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APPEAL
FROM THE CIRCUIT COURT OF THE UNITED STATES FOR THE SOUTHERN DISTRICT
OF NEW YORK | |
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Syllabus |
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court of equity has jurisdiction to prevent a threatened breach of trust
in the misapplication or diversion of the funds of a corporation by
illegal payments out of its capital or profits.
Such a bill being filed by a stockholder to prevent a trust company
from voluntarily making returns for the imposition and payment of a tax
claimed to be unconstitutional, and on the further ground of threatened
multiplicity of suits and irreparable injury, and the objection of
adequate remedy at law not having been raised below or in this court,
and the question of jurisdiction having been waived by the United States
so far as it was within its power to do so, and the relief sought being
to prevent the voluntary action of the trust company, and not in respect
to the assessment and collection of the tax, the court will proceed to
judgment on the merits.
The doctrine of stare decisis is a salutary one, and is to be
adhered to on proper occasions, in respect of decisions directly upon
points in issue; but this court should not extend any decision upon a
constitutional question if it is convinced that error in principle might
supervene.
In the cases referred to in the opinion of the court in this case,
beginning with Hylton v. United States, 3 Dall. 171, (February
Term, 1796) and ending with Springer v. United States, 102 U.S.
586 (October Term, 1880), taxes on land are conceded to be direct taxes,
and in none of them is it determined that a tax on rent or income
derived from land is not a tax on land.
A tax on the rents or income of real estate is a direct tax within the
meaning of that term as used in the Constitution of the United States.
A tax upon income derived from the interest of bonds issued by a
municipal corporation is a tax upon the power of the State and its
instrumentalities to borrow money, and is consequently repugnant to the
Constitution of the United States.
So much of the act "to reduce taxation, to provide revenue for the
government, and for other purposes," 28 Stat. 509, c. 349, as
provides for levying taxes upon rents or income derived from real
estate, or from the interest on municipal bonds, is repugnant to the
Constitution of the United States, and is invalid.
Upon each of the other questions argued at the bar, to-wit: 1, whether
the void provision as to rents and income from real estate invalidates
the whole act? 2, whether, as to the income from personal property a
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.
This was a bill filed by Charles Pollock, a citizen of the State of
Massachusetts, on behalf of himself and all other stockholders of the
defendant company similarly situated against the Farmers' Loan and Trust
Company, a corporation of the State of New York, and its directors,
alleging that the capital stock of the corporation consisted of one
million dollars, divided into forty thousand shares of the par value of
twenty-five dollars each; that the company was authorized to invest its
assets in public stocks and bonds of the United States, of individual
States, or of any incorporated city, or county, or in such real or
personal securities as it might deem proper, and also to take, accept,
and execute all such trusts of every description as might be committed
to it by any person or persons or any corporation, by grant, assignment,
devise, or bequest, or by order of any court of record of New York, and
to receive and take any real estate which might be the subject of such
trust; that the property and assets of the company amounted to more than
five million dollars, of which at least one million was invested in real
estate owned by the company in fee; at least two millions in bonds of
the city of New York, and at least one million in the bonds and stocks
of other corporations of the United States; that the net profits or
income of the defendant company during the year ending December 31,
1894, amounted to more than the sum of $300,000 above its actual
operating and business expenses, including losses and interest on bonded
and other indebtedness; that, from its real estate, the company derived
an income of $50,000 per annum, after deducting all county, state, and
municipal taxes, and that the company derived an income or profit of
about $60,000 per annum from its investments in municipal bonds.
It was further alleged that, under and by virtue of the powers
conferred upon the company, it had from time to time taken and executed,
and was holding and executing, numerous trusts committed to the company
by many persons, copartnerships, unincorporated associations, and
corporations, by grant, assignment, devise, and bequest, and by orders
of various courts, and that the company now held as trustee for many
minors, individuals, copartnerships, associations, and corporations,
resident in the United States and elsewhere, many parcels of real estate
situated in the various States of the United States, and amounting, in
the aggregate, to a value exceeding five millions of dollars, the rents
and income of which real estate collected and received by said defendant
in its fiduciary capacity annually exceeded the sum of two hundred
thousand dollars.
The bill also averred that complainant was and had been since May 20,
1892, the owner and registered holder of ten shares of the capital stock
of the company, of a value exceeding the sum of $5,000; that the capital
stock was divided among a large number of different persons who, as such
stockholders, constituted a large body; that the bill was filed for an
object common to them all, and that he therefore, brought suit not only
in his own behalf as a stockholder of the company, but also as a
representative of and on behalf of such of the other stockholders
similarly situated and interested as might choose to intervene and
become parties.
It was then alleged that the management of the stock, property,
affairs, and concerns of the company was committed under its acts of
incorporation to its directors, and charged that the company and a
majority of its directors claimed and asserted that, under and by virtue
of the alleged authority of the provisions of an act of Congress of the
United States entitled, "An act to reduce taxation, to provide
revenue for the government, and for other purposes," passed August
15, 1894, the company was liable, and that they intended to pay to the
United States before July 1, 1895, a tax of two percentum on the net
profits of said company for the year ending December 31, 1894, above
actual operating and business expenses, including the income derived
from its real estate and its bonds of the city of New York, and that the
directors claimed and asserted that a similar tax must be paid upon the
amount of the incomes, gains, and profits, in excess of $4000, of all
minors and others for whom the company was acting in a fiduciary
capacity. And further, that the company and its directors had avowed
their intention to make and file with the collector of internal revenue
for the second district of the city of New York a list, return, or
statement showing the amount of the net income of the company received
during the year 1894 as aforesaid, and likewise to make and render a
list or return to said collector of internal revenue, prior to that
date, of the amount of the income, gains, and profits of all minors and
other persons having incomes in excess of $300, for whom the company was
acting in a fiduciary capacity.
The bill charged that the provisions in respect of said alleged income
tax incorporated in the act of Congress were unconstitutional, null, and
void, in that the tax was a direct tax in respect of the real estate
held and owned by the company in its own right and in its fiduciary
capacity as aforesaid by being imposed upon the rents, issues, and
profits of said real estate, and was likewise a direct tax in respect of
its personal property and the personal property held by it for others
for whom it acted in its fiduciary capacity as aforesaid, which direct
taxes were not in and by said act apportioned among the several States
as required by section 2 of article I of the Constitution, and that, if
the income tax so incorporated in the act of Congress aforesaid were
held not to be a direct tax, nevertheless its provisions were
unconstitutional, null and void in that they were not uniform throughout
the United States as required in and by section of article I of the
Constitution of the United States, upon many grounds and in many
particulars specifically set forth.
