Blake v. National Banks
ERROR to the Circuit Court for the Southern District of New York, in which court several National banks sued Blake, a collector of internal revenue, to recover certain taxes of 2 1/2 per cent., upon dividends which had been declared and made payable by the banks, during the last five months of the year 1870; which taxes Blake as collector had demanded, and which the banks had paid on compulsion and under protest.
There were other cases from other circuits, including one from the Eastern District of Pennsylvania, heard with these, involving the same question, and also the question whether additions to surplus and payments of interest made by corporations during the five months above mentioned, that is to say, during the months of August, September, October, November, or December, 1870, were liable to be charged with the said tax.
The case depended upon certain statutes, and was thus:
The 118th, 119th, 120th, 121st, and 122d sections of an act of June 30th, 1864, laid a tax of 5 per cent. on income; the tax commonly known as the 'income tax.' [*]
So far as the income which was enjoyed by any one was not obtained from dividends made by corporations, or from interest on their bonds or other securities, or from additions to the surplus, contingent, or other funds of such corporations, individuals, by the 118th and 119th sections of the act, were to make it known by return to the assessor, and were themselves to pay it directly to the collector. The tax thus payable directly by individuals was to be levied on the first day of May in each year (on the gains, of course, of the preceding year), and be payable on or before the 30th of June following; and it was enacted that it should be levied until the year 1870 and no longer than until that year; that is to say, that this tax of 5 per cent. should end with and in the year 1869.
So far as income came from dividends made by corporations or additions by the corporations to the surplus, contingent or other fund of undistributed earnings, or by the interest payable on bonds, &c., of corporations, the matter was regulated by the 120th, 121st, 122d, and 123d sections.
The 122d section-which imposed a duty of 5 per cent. upon interest on bonds issued, on dividends declared, and on undistributed profits earned by railroad and other corporations made it the duty of the officers of said corporations to return to the assessor and pay to the commissioner the tax within thirty days after the said interest and dividends became due and payable, and they were authorized to retain the tax so paid, out of the interest and dividends due to bond and stockholders.
This act of June 30th, 1864, was the only act, prior to July, 1870, which imposed a tax on interest and dividends payable by railroad companies.
In this condition of things-that is to say, with an income tax law in 1864, which extended to and included the year 1869, but no later years-Congress, on the 14th July, 1870, passed a new act. This new act of July 14th, 1870, was entitled 'An act to reduce internal taxes, and for other purposes;' and in certain sections not now under consideration, taxation was reduced.
The sections with which the present case was immediately concerned, were the sixth, the seventh, the fifteenth, and the seventeenth; and they were in substance as follows:
'SECTION 6. There shall be levied and collected annually, as hereinafter provided, for the years 1870 and 1871, and no longer, a tax of 2 1/2 per centum upon the gains, profits, and income of every person residing in the United States, and of every citizen of the United States residing abroad, derived from any source whatever, whether within or without the United States, except as hereinafter provided.' [**]
'SECTION 7. In estimating the gains, profits, and income of any person, there shall be included all income derived from . . . the gains, profits, and income of any business, profession, trade, employment, office, or vocation, including any amount received as salary or pay for services in the civil, military, naval, or other service of the United States, or as senator, representative, or delegate in Congress, except that portion thereof from which, under authority of acts of Congress previous hereto, a tax of 5 per centum shall have been withheld.'
'SECTION 15. There shall be levied and collected for and during the year 1871, a tax of 2 1/2 per centum on the amount of all interest or coupons paid on bonds or other evidences of debt issued and payable in one or more years after date, by any of the corporations in this section hereinafter enumerated, and on the amount f all dividends of earnings, income, or gains hereafter declared by any bank, . . . railroad company, &c., whenever and wherever the same shall be payable, and to whatsoever person the same may be due; and on all undivided profits of any such corporation, which have accrued and been earned and added to any surplus, contingent, or other fund. And every such corporation having paid the tax as aforesaid is hereby authorized to deduct and withhold from any payment on account of interest, coupons, and dividends, an amount equal to the tax of 2 1/2 per centum on the same.'
The sixteenth section provided that an account should be rendered by the corporation making a dividend, &c., to the assessor on or before the tenth day of the month following the dividend of the amount of income and of profits and of taxes as aforesaid, and that the amount payable as tax should be paid within thirty days after it became due.
