Source: https://caselaw.findlaw.com/us-supreme-court/74/262.html
Timestamp: 2019-04-22 19:06:15+00:00

Document:
The State of Pennsylvania, by certain acts, as expounded by the Supreme Court of that State,1 taxed 'money owing by solvent debtors, whether by promissory note, penal or single bill, bond or judgment,' imposing three mills on the dollar of the principal, payable out of the interest. And where the money was due by a railroad corporation, they made it the duty of the president, or other officer of the company who paid the coupons or interest to the holder, to retain the amount of the tax.
The first tax of this kind was imposed by the act of Congress passed August 5th, 1861.2 The 49th section of that act directed that there should be levied and collected upon [74 U.S. 262, 263] the annual income of every person residing in the United States, from whatever source derived, a tax of 3 per cent. on the amount of the excess of such income over $800; and upon the income, rents, or dividends, accruing upon property, &c., owned in the United States by any citizen residing abroad, a tax of 5 per cent.
The next act was passed July 1st, 1862,3 and the 90th section of it directed that there should be levied and collected a tax of 3 per cent. on the annual income of every person residing in the United States, over $600 and under $10,000; and when exceeding $10,000, a tax of 5 per cent.; and upon the income of citizens residing abroad, a tax of 5 per cent. The next section provided that the portion of income derived from interest on bonds, or other evidences of indebtedness of any railroad company, which should have been assessed and paid by said companies, should be deducted from that prescribed in the previous section; and the 81st section directed that this tax on the bonds and evidences of indebtedness should be paid by the companies, and that they might deduct the same on the payment of interest to the bondholders.
This consolidation was entered into by the respective companies in pursuance of acts of the legislatures of the two States; and by means of them the four companies were merged in one, called the Northern Central Railway Company, and was incorporated by the same name by the legislature of each State. The stockholders of the old companies received from the new twice the number of shares held by them in the old, upon the receipt of which the old shares [74 U.S. 262, 265] were cancelled, after this company was thus organized and the directors elected. On the 20th of December, 1855, the company executed a mortgage to a board of trustees upon the entire line of its road from Baltimore to Sunbury, including all its property and estate situate within both the States, which mortgage was given to secure the payment of $2,500,000 in bonds, to be issued in amounts therein specified. The bonds were issued by the company accordingly. And it was upon the coupons of a portion of them in the hands of the plaintiff that this suit was brought.
So, by the true construction of the internal revenue act of Congress of June 30th, 1864, that it was not intended to tax incomes, except of citizens of the United States wherever resident, and of residents, whether citizens or not; that here, too, even if Congress had made an attempt to tax the incomes of foreigners resident in their own countries, it would have been 'ultra vires.' 8 A corporation in the United States, when it borrows money from a foreigner abroad, creates a debt, whose locality is always the locality of the creditor; and to tax it, or the annual interest due on it, is to tax him, resident abroad and not a subject of the taxing power, for that which, in contemplation of law, is also outside the country. 9 This plainly was illegal.
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 authorize the deduction, and, if no other objection existed [74 U.S. 262, 267] against the tax, the defence would fail. If this was an open question we should have concurred with the interpretation of the court below, which concurred with the views of the plaintiff's counsel. Nor shall we inquire into the competency of the legislature of Pennsylvania to impose this tax, upon general principles, as we shall place the objection upon other and distinct grounds, though we must say, that the tax upon the promissory note or bond, given by the resident debtor, and the withholding of the amount from the interest due to the non-resident holder, would seem to be a tax upon such non-resident. It is not a tax of the money lent, because that belongs to the resident debtor, for which he is taxable; it is a tax on the security, the bond, which is in the hands of the non-resident holder.
The ground upon which we place the objection in this case, to the tax is, in brief, that the bonds, amounting to $2,500,000, of which those in question are a part, were issued by this company upon the credit of the line of road, its franchises and fixtures, extending from Baltimore to Sunbury, a given portion of which line lies within the jurisdiction of the State of Maryland. The old company, to which this line belonged, by the act of consolidation, transferred it, with its fixtures and all other interests connected therewith, including their stock, to the new organization which have issued these bonds. The security therefore pledged and bound for the payment of them and of the interest embraces this Maryland portion of the road; and in case of a filure to pay the principal or interest, this portion with its franchises and fixtures would be liable to sale in satisfaction of the bonds and interest.
Now, 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. This portion avails her tax-roll as effectually as if it was situate within her own limits. The Maryland portion is not liable for the payment of any specified part, or quantity of these bonds thus taxed, but is liable, with all its interests, for the whole amount, the same as that [74 U.S. 262, 268] portion of the road within the State of Pennsylvania. The bonds were an issue, in the usual way, by this Northern Central Railway Company, and the security given by mortgage on the entire line of the road. No portion of the bonds belong to one part more than to another. No severance was made of the bonds, and, therefore, none can be made, in the taxation, with reference to the line within the respective jurisdictions of the States. If the tax is permitted as it respects one bond, it must be as it respects all.
The effect of this taxation upon the bondholder 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 eachState, at this rate, amounts to an annual deduction 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.
The next question is, whether or not the coupons were [74 U.S. 262, 269] subject to a tax of five per centum per annum to the United States on the 1st of July, 1865, when they became due?
The act in force when the coupons in question fell due, was the act of June 30, 1864,10 and is the one by which the tax of five per centum claimed on the bonds of the plaintiff must be determined. The court below held that the act did not include a non-resident alien, and directed a verdict and judgment for the whole amount of interest. The decision was placed mainly on the ground that, looking at the several provisions bearing upon the question, and giving to them a reasonable construction, it was believed not to be the intent of Congress to impose an income tax on non-resident aliens; that they were not only not included in the description of persons upon whom the tax was imposed, but were impliedly excluded by confining it to residents of the United States and citizens residing abroad, and that the deduction from the prescribed income of the interest on these railroad bonds, when paid by the companies, was regarded as simply a mode of collecting this part of the income tax. We concur in this view. It is not important, however, to pursue the argument, as Congress has since, in express terms, by the acts of March 10th, and July 13th, 1866, imposed a tax on alien non-resident bondholders. The question hereafter will be, not whether the laws embrace the alien non-resident holder, but whether it is competent for Congress to impose it; upon which we express no opinion.
[ Footnote 1 ] Maltby v. Railroad Company, 52 Pennsylvania State, 140.
[ Footnote 2 ] 12 Stat. at Large, 309.
[ Footnote 3 ] 12 Stat. at Large 473.
[ Footnote 4 ] 13 Ib. 281, 116.
[ Footnote 5 ] 117, 122.
[ Footnote 6 ] McCulloch v. State of Maryland, 4 Wheaton, 429; Providence Bank v. Billings, 4 Peters, 561; Milne v. Moreton, 12 Wheaton, 358; Harrison v. Sterry, 5 Cranch, 289.
[ Footnote 7 ] Gordon v. Appeal Tax Court, 3 Howard, 133, 140, 150; Appeal Tax Cases, 12 Gill & Johnson, 117.
[ Footnote 8 ] McCulloch v. State of Maryland, 4 Wheaton, 429; Union Bank v. The State, 9 Yerger, 501.
[ Footnote 9 ] The Apollon, 9 Wheaton, 370.
[ Footnote 10 ] See supra, 263.

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