of certiorari in an Illinois court, and raise the question that, inasmuch as personal property is held in law to follow the person, the property in question was not taxable in Illinois. And after the courts of Illinois had rendered an adverse judgment, as they undoubtedly would, the owner taxed for the same property in Massachusetts could obtain a writ of certiorari in the courts of that State, and raise the following questions:
1. Want of jurisdiction in respect to the property on the part of the State of Massachusetts.
2. Violation of the Constitution of the United States in denying full faith and credit to the "public acts (tax laws of Illinois) and judicial proceedings" of a sister State.
It needs no argument to prove that under the provisions of the Constitution of the United States, above referred to, both the laws and judicial proceedings of one State are as valid and as much to be respected in another State as the laws and judicial proceedings of the latter State itself. If the courts of Massachusetts, following precedents in that State, should decide that personal property situated beyond the State follows the person residing in Massachusetts, and so disregards the judicial proceedings and public acts of Illinois, a question under the Constitution of the United States would arise, which would give jurisdiction in the United States Court. And as one and the same thing can not occupy two places at the same time, the Federal court must finally decide in which State is the situs of the property for taxation in the case presented. The principle involved in this case would seem to be identical with an attempt on the part of a State to convict a citizen for an offense committed beyond her jurisdiction, in respect to which judgment had already been rendered in a sister State, where the offense had been committed.
As further bearing upon this subject, reference is made to the ​following judicial decisions: The Court of Errors of New York, some years ago, decided that private property could not be forcibly taken for a private road, even if compensation was made by the party benefited, because the act was the taking property arbitrarily, and not according to due process of law.
The national bank act acknowledges, and the courts of the United States have so held, that a bank has a situs and its shares a situs where the bank is located, and not where the stockholders reside. The national bank act, therefore, discards the usual State principle of taxation, that personal property follows the owner.
The principle that two States can not tax at the same time the same property, and that a State can not tax property and rights to property lying beyond her jurisdiction, has been also affirmed by the Supreme Court of the United States (December, 1868), in the case of The Northern Central Railroad vs. Jackson (7 Wallace, 262). The railroad corporation in question, extending from Baltimore in Maryland to Sunbury in Pennsylvania, was the result of the consolidation of four railroad companies, one incorporated by the State of Maryland and three by the State of Pennsylvania. The latter State imposed a tax of three mills per dollar of the principal of each bond issued by said road, which tax the company, at their office in Baltimore, deducted from the coupons of the bonds of said consolidated road held by Jackson, an alien, resident in Ireland.
The court, by Mr. Justice Nelson, decided adversely to the tax, on the ground that the bonds were issued upon the credit of the line of road, a portion of which was within the jurisdiction of the State of Maryland, and that the security, bound and pledged for the payment of the bonds and of the interest on them, embraced the Maryland portion of the road equally with that portion situated in the State of Pennsylvania, respecting which condition of affairs the court used the following language:
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. Again, if Pennsylvania can tax these bonds, upon the same principle Maryland can tax them; this is too apparent to require argument. The consequence of this, if permitted, would be double taxation of the bondholder. The effect of this taxation is readily seen: a tax of three mills per dollar of the principal, at an interest of six per centum, payable semi-annually, is ten per centum per annum of the interest; a tax, therefore, by each State at this rate amounts to an annual reduction from the coupons of twenty per centum; 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 is that to permit the deduction of the tax from the coupons in question would be giving effect to the acts of the Pennsylvania Legislature upon property and interests lying beyond her jurisdiction."
* ↑ Reference in this connection is made to the opinions on this general subject expressed by the Supreme Court of California, given in chapter xvi, Popular Science Monthly, pp. 651-653.
* ↑ In this case, which covered a proceeding under the confiscation act of 1862, the United States Court rejected the theory that a credit has a legal situs where the owner resides, and held that a bond and mortgage form of credit could be confiscated by the United States where the mortgage debtor resided, though, in point of fact, the bond and mortgage were never in the State of Kansas where the proceedings in forfeiture took place, and were, in fact, in possession of the owner, in the rebel lines, in the State of Virginia. The court accordingly passed a decree, and ordered that the said bond, mortgage, and credit be condemned and declared forfeited to the United States. The decree also ordered Kennedy, one of the obligors and mortgagors, to pay the debt into the court, for the use of the United States; and in pursuance of the decree the payment was made to the officers of the court. After the termination of the war, or in 1868, Brown, the obligee and mortgagee in this bond and mortgage, having obtained a pardon from the President of the United States, filed a bill in the United States Circuit Court for the district of Kansas against Kennedy and wife, for the foreclosure of this mortgage. The principal defense was, that the mortgage and the debt secured by it had been confiscated under the act of Congress. That, of course, put in issue the validity of those proceedings. It was admitted as matter of fact and agreed, that Brown, the complainant, was and always had been a resident of Virginia, had been a continuous resident of the State from June, 1860, to September, 1865, and neither the bond nor mortgage in question was during any part of that time in the district of Kansas.