US SUPREME COURT DECISIONS

The tax provided for in the 122d section of the Internal Revenue Act of June 30, 1864, as subsequently amended, in which section it is enacted that railroad and certain other companies specified,

"indebted for money for which bonds shall have been issued . . . upon which interest is stipulated to be paid . . . shall be subject to and pay a tax of 5 percentum on the amount of all such interest"

is a tax upon the creditor and not upon the corporation. The corporation is made use of but, as a convenient means of collecting the tax.

A municipal corporation is a portion of the sovereign power of the state, and is not subject to taxation by Congress upon its municipal revenues.

This case arose upon the identical 122d section of the Internal Revenue Act of 1864, as amended by that of 1866, which is discussed in the preceding case. The section enacts:

"That any railroad, canal, turnpike, canal navigation, or slack-water company, indebted for any money for which bonds or other evidence of indebtedness have been issued, payable in one or more years after date, upon which interest is stipulated to be paid, or coupons representing the interest, or any such company that may have declared any dividend in scrip or money due or payable to its stockholders, including nonresidents, whether citizens or aliens, as part of the earnings, profits, income, or gains of such company, and all profits of such company carried to the account of any fund, or used for construction, shall be subject to and pay a tax of 5 percentum on the amount of all such interest or coupons, dividends or profits, whenever and wherever the same shall be payable, and to whatsoever party or person the same may be payable, including nonresidents, whether citizens or aliens."

"And said companies are hereby authorized to deduct and withhold from all payments on account of any interest or coupons, and dividends, due and payable as aforesaid, the tax of 5 percentum, and the payment of the amount of said tax so deducted from the interest, or coupons, or dividends, and certified by the president or treasurer of said company, shall discharge said company from that amount of the dividend, or interest, or coupon on the

Page 84 U. S. 323

bonds or other evidences of their indebtedness so held by any person or party whatever, except where said companies may have contracted otherwise."

This is the material part of the section. Another paragraph is, however, here presented, as it is spoken of in one of the opinions [Footnote 1] in the preceding case, as assisting to interpret the parts that precede it.

"And a list or return shall be made and rendered to the assessor or assistant assessor on or before the tenth day of the month following that in which said interest, coupons, or dividends become due and payable, and as often as every six months, and said list or return shall contain a true and faithful account of the amount of tax, and there shall be annexed thereto a declaration of the president or treasurer of the company, under oath or affirmation, in form and manner as may be prescribed by the Commissioner of Internal Revenue, that the same contains a true and faithful account of said tax. And for any default in making or rendering such list or return, with the declaration annexed, or of the payment of the tax as aforesaid, the company making such default shall forfeit as a penalty the sum of $1,000; and in case of any default in making or rendering said list or return, or of the payment of the tax or any part thereof, as aforesaid, the assessment and collection of the tax and penalty shall be made according to the provisions of law in other cases of neglect or refusal."

In the year 1854, and prior, of course, to the enactment of the said section, or indeed of any internal revenue statutes, the Legislature of Maryland gave to the City of Baltimore (then desirous of aiding the Baltimore and Ohio Railroad Company in the construction of its road, which the city councils of Baltimore conceived would, if made, greatly benefit the city), authority to issue and sell its bonds to the extent of $5,000,000, payable in 1890; and to lend the proceeds to the railroad company, less 10 percent, to be reserved as a sinking fund to pay the principal of the loan at its maturity. This the city did, the railroad company in chanrobles.com-red

Page 84 U. S. 324

turn giving to it a mortgage on all its road, revenue, and franchises, to secure the payment of the bonds which the city had issued, and the interest which it had bound itself to pay.

After the passage of the internal revenue laws, the 122d section of which is above quoted, the government claimed payment from the company of a tax of 5 percent, which the collectors of the federal revenue alleged that under the plain language of the above-quoted 122d section, the company was bound to withhold from the city and pay to the United States. The company refused so to pay the 5 percent to the government, on the ground that the tax was not a tax laid on it, the company, but one laid on their creditor, the City of Baltimore, and that that city, being a municipal corporation, could not have its revenues taxed by the federal government.

The United States accordingly sued the company, in the court below, in assumpsit.

The first count alleged that the company, by force of the provisions of the mortgage, became bound to pay to the city the interest on the loan, and that the company owed for tax on such interest $87,000.

The second count was for $87,000, money had and received. The defendant pleaded the general issue.

The court below gave judgment for the company