The bill further charged that the income tax provisions of the act were
likewise unconstitutional in that they imposed a tax on incomes not
taxable under the Constitution and likewise income derived from the
stocks and bonds of the States of the United States and counties and
municipalities therein, which stocks and bonds are among the means and
instrumentalities employed for carrying on their respective governments,
and are not proper subjects of the taxing power of Congress, and which
States and their counties and municipalities are independent of the
general government of the United States, and the respective stocks and
bonds of which are, together with the power of the States to borrow in
any form, exempt from Federal taxation.
Other grounds of unconstitutionality were assigned, and the violation
of articles IV and V of the Constitution asserted.
The bill further averred that the suit was not a collusive one to
confer on a court of the United States jurisdiction of the case of which
it would not otherwise have cognizance, and that complainant had
requested the company and its directors to omit and refuse to pay said
income tax, and to contest the constitutionality of said act, and to
refrain from voluntarily making lists, returns, and statements on its
own behalf and on behalf of the minors and other persons for whom it was
acting in a fiduciary capacity, and to apply to a court of competent
jurisdiction to determine its liability under said act, but that the
company and a majority of its directors, after a meeting of the
directors at which the matter and the request of complainant were
formally laid before them for action, had refused and still refuse, and
intend omitting to comply with complainant's demand, and had resolved
and determined, and intended to comply with all and singular the
provisions of the said act of Congress, and to pay the tax upon all its
net profits or income as aforesaid, including its rents from real estate
and its income from municipal bonds, and a copy of the refusal of the
company was annexed to the complaint.
It was also alleged that, if the company and its directors, as they
proposed and had declared their intention to do, should pay the tax out
of its gains, income, and profits, or out of the gains, income, and
profits of the property held by it in its fiduciary capacity, they will
diminish the assets of the company and lessen the dividends thereon and
the value of the shares; that voluntary compliance with the income tax
provisions would expose the company to a multiplicity of suits, not only
by and on behalf of its numerous shareholders, but by and on behalf of
numerous minors and others for whom it acts in a fiduciary capacity, and
that such numerous suits would work irreparable injury to the business
of the company, and subject it to great and irreparable damage, and to
liability to the beneficiaries aforesaid, to the irreparable damage of
complainant and all its shareholders.
The bill further averred that this was a suit of a civil nature in
equity; that the matter in dispute exceeded, exclusive of costs, the sum
of five thousand dollars, and arose under the Constitution or laws of
the United States, and that there was furthermore a controversy between
citizens of different States.
The prayer was that it might be adjudged and decreed that the said
provisions known as the income tax incorporated in said act of Congress
passed August 1, 1894, are unconstitutional, null, and void; that the
defendants be restrained from voluntarily complying with the provisions
of said act and making the lists, returns, and statements above referred
to, or paying the tax aforesaid, and for general relief.
The defendants demurred on the ground of want of equity, and the cause
having been brought on to be heard upon the bill and demurrer thereto,
the demurrer was sustained and the bill of complaint dismissed with
costs, whereupon the record recited that the constitutionality of a law
of the United States was drawn in question, and an appeal was allowed
directly to this court.
An abstract of the act in question will be found in the margin. [*]
By the third clause of section two of Article I of the Constitution, it
was provided:
Representatives and direct taxes shall be apportioned among the several
States which may be included within this Union, according to their
respective numbers, which shall be determined by adding to the whole
number of free persons, including those bound to service for term of
[p*438] years, and excluding Indians not taxed, three-fifths of all
other persons.
This was amended by the second section of the [p*439] Fourteenth
Article, declared ratified July 28, 1868, so that the whole number of
persons in each State should be counted, [p*440] Indians not taxed
excluded, and the provision, as thus amended, remains in force. [p*441]
The actual enumeration was prescribed to be made within three years
after the first meeting of Congress and within every subsequent term of
ten years, in such manner as should be directed. Section 7 requires "all
bills for raising revenue shall originate in the House of
Representatives."
The first clause of section 8 reads thus:
The Congress shall have power to lay and collect taxes, duties,
imposts, and excises, to pay the debts and provide for the common
defence and general welfare of the United States; but all duties,
imposts and excises shall be uniform throughout the United States.
And the third clause thus:
To regulate commerce with foreign nations, and among the several
States, and with the Indian tribes.
The fourth, fifth, and sixth clauses of section are as follows:
No capitation, or other direct, tax shall be laid, unless in proportion
to the census or enumeration hereinbefore directed to be taken.
No tax or duty shall be laid on articles exported from any State.
No preference shall be given by any regulation of commerce or revenue
to the ports of one State over those of another; nor shall vessels bound
to, or from, one State, be obliged to enter, clear, or pay duties in
another.
It is also provided by the second clause of section 10 that
no State shall, without the consent of the Congress, lay any imposts or
duties on imports or exports, except what may be [p*442] absolutely
necessary for executing its inspection laws;
and, by the third clause, that "no State shall, without the
consent of Congress, lay any duty of tonnage."
The first clause of section 9 provides:
The migration or importation of such persons as any of the States now
existing shall think proper to admit shall not be prohibited by the
Congress prior to the year one thousand eight hundred and eight, but a
tax or duty may be imposed on such importations, not exceeding ten
dollars for each person.
Article V prescribes the mode for the amendment of the Constitution,
and concludes with this proviso:
Provided that no amendment which may be made prior to the year one
thousand eight hundred and eight shall in any manner affect the first
and fourth clauses in the ninth section of the first article. |
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| Opinions
FULLER, C.J.,
Opinion of the Court
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| 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 books of account should be kept by corporations as
prescribed, and inspection thereof be granted under penalty.
By section 37, provision is made for receipts for taxes paid.
