| MR.
CHIEF JUSTICE FULLER, after stating the case as above reported,
delivered the opinion of the court.
The jurisdiction of a court of equity to prevent any threatened breach
of trust in the misapplication or diversion of the funds of a
corporation by illegal payments out of its capital or profits has been
frequently sustained. Dodge v. Woolsey, 18 How. 331; Hawes
v. Oakland, 104 U.S. 450.
As in Dodge v. Woolsey, this bill proceeds on the ground that
the defendants would be guilty of such breach of trust or duty in
voluntarily making returns for the imposition of, and paying, an
unconstitutional tax, and also on allegations of threatened multiplicity
of suits and irreparable injury.
The objection of adequate remedy at law was not raised below, nor is it
now raised by appellees, if it could be entertained at all at this stage
of the proceedings; and, so far as it was within the power of the
government to do so, the question of jurisdiction, for the purposes of
the case, was explicitly waived on the argument. The relief sought was
in respect of voluntary action by the defendant company, and not in
respect of the assessment and collection themselves. Under these
circumstances, we should not be justified in declining to proceed to
judgment upon the merits. Pelton. v. National Bank, 101 U.S.
143148; Cummings v. National Bank, 101 U.S. 153 157; Reynes
v. Dumont, 130 U.S. 354.
Since the opinion in Marbury v. Madison, 1 Cranch 137 , 1
Cranch 177, was delivered, it has not been doubted that it is within
judicial competency, by express provisions of the Constitution or by
necessary inference and implication, to determine whether a given law of
the United States is or is not made in pursuance of the Constitution,
and to hold it valid or void accordingly. "If," said Chief
Justice Marshall,
both the law and the Constitution apply to a particular case, so that
the court must either decide that case conformably to the law,
disregarding the Constitution; or conformably to the Constitution,
disregarding the law; the court must determine which of these
conflicting rules governs the case. This is of the very essence of
judicial duty.
And the Chief Justice added that
the doctrine that courts must close their eyes on the Constitution, and
see only the law . . . would subvert the very foundation of all written
constitutions.
Necessarily, the power to declare a law unconstitutional is always
exercised with reluctance; but the duty to do so, in a proper case,
cannot be declined, and must be discharged in accordance with the
deliberate judgment of the tribunal in which the validity of the
enactment is directly drawn in question.
The contention of the complainant is:
First. That the law in question, in imposing a tax on the income or
rents of real estate, imposes a tax upon the real estate itself, and in
imposing a tax on the interest or other income of bonds or other
personal property held for the purposes of income or ordinarily yielding
income, imposes a tax upon the personal estate itself; that such tax is
a direct tax, and void because imposed without regard to the rule of
apportionment, and that, by reason thereof, the whole law is
invalidated.
Second. That the law is invalid because imposing indirect taxes in
violation of the constitutional requirement of uniformity, and therein
also in violation of the implied limitation upon taxation that all tax
laws must apply equally, impartially, and uniformly to all similarly
situated. Under the second head, it is contended that the rule of
uniformity is violated in that the law taxes the income of certain
corporations, companies, and associations, no matter how created or
organized, at a higher rate than the incomes of individuals or
partnerships derived from precisely similar property or business; in
that it exempts from the operation of the act and from the burden of
taxation numerous corporations, companies, and associations having
similar property and carrying on similar business to those expressly
taxed, in that it denies to individuals deriving their income from
shares in certain corporations, companies, and associations the benefit
of the exemption of $4,000 granted to other persons interested in
similar property and business; in the exemption of $4,000; in the
exemption of building and loan associations, savings banks, mutual life,
fire, marine, and accident insurance companies, existing solely for the
pecuniary profit of their members; these and other exemptions being
alleged to be purely arbitrary and capricious, justified by no public
purpose, and of such magnitude as to invalidate the entire enactment,
and in other particulars.
Third. That the law is invalid so far as imposing a tax upon income
received from state and municipal bonds.
The Constitution provides that representatives and direct taxes shall
be apportioned among the several States according to numbers, and that
no direct tax shall be laid except according to the enumeration provided
for, and also that all duties, imposts, and excises shall be uniform
throughout the United States.
The men who framed and adopted that instrument had just emerged from
the struggle for independence whose rallying cry had been that "taxation
and representation go together."
The mother country had taught the colonists, in the contests waged to
establish that taxes could not be imposed by the sovereign except as
they were granted by the representatives of the realm, that
self-taxation constituted the main security against oppression. As Burke
declared in his speech on Conciliation with America, the defenders of
the excellence of the English constitution
took infinite pains to inculcate, as a fundamental principle, that, in
all monarchies, the people must, in effect, themselves, mediately or
immediately, possess the power of granting their own money, or no shadow
of liberty could subsist.
The principle was that the consent of those who were expected to pay it
was essential to the validity of any tax.
The States were about, for all national purposes embraced in the
Constitution, to become one, united under the same sovereign authority
and governed by the same laws. But as they still retained their
jurisdiction over all persons and things within their territorial
limits, except where surrendered to the general government or restrained
by the Constitution, they were careful to see to it that taxation and
representation should go together, so that the sovereignty reserved
should not be impaired, and that, when Congress, and especially the
House of Representatives, where it was specifically provided that all
revenue bills must originate, voted a tax upon property, it should be
with the consciousness, and under the responsibility, that, in so doing,
the tax so voted would proportionately fall upon the immediate
constituents of those who imposed it.
More than this, by the Constitution, the States not only gave to the
action the concurrent power to tax persons and property directly, but
they surrendered their own power to levy taxes on imports and to
regulate commerce. All the thirteen were seaboard States, but they
varied in maritime importance, and differences existed between them in
population, in wealth, in the character of property and of business
interests. Moreover, they looked forward to the coming of new States
from the great West into the vast empire of their anticipations. So when
the wealthier States, as between themselves and their less favored
associates, and all as between themselves and those who were to come,
gave up for the common good the great sources of revenue derived through
commerce, they did so in reliance on the protection afforded by
restrictions on the grant of power.
Thus, in the matter of taxation, the Constitution recognizes the two
great classes of direct and indirect taxes, and lays down two rules by
which their imposition must be governed, namely: the rule of
apportionment as to direct taxes, and the rule of uniformity as to
duties, imposts and excises.
The rule of uniformity was not prescribed to the exercise of the power
granted by the first paragraph of section eight, to lay and collect
taxes, because the rule of apportionment as to taxes had already been
laid down in the third paragraph of the second section.
And this view was expressed by Mr. Chief Justice Chase in The
License Tax Cases, 5 Wall. 462, 471, when he said:
It is true that the power of Congress to tax is a very extensive power.
It is given in the Constitution, with only one exception and only two
qualifications. Congress cannot tax exports, and it must impose direct
taxes by the rule of apportionment, and indirect taxes by the rule of
uniformity. Thus limited, and thus only it reaches every subject, and
may be exercised at discretion.
And although there have been from time to time intimations that there
might be some tax which was not a direct tax nor included under the
words "duties, imposts and excises," such a tax, for more than
one hundred years of national existence, has as yet remained
undiscovered, notwithstanding the stress of particular circumstances has
invited thorough investigation into sources of revenue.
The first question to be considered is whether a tax on the rents or
income of real estate is a direct tax within the meaning of the
Constitution. Ordinarily, all taxes paid primarily by persons who can
shift the burden upon someone else, or who are under no legal compulsion
to pay them, are considered indirect taxes; but a tax upon property
holders in respect of their estates, whether real or personal, or of the
income yielded by such estates, and the payment of which cannot be
avoided, are direct taxes. Nevertheless, it may be admitted that,
although this definition of direct taxes is prima facie correct,
and to be applied in the consideration of the question before us, yet
that the Constitution may bear a different meaning, and that such
different meaning must be recognized. But in arriving at any conclusion
upon this point, we are at liberty to refer to the historical
circumstances attending the framing and adoption of the Constitution, as
well as the entire frame and scheme of the instrument, and the
consequences naturally attendant upon the one construction or the other.
We inquire, therefore, what, at the time the Constitution was framed
and adopted, were recognized as direct taxes? What did those who framed
and adopted it understand the terms to designate and include?
We must remember that the fifty-five members of the constitutional
convention were men of great sagacity, fully conversant with
governmental problems, deeply conscious of the nature of their task, and
profoundly convinced that they were laying the foundations of a vast
future empire.
To many in the assembly, the work of the great French magistrate on the
"Spirit of Laws," of which Washington, with his own hand, had
copied an abstract by Madison, was the favorite manual; some of them had
made an analysis of all federal governments in ancient and modern times,
and a few were well versed in the best English, Swiss, and Dutch writers
on government. They had immediately before them the example of Great
Britain, and they had a still better school of political wisdom in the
republican constitutions of their several States, which many of them had
assisted to frame.
2 Bancroft's Hist.Const.
The Federalist demonstrates the value attached by Hamilton, Madison,
and Jay to historical experience, and shows that they had made a careful
study of many forms of government. Many of the framers were particularly
versed in the literature of the period, Franklin, Wilson, and Hamilton,
for example. Turgot had published in 1764 his work on taxation, and in
1766 his essay on "The Formation and Distribution of Wealth,"
while Adam Smith's "Wealth of Nations" was published in 1776.