The next section was thus:
'SECTION 17. Sections 120, 121, 122, and 123 of the act of June 30th, 1864, & c., shall be construed to impose the taxes therein mentioned to the 1st day of August, 1870; but after that date no further taxes be levied or assessed under said sections,' &c.
The difficulty now arose upon the peculiar phraseology of the above-quoted fifteenth section as indicated by the italicized words: 'There shall be levied and collected for and during the year 1871, a tax of 2 1/2 per centum, on the amount of all . . . dividends hereafter declared.' The act was passed July 14th, 1870. Suppose now that a dividend was made between that date and January 1st, 1871. It was declared 'after' the passage of the act, and the act enacted that the tax was to be on all dividends 'thereafter declared.' But it also enacted that the tax was to be levied for and during the year 1871, and the dividend was not made for that year.
And the seventeenth section of the act enacted that no tax should be levied longer under the sections 120, 121, 122, or 123 (the sections affecting corporations) of the act of 1864.
Only two constructions seemed possible:
One of them would hold that the thing to be done in 1871 was the 'levying and collecting.' This would make the meaning thus: 'A tax of 2 1/2 per cent. on the amount of all dividends hereafter declared shall be levied and collected in the year 1871.' This was the view of the meaning of the act taken by the government. It asserted that the limitation to the year 1871 did not apply to the accruing or to the declaring of the dividend to be taxed, but only to the time when the tax was to be levied and collected, and that the words 'hereafter declared' showed that the tax was to be levied on all dividends declared after the passage of the act, and therefore that a dividend declared in December, 1870, being 'hereafter declared,' must pay the tax, though the levying and collecting was to be postponed till 1871.
The other construction was that the words 'for and during the year 1871' apply to, and limited, and were intended to describe, the time of the earning of the money out of which the dividends were declared, and also the time of the declaration of the dividends; that is to say, that dividends were not to be taxed unless they were either declared in 1871, or the moneys from which they were declared were earned in that year, and that the object of the section was to tax only dividends declared or earned therein.
On the part of the government it was said, 'Income is equally income, and, in practical view, identically the same thing, whether it be interest coming from an individual debtor or interest coming from a railroad company; whether it be a dividend of profits declared to one of a mercantile firm having several partners, or a like dividend declared to one of several stockholders of a bank or railroad or other corporation specified in the fifteenth section of the act of 1870. Why would you seek to tax the income from the first source and not to tax that from the second? In so acting you would make us give up and aban on for five months the less odious form of taxation, since it is less odious to let the corporation retain the tax and pay it for the citizen-in which case vast numbers of persons never so much as know that they have been taxed-and you would make us retain and enforce the more odious form, since it is more odious to make the citizen report, by an inquisitorial process, what gain has come directly into his hands, and then make him unclench his hand and give up what, from his mere possession of it, he had almost felt was his own. In so acting you would make us do worse, for you would make us put the burden of taxes on the poorer sorts of persons in every class (since the gains of these are generally made directly by themselves); and you would make us absolve, for five months, those whose gains come from the bonds and stocks of corporations, that is to say, the rich alone or chiefly.'
To all this the reply of the banks, railroad, and other corporations was: We do not presume to be wiser than Congress, or to speculate upon the reasons for what it has done. Command being plain, our duty is obedience. And when in regard to income paid directly Congress says—
'There shall be levied and collected annually . . . for the years 1870 AND 1871, and no longer, a tax of 2 1/2 per centum,' &c.;
and in regard to income retained by and paid through corporations, says:'There shall be levied and collected for and during the year 1871, a tax of 2 1/2 per centum,' &c.;
We think it plain that Congress did not mean to lay a tax in the two cases for the same term of time.
This was the view taken by the banks, and in accordance with it they construed the section as though it read 'a tax of 2 1/2 per cent. shall be levied and collected on the amount of all dividends hereafter declared for and during the year 1871.'
The Circuit Courts, where the question arose, sustained the position taken by the banks. That position was thus forcibly defended by McKennan, J., in the Pennsylvania Circuit:
^* 13 Stat. at Large, 283.
^** 16 Stat. at Large, 257.