By a joint resolution of February 21, 1895, the time for making returns
of income for the year 1894 was extended, and it was provided that,
in computing incomes under said act, the amounts necessarily paid for
fire insurance premiums and for ordinary repairs shall be deducted;
and that
in computing incomes under said act, the amounts received as dividends
upon the stock of any corporation, company, or association shall not be
included in case such dividends are also liable to the tax of two
percentum upon the net profits of said corporation, company, or
association although such tax may not have been actually paid by said
corporation, company, or association at the time of making returns by
the person, corporation, or association receiving such dividends, and
returns or reports of the names and salaries of employees shall not be
required from employers unless called for by the collector in order to
verify the returns of employees.
| |
| | |
| FIELD,
J., Separate Opinion
| |
| MR.
JUSTICE FIELD.
I also desire to place my opinion on record upon some of the important
questions discussed in relation to the direct and indirect taxes
proposed by the income tax law of 1894.
Several suits have been instituted in state and Federal courts, both at
law and in equity, to test the validity of the provisions of the law,
the determination of which will necessitate careful and extended
consideration.
The subject of taxation in the new government which was to be
established created great interest in the convention which framed the
Constitution, and was the cause of much difference of opinion among its
members and earnest contention between the States. The great source of
weakness of the confederation was its inability to levy taxes of any
kind for the support of its government. To raise revenue, it was obliged
to make requisitions upon the States, which were respected or
disregarded at their pleasure. Great embarrassments followed the
consequent inability to obtain the necessary funds to carry on the
government. One of the principal objects of the proposed new government
was to obviate this defect of the confederacy by conferring authority
upon the new government by which taxes could be directly laid whenever
desired. Great difficulty in accomplishing this object was found to
exist. The States bordering on the ocean were unwilling to give up their
right to lay duties upon imports, which were their chief source of
revenue. The other States, on the other hand, were unwilling to make any
agreement for the levying of taxes directly upon real and personal
property, the smaller States fearing that they would be overborne by
unequal burdens forced upon them by the action of the larger States. In
this condition of things, great embarrassment was felt by the members of
the convention. It was feared at times that the effort to form a new
government would fail. But happily, a compromise was effected by an
agreement that direct taxes should be laid by Congress by apportioning
them among the States according to their representation. In return for
this concession by some of the States, the other States bordering on
navigable waters consented to relinquish to the new government the
control of duties, imposts, and excises, and the regulation of commerce,
with the condition that the duties, imposts, and excises should be
uniform throughout the United States. So that, on the one hand, anything
like oppression or undue advantage of any one State over the others
would be prevented by the apportionment of the direct taxes among the
States according to their representation, and, on the other hand,
anything like oppression or hardship in the levying of duties, imposts,
and excises would be avoided by the provision that they should be
uniform throughout the United States. This compromise was essential to
the continued union and harmony of the States. It protected every State
from being controlled in its taxation by the superior numbers of one or
more other States.
The Constitution accordingly, when completed, divided the taxes which
might be levied under the authority of Congress into those which were
direct and those which were indirect. Direct taxes, in a general and
large sense, may be described as taxes derived immediately from the
person, or from real or personal property, without any recourse
therefrom to other sources for reimbursement. In a more restricted
sense, they have sometimes been confined to taxes on real property,
including the rents and income derived therefrom. Such taxes are
conceded to be direct taxes, however taxes on other property are
designated, and they are to be apportioned among the States of the Union
according to their respective numbers. The second section of article I
of the Constitution declares that representatives and direct taxes shall
be thus apportioned. It had been a favorite doctrine in England and in
the colonies, before the adoption of the Constitution, that taxation and
representation should go together. The Constitution prescribes such
apportionment among the several States according to their respective
numbers, to be determined by adding to the whole number of free persons,
including those bound to service for a term of years, and excluding
Indians not taxed, three-fifths of all other persons.
Some decisions of this court have qualified or thrown doubts upon the
exact meaning of the words "direct taxes." Thus, in Springer
v. United States, 102 U.S. 586, it was held that a tax upon gains,
profits, and income was an excise or duty, and not a direct tax within
the meaning of the Constitution, and that its imposition was not
therefore unconstitutional. And in Pacific Insurance Co. v. Soule,
7 Wall. 433, it was held that an income tax or duty upon the amounts
insured, renewed or continued by insurance companies, upon the gross
amounts of premiums received by them and upon assessments made by them,
and upon dividends and undistributed sums, was not a direct tax, but a
duty or excise.
In the discussions on the subject of direct taxes in the British
Parliament, an income tax has been generally designated as a direct tax,
differing in that respect from the decision of this court in Springer
v. United States. But whether the latter can be accepted as correct
or otherwise, it does not affect the tax upon real property and its
rents and income as a direct tax. Such a tax is by universal consent
recognized to be a direct tax.
As stated, the rents and income of real property are included in the
designation of direct taxes as part of the real property. Such has been
the law in England for centuries, and in this country from the early
settlement of the colonies, and it is strange that any member of the
legal profession should, at this day, question a doctrine which has
always been thus accepted by common law lawyers. It is so declared in
approved treatises upon real property and in accepted authorities on
particular branches of real estate law, and has been so announced in
decisions in the English courts and our own courts without number. Thus,
in Washburn on Real Property, it is said that a devise of the rents and
profits of land, or the income of land, is equivalent to
a devise of the land itself, and will be for life or in fee according
to the limitation expressed in the devise.
Vol. 2, p. 695, § 30.
In Jarman on Wills, Vol. 1, page 40, it is laid down that
a devise of the rents and profits or of the income of land passes the
land itself both at law and in equity; a rule, it is said, founded on
the feudal law, according to which the whole beneficial interest in the
land consisted in the right to take the rents and profits. And since the
act 1 Vict. c. 26, such a devise carries the fee simple; but before that
act, it carried no more than an estate for life unless words of
inheritance were added.
Mr. Jarman cites numerous authorities in support of his statement. South
v. Alleine, 1 Salk. 228; Doe d. Goldin v. Lakeman, 2 B. &
Ad. 30, 42; Johnson v. Arnold, 1 Ves.Sen. 171; Baines v.
Dixon, 1 Ves.Sen. 42; Mannox v. Greener, L.R. 14 Eq. 46;
Blann v. Bell, 2 De G., M. & G. 781; Plenty v. West,
6 C.B. 201.
Coke upon Littleton says:
If a man seised of lands in fee by his deed granteth to another the
profit of those lands, to have and to hold to him and his heires, and
maketh livery secundum formam chartae, the whole land itselfe
doth passe; for what is the land but the profits thereof?
Lib. 1, cap. 1, § 1, p. 4b.