Franklin, in 1766, had said upon his examination before the House of
Commons that:
An external tax is a duty laid on commodities imported; that duty is
added to the first cost and other charges on the commodity, and, when it
is offered to sale, makes a part of the price. If the people do not like
it at that price, they refuse it; they are not obliged to pay it. But an
internal tax is forced from the people without their consent if not laid
by their own representatives. The stamp act says, we shall have no
commerce, make no exchange of property with each other, neither purchase
nor grant, nor recover debts; we shall neither marry nor make our wills,
unless we pay such and such sums; and thus it is intended to extort our
money from us or ruin us by the consequences of refusing to pay.
16 Parl.Hist. 144.
They were, of course, familiar with the modes of taxation pursued in
the several States. From the report of Oliver Wolcott, when Secretary of
the Treasury, on direct taxes, to the House of Representatives, December
14, 1796, his most important state paper, (Am.State Papers, 1 Finance
431) and the various state laws then existing, it appears that, prior to
the adoption of the Constitution, nearly all the States imposed a poll
tax, taxes on land, on cattle of all kinds, and various kinds of
personal property, and that, in addition, Massachusetts, Connecticut,
Pennsylvania, Delaware, New Jersey, Virginia, and South Carolina
assessed their citizens upon their profits from professions, trades, and
employments.
Congress, under the articles of confederation, had no actual operative
power of taxation. It could call upon the States for their respective
contributions or quotas as previously determined on, but in case of the
failure or omission of the States to furnish such contribution, there
were no means of compulsion, as Congress had no power whatever to lay
any tax upon individuals. This imperatively demanded a remedy, but the
opposition to granting the power of direct taxation in addition to the
substantially exclusive power of laying imposts and duties was so strong
that it required the convention, in securing effective powers of
taxation to the Federal government, to use the utmost care and skill to
so harmonize conflicting interests that the ratification of the
instrument could be obtained.
The situation and the result are thus described by Mr. Chief Justice
Chase in Lane County v. Oregon, 7 Wall. 71, 76:
The people of the United States constitute one nation, under one
government, and this government, within the scope of the powers with
which it is invested, is supreme. On the other hand, the people of each
State compose a State, having its own government, and endowed with all
the functions essential to separate and independent existence. The
States, disunited, might continue to exist. Without the States in union,
there could be no such political body as the United States. Both the
States and the United States existed before the Constitution. The
people, through that instrument, established a more perfect union by
substituting a national government, acting, with ample power, directly
upon the citizens, instead of the confederate government, which acted
with powers, greatly restricted, only upon the States. But, in many
articles of the Constitution, the necessary existence of the States,
and, within their proper spheres, the independent authority of the
States, is distinctly recognized. To them, nearly the whole charge of
interior regulation is committed or left; to them and to the people, all
powers not expressly delegated to the national government are reserved.
The general condition was well stated by Mr. Madison in the Federalist,
thus:
The Federal and state governments are, in fact, but different agents
and trustees of the people, constituted with different powers and
designated for different purposes.
Now, to the existence of the States, themselves necessary to the
existence of the United States, the power of taxation is indispensable.
It is an essential function of government. It was exercised by the
colonies, and when the colonies became States, both before and after the
formation of the confederation, it was exercised by the new governments.
Under the Articles of Confederation, the government of the United States
was limited in the exercise of this power to requisitions upon the
States, while the whole power of direct and indirect taxation of persons
and property, whether by taxes on polls, or duties on imports, or duties
on internal production, manufacture, or use, was acknowledged to belong
exclusively to the States, without any other limitation than that of
noninterference with certain treaties made by Congress. The
Constitution, it is true, greatly changed this condition of things. It
gave the power to tax, both directly and indirectly, to the national
government, and, subject to the one prohibition of any tax upon exports
and to the conditions of uniformity in respect to indirect and of
proportion in respect to direct taxes, the power was given without any
express reservation. On the other hand, no power to tax exports, or
imports except for a single purpose and to an insignificant extent, or
to lay any duty on tonnage, was permitted to the States. In respect,
however, to property, business, and persons within their respective
limits, their power of taxation remained and remains entire. It is
indeed a concurrent power, and, in the case of a tax on the same subject
by both governments, the claim of the United States, as the supreme
authority, must be preferred; but, with this qualification, it is
absolute. The extent to which it shall be exercised, the subjects upon
which it shall be exercised, and the mode in which it shall be exercised
are all equally within the discretion of the legislatures to which the
States commit the exercise of the power. That discretion is restrained
only by the will of the people expressed in the state constitutions or
through elections, and by the condition that it must not be so used as
to burden or embarrass the operations of the national government. There
is nothing in the Constitution which contemplates or authorizes any
direct abridgment of this power by national legislation. To the extent
just indicated, it is as complete in the States as the like power,
within the limits of the Constitution, is complete in Congress.
On May 29, 1787, Charles Pinckney presented his draft of a proposed
constitution, which provided that the proportion of direct taxes should
be regulated by the whole number of inhabitants of every description,
taken in the manner prescribed by the legislature, and that no tax
should be paid on articles exported from the United States. 1 Elliot
147, 148.
Mr. Randolph's plan declared
that the right of suffrage in the national legislature ought to be
proportioned to the quotas of contribution, or to the number of free
inhabitants, as the one or the other may seem best in different cases.
1 Elliot 143.
On June 15, Mr. Paterson submitted several resolutions, among which was
one proposing that the United States in Congress should be authorized to
make requisitions in proportion to the whole number of white and other
free citizens and inhabitants, including those bound to servitude for a
term of years, and three-fifths of all other persons, except Indians not
taxed. 1 Elliot 175, 176.
On the ninth of July, the proposition that the legislature be
authorized to regulate the number of representatives according to wealth
and inhabitants was approved, and on the eleventh, it was voted that "in
order to ascertain the alterations that may happen in the population and
wealth of the several States, a census shall be taken," although
the resolution of which this formed a part was defeated. Elliot (Madison
Papers) 288, 295; 1 Elliot 200.
On July 12, Gouverneur Morris moved to add to the clause empowering the
legislature to vary the representation according to the amount of wealth
and number of the inhabitants, a proviso that taxation should be in
proportion to representation, and, admitting that some objections lay
against his proposition which would be removed by limiting it to direct
taxation, since, with regard to indirect taxes on exports and imports,
and on consumption, the rule would be inapplicable, varied his motion by
inserting the word "direct," whereupon it passed as follows: "Provided
always that direct taxation ought to be proportioned to representation."
5 Elliot (Madison Papers) 302.
Amendments were proposed by Mr. Ellsworth and Mr. Wilson to the effect
that the rule of contribution by direct taxation should be according to
the number of white inhabitants and three-fifths of every other
description, and that, in order to ascertain the alterations in the
direct taxation which might be required from time to time, a census
should be taken; the word wealth was struck out of the clause, on motion
of Mr. Randolph, and the whole proposition, proportionate representation
to direct taxation, and both to the white and three-fifths of the
colored inhabitants, and requiring a census, was adopted.
In the course of the debates, and after the motion of Mr. Ellsworth
that the first census be taken in three years after the meeting of
Congress had been adopted, Mr. Madison records: "Mr. King asked
what was the precise meaning of direct taxation. No one answered."
But Mr. Gerry immediately moved to amend by the insertion of the clause
that
from the first meeting of the legislature of the United States until a
census shall be taken, all moneys for supplying the public treasury by
direct taxation shall be raised from the several States according to the
number of their representatives respectively in the first branch.
This left for the time the matter of collection to the States. Mr.
Langdon objected that this would bear unreasonably hard against New
Hampshire, and Mr. Martin said that direct taxation should not be used
but in cases of absolute necessity, and then the States would be the
best judges of the mode. 5 Elliot (Madison Papers) 451, 453.
Thus was accomplished one of the great compromises of the Constitution,
resting on the doctrine that the right of representation ought to be
conceded to every community on which tax is to be imposed, but
crystallizing it in such form as to allay jealousies in respect of the
future balance of power; to reconcile conflicting views in respect of
the enumeration of slaves, and to remove the objection that, in
adjusting a system of representation between the States, regard should
be had to their relative wealth, since those who were to be most heavily
taxed ought to have a proportionate influence in the government.
The compromise, in embracing the power of direct taxation, consisted
not simply in including part of the slaves in the enumeration of
population, but in providing that, as between State and State, such
taxation should be proportioned to representation. The establishment of
the same rule for the apportionment of taxes as for regulating the
proportion of representatives, observed Mr. Madison in No. 54 of the
Federalist, was by no means founded on the same principle, for, as to
the former, it had reference to the proportion of wealth, and although
in respect of that it was, in ordinary cases, a very unfit measure, it "had
too recently obtained the general sanction of America not to have found
a ready preference with the convention," while the opposite
interests of the States, balancing each other, would produce
impartiality in enumeration. By prescribing this rule, Hamilton wrote
(Federalist, No. 36) that the door was shut "to partiality or
oppression," and "the abuse of this power of taxation to have
been provided against with guarded circumspection;" and obviously
the operation of direct taxation on every State tended to prevent resort
to that mode of supply except under pressure of necessity and to promote
prudence and economy in expenditure.
