US SUPREME COURT DECISIONS

A provision in a defeasance clause in a mortgage given by a railroad company to secure its coupon bonds that the mortgage shall be void if the mortgagor well and truly pays &c., the debt and interest, "without any deduction, defalcation or abatement to be made of anything for or in respect of any taxes, charges or assessments whatsoever" does not oblige the company to pay the interest on its bonds clear of the duty of five percent which by the 122d section of the revenue, act of 1864, such companies "are authorized to deduct and withhold from all payments on account of any interest or coupons due and payable." On the contrary, the company complies with its contract when it pays the interest less five percent and retains the tax for the government.

Error to the circuit court for the Western District of Pennsylvania; the case, as derived from the statement of it chanrobles.com-red

Page 73 U. S. 16

by the learned judge below (McCandless, J.), who sat for the circuit court, having been thus:

The 122d section of the internal revenue act of 1864, provides that

"any railroad company indebted for any money for which bonds have been issued upon which interest is payable shall be subject to and pay a duty of five percent on the amount of all such interest whenever the same shall be payable, and said company are authorized to deduct and withhold from all payments on account of any interest or coupons due and payable as aforesaid, the duty of five percent, and the payment of the amount of said duty, so deducted from the interest or coupons, shall discharge said company from that amount of the interest on the bonds held by any person whatever. Except where said company may have contracted otherwise."

With this act of Congress in force, Haight, a citizen of New York, was the holder of bonds to the amount of $100,000, issued by the Pittsburg, Fort Wayne & Chicago Railroad Company, and secured by a mortgage on real estate. The bonds were in the ordinary form of coupon bonds, and promised that the Company would pay $1,000 to the obligee or bearer, on the 1st of January, 1887, with interest at the rate of seven percent, payable half yearly, on the presentation of the interest warrants &c. The defeasance clause of the mortgage was thus:

"Provided always that if the said railway company or their successors do well and truly pay to the said Haight the said $100,000 on the days and times hereinbefore mentioned, together with the interest payable thereon, without any deduction, defalcation or abatement to be made of anything for or in respect of any taxes, charges or assessments whatsoever, then"

&c.

The railway company having retained five percent on the amount of the coupons as they paid them, Haight brought suit against it, contending that it could not deduct the taxes from the interest due him, because it had, in the language of the act of Congress, "contracted otherwise."

The argument in the court below, derived from a very chanrobles.com-red

Page 73 U. S. 17

critical examination of the different parts of the act of Congress in question, was that the tax of five percent laid in the 122d section, was a tax upon the coupon or interest -- that is to say a tax on the thing, and not on Haight's income, and therefore that under the contract in the mortgage it was to be paid by the company from its own property and not from Haight's.

It was admitted that Haight paid no income tax at New York, his residence, on the interest received from these bonds.

The learned judge who heard the case, thought that the tax was on Haight's income, and gave his opinion to this effect:

"What are the coupons, upon which this suit is instituted, but income -- the annual profit upon money safely invested? There is no special contract to pay government taxes upon the interest. The measure of the company's liability is expressed in the bonds as being debt and interest only. It has nothing to do with the taxes which the government may impose upon the plaintiff for the interest payable to him. The clause in the mortgage cannot enlarge the duty which the mortgage was given to secure -- that is, the payment of debt and interest. It is to be found in all mortgages. . . . The plaintiff, a citizen of New York, pays no internal revenue tax on these bonds at the place of his residence. It is therefore no case of double taxation. The tax should be paid somewhere, and it was to meet investments like this in banks, railroads, insurance and other companies, that the 122d section of the act of 1864 was passed."

Judgment was accordingly given for the company, and the case was brought by Haight on error to this Court, where it was submitted on briefs.