In Doe d. Goldin v. Lakeman, Lord Tenterden, Chief Justice of
the Court of King's Bench, to the same effect, said: "It is an
established rule that a devise of the rents and profits is a devise of
the land." And in Johnson v. Arnold, Lord Chancellor
Hardwicke reiterated the doctrine that a "devise of the profits of
lands is a devise of the lands themselves."
The same rule is announced in this country; the Court of Errors of New
York in Paterson v. Ellis, 11 Wend. 29, 98, holding that the
devise of the interest or of the rents and profits is a devise of the
thing itself, out of which that interest or those rents and profits may
issue;
and the Supreme Court of Massachusetts, in Reed v. Reed, 9
Mass. 372, 374, that "a devise of the income of lands is the same
in its effect as a devise of the lands." The same view of the law
was expressed in Anderson v. Greble, 1 Ashmead (Penn.) 136, 138,
King, the president of the court, stating: "I take it to be a well
settled rule of law that, by a devise of the rent, profits, and income
of land, the land itself passes." Similar adjudications might be
repeated almost indefinitely. One may have the reports of the English
courts examined for several centuries without finding a single decision
or even a dictum of their judges in conflict with them. And what answer
do we receive to these adjudications? Those rejecting them furnish no
proof that the framers of the Constitution did not follow them, as the
great body of the people of the country then did. An incident which
occurred in this court and room twenty years ago may have become a
precedent. To a powerful argument then being made by a distinguished
counsel on a public question, one of the judges exclaimed that there was
a conclusive answer to his position, and that was that the court was of
a different opinion. Those who decline to recognize the adjudications
cited may likewise consider that they have a conclusive answer to them
in the fact that they also are of a different opinion. I do not think
so. The law as expounded for centuries cannot be set aside or
disregarded because some of the judges are now of a different opinion
from those who, a century ago, followed it in framing our Constitution.
Hamilton, speaking on the subject, asks: "What, in fact, is
property but a fiction without the beneficial use of it?" And adds:
"In many cases, indeed, the income or annuity is the property
itself." 3 Hamilton's Works, Putnam's ed. 34.
It must be conceded that whatever affects any element that gives an
article its value, in the eye of the law affects the article itself.
In Brown v. Maryland, 12 Wheat. 419, 444, it was held that a
tax on the occupation of an importer is the same as a tax on his
imports, and, as such, was invalid. It was contended that the State
might tax occupations, and that this was nothing more, but the court
said, by Chief Justice Marshall (p. 444):
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
upon stock issued for loans to the United States was a tax upon the
loans themselves, and equally invalid. In Dobbins v. Commissioners,
16 Pet. 435, it was held that the salary of an officer of the United
States could not be taxed if the office was itself 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 transported. In Cook
v. Pennsylvania, 97 U.S. 566 it was held that a tax upon the amount
of sales of goods made by an auctioneer was a tax upon the goods sold.
In Philadelphia & Southern Steamship Co. v. Pennsylvania,
122 U.S. 326, and Leloup v. Mobile, 127 U.S. 640, 648, it was
held that a tax upon the income received from interstate commerce was a
tax upon the commerce itself, and equally unauthorized. The same
doctrine was held in People v. Commissioners of Taxes, 90 N.Y.
63; State Freight Tax, 15 Wall. 232, 274; Welton v. Missouri,
91 U.S. 75, 78, and in Fargo v. Michigan, 121 U.S. 230.
The law, so far as it imposes a tax upon land by taxation of the rents
and income thereof, must therefore fail, as it does not follow the rule
of apportionment. The Constitution is imperative in its direction on
this subject, and admits of no departure from them.
But the law is not invalid merely in its disregard of the rule of
apportionment of the direct tax levied. There is another and an equally
cogent objection to it. In taxing incomes other than rents and profits
of real estate, it disregards the rule of uniformity which is prescribed
in such cases by the Constitution. The eighth section of the first
article of the Constitution declares that
the Congress shall have power to lay and collect taxes, duties,
imposts, and excises, to pay the debts and provide for the common
defence and general welfare of the United States; but all duties,
imposts, and excises shall be uniform throughout the United States.
Excise are a species of tax consisting generally of duties laid upon
the manufacture, sale, or consumption of commodities within the country,
or upon certain callings or occupations, often taking the form of
exactions for licenses to pursue them. The taxes created by the law
under consideration as applied to savings banks, insurance companies,
whether of fire, life, or marine, to building or other associations, or
to the conduct of any other kind of business, are excise taxes, and fall
within the requirement, so far as they are laid by Congress, that they
must be uniform throughout the United States.
The uniformity thus required is the uniformity throughout the United
States of the duty, impost, and excise levied. That is, the tax levied
cannot be one sum upon an article at one place and a different sum upon
the same article at another place. The duty received must be the same at
all places throughout the United States, proportioned to the quantity of
the article disposed of or the extent of the business done. If, for
instance, one kind of wine or grain or produce has a certain duty laid
upon it proportioned to its quantity in New York, it must have a like
duty proportioned to its quantity when imported at Charleston or San
Francisco, or if a tax be laid upon a certain kind of business
proportioned to its extent at one place, it must be a like tax on the
same kind of business proportioned to its extent at another place. In
that sense, the duty must be uniform throughout the United States. It is
contended by the government that the Constitution only requires an
uniformity geographical in its character. That position would be
satisfied if the same duty were laid in all the States, however variant
it might be in different places of the same State. But it could not be
sustained in the latter case without defeating the equality, which is an
essential element of the uniformity required, so far as the same is
practicable.
In United States v. Singer, 15 Wall. 111, 121, a tax was
imposed upon a distiller, in the nature of an excise, and the question
arose whether, in its imposition upon different distillers, the
uniformity of the tax was preserved, and the court said:
The law is not in our judgment subject to any constitutional objection.
The tax imposed upon the distiller is in the nature of an excise, and
the only limitation upon the power of Congress in the imposition of
taxes of this character is that they shall be "uniform throughout
the United States." The tax here is uniform in its operation; that
is, it is assessed equally upon all manufacturers of spirits wherever
they are. The law does not establish one rule for one distiller and
a different rule for another, but the same rule for all alike.