We repeat that the right of the Federal government to directly assess
and collect its own taxes, at least until after requisitions upon the
States had been made and failed, was one of the chief points of
conflict, and Massachusetts, in ratifying, recommended the adoption of
an amendment in these words:
That Congress do not lay direct taxes but when the moneys arising from
the impost and excise are insufficient for the public exigencies, nor
then until Congress shall have first made a requisition upon the States
to assess, levy, and pay, their respective proportions of such
requisition, agreeably to the census fixed in the said Constitution, in
such way and manner as the legislatures of the States shall think best.
1 Elliot 322. And in this South Carolina, New York, New Hampshire, and
Rhode Island concurred. Id. 325, 326, 329, 336.
Luther Martin, in his well known communication to the legislature of
Maryland in January, 1788, expressed his views thus:
By the power to lay and collect taxes, they may proceed to direct
taxation on every individual, either by a capitation tax on their heads
or an assessment on their property. . . . Many of the members, and
myself in the number, thought that states were much better judges of the
circumstances of their citizens, and what sum of money could be
collected from them by direct taxation, and of the manner in which it
could be raised with the greatest ease and convenience to their
citizens, than the general government could be, and that the general
government ought not to have the power of laying direct taxes in any
case but in that of the delinquency of a State.
1 Elliot 34, 38, 369.
Ellsworth and Sherman wrote the governor of Connecticut, September 26,
1787, that
it was probable that the principal branch of revenue will be duties on
imports. What may be necessary to be raised by direct taxation is to be
apportioned on the several States, according to the number of their
inhabitants, and although Congress may raise the money by their own
authority, if necessary, yet that authority need not be exercised, if
each State will furnish its quota.
1 Elliot 49.
And Ellsworth, in the Connecticut convention, in discussing the power
of Congress to lay taxes, pointed out that all sources of revenue,
excepting the impost, still lay open to the States, and insisted that it
was
necessary that the power of the general legislature should extend to
all the objects of taxation, that government should be able to command
all the resources of the country, because no man can tell what our
exigencies may be. Wars have now become rather wars of the purse than of
the sword. Government must therefore be able to command the whole power
of the purse. . . . Direct taxation can go but little way towards
raising a revenue. To raise money in this way, people must be provident;
they must constantly be laying up money to answer the demands of the
collector. But you cannot make people thus provident. If you would do
anything to the purpose, you must come in when they are spending, and
take a part with them. . . . All nations have seen the necessity and
propriety of raising a revenue by indirect taxation, by duties upon
articles of consumption. . . . In England, the whole public revenue is
about twelve millions sterling per annum. The land tax amounts to about
two millions; the window and some other taxes, to about two millions
more. The other eight millions are raised upon articles of consumption.
. . . This Constitution defines the extent of the powers of the general
government. If the general legislature should at any time overleap their
limits, the judicial department is a constitutional check. If the United
States go beyond their powers, if they make a law which the Constitution
does not authorize, it is void, and the judicial power, the national
judges, who, to secure their impartiality, are to be made independent,
will declare it to be void.
2 Elliot 191, 192, 196.
In the convention of Massachusetts by which the Constitution was
ratified, the second section of article I being under consideration, Mr.
King said:
It is a principle of this Constitution that representation and taxation
should go hand in hand. . . . By this rule are representation and
taxation to be apportioned. And it was adopted because it was the
language of all America. According to the confederation, ratified in
1781, the sums for the general welfare and defence should be apportioned
according to the surveyed lands, and improvements thereon, in the
several States; but that it hath never been in the power of Congress to
follow that rule, the returns from the several States being so very
imperfect.
2 Elliot 36.
Theophilus Parsons observed:
Congress have only a concurrent right with each State in laying direct
taxes, not an exclusive right, and the right of each State to direct
taxation is equally extensive and perfect as the right of Congress.
Id. 93. And John Adams, Dawes, Sumner, King, and Sedgwick all
agreed that a direct tax would be the last source of revenue resorted to
by Congress.
In the New York convention, Chancellor Livingston pointed out that,
when the imposts diminished and the expenses of the government
increased, "they must have recourse to direct taxes; that is, taxes
on land and specific duties." 2 Elliot 341. And Mr. Jay, in
reference to an amendment that direct taxes should not be imposed until
requisition had been made and proved fruitless, argued that the
amendment would involve great difficulties, and that it ought to be
considered that direct taxes were of two kinds, general and specific.
Id. 380, 381.
In Virginia, Mr. John Marshall said:
The objects of direct taxes are well understood; they are but few; what
are they? Lands, slaves, stock of all kinds, and a few other articles of
domestic property. . . . They will have the benefit of the knowledge and
experience of the state legislature. They will see in what manner the
legislature of Virginia collects its taxes. . . . Cannot Congress
regulate the taxes so as to be equal on all parts of the community?
Where is the absurdity of having thirteen revenues? Will they clash
with, or injure, each other? If not, why cannot Congress make thirteen
distinct laws, and impose the taxes on the general objects of taxation
in each State, so as that all persons of the society shall pay equally,
as they ought?
3 Elliot 229, 235. At that time, in Virginia, lands were taxed, and
specific taxes assessed on certain specified objects. These objects were
stated by Secretary Wolcott to be taxes on lands, houses in towns,
slaves, stud horses, jackasses, other horses and mules, billiard tables,
four-wheel riding carriages, phaetons, stage wagons, and riding
carriages with two wheels, and it was undoubtedly to these objects that
the future Chief Justice referred.
Mr. Randolph said:
But in this new Constitution, there is a more just and equitable rule
fixed -- a limitation beyond which they cannot go. Representatives and
taxes go hand in hand; according to the one will the other be regulated.
The number of representatives is determined by the number of
inhabitants; they have nothing to do but to lay taxes accordingly.
3 Elliot 121.
Mr. George Nicholas said:
the proportion of taxes is fixed by the number of inhabitants, and not
regulated by the extent of territory, or fertility of soil. . . . Each
State will know, from its population, its proportion of any general tax.
As it was justly observed by the gentleman over the way (Mr. Randolph),
they cannot possibly exceed that proportion; they are limited and
restrained expressly to it. The state legislatures have no check of this
kind. Their power is uncontrolled.
3 Elliot 243, 244.
Mr. Madison remarked that
they will be limited to fix the proportion of each State, and they must
raise it in the most convenient and satisfactory manner to the public.
3 Elliot 255.
From these references, and they might be extended indefinitely, it is
clear that the rule to govern each of the great classes into which taxes
were divided was prescribed in view of the commonly accepted distinction
between them and of the taxes directly levied under the systems of the
States. And that the difference between direct and indirect taxation was
fully appreciated is supported by the congressional debates after the
government was organized.
In the debates in the House of Representatives preceding the passage of
the act of Congress to lay "duties upon carriages for the
conveyance of persons," approved June 5, 1794 (1 Stat. 373, c. 45),
Mr. Sedgwick said that
a capitation tax, and taxes on land and on property and income
generally were direct charges, as well in the immediate as ultimate
sources of contribution. He had considered those, and those only, as
direct taxes in their operation and effects. On the other hand, a tax
imposed on a specific article of personal property, and particularly if
objects of luxury, as in the case under consideration, he had never
supposed had been considered a direct tax within the meaning of the
Constitution.
Mr. Dexter observed that his colleague
had stated the meaning of direct taxes to be a capitation tax, or a
general tax on all the taxable property of the citizens, and that a
gentleman from Virginia (Mr. Nicholas) thought the meaning was that all
taxes are direct which are paid by the citizen without being recompensed
by the consumer; but that, where the tax was only advanced and repaid by
the consumer, the tax was indirect. He thought that both opinions were
just, and not inconsistent, though the gentlemen had differed about
them. He thought that a general tax on all taxable property was a direct
tax, because it was paid without being recompensed by the consumer.
Annals 3d Congress 644, 646.
At a subsequent day of the debate, Mr. Madison objected to the tax on
carriages as "an unconstitutional tax," but Fisher Ames
declared that he had satisfied himself that it was not a direct tax, as
"the duty falls not on the possession, but on the use." Annals
730.
Mr. Madison wrote to Jefferson on May 11, 1794:
And the tax on carriages succeeded, in spite of the Constitution, by a
majority of treaty, the advocates for the principle being reinforced by
the adversaries to luxuries. . . . Some of the motives which they
decoyed to their support ought to premonish them of the danger. By
breaking down the barriers of the Constitution, and giving sanction to
the idea of sumptuary regulations, wealth may find a precarious defence
in the shield of justice. If luxury, as such, is to be taxed, the
greatest of all luxuries, says Paine, is a great estate. Even on the
present occasion, it has been found prudent to yield to a tax on
transfers of stock in the funds and in the banks.
