Nashville union and American. [volume] (Nashville, Tenn.) 1868-1875, 1870-09-29

THE TAX on DIVIDENDS. I
: The decision of Judge Strong, in the
United States Circuit Court at Phiadel-
phia on the 18th inst, in the case of the
Philadelphia and Reading Railroad Com
psny against Barnes, Collector Of Internal
Revenue, ct al, in which lie declares that
the tax on the dividends of that company
which fell due and were payable after
Jan. /, 1870, to be cold and uncollectable, |
is of more than ordinary importance. The
plea of the plaintiffs sets forth that the |
company declared dividend on the
capital stock on the Esd of December
last, on the earnings accrued between
July 1, 1869, and the date OF the
declaration, and made payable on and
after Jan. II, 1870. A return of
this dividend was subsequently made to |
an Assessor of Internal Revenue, and a
tax of five per cent of the amount of the
dividend was assessed thereon and de-
clared payable on or before the 9lst of
March; that notice of the assessment was
duly given, and demand for payment
was made upon the plaintiff by the dis
trict collector; that the tax was not paid
IN response to the demand, whereupon
the defendants, who were the collector
and deputy collectors, on the 9Th of May,
1870, made distraint for the tax, to-
gether with five per cent additional there
to, and the interest accrued thereon, and
that this was the supposed trespass. The
real question involved in the suit is
whether the act of June 80, 1854, as
amended, authorizes the collection of a
government tax upon dividends declared
| by railroad companies in 1869 and made
| PAYABLE to stockholders in 1870. Judge
Strong held that the tax in question is
part OF the five per cent tax imposed upon
all incomes which, under the 10th sec
ton of the act, were to be assessed and
collected for the year ending the 3lst
day of December next preceding the
time of levying, collecting and paying
said duty" After carefully examining
and commenting on the several sections
of the law under which the tax on divi-
dends was assessed by the officers of the
Internal Revenue Department for the cur
rent year, Judge Strong says in conclu-
sion:
els, then, a dividend, declared Dec.
20, 1869, but declared to be payable Jan.
II, 1870, income of 1869 or of 1870,
within the meaning of the act of Con-
| gressg think it must be income of the
latter year. True, it was earned by the
| Company III 1859, but it was not available
to the stockholders. The act speaks of
income derived from any kind of proper
/ ty, etc. 1t seems to contemplate tax
/ upon income received or receivable, some
| thing out of which the tax can be paid.
| If it were not so, the tax might be ex-
acted for that which never came and
1 never could come into the hands of the
taxpayer. The language of the 1921
section is also significant In speaking
of the companies therein mentioned, it
| declares they Shall be subject to and
pay duty of five per centum on the
amount of all such interest or cOu-
pons, dividends or profits, whenever
the same shall be payable In
other words, tina duty arises when
the dividend is payable. And such is the
construction that has been given to the
act, in accordance with which the taxes
have been collected. Prior to the act of
| 1854 there was tax on dividends at the
rate of three per cent, and when by that
act the rate was raised to five per cent,
the Commissioners of Internal Revenue
issued circular, dated July 1, 1864, de-
claIing that all dividends payable Onand
| after July l, 1864, no matter when de-
clared, are subject 20 the duty of five
| per centum.' l am not aware that any
different construction of the act has ever
prevailed My opinion, therefore, is that
| the dividend declared by the plaintiffs
| must be regarded as income of the stock
| holders for the year in which it becomes
| payable. 1t follows that the assessor was
without authority to assess a tax upon it,
and that the plea of the defendants does
| not justify the distress they made to en-
force its payment by the plaintiffs, to-
| gether with the payment of five per
cent. additional penalty. Judgment on
the demurrer is therefore directed against
| the defendants. "
Although this decision was only in the
case of a single railroad, it involves and
| affects the validity of all the income taxes
save that known as personal income In
other words, it decides in effect that all
the taxes collected since the first of jan
uary last on the dividends of railroads.
banks, trust companies, savings institu-
| tons, insurance companies, canal, turn
pike and slack-water, navigation compa-
| MES and interest paid on the bonds of
said companies and the taxes retained on
salaries of Government officials for the
same time are invalid, and if sustained by
the Supreme Court, will have to be re-
funded. 1t will be remembered that Con-
gress, at its laat session, passed an amend
ed tax bill, section seventeen of which
construed the internal revenue act of
1864 to extend the collection of the tax
on these items OF income to and for the
year 1870, but also provided that they
should cease on the LIST of August,
1870. There had already been
much controversy between the
Revenue Bureau and the tax
payers as to the validity of these taxes,
and Congress, instead of reimposing the
income tax, passed an act constituting
former laws on the subject. Judge Strong
gives Congress sharp rap for this kind
of legislation, and contending that con-
struction of the law is judicial func-
ton, he CONSTITUTES it the other way. As
the taxes were to terminate absolutely on
the 1st of August, 1870, as provided by
the act of July last, the effect is to wipe
out the whole seven months tax. The