In the Head Money Cases, 112 U.S. 580 , 594 , a tax was imposed
upon the owners of steam vessels for each passenger landed at New York
from a foreign port, and it was objected that the tax was not levied by
any rule of uniformity, but the court, by Justice Miller, replied:
The tax is uniform when it operates with the same force and effect in
every place where the subject of it is found. The tax in this case,
which, as far as it can be called a tax, is an excise duty on the
business of bringing passengers from foreign countries into this by
ocean navigation, is uniform, and operates precisely alike in every port
of the United States where such passengers can be landed.
In the decision in that case in the Circuit Court, 18 Fed.Rep. 135,
139, Mr. Justice Blatchford, in addition to pointing out that "the
act was not passed in the exercise of the power of laying taxes,"
but was a regulation of commerce, used the following language:
Aside from this, the tax applies uniformly to all steam and sail
vessels coming to all ports in the United States, from all foreign
ports, with all alien passengers. The tax being a license tax on the
business, the rule of uniformity is sufficiently observed if the tax
extends to all persons of the class selected by Congress; that is, to
all owners of such vessels. Congress has the exclusive power of
selecting the class. It has regulated that particular branch of commerce
which concerns the bringing of alien passengers,
and that taxes shall be levied upon such property as shall be
prescribed by law. The object of this provision was to prevent unjust
discriminations. It prevents property from being classified and taxed,
as classed, by different rules. All kinds of property must be taxed
uniformly or be entirely exempt. The uniformity must be coextensive with
the territory to which the tax applies.
Mr. Justice Miller, in his lectures on the Constitution (N.Y. 1891) pp.
240, 241, said of taxes levied by Congress:
The tax must be uniform on the particular article, and it is
uniform, within the meaning of the constitutional requirement, if it is
made to bear the same percentage over all the United States. That is
manifestly the meaning of this word as used in this clause. The framers
of the Constitution could not have meant to say that the government, in
raising its revenues, should not be allowed to discriminate between the
articles which it should tax.
In discussing generally the requirement of uniformity found in state
constitutions, he said:
The difficulties in the way of this construction have, however, been
very largely obviated by the meaning of the word "uniform"
which has been adopted, holding that the uniformity must refer to
articles of the same class. That is, different articles may be taxed
at different amounts, provided the rate is uniform on the same class
everywhere, with all people, and at all times.
One of the learned counsel puts it very clearly when he says that the
correct meaning of the provisions requiring duties, imposts, and excises
to be "uniform throughout the United States" is that the law
imposing them should "have an equal and uniform application in
every part of the Union."
If there were any doubt as to the intention of the States to make the
grant of the right to impose indirect taxes subject to the condition
that such taxes shall be in all respects uniform and impartial, that
doubt, as said by counsel, should be resolved in the interest of
justice, in favor of the taxpayer.
Exemptions from the operation of a tax always create inequalities.
Those not exempted must, in the end, bear an additional burden or pay
more than their share. A law containing arbitrary exemptions can in no
just sense be termed uniform. In my judgment, Congress has rightfully no
power, at the expense of others, owning property of a like character, to
sustain private trading corporations, such as building and loan
associations, savings banks, and mutual life, fire, marine, and accident
insurance companies, formed under the laws of the various States, which
advance no national purpose or public interest and exist solely for the
pecuniary profit of their members.
Where property is exempt from taxation, the exemption, as has been
justly stated, must be supported by some consideration that the public,
and not private, interests will be advanced by it. Private corporations
and private enterprises cannot be aided under the pretence that it is
the exercise of the discretion of the legislature to exempt them. Loan
Association v. Topeka, 20 Wall. 655; Parkersburg v. Brown,
106 U.S. 487; Barbour v. Louisville Board of Trade, 82 Kentucky
645, 654, 655; Lexington v. McQuillan's Heirs, 9 Dana, 513, 516,
517, and Sutton's Heirs v. Louisville, 5 Dana, 28, 31.
Cooley, in his treatise on Taxation (2d ed. 215), justly observes that:
It is difficult to conceive of a justifiable exemption law which should
select single individuals or corporations, or single articles of
property, and, taking them out of the class to which they belong, make
them the subject of capricious legislative favor. Such favoritism could
make no pretence to equality; it would lack the semblance of legitimate
tax legislation.
The income tax law under consideration is marked by discriminating
features which affect the whole law. It discriminates between those who
receive an income of four thousand dollars and those who do not. It thus
vitiates, in my judgment, by this arbitrary discrimination, the whole
legislation. Hamilton says in one of his papers (the Continentalist),
the genius of liberty reprobates everything arbitrary or discretionary
in taxation. It exacts that every man, by a definite and general rule,
should know what proportion of his property the State demands; whatever
liberty we may boast of in theory, it cannot exist in fact while
[arbitrary] assessments continue.
1 Hamilton's Works, ed. 1885, 270. The legislation, in the
discrimination it makes, is class legislation. Whenever a distinction is
made in the burdens a law imposes or in the benefits it confers on any
citizens by reason of their birth, or wealth, or religion, it is class
legislation, and leads inevitably to oppression and abuses, and to
general unrest and disturbance in society. It was hoped and believed
that the great amendments to the Constitution which followed the late
civil war had rendered such legislation impossible for all future time.
But the objectionable legislation reappears in the act under
consideration. It is the same in essential character as that of the
English income statute of 1691, which taxed Protestants at a certain
rate, Catholics, as a class, at double the rate of Protestants, and Jews
at another and separate rate. Under wise and constitutional legislation,
every citizen should contribute his proportion, however small the sum,
to the support of the government, and it is no kindness to urge any of
our citizens to escape from that obligation. If he contributes the
smallest mite of his earnings to that purpose, he will have a greater
regard for the government, and more self-respect for himself, feeling
that, though he is poor in fact, he is not a pauper of his government.
And it is to be hoped that, whatever woes and embarrassments may betide
our people, they may never lose their manliness and self-respect. Those
qualities preserved, they will ultimately triumph over all reverses of
fortune.
There is nothing in the nature of the corporations or associations
exempted in the present act, or in their method of doing business, which
can be claimed to be of a public or benevolent nature. They differ in no
essential characteristic in their business from "all other
corporations, companies, or associations doing business for profit in
the United States." Act of August 15, 1894, c. 349, § 32.