2 Madison's Writings 14.
But Albert Gallatin, in his "Sketch of the Finances of the United
States," published in November, 1796, said:
The most generally received opinion, however, is that, by direct taxes
in the Constitution, those are meant which are raised on the capital or
revenue of the people; by indirect, such as are raised on their expense.
As that opinion is, in itself, rational and conformable to the decision
which has taken place on the subject of the carriage tax, and as it
appears important, for the sake of preventing future controversies,
which may be not more fatal to the revenue than to the tranquility of
the Union, that a fixed interpretation should be generally adopted, it
will not be improper to corroborate it by quoting the author from whom
the idea seems to have been borrowed.
He then quotes from Smith's Wealth of Nations, and continues:
The remarkable coincidence of the clause of the Constitution with this
passage in using the word "capitation" as a generic
expression, including the different species of direct taxes, an
acceptation of the word peculiar, it is believed, to Dr. Smith, leaves
little doubt that the framers of the one had the other in view at the
time, and that they, as well as he, by direct taxes, meant those paid
directly from, and falling immediately on, the revenue, and, by
indirect, those which are paid indirectly out of the revenue by falling
immediately upon the expense.
3 Gallatin's Writings (Adams' ed.) 74, 75.
The act provided in its first section
that there shall be levied, collected, and paid upon all carriages for
the conveyance of persons, which shall be kept by or for any person for
his or her own use, or to be let out to hire or for the conveyance of
passengers, the several duties and rates following,
and then followed a fixed yearly rate on every coach, chariot, phaeton,
and coachee, every four-wheel and every two-wheel top carriage, and upon
every other two-wheel carriage, varying according to the vehicle.
In Hylton v. United States, 3 Dall. 171, decided in March,
1796, this court held the act to be constitutional, because not laying a
direct tax. Chief Justice Ellsworth and Mr. Justice Cushing took no part
in the decision, and Mr. Justice Wilson gave no reasons.
Mr. Justice Chase said that he was inclined to think, but of this he
did not "give a judicial opinion," that
the direct taxes contemplated by the Constitution are only two, to-wit,
a capitation, or poll tax, simply, without regard to property,
profession, or any other circumstance, and a tax on land;
and that he doubted "whether a tax, by a general assessment on
personal property within the United States is included within the term
direct tax." But he thought that
an annual tax on carriages for the conveyance of persons may be
considered as within the power granted to Congress to lay duties. The
term duty is the most comprehensive next to the generical term tax, and
practically, in Great Britain (whence we take our general ideas of
taxes, duties, imposts, excises, customs, etc.), embraces taxes on
stamps, tolls for passage, etc., and is not confined to taxes on
importation only., It seems to me that a tax on expense is an indirect
tax, and I think an annual tax on a carriage for the conveyance of
persons is of that kind, because a carriage is a consumable commodity,
and such annual tax on it is on the expense of the owner.
Mr. Justice Paterson said that
the Constitution declares that a capitation tax is a direct tax, and,
both in theory and practice, a tax on land is deemed to be a direct tax.
. . . It is not necessary to determine whether a tax on the product of
land be a direct or indirect tax. Perhaps the immediate product of land,
in its original and crude state, ought to be considered as the land
itself; it makes part of it; or else the provision made against taxing
exports would be easily eluded. Land, independently of its produce, is
of no value. . . . Whether direct taxes, in the sense of the
Constitution, comprehend any other tax than a capitation tax and taxes
on land is a questionable point. . . . But as it is not before the
court, it would be improper to give any decisive opinion upon it.
And he concluded: "All taxes on expenses or consumption are
indirect taxes. A tax on carriages is of this kind, and, of course, is
not a direct tax." This conclusion he fortified by reading extracts
from Adam Smith on the taxation of consumable commodities.
Mr. Justice Iredell said:
There is no necessity or propriety in determining what is or is not a
direct or indirect tax in all cases. Some difficulties may occur which
we do not at present foresee. Perhaps a direct tax, in the sense of the
Constitution, can mean nothing but a tax on something inseparably
annexed to the soil; something capable of apportionment under all such
circumstances. A land or a poll tax may be considered of this
description. . . . In regard to other articles, there may possibly be
considerable doubt. It is sufficient, on the present occasion, for the
court to be satisfied that this is not a direct tax contemplated by the
Constitution in order to affirm the present judgment.
It will be perceived that each of the justices, while suggesting doubt
whether anything but a capitation or a land tax was a direct tax within
the meaning of the Constitution, distinctly avoided expressing an
opinion upon that question or laying down a comprehensive definition,
but confined his opinion to the case before the court.
The general line of observation was obviously influenced by Mr.
Hamilton's brief for the government, in which he said:
The following are presumed to be the only direct taxes: capitation or
poll taxes, taxes on lands and buildings, general assessments, whether
on the whole property of individuals or on their whole real or personal
estate. All else must of necessity be considered as indirect taxes.
7 Hamilton's Works (Lodge's ed.) 332.
Mr. Hamilton also argued:
If the meaning of the word "excise" is to be sought in a
British statute, it will be found to include the duty on carriages,
which is there considered as an "excise." . . . An argument
results from this, though not perhaps a conclusive one, yet, where so
important a distinction in the Constitution is to be realized, it is
fair to see the meaning of terms in the statutory language of that
country from which our jurisprudence is derived.
Id., 333.
If the question had related to an income tax, the reference would have
been fatal, as such taxes have been always classed by the law of Great
Britain as direct taxes.
The above act was to be enforced for two years, but, before it expired,
was repealed, as was the similar act of May 28, 1796, c. 37, which
expired August 31, 1801, 1 Stat. 478, 482.
By the act of July 14, 1798, when a war with France was supposed to be
impending, a direct tax of two millions of dollars was apportioned to
the States respectively, in the manner prescribed, which tax was to be
collected by officers of the United States and assessed upon "dwelling
houses, lands, and slaves" according to the valuations and
enumerations to be made pursuant to the act of July 9, 1798, entitled "An
act to provide for the valuation of lands and dwelling houses and the
enumeration of slaves within the United States." 1 Stat. 597, c.
75; id., 580, c. 70. Under these acts, every dwelling house was
assessed according to a prescribed value, and the sum of fifty cents
upon every slave enumerated, and the residue of the sum apportioned was
directed to be assessed upon the lands within each State according to
the valuation made pursuant to the prior act and at such rate percentum
as would be sufficient to produce said remainder. By the act of August
2, 1813, a direct tax of three millions of dollars was laid and
apportioned to the States respectively, and reference had to the prior
act of July 22, 1813, which provided that, whenever a direct tax should
be laid by the authority of the United States, the same should be
assessed and laid
on the value of all lands, lots of ground with their improvements,
dwelling houses, and slaves, which several articles subject to taxation
shall be enumerated and valued by the respective assessors at the rate
each of them is worth in money.
3 Stat. 3, c. 37; id., 22, c. 16. The act of January 9, 1815, laid a
direct tax of six millions of dollars, which was apportioned, assessed,
and laid as in the prior act on all lands, lots of grounds with their
improvements, dwelling houses, and slaves. These acts are attributable
to the war of 1812.
The act of August, 1861 (12 Stat. 292, 294, c. 4), imposed a tax of
twenty millions of dollars, which was apportioned and to be levied
wholly on real estate, and also levied taxes on incomes whether derived
from property or profession, trade or vocation (12 Stat. 309), and this
was followed by the acts of July 1, 1862 (12 Stat. 432, 473, c. 119),
March 3, 1863 (12 Stat. 713, 723, c. 74), June 30, 1864 (13 Stat. 223,
281, c. 173), March 3, 1863 (13 Stat. 469, 479, c. 78), March 10, 1866
(14 Stat. 4, c. 1), July 13, 1866 (14 Stat. 98, 137, c. 184), March 2,
1867 (14 Stat. 471, 477, c. 169), and July 14, 1870 (16 Stat. 256, c.
255). The differences between the latter acts and that of August 1,
1894, call for no remark in this connection. These acts grew out of the
war of the rebellion, and were, to use the language of Mr. Justice
Miller,
part of the system of taxing incomes, earnings, and profits adopted
during the late war and abandoned as soon after that war was ended as it
could be done safely.
Railroad Company v. Collector, 100 U.S. 95, 98.
From the foregoing, it is apparent: 1. That the distinction between
direct and indirect taxation was well understood by the framers of the
Constitution and those who adopted it. 2. That, under the state systems
of taxation, all taxes on real estate or personal property or the rents
or income thereof were regarded as direct taxes. 3. That the rules of
apportionment and of uniformity were adopted in view of that distinction
and those systems. 4. That whether the tax on carriages was direct or
indirect was disputed, but the tax was sustained as a tax on the use and
an excise. 5. That the original expectation was that the power of direct
taxation would be exercised only in extraordinary exigencies, and down
to August 1894, this expectation has been realized. The act of that date
was passed in a time of profound peace, and if we assume that no special
exigency called for unusual legislation, and that resort to this mode of
taxation is to become an ordinary and usual means of supply, that fact
furnishes an additional reason for circumspection and care in disposing
of the case.
