Pacific Insurance Company v. Soule
ON certificate of division from the Circuit Court for California.
The Constitution of the United States  ordains thus:
'Direct taxes shall be apportioned among the several States which may be included within the Union, according to their respective numbers.'
With this provision of the Constitution in existence, Congress, by an internal revenue act of June 30, 1864,  amended by act of July 13, 1866, laid a certain tax upon the amounts insured, renewed, or continued by insurance companies; upon the gross amount of premiums received and assessments by them; and a tax also upon dividends, undistributed sums, and income. A portion of the ninth section of the internal revenue act of July 13, 1866,  and acts amendatory thereto, provide:
'That it shall be the duty of all persons required to make returns or lists of income, and articles or objects charged with an internal tax, to declare in such returns or lists whether the several rates and amounts therein contained are stated according to their values in legal tender currency, or according to their values in coined money; and in case of neglect or refusal so to declare to the satisfaction of the assistant assessor receiving such returns or lists, such assistant assessor is hereby required to make returns or lists of such persons neglecting or refusing, as in cases of persons neglecting or refusing to make the returns or lists required by the acts aforesaid, and to assess the duty thereon, and to add thereto the amount of penalties imposed by law in cases of such neglect or refusal. And whenever the rates and amounts contained in the returns or lists as aforesaid, shall be stated in coined money, it shall be the duty of each assessor receiving the same, to reduce such rates and amounts to their equivalent in legal tender currency, according to the value of such coined money in said currency, for the time covered by said returns. And the lists required by law to be furnished to collectors by assessors shall in all cases contain the several amounts of taxes or duties assessed, estimated or valued in legal tender currency only.'
Prior acts of Congress had authorized the issue of United States notes, commonly called legal tender notes. The act first authorizing their issue, an act of February 25, 1862,  enacted—
'Such notes shall be receivable in payment of all taxes, internal duties, excises, debts, and demands of every kind due to the United States (except duties on imports), and of all claims and demands against the United States, of every kind whatsoever (except for interest on bonds and notes, which shall be paid in coin), and shall also be lawful money and a legal tender in payment of all debts public and private, within the United States (except duties on imports and interest as aforesaid). And such United States notes shall be received the same as coin at their par value, in payment of any loans that may be hereafter sold or negotiated by the Secretary of the Treasury, and may be reissued from time to time, as the exigencies of the public interests shall require.'
With these acts in force, the Pacific Insurance Company, a corporation engaged in the business of insurance in California, made returns upon the amounts insured, renewed, &c., by it, upon its premiums and assessments, and finally upon its dividends, undistributed sums, and income; all as required by the statute; the correctness of all the returns being conceded. The different sources of income thus returned had been received by the company in coined money (the currency of California), and the amounts as returned were the amounts in that form of currency. The aggregate tax under the statute upon this sum of coin was $5376. The assessor then (against the protest of the insurance company) added to the amounts as returned, the difference in value between legal tender currency and coined money during the time covered by the returns; and fixing the tax upon the sum as thus increased, the aggregate amount of the tax came to $7365. The collector demanded payment of this sum. The company refused to pay the $7365, but tendered the $5376 in legal tender notes. The collector refusing this, and having seized and being about to sell the insurance company's property, the company paid the larger sum, $7365, under protest. The suit below was to recover back the amount wrongly paid. The case coming on to be heard upon demurrer, the court was divided in opinion upon seven questions, reducible, as this court considered, in substance to these two:
1. Whether that portion of the ninth section of the internal revenue act of July, 1866, above quoted, 'is to be construed as merely providing a rule as to the currency in which accounts, returns, and lists are to be stated, with a view to uniformity in keeping the accounts of internal revenue, or whether it is to be construed as denying to a person who has received in coined money, incomes or other moneys subject to tax or duty, the right to return the amount thereof in the currency in which it was actually received, and to pay the tax or duty thereon in legal tender currency, and be construed to require that the difference between coined money and legal tender currency shall be added to his return when made in coined money, and that he shall pay the tax or duty upon the amount thus increased?'
2. (Sixth in the series.) Whether the taxes paid by the plaintiff, and sought to be recovered back in this action, are not direct taxes within the meaning of the Constitution?
Mr. Wills, for the Insurance Company:
As to the first question. The undertaking made between the government and the citizen, by Congress, when issuing the notes called legal tenders, was that in all transactions between the government and the citizen, other than in two excepted cases stated, the paper dollar should be equivalent to the coin dollar, and in nothing is this contract made more expressly than in regard to the subject of internal taxation in all its branches. In other words, the government, as the taxing power, agrees that it will receive at par the notes issued by it as a debtor, in payment of all internal taxes due to it as the taxing power. It is therefore estopped from regarding them as below par, for any purpose relating to the subject of internal taxation, including the assessment as well as the payment of that class of taxes.
The portion of the ninth section of the Internal Revenue Act of 1866 in question cannot therefore be held to deny to any man who actually receives his income in coin-a form in which income is universally received in California where this case comes from-the right to pay his tax on such income, in notes of the government, at the value expressed on their face.
As to the second question. The ordinary test of the difference between direct and indirect taxes, is whether the tax falls ultimately on the tax-payer, or whether, through the tax-payer, it falls ultimately on the consumer. If it falls ultimately on the tax-payer, then it is direct in its nature, as in the case of poll taxes and land taxes. If, on the contrary, it falls ultimately on the consumer, then it is an indirect tax.
Such is the test, as laid down by all writers on the subject. Adam Smith, who was the great and universally received authority on political economy, in the day when the Federal Constitution was framed, sets forth a tax on a person's revenue to be a direct tax.  Mill,  Say,  J. R. McCulloch,  Lieber,  among political economists, do the same in specific language. Mr. Justice Bouvier, in his learned Law Dictionary, defines a capitation tax, 'A poll tax; an imposition which is yearly laid on each person according to his estate and ability.'
^1 Article I, § 2.
^2 13 Stat. at Large, §§ 105, 120, pp. 276, 283.
^3 14 Id. 98.
^4 12 Stat. at Large, 345, § 1.
^5 Wealth of Nations, vol. 3, p. 331.
^6 Elements of Political Economy, p. 267; Political Economy, vol. 2, 371, 382.
^7 Political Economy, 466.
^8 Treatise on Taxation, pp. 125, 126, 134.
^9 New American Cyclopedia, vol. 7, p. 155.