A few words as to some of them, the extent of their capital and
business, and of the exceptions made to their taxation:
1st. As to mutual savings banks. -- Under income tax laws prior
to 1870, these institutions were specifically taxed. Under the new law,
certain institutions of this class are exempt, provided the shareholders
do not participate in the profits, and interest and dividends are only
paid to the depositors. No limit is fixed to the property and income
thus exempted -- it may be $100,000 or $100,000,000. One of the counsel
engaged in this case read to us during the argument from the report of
the Comptroller of the Currency, sent by the President to Congress
December 3, 1894, a statement to the effect that the total number of
mutual savings banks exempted was 646, and the total number of stock
savings banks was 378, and showed that they did the same character of
business and took in the money of depositors for the purpose of making
it bear interest, with profit upon it in the same way, and yet the 646
are exempt and the 378 are taxed. He also showed that the total deposits
in savings banks were $1,748,000,000.
2d. As to mutual insurance corporations. -- These companies
were taxed under previous income tax laws. They do business somewhat
differently from other companies, but they conduct a strictly private
business in which the public has no interest, and have been often held
not to be benevolent or charitable organizations.
The sole condition for exempting them under the present law is declared
to be that they make loans to or divide their profits among their
members, or depositors or policyholders. Every corporation is carried
on, however, for the benefit of its members, whether stockholders or
depositors or policyholders. If it is carried on for the benefit of its
shareholders, every dollar of income is taxed; if it is carried on for
the benefit of its policyholders or depositors, who are but another
class of shareholders, it is wholly exempted. In the State of New York,
the act exempts the income from over $1,000,000,000 of property of these
companies. The leading mutual life insurance company has property
exceeding 204,000,000 in value, the income of which is wholly exempted.
The insertion of the exemption is stated by counsel to have saved that
institution fully $200,000 a year over other insurance companies and
associations having similar property and carrying on the same business,
simply because such other companies or associations divide their profits
among their shareholders, instead of their policyholders.
3d. As to building and loan associations. -- The property of
these institutions is exempted from taxation to the extent of millions.
They are in no sense benevolent or charitable institutions, and are
conducted solely for the pecuniary profit of their members. Their assets
exceed the capital stock of the national banks of the country. One, in
Dayton, Ohio, has a capital of $10,000,000, and Pennsylvania has
$65,000,000 invested in these associations. The census report submitted
to Congress by the President, May 1, 1894, shows that their property in
the United States amounts to over $628,000,000. Why should these
institutions and their immense accumulations of property be singled out
for the special favor of Congress and be freed from their just, equal,
and proportionate share of taxation when others engaged under different
names, in similar business, are subjected to taxation by this law? The
aggregate amount of the saving to these associations, by reason of their
exemption, is over $600,000 a year. If this statement of the exemptions
of corporations under the law of Congress, taken from the carefully
prepared briefs of counsel and from reports to Congress, will not
satisfy parties interested in this case that the act in question
disregards, in almost every line and provision, the rule of uniformity
required by the Constitution, then "neither will they be persuaded,
though one rose from the dead." That there should be any question
or any doubt on the subject surpasses my comprehension. Take the case of
mutual savings banks and stock savings banks. They do the same character
of business, and in the same way use the money of depositors, loaning it
at interest for profit, yet 646 of them, under the law before us, are
exempt from taxation on their income, and 378 are taxed upon it. How the
tax on the income of one kind of these banks can be said to be laid upon
any principle of uniformity, when the other is exempt from all taxation,
I repeat, surpasses my comprehension.
But there are other considerations against the law which are equally
decisive. They relate to the uniformity and equality required in all
taxation, national and State; to the invalidity of taxation by the
United States of the income of the bonds and securities of the States
and of their municipal bodies, and the invalidity of the taxation of the
salaries of the judges of the United States courts.
As stated by counsel: "There is no such thing in the theory of our
national government as unlimited power of taxation in Congress. There
are limitations," as he justly observes,
of its powers arising out of the essential nature of all free
governments; there are reservations of individual rights, without which
society could not exist, and which are respected by every government.
The right of taxation is subject to these limitations.
Loan Association v. Topeka, 20 Wall. 635, and Parkersburg v.
Brown, 106 U.S. 487.
The inherent and fundamental nature and character of a tax is that of a
contribution to the support of the government, levied upon the principle
of equal and uniform apportionment among the persons taxed, and any
other exaction does not come within the legal definition of a tax.
This inherent limitation upon the taxing power forbids the imposition
of taxes which are unequal in their operation upon similar kinds of
property, and necessarily strikes down the gross and arbitrary
distinctions in the income law as passed by Congress. The law, as we
have seen, distinguishes in the taxation between corporations by
exempting the property of some of them from taxation and levying the tax
on the property of others when the corporations do not materially differ
from one another in the character of their business or in the protection
required by the government. Trifling differences in their modes of
business, but not in their results, are made the ground and occasion of
the greatest possible differences in the amount of taxes levied upon
their income, showing that the action of the legislative power upon them
has been arbitrary and capricious and sometimes merely fanciful.
There was another position taken in this case which is not the least
surprising to me of the many advanced by the upholders of the law, and
that is that, if this court shall declare that the exemptions and
exceptions from taxation extended to the various corporations mentioned,
fire, life, and marine insurance companies, and to mutual savings banks,
building, and loan associations violate the requirement of uniformity,
and are therefore void, the tax as to such corporations can be enforced,
and that the law will stand as though the exemptions had never been
inserted. This position does not, in my judgment, rest upon any solid
foundation of law or principle. The abrogation or repeal of an
unconstitutional or illegal provision does not operate to create and
give force to any enactment or part of an enactment which Congress has
not sanctioned and promulgated. Seeming support of this singular
position is attributed to the decision of this court in Huntington
v. Worthen, 120 U.S. 97. But the examination of that case will show
that it does not give the slightest sanction to such a doctrine. There,
the constitution of Arkansas had provided that all property subject to
taxation should be taxed according to its value, to be ascertained in
such manner as the general assembly should direct, making the same equal
and uniform throughout the State, and certain public property was
declared by statute to be exempt from taxation, which statute was
subsequently held to be unconstitutional. The court decided that the
unconstitutional part of the enactment, which was separable from the
remainder, could be omitted and the remainder enforced; a doctrine
undoubtedly sound, and which has never, that I am aware of, been
questioned. But that is entirely different from the position here taken,
that exempted things can be taxed by striking out their exemption.
The law of 1894 says there shall be assessed, levied, and collected, "except
as hereinafter otherwise provided," two percentum of the amount,
etc. If the exceptions are stricken out, there is nothing to be assessed
and collected except what Congress has otherwise affirmatively ordered.