We proceed then to examine certain decisions of this court under the
acts of 1861 and following years in which it is claimed that this court
has heretofore adjudicated that taxes like those under consideration are
not direct taxes and subject to the rule of apportionment, and that we
are bound to accept the rulings thus asserted to have been made as
conclusive in the premises. Is this contention well founded as respects
the question now under examination? Doubtless the doctrine of stare
decisis is a salutary one, and to be adhered to on all proper
occasions, but it only arises in respect of decisions directly upon the
points in issue.
The language of hie Justice Marshall, in Cohens v. Virginia, 6
Wheat. 264 , 399, may profitably again be quoted:
It is a maxim not to be disregarded that general expressions, in every
opinion, are to be taken in connection with the case in which those
expressions are used. If they go beyond the case, they may be respected,
but ought not to control the judgment in a subsequent suit when the very
point is presented for decision. The reason for this maxim is obvious.
The question actually before the court is investigated with care and
considered in its full extent. Other principles, which may serve to
illustrate it, are considered in their relation to the case decided, but
their possible bearing on all other cases is seldom completely
investigated.
So, in Carroll v. Lessee of Carroll, 16 How. 275, 286, where a
statute of the State of Maryland came under review, Mr Justice Curtis
said:
If the construction put by the court of a State upon one of its
statutes was not a matter in judgment, if it might have been decided
either way without affecting any right brought into question, then,
according to the principles of the common law, an opinion on such a
question is not a decision. To make it so, there must have been an
application of the judicial mind to the precise question necessary to be
determined to fix the rights of the parties and decide to whom the
property in contestation belongs. And therefore this court, and other
courts organized under the common law, has never held itself bound by
any part of an opinion, in any case, which was not needful to the
ascertainment of the right or title in question between the parties.
Nor is the language of Mr. Chief Justice Taney inapposite, as expressed
in The Genesee Chief, 12 How. 443, 455, wherein it was held that
the lakes and navigable waters connecting them are within the scope of
admiralty and maritime jurisdiction as known and understood in the
United States when the Constitution was adopted, and the preceding case
of The Thomas Jefferson, 10 Wheat. 428, was overruled. The Chief
Justice said:
It was under the influence of these precedents and this usage that the
case of The Thomas Jefferson, 10 Wheat. 428, was decided in this
court, and the jurisdiction of the courts of admiralty of the United
States declared to be limited to the ebb and flow of the tide. The
Steamboat Orleans v. Phoebus, 11 Pet. 175, afterwards followed this
case, merely as a point decided. It is the decision in the case of The
Thomas Jefferson which mainly embarrasses the court in the present
inquiry. We are sensible of the great weight to which it is entitled.
But, at the same time, we are convinced that, if we follow it, we follow
an erroneous decision into which the court fell when the great
importance of the question as it now presents itself could not be
foreseen, and the subject did not therefore receive that deliberate
consideration which at this time would have been given to it by the
eminent men who presided here when that case was decided. For the
decision was made in 1825, when the commerce on the rivers of the West
and on the Lakes was in its infancy and of little importance, and but
little regarded compared with that of the present day. Moreover, the
nature of the questions concerning the extent of the admiralty
jurisdiction which have arisen in this court were not calculated to call
its attention particularly to the one we are now considering.
Manifestly, as this court is clothed with the power, and entrusted with
the duty, to maintain the fundamental law of the Constitution, the
discharge of that duty requires it not to extend any decision upon a
constitutional question if it is convinced that error in principle might
supervene. Let us examine the cases referred to in the light of these
observations.
In Pacific Insurance Co. v. Soule, 7 Wall. 433, the validity of
a tax which was described as "upon the business of an insurance
company" was sustained on the ground that it was "a duty or
excise," and came within the decision in Hylton's case. The
arguments for the insurance company were elaborate, and took a wide
range, but the decision rested on narrow ground, and turned on the
distinction between an excise duty and a tax strictly so termed,
regarding the former a charge for a privilege, or on the transaction of
business, without any necessary reference to the amount of property
belonging to those on whom the charge might fall, although it might be
increased or diminished by the extent to which the privilege was
exercised or the business done. This was in accordance with Society
for Savings v. Coite, 6 Wall. 594; Provident Institution v.
Massachusetts, 6 Wall. 611, and Hamilton Company v.
Massachusetts, 6 Wall. 632, in which cases there was a difference of
opinion on the question whether the tax under consideration was a tax on
the property, and not upon the franchise or privilege. And see Van
Allen v. The Assessors, 3 Wall. 573; Home Insurance Co. v. New
York, 134 U.S. 594; Pullman Co. v. Pennsylvania, 141 U.S.
18.
In Veazie Bank v. Fenno, 8 Wall. 533, 544, 546, a tax was laid
on the circulation of state banks or national banks paying out the notes
of individuals or state banks, and it was held that it might well be
classed under the head of duties, and as falling within the same
category as Soule's case, 8 Wall. 547. It was declared to be of
the same nature as excise taxation on freight receipts, bills of lading,
and passenger tickets issued by a railroad company. Referring to the
discussions in the convention which framed the Constitution, Mr. Chief
Justice Chase observed that what as said there
doubtless shows uncertainty as to the true meaning of the term direct
tax; but it indicates also an understanding that direct taxes were such
as may be levied by capitation, and on lands and appurtenances; or,
perhaps, by valuation and assessment of personal property upon general
lists. For these were the subjects from which the States at that time
usually raised their principal supplies.
And in respect of the opinions in Hylton's case, the Chief
Justice said:
It may further be taken as established upon the testimony of Paterson,
that the words direct taxes, as used in the Constitution, comprehended
only capitation taxes and taxes on land, and perhaps taxes on personal
property by general valuation and assessment of the various descriptions
possessed within the several States.
In National Bank v. United States, 101 U.S. 1, involving the
constitutionality of § 3413 of the Revised Statutes, enacting that
every national banking association, state bank, or banker, or
association, shall pay a tax of ten percentum on the amount of notes of
any town, city, or municipal corporation, paid out by them.
Veazie Bank v. Fenno was cited with approval to the point that
Congress, having undertaken to provide a currency for the whole country,
might, to secure the benefit of it to the people, restrain, by suitable
enactments, the circulation as money of any notes not issued under its
authority, and Mr. Chief Justice Waite, speaking for the court, said: "
The tax thus laid is not on the obligation, but on its use in a
particular way."
Scholey v. Rew, 3 Wall. 331, was the case of a succession tax
which the court held to be
plainly an excise tax or duty upon the devolution of the estate or the
right to become beneficially entitled to the same, or the income
thereof, in possession or expectancy.
It was like the succession tax of a State, held constitutional in Mager
v. Grima, 8 How. 490, and the distinction between the power of a
State and the power of the United States to regulate the succession of
property was not referred to, and does not appear to have been in the
mind of the court. The opinion stated that the act of Parliament from
which the particular provision under consideration was borrowed had
received substantially the same construction, and cases under that act
hold that a succession duty is not a tax upon income or upon property,
but on the actual benefit derived by the individual, determined as
prescribed. In re Elwes, 3 H. & N. 719; Attorney General
v. Sefton, 2 H. & C. 362; S.C. (H.L.) 3 H. & C. 1023; 11
H.L.Cas. 257..
In Railroad Company v. Collector, 100 U.S. 595, 596, the
validity of a tax collected of a corporation upon the interest paid by
it upon its bonds was held to be "essentially an excise on the
business of the class of corporations mentioned in the statute."
And Mr. Justice Miller, in delivering the opinion, said:
As the sum involved in this suit is small, and the law under which the
tax in question was collected has long since been repealed, the case is
of little consequence as regards any principle involved in it as a rule
of future action.
All these cases are distinguishable from that in hand, and this brings
us to consider that of Springer v. United States, 102 U.S. 586,
602, chiefly relied on and urged upon us as decisive.
That was an action of ejectment brought on a tax deed issued to the
United States on sale of defendant's real estate for income taxes. The
defendant contended that the deed was void because the tax was a direct
tax, not levied in accordance with the Constitution. Unless the tax were
wholly invalid, the defence failed.
The statement of the case in the report shows that Springer returned a
certain amount as his net income for the particular year, but does not
give the details of what his income, gains, and profits consisted in.
The original record discloses that the income was not derived in any
degree from real estate, but was in part professional as attorney at law
and the rest interest on United States bonds. It would seem probable
that the court did not feel called upon to advert to the distinction
between the latter and the former source of income, as the validity of
the tax as to either would sustain the action.
The opinion thus concludes:
Our conclusions are that direct taxes, within the meaning of
the Constitution, are only capitation taxes, as expressed in that
instrument, and taxes on real estate, and that the tax of which the
plaintiff in error complains is within the category of an excise or
duty.
While this language is broad enough to cover the interest as well as
the professional earnings, the case would have been more significant as
a precedent if the distinction had been brought out in the report and
commented on in arriving at judgment, for a tax on professional receipts
might be treated as an excise or duty, and therefore indirect, when a
tax on the income of personalty might be held to be direct.
Be this as it may, it is conceded in all these cases, from that of Hylton
to that of Springer, that taxes on land are direct taxes, and in
none of them is it determined that taxes on rents or income derived from
land are not taxes on land.