Nothing less can have the force of law. This court is impotent to pass
any law on the subject. It has no legislative power. I am unable,
therefore, to see how we can, by declaring an exemption or exception
invalid, thereby give effect to provisions as though they were never
exempted. The court, by declaring the exemptions invalid, cannot, by any
conceivable ingenuity, give operative force as enacting clauses to the
exempting provisions. That result is not within the power of man.
The law is also invalid in its provisions authorizing the taxation of
the bonds and securities of the States and of their municipal bodies. It
is objected that the cases pending before us do not allege any
threatened attempt to tax the bonds or securities of the State, but only
of municipal bodies of the States. The law applies to both kinds of
bonds and securities, those of the States as well as those of municipal
bodies, and the law of Congress we are examining, being of a public
nature, affecting the whole community, having been brought before us and
assailed as unconstitutional in some of its provisions, we are at
liberty, and I think it is our duty, to refer to other unconstitutional
features brought to our notice in examining the law, though the
particular points of their objection may not have been mentioned by
counsel. These bonds and securities are as important to the performance
of the duties of the State as like bonds and securities of the United
States are important to the performance of their duties, and are as
exempt from the taxation of the United States as the former are exempt
from the taxation of the States. As stated by Judge Cooley in his work
on the principles of constitutional law:
The power to tax, whether by the United States or by the States, is to
be construed in the light of, and limited by, the fact that the States
and the Union are inseparable, and that the Constitution contemplates
the perpetual maintenance of each with all its constitutional powers,
unembarrassed and unimpaired by any action of the other. The taxing
power of the Federal government does not therefore extend to the means
or agencies through or by the employment of which the States perform
their essential functions, since, if these were within its reach, they
might be embarrassed, and perhaps wholly paralyzed, by the burdens it
should impose.
That the power to tax involves the power to destroy; that the power to
destroy may defeat and render useless the power to create; that there is
a plain repugnance in conferring on one government a power to control
the constitutional measures of another, which other, in respect to those
very measures, is declared to be supreme over that which exerts the
control -- are propositions not to be denied.
It is true that taxation does not necessarily and unavoidably destroy,
and that to carry it to the excess of destruction would be an abuse not
to be anticipated, but the very power would take from the States a
portion of their intended liberty of independent action within the
sphere of their powers, and would constitute to the State a perpetual
danger of embarrassment and possible annihilation. The Constitution
contemplates no such shackles upon state powers, and, by implication,
forbids them.
The Internal Revenue Act of June 30, 1864, in section 122, provided
that railroad and certain other companies specified, indebted for money
for which bonds had been issued upon which interest was stipulated to be
paid, should be subject to pay a tax of five percent on the amount of
all such interest, to be paid by the corporations and by them deducted
from the interest payable to the holders of such bonds, and the question
arose in United States v. Railroad Co., 17 Wall. 322, 327,
whether the tax imposed could be thus collected from the revenues of a
city owning such bonds. This court answered the question as follows:
There is no dispute about the general rules of the law applicable to
this subject. The power of taxation by the Federal government upon the
subjects and in the manner prescribed by the act we are considering is
undoubted. There are, however, certain departments which are excepted
from the general power. The right of the States to administer their own
affairs through their legislative, executive, and judicial departments,
in their own manner through their own agencies, is conceded by the
uniform decisions of this court, and by the practice of the Federal
government from its organization. This carries with it an exemption of
those agencies and instruments from the taxing power of the Federal
government. If they may be taxed lightly, they may be taxed heavily; if
justly, oppressively. Their operation may be impeded and may be
destroyed if any interference is permitted. Hence, the beginning of such
taxation is not allowed on the one side, is not claimed on the other.
And again:
A municipal corporation like the city of Baltimore is a representative
not only of the State, but it is a portion of its governmental power. It
is one of its creatures, made for a specific purpose, to exercise within
a limited sphere the powers of the State. The State may withdraw these
local powers of government at pleasure, and may, through its legislature
or other appointed channels, govern the local territory as it governs
the State at large. It may enlarge or contract its powers or destroy its
existence. As a portion of the State in the exercise of a limited
portion of the powers of the State, its revenues, like those of the
State, are not subject to taxation.
In Collector v. Day, 11 Wall. 113, 124, the court, speaking by
Mr. Justice Nelson, 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.
According to the census reports, the bonds and securities of the States
amount to the sum of $1,243,268,000, on which the income or interest
exceeds the sum of $65,000,000 per annum, and the annual tax of two
percent upon this income or interest would be $1,300,000.
The law of Congress is also invalid in that it authorizes a tax upon
the salaries of the judges of the courts of the United States, against
the declaration of the Constitution that their compensation shall not be
diminished during their continuance in office. The law declares that a
tax of two percent shall be assessed, levied, and collected and paid
annually upon the gains, profits, and income received in the preceding
calendar year by every citizen of the United States, 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 within the United States or
elsewhere, or from any source whatever. The annual salary of a justice
of the Supreme Court of the United States is ten thousand dollars, and
this act levies a tax of two percent on six thousand dollars of this
amount, and imposes a penalty upon those who do not make the payment or
return the amount for taxation.
The same objection, as presented to a consideration of the objection to
the taxation of the bonds and securities of the States as not being
specially taken in the cases before us is urged here to a consideration
of the objection to the taxation by the law of the salaries of the
judges of the courts of the United States. The answer given to that
objection may be also given to the present one. The law of Congress
being of a public nature, affecting the interests of the whole
community, and attacked for its unconstitutionality in certain
particulars, may be considered with reference to other unconstitutional
provisions called to our attention upon examining the law, though not
specifically noticed in the objections taken in the records or briefs of
counsel, that the Constitution may not be violated from the carelessness
or oversight of counsel in any particular. See O'Neil v. Vermont,
144 U.S. 323, 359.
Besides, there is a duty which this court owes to the one hundred other
United States judges who have small salaries and who, having their
compensation reduced by the tax, may be seriously affected by the law.
The Constitution of the United States provides in the first section of
article III that:
The judicial power of the United States shall be vested in one Supreme
Court, and in such inferior courts as the Congress may from time to time
ordain and establish. The judges, both of the Supreme and inferior
courts, shall hold their offices during good behavior, and shall, at
stated times, receive for their services a compensation, which shall
not be diminished during their continance in office.
The act of Congress under discussion imposes, as said, a tax on six
thousand dollars of this compensation, and therefore diminishes, each
year, the compensation provided for every justice. How a similar law of
Congress was regarded thirty years ago may be shown by the following
incident in which the justices of this court were assessed at three
percent upon their salaries. Against this, Chief Justice Taney protested
in a letter to Mr. Chase, then Secretary of the Treasury, appealing to
the above article in the Constitution, and adding:
If it [his salary] can be diminished to that extent by the means of a
tax, it may in the same way be reduced from time to time at the pleasure
of the legislature.
He explained in his letter the object of the constitutional inhibition
thus:
The judiciary is one of the three great departments of the government
created and established by the Constitution. Its duties and powers are
specifically set forth, and are of a character that require it to be
perfectly independent of the other departments. And in order to place it
beyond the reach, and above even the suspicion, of any such influence,
the power to reduce their compensation is expressly withheld from
Congress and excepted from their power of legislation.
Language could not be more plain than that used in the Constitution. It
is, moreover, one of its most important and essential provisions. For
the articles which limit the powers of the legislative and executive
branches of the government, and those which provide safeguards for the
protection of the citizen in his person and property, would be of little
value without a judiciary to uphold and maintain them which was free
from every influence, direct or indirect, that might by possibility, in
times of political excitement, warp their judgment.
Upon these grounds, I regard an act of Congress retaining in the
Treasury a portion of the compensation of the judges as unconstitutional
and void.
This letter of Chief Justice Taney was addressed to Mr. Chase, then
Secretary of the Treasury and afterwards the successor of Mr. Taney as
Chief Justice. It was dated February 16, 1863, but, as no notice was
taken of it, on the 10th of March following, at the request of the Chief
Justice, the Court ordered that his letter to the Secretary of the
Treasury be entered on the records of the court, and it was so entered.
And in the Memoir of the Chief Justice, it is stated that the letter
was, by this order, preserved "to testify to future ages that, in
war, no less than in peace, Chief Justice Taney strove to protect the
Constitution from violation."
Subsequently, in 1869 and during the administration of President Grant,
when Mr. Boutwell was Secretary of the Treasury and Mr. Hoar, of
Massachusetts, was Attorney General, there were in several of the
statutes of the United States for the assessment and collection of
internal revenue provisions for taxing the salaries of all civil
officers of the United States, which included, in their literal
application, the salaries of the President and of the judges of the
United States. The question arose whether the law which imposed such a
tax upon them was constitutional. The opinion of the Attorney General
thereon was requested by the Secretary of the Treasury. The Attorney
General, in reply, gave an elaborate opinion advising the Secretary of
the Treasury that no income tax could be lawfully assessed and collected
upon the salaries of those officers who were in office at the time the
statute imposing the tax was passed, holding on this subject the views
expressed by Chief Justice Taney. His opinion is published in volume
XIII of the Opinions of the Attorneys General, at page 161. I am
informed that it has been followed ever since without question by the
department supervising or directing the collection of the public
revenue.
Here I close my opinion. I could not say less in view of questions of
such gravity that go down to the very foundation of the government. If
the provisions of the Constitution can be set aside by an act of
Congress, where is the course of usurpation to end? The present assault
upon capital is but the beginning. It will be but the stepping stone to
others, larger and more sweeping, till our political contests will
become a war of the poor against the rich; a war constantly growing in
intensity and bitterness.
"If the court sanctions the power of discriminating taxation, and
nullifies the uniformity mandate of the Constitution," as said by
one who has been all his life a student of our institutions, "it
will mark the hour when the sure decadence of our present government
will commence." If the purely arbitrary limitation of $4,000 in the
present law can be sustained, none having less than that amount of
income being assessed or taxed for the support of the government, the
limitation of future Congresses may be fixed at a much larger sum, at
five or ten or twenty thousand dollars, parties possessing an income of
that amount alone being bound to bear the burdens of government; or the
limitation may be designated at such an amount as a board of "walking
delegates" may deem necessary. There is no safety in allowing the
limitation to be adjusted except in strict compliance with the mandates
of the Constitution which require its taxation, if imposed by direct
taxes, to be apportioned among the States according to their
representation, and if imposed by indirect taxes, to be uniform in
operation and, so far as practicable, in proportion to their property,
equal upon all citizens. Unless the rule of the Constitution governs, a
majority may fix the limitation at such rate as will not include any of
their own number.
I am of opinion that the whole law of 1894 should be declared void and
without any binding force -- that part which relates to the tax on the
rents, profits or income from real estate, that is, so much as
constitutes part of the direct tax, because not imposed by the rule of
apportionment according to the representation of the States, as
prescribed by the Constitution -- and that part which imposes a tax upon
the bonds and securities of the several States, and upon the bonds and
securities of their municipal bodies, and upon the salaries of judges of
the courts of the United States as being beyond the power of Congress,
and that part which lays duties, imposts and excises as void in not
providing for the uniformity required by the Constitution in such cases.
| |
| | |
| WHITE,
J., Dissent
| |
| MR.
JUSTICE WHITE with whom concurred MR. JUSTICE HARLAN, dissenting.
My brief judicial experience has convinced me that the custom of filing
long dissenting opinions is one "more honored in the breach than in
the observance." The only purpose which an elaborate dissent can
accomplish, if any, is to weaken the effect of the opinion of the
majority, and thus engender want of confidence in the conclusions of
courts of last resort. This consideration would impel me to content
myself with simply recording my dissent in the present case were it not
for the fact that I consider that the result of the opinion of the court
just announced is to overthrow a long and consistent line of decisions,
and to deny to the legislative department of the government the
possession of a power conceded to it by universal consensus for one
hundred years, and which has been recognized by repeated adjudications
of this court. The issues presented are as follows:
Complainant, as a stockholder in a corporation, avers that the latter
will voluntarily pay the income tax levied under the recent act of
Congress; that such tax is unconstitutional, and that its voluntary
payment will seriously affect his interest by defeating his right to
test the validity of the exaction, and also lead to a multiplicity of
suits against the corporation. The prayer of the bill is as follows:
First. That it may be decreed that the provisions known as "The
Income Tax Law," incorporated in the act of Congress, passed August
15, 1894, are unconstitutional, null, and void