We admit that it may not unreasonably be said that logically, if taxes
on the rents, issues and profits of real estate are equivalent to taxes
on real estate, and are therefore direct taxes, taxes on the income of
personal property as such are equivalent to taxes on such property, and
therefore direct taxes. But we are considering the rule stare
decisis, and we must decline to hold ourselves bound to extend the
scope of decisions -- none of which discussed the question whether a tax
on the income from personalty is equivalent to a tax on that personalty,
but all of which held real estate liable to direct taxation only -- so
as to sustain a tax on the income of realty on the ground of being an
excise or duty.
As no capitation, or other direct, tax was to be laid otherwise than in
proportion to the population, some other direct tax than a capitation
tax (and it might well enough be argued some other tax of the same kind
as a capitation tax) must be referred to, and it has always been
considered that a tax upon real estate eo nomine or upon its
owners in respect thereof is a direct tax within the meaning of the
Constitution. But is there any distinction between the real estate
itself or its owners in respect of it and the rents or income of the
real estate coming to the owners as the natural and ordinary incident of
their ownership?
If the Constitution had provided that Congress should not levy any tax
upon the real estate of any citizen of any State, could it be contended
that Congress could put an annual tax for five or any other number of
years upon the rent or income of the real estate? And if, as the
Constitution now reads, no unapportioned tax can be imposed upon real
estate, can Congress, without apportionment, nevertheless impose taxes
upon such real estate under the guise of an annual tax upon its rents or
income?
As, according to the feudal law, the whole beneficial interest in the
land consisted in the right to take the rents and profits, the general
rule has always been, in the language of Coke, that
if a man seized of land in fee by his deed granteth to another the
profits of those lands, to have and to hold to him and his heirs, and
marketh livery secundum formam chartae, the whole land itself
doth pass. For what is the land but the profits thereof?
Co.Lit. 45. And that a devise of the rents and profits or of the income
of lands passes the land itself both at law and in equity. 1 Jarm. on
Wills (5th ed.) *98 and cases cited.
The requirement of the Constitution is that no direct tax shall be laid
otherwise than by apportionment -- the prohibition is not against direct
taxes on land, from which the implication is sought to be drawn that
indirect taxes on land would be constitutional, but it is against all
direct taxes -- and it is admitted that a tax on real estate is a direct
tax. Unless, therefore, a tax upon rents or income issuing out of lands
is intrinsically so different from a tax on the land itself that it
belongs to a wholly different class of taxes, such taxes must be
regarded as falling within the same category as a tax on real estate
eo nomine. The name of the tax is unimportant. The real question
is, is there any basis upon which to rest the contention that real
estate belongs to one of the two great classes of taxes, and the rent or
income which is the incident of its ownership belongs to the other? We
are unable to perceive any ground for the alleged distinction. An annual
tax upon the annual value or annual user of real estate appears to us
the same in substance as an annual tax on the real estate, which would
be paid out of the rent or income. This law taxes the income received
from land and the growth or produce of the land. Mr. Justice Paterson
observed in Hylton's case, "land, independently of its
produce, is of no value;" and certainly had no thought that direct
taxes were confined to unproductive land.
If it be true that, by varying the form, the substance may be changed,
it is not easy to see that anything would remain of the limitations of
the Constitution, or of the rule of taxation and representation, so
carefully recognized and guarded in favor of the citizens of each State.
But constitutional provisions cannot be thus evaded. It is the
substance, and not the form, which controls, as has indeed been
established by repeated decisions of this court. Thus, in Brown v.
Maryland, 12 Wheat. 419, 444, it was held that the tax on the
occupation of an importer was the same as a tax on imports, and
therefore void. And Chief Justice Marshall said:
It is impossible to conceal from ourselves that this is varying the
form without varying the substance. It is treating a prohibition which
is general as if it were confined to a particular mode of doing the
forbidden thing. All must perceive that a tax on the sale of an article
imported only for sale is a tax on the article itself.
In Weston v. Charleston, 2 Pet. 449, it was held that a tax on
the income of United States securities was a tax on the securities
themselves, and equally inadmissible. The ordinance of the city of
Charleston involved in that case was exceedingly obscure; but the
opinions of Mr. Justice Thompson and Mr. Justice Johnson, who dissented,
make it clear that the levy was upon the interest of the bonds, and not
upon the bonds, and they held that it was an income tax, and, as such,
sustainable; but the majority of the court, Chief Justice Marshall
delivering the opinion, overruled that contention.
So, in Dobbins v. Commissioners, 16 Pet. 435, it was decided
that the income from an official position could not be taxed if the
office itself was exempt.
In Almy v. California, 24 How. 169, it was held that a duty on
a bill of lading was the same thing as a duty on the article which it
represented; in Railroad v. Jackson, 7 Wall. 262, that a tax
upon the interest payable on bonds was a tax not upon the debtor, but
upon the security, and in Cook v. Pennsylvania, 97 U.S. 566,
that a tax upon the amount of sales of goods made by an auctioneer was a
tax upon the goods sold.
In Philadelphia Steamship Co. v. Pennsylvania, 122 U.S. 326,
and Leloup v. Mobile, 127 U.S. 640, it was held that a tax on
income received from interstate commerce was a tax upon the commerce
itself, and therefore unauthorized. And so, although it is thoroughly
settled that, where by way of duties laid on the transportation of the
subjects of interstate commerce, and on the receipts derived therefrom,
or on the occupation or business of carrying it on.a tax is levied by a
State on interstate commerce, such taxation amounts to a regulation of
such commerce, and cannot be sustained, yet the property in a State
belonging to a corporation, whether foreign or domestic, engaged in
foreign or domestic commerce, may be taxed, and when the tax is
substantially a mere tax on property, and not one imposed on the
privilege of doing interstate commerce, the exaction may be sustained. "The
substance, and not the shadow, determines the validity of the exercise
of the power." Postal Telegraph Co. v. Adams, 155 U.S. 688,
698.
Nothing can be clearer than that what the Constitution intended to
guard against was the exercise by the general government of the power of
directly taxing persons and property within any State through a majority
made up from the other States. It is true that the effect of requiring
direct taxes to be apportioned among the States in proportion to their
population is necessarily that the amount of taxes on the individual
taxpayer in a State having the taxable subject matter to a larger extent
in proportion to its population than another State has would be less
than in such other State, but this inequality must be held to have been
contemplated, and was manifestly designed to operate to restrain the
exercise of the power of direct taxation to extraordinary emergencies,
and to prevent an attack upon accumulated property by mere force of
numbers.
It is not doubted that property owners ought to contribute in just
measure to the expenses of the government. As to the States and their
municipalities, this is reached largely through the imposition of direct
taxes. As to the Federal government, it is attained in part through
excises and indirect taxes upon luxuries and consumption generally, to
which direct taxation may be added to the extent the rule of
apportionment allows. And, through one mode or the other, the entire
wealth of the country, real and personal, may be made, as it should be,
to contribute to the common defence and general welfare.
But the acceptance of the rule of apportionment was one of the
compromises which made the adoption of the Constitution possible, and
secured the creation of that dual form of government, so elastic and so
strong, which has thus far survived in unabated vigor. If, by calling a
tax indirect when it is essentially direct, the rule of protection could
be frittered away, one of the great landmarks defining the boundary
between the Nation and the States of which it is composed would have
disappeared, and with it one of the bulwarks of private rights and
private property.
We are of opinion that the law in question, so far as it levies a tax
on the rents or income of real estate, is in violation of the
Constitution, and is invalid.
Another question is directly presented by the record as to the validity
of the tax levied by the act upon the income derived from municipal
bonds. The averment in the bill is that the defendant company owns two
millions of the municipal bonds of the city of New York, from which it
derives an annual income of $60,000, and that the directors of the
company intend to return and pay the taxes on the income so derived.
The Constitution contemplates the independent exercise by the Nation
and the State, severally, of their constitutional powers.
As the States cannot tax the powers, the operations, or the property of
the United States, nor the means which they employ to carry their powers
into execution, so it has been held that the United States have no power
under the Constitution to tax either the instrumentalities or the
property of a State.
A municipal corporation is the representative of the State and one of
the instrumentalities of the state government. It was long ago
determined that the property and revenues of municipal corporations are
not subjects of Federal taxation. Collector v. Day, 11 Wall.
113, 124; United States v. Railroad Company, 17 Wall. 322, 332.
In Collector v. Day, it was adjudged that Congress had no power,
even by an act taxing all incomes, to levy a tax upon the salaries of
judicial officers of a State, for reasons similar to those on which it
had been held in Dobbin v. Commissioner, 16 Pet. 435, that a
State could not tax the salaries of officers of the United States. Mr.
Justice Nelson, in delivering judgment, said:
The general government, and the States, although both exist within the
same territorial limits, are separate and distinct sovereignties, acting
separately and independently of each other within their respective
spheres. The former in its appropriate sphere is supreme; but the States
within the limits of their powers not granted, or, in the language of
the tenth amendment, "reserved," are as independent of the
general government as that government within its sphere is independent
of the States.
This is quoted in Van Brocklin v. Tennessee, 117 U.S. 151, 178,
and the opinion continues:
Applying the same principles, this court, in United States v.
Railroad Company, 17 Wall. 322, held that a municipal corporation
within a State could not be taxed by the United States on the dividends
or interest of stock or bonds held by it in a railroad or canal company,
because the municipal corporation was a representative of the State,
created by the State to exercise a limited portion of its powers of
government, and therefore its revenues, like those of the State itself,
were not taxable by the United States. The revenues thus adjudged to be
exempt from Federal taxation were not themselves appropriated to any
specific public use, nor derived from property held by the State or by
the municipal corporation for any specific public us, but were part of
the general income of that corporation, held for the public use in no
other sense than all property and income, belonging to it in its
municipal character, must be so held. The reasons for exempting all the
property and income of a State, or of a municipal corporation, which is
a political division of the State, from Federal taxation, equally
require the exemption of all the property and income of the national
government from state taxation.
In Mercantile Bank v. New York, 131 U.S. 138, 169., this Court
said:
Bonds issued by the State of New York, or under its authority by its
public municipal bodies, are means for carrying on the work of the
government, and are not taxable even by the United States, and it is not
a part of the policy of the government which issues them to subject them
to taxation for its own purposes.
The question in Bonaparte v. Tax Court, 104 U.S. 592, was
whether the registered public debt of one State, exempt from taxation by
that State or actually taxed there, was taxable by another State when
owned by a citizen of the latter, and it was held that there was no
provision of the Constitution of the United States which prohibited such
taxation. The States had not covenanted that this could not be done,
whereas, under the fundamental law, as to the power to borrow money,
neither the United States, on the one hand, nor the States, on the
other, can interfere with that power as possessed by each and an
essential element of the sovereignty of each.
The law under consideration provides "that nothing herein
contained shall apply to States, counties or municipalities." It is
contended that, although the property or revenues of the States or their
instrumentalities cannot be taxed, nevertheless the income derived from
state, county, and municipal securities can be taxed. But we think the
same want of power to tax the property or revenues of the States or
their instrumentalities exists in relation to a tax on the income from
their securities, and for the same reason, and that reason is given by
Chief Justice Marshall in Weston v. Charleston, 2 Pet. 449, 468,
where he said:
The right to tax the contract to any extent, when made, must operate
upon the power to borrow before it is exercised, and have a sensible
influence on the contract. The extent of this influence, depends on the
will of a distinct government. To any extent, however inconsiderable, it
is a burthen on the operations of government. It may be carried to an
extent which shall arrest them entirely. . . . The tax on government
stock is thought by this court to be a tax on the contract, a tax on the
power to borrow money on the credit of the United States, and
consequently to be repugnant to the Constitution.
Applying this language to these municipal securities, it is obvious
that taxation on the interest therefrom would operate on the power to
borrow before it is exercised, and would have a sensible influence on
the contract, and that the tax in question is a tax on the power of the
States and their instrumentalities to borrow money, and consequently
repugnant to the Constitution. Upon each of the other questions argued
at the bar, to-wit, 1, Whether the void provisions as to rents and
income from real estate invalidated the whole act? 2, whether, as to the
income from personal property as such, the act is unconstitutional as
laying direct taxes? 3, Whether any part of the tax, if not considered
as a direct tax, is invalid for want of uniformity on either of the
grounds suggested? -- the justices who heard the argument are equally
divided, and, therefore no opinion is expressed.
The result is that the decree of the Circuit Court is reversed and
the case remanded with directions to enter a decree in favor of the
complainant in respect only of the voluntary payment of the tax on the
rents and income of the real estate of the defendant company, and of
that which it holds in trust, and on the income from the municipal bonds
owned or so held by it.
* By sections 27 to 37, inclusive, of the act of Congress entitled "An
act to reduce taxation, to provide revenue for the government, and for
other purposes," received by the President August 15, 1894, and
which, not having been returned by him to the House in which it
originated within the time prescribed by the Constitution of the United
States, became a law without approval (28 Stat. 509, c. 349), it was
provided that, from and after January 1, 1895, and until January 1,
1900,
there shall be assessed, levied, collected, and paid annually upon the
gains, profits, and income received in the preceding calendar year by
every citizen of the United States, whether residing at home or abroad,
and every person residing therein, whether said gains, profits, or
income be derived from any kind of property, rents, interest, dividends,
or salaries, or from any profession, trade, employment, or vocation
carried on in the United States or elsewhere, or from any other source
whatever, a tax of two percentum on the amount so derived over and above
four thousand dollars, and a like tax shall be levied, collected and
paid annually upon the gains, profits, and income from all property
owned and of every business, trade, or profession carried on in the
United States by persons residing without the United States. . . .
SEC. 28. That in estimating the gains, profits, and income of any
person there shall be included all income derived from interest upon
notes, bonds, and other securities, except such bonds of the United
States the principal and interest of which are by the law of their
issuance exempt from all Federal taxation; profits realized within the
year from sales of real estate purchased within two years previous to
the close of the year for which income is estimated; interest received
or accrued upon all notes, bonds, mortgages, or other forms of
indebtedness bearing interest, whether paid or not, if good and
collectible, less the interest which has become due from said person or
which has been paid by him during the year; the amount of all premium on
bonds, notes, or coupons; the amount of sales of livestock, sugar,
cotton, wool, butter, cheese, pork, beef, mutton, or other meats, hay,
and grain, or other vegetable or other productions, being the growth or
produce of the estate of such person, less the amount expended in the
purchase or production of said stock or produce, and not including any
part thereof consumed directly by the family; money and the value of all
personal property acquired by gift or inheritance; all other gains,
profits, and income derived from any source whatever except that portion
of the salary, compensation, or pay received for services in the civil,
military, naval, or other service of the United States, including
Senators, Representatives, and Delegates in Congress, from which the tax
has been deducted, and except that portion of any salary upon which the
employer is required by law to withhold, and does withhold the tax and
pays the same to the officer authorized to receive it. In computing
incomes the necessary expenses actually incurred in carrying on any
business, occupation, or profession shall be deducted and also all
interest due or paid within the year by such person on existing
indebtedness. And all national, state, county, school, and municipal
taxes, not including those assessed against local benefits, paid within
the year shall be deducted from the gains, profits, or income of the
person who has actually paid the same, whether such person be owner,
tenant, or mortgagor; also losses actually sustained during the year,
incurred in trade or arising from fires, storms, or shipwreck, and not
compensated for by insurance or otherwise, and debts ascertained to be
worthless, but excluding all estimated depreciation of values and losses
within the year on sales of real estate purchased within two years
previous to the year for which income is estimated: Provided,
That no deduction shall be made for any amount paid out for new
buildings, permanent improvements, or betterments, made to increase the
value of any property or estate: Provided further, That only one
deduction of four thousand dollars shall be made from the aggregate
income of all the members of any family, composed of one or both
parents, and one or more minor children, or husband and wife; that
guardians shall be allowed to make a deduction in favor of each and
every ward, except that, in case where two or more wards are comprised
in one family, and have joint property interests, the aggregate
deduction in their favor shall not exceed four thousand dollars: and
provided further, that in cases where the salary or other
compensation paid to any person in the employment or service of the
United States shall not exceed the rate of four thousand dollars per
annum, or shall be by fees, or uncertain or irregular in the amount or
in the time during which the same shall have accrued or been earned,
such salary or other compensation shall be included in estimating the
annual gains, profits, or income of the person to whom the same shall
have been paid, and shall include that portion of any income or salary
upon which a tax has not been paid by the employer, where the employer
is required by law to pay on the excess over four thousand dollars: Provided
also, that in computing the income of any person, corporation,
company, or association there shall not be included the amount received
from any corporation, company, or association as dividends upon the
stock of such corporation, company, or association if the tax of two
percentum has been paid upon its net profits by said corporation,
company, or association as required by this act.
SEC. 29. That it shall be the duty of all persons of lawful age having
an income of more than three thousand five hundred dollars for the
taxable year, computed on the basis herein prescribed, to make and
render a list or return, on or before the day provided by law, in such
form and manner as may be directed by the Commissioner of Internal
Revenue, with the approval of the Secretary of the Treasury, to the
collector or a deputy collector of the district in which they reside, of
the amount of their income, gains, and profits, as aforesaid, and all
guardians and trustees, executors, administrators, agents, receivers,
and all persons or corporations acting in any fiduciary capacity, shall
make and render a list or return as aforesaid, to the collector or a
deputy collector of the district in which such person or corporation
acting in a fiduciary capacity resides or does business, of the amount
of income, gains, and profits of any minor or person for whom they act,
but persons having less than three thousand five hundred dollars income
are not required to make such report; and the collector or deputy
collector shall require every list or return to be verified by the oath
or affirmation of the party rendering it, and may increase the amount of
any list or return if he has reason to believe that the same is
understated, and in case any such person having a taxable income shall
neglect or refuse to make and render such list and return, or shall
render a willfully false or fraudulent list or return, it shall be the
duty of the collector or deputy collector, to make such list, according
to the best information he can obtain, by the examination of such
person, or any other evidence, and to add fifty percentum as a penalty
to the amount of the tax due on such list in all cases of willful
neglect or refusal to make and render a list or return, and in all cases
of a willfully false or fraudulent list or return having been rendered
to add one hundred percentum as a penalty to the amount of tax
ascertained to be due, the tax and the additions thereto as a penalty to
be assessed and collected in the manner provided for in other cases of
willful neglect or refusal to render a list or return, or of rendering a
false or fraudulent return <GR:"157 U.S. 429">A proviso
was added that any person or corporation might show that he or its ward
had no taxable income, or that the same had been paid elsewhere, and the
collector might exempt from the tax for that year.
Any person or company, corporation, or association, feeling aggrieved
by the decision of the deputy collector in such cases may appeal to the
collector of the district, and his decision thereon, unless reversed by
the Commissioner of Internal Revenue, shall be final. If dissatisfied
with the decision of the collector, such person or corporation, company,
or association may submit the case, with all the papers, to the
Commissioner of Internal Revenue for his decision, and may furnish the
testimony of witnesses to prove any relevant facts, having served notice
to that effect upon the Commissioner of Internal Revenue, as herein
prescribed.
Provision was made for notice of time and place for taking testimony on
both sides, and that no penalty should be assessed until after notice.
By section 30, the taxes on incomes were made payable on or before July
1 of each year, and five percent penalty levied on taxes unpaid, and
interest.
By section 31, any nonresident might receive the benefit of the
exemptions provided for, and
in computing income he shall include all income from every source, but
unless he be a citizen of the United States he shall only pay on that
part of the income which is derived from any source in the United
States. In case such nonresident fails to file such statement, the
collector of each district shall collect the tax on the income derived
from property situated in his district, subject to income tax, making no
allowance for exemptions, and all property belonging to such nonresident
shall be liable to distraint for tax: Provided, That nonresident
corporations shall be subject to the same laws as to tax as resident
corporations, and the collection of the tax shall be made in the same
manner as provided for collections of taxes against nonresident persons.
SEC. 32. That there shall be assessed, levied, and collected, except as
herein otherwise provided, a tax of two percentum annually on the net
profits or income above actual operating and business expenses,
including expenses for materials purchased for manufacture or bought for
resale, losses, and interest on bonded and other indebtedness of all
banks, banking institutions, trust companies, saving institutions, fire,
marine, life, and other insurance companies, railroad, canal, turnpike,
canal navigation, slack water, telephone, telegraph, express, electric
light, gas, water, street railway companies, and all other corporations,
companies, or associations doing business for profit in the United
States, no matter how created and organized but not including
partnerships.
The tax is made payable on or before the first day of July in each
year, and if the president or other chief officer of any corporation,
company, or association, or in the case of any foreign corporation,
company, or association, the resident manager or agent shall neglect or
refuse to file with the collector of the internal revenue district in
which said corporation, company, or association shall be located or be
engaged in business, a statement verified by his oath or affirmation, in
such form as shall be prescribed by the Commissioner of Internal
Revenue, with the approval of the Secretary of the Treasury, showing the
amount of net profits or income received by said corporation, company,
or association during the whole calendar year last preceding the date of
filing said statement as hereinafter required, the corporation, company,
or association making default shall forfeit as a penalty the sum of one
thousand dollars and two percentum on the amount of taxes due, for each
month until the same is paid, the payment of said penalty to be enforced
as provided in other cases of neglect and refusal to make return of
taxes under the internal revenue laws.
The net profits or income of all corporations, companies, or
associations shall include the amounts paid to shareholders, or carried
to the account of any fund, or used for construction, enlargement of
plant, or any other expenditure or investment paid from the net annual
profits made or acquired by said corporations, companies, or
associations.
That nothing herein contained shall apply to States, counties, or
municipalities; nor to corporations, companies, or associations
organized and conducted solely for charitable, religious, or educational
purposes, including fraternal beneficiary societies, orders, or
associations operating upon the lodge system and providing for the
payment of life, sick, accident, and other benefits to the members of
such societies, orders, or associations and dependents of such members;
nor to the stocks, shares, funds, or securities held by any fiduciary or
trustee for charitable, religious, or educational purposes; nor to
building and loan associations or companies which make loans only to
their shareholders; nor to such savings banks, savings institutions or
societies as shall, first, have no stockholders or members except
depositors and no capital except deposits; secondly, shall not receive
deposits to an aggregate amount, in any one year, of more than one
thousand dollars from the same depositor; thirdly, shall not allow an
accumulation or total of deposits, by any one depositor exceeding ten
thousand dollars; fourthly, shall actually divide and distribute to its
depositors, ratably to deposits, all the earnings over the necessary and
proper expenses of such bank, institution, or society, except such as
shall be applied to surplus; fifthly, shall not possess, in any form, a
surplus fund exceeding ten percentum of its aggregate deposits; nor to
such savings banks, savings institutions, or societies composed of
members who do not participate in the profits thereof and which pay
interest or dividends only to their depositors; nor to that part of the
business of any savings bank, institution, or other similar association
having a capital stock, that is conducted on the mutual plan solely for
the benefit of its depositors on such plan, and which shall keep its
accounts of its business conducted on such mutual plan separate and
apart from its other accounts.
Nor to any insurance company or association which conducts all its
business solely upon the mutual plan, and only for the benefit of its
policy holders or members, and having no capital stock and no stock or
shareholders, and holding all its property in trust and in reserve for
its policyholders or members; nor to that part of the business of any
insurance company having a capital stock and stock and shareholders,
which is conducted on the mutual plan, separate from its stock plan of
insurance, and solely for the benefit of the policyholders and members
insured on said mutual plan, and holding all the property belonging to
and derived from said mutual part of its business in trust and reserve
for the benefit of its policyholders and members insured on said mutual
plan.
That all state, county, municipal, and town taxes paid by corporations,
companies, or associations, shall be included in the operating and
business expenses of such corporations, companies, or associations.
SEC. 33. That there shall be levied, collected, and paid on all
salaries of officers, or payments for services to persons in the civil,
military, naval, or other employment or service of the United States,
including Senators and Representatives and Delegates in Congress, when
exceeding the rate of four thousand dollars per annum, a tax of two
percentum on the excess above the said four thousand dollars, and it
shall be the duty of all paymasters and all disbursing officers under
the government of the United States, or persons in the employ thereof,
when making any payment to any officers or persons as aforesaid, whose
compensation is determined by a fixed salary, or upon settling or
adjusting the accounts of such officers or persons, to deduct and
withhold the aforesaid tax of two percentum, and the payroll, receipts,
or account of officers or persons paying such tax as aforesaid shall be
made to exhibit the fact of such payment. And it shall be the duty of
the accounting officers of the Treasury Department, when auditing the
accounts of any paymaster or disbursing officer, or any officer
withholding his salary from moneys received by him, or when settling or
adjusting the accounts of any such officer, to require evidence that the
taxes mentioned in this section have been deducted and paid over to the
Treasurer of the United States, or other officer authorized to receive
the same. Every corporation which pays to any employee a salary or
compensation exceeding four thousand dollars per annum shall report the
same to the collector or deputy collector of his district and said
employee shall pay thereon, subject to the exemptions herein provided
for, the tax of two percentum on the excess of his salary over four
thousand dollars: Provided, That salaries due to state, county, or
municipal officers shall be exempt from the income tax herein levied.
By section 34, sections thirty-one hundred and sixty-seven, thirty-one
hundred and seventy-two, thirty-one hundred and seventy-three, and
thirty-one hundred and seventy-six of the Revised Statutes of the United
States as amended were amended so as to provide that it should be
unlawful for the collector and other officers to make known, or to
publish amount or source of income under penalty; that every collector
should
from time to time cause his deputies to proceed through every part of
his district and inquire after and concerning all persons therein who
are liable to pay any internal revenue tax, and all persons owning or
having the care and management of any objects liable to pay any tax, and
to make a list of such persons and enumerate said objects;
that the tax returns must he made on or before the first Monday in
March; that the collectors may make returns when particulars are
furnished; that notice be given to absentees to render returns; that
collectors may summon persons to produce books and testify concerning
returns; that collectors may enter other districts to examine persons
and books, and may make returns, and that penalties may be imposed on
false returns.
By section 35, it was provided that corporations doing business for
profit should make returns on or before the first Monday of March of
each year
of all the following matters for the whole calendar year last preceding
the date of such return:
First. The gross profits of such corporation, company, or association,
from all kinds of business of every name and nature.
Second. The expenses of such corporation, company, or association,
exclusive of interest, annuities, and dividend.
Third. The net profits of such corporation, company, or association,
without allowance for interest, annuities, or dividends.
Fourth. The amount paid on account of interest, annuities, and
dividends, stated separately.
Fifth. The amount paid in salaries of four thousand dollars or less to
each person employed.
Sixth. The amount paid in salaries of more than four thousand dollars
to each person employed and the name and address of each of such persons
and the amount paid to each.
By section 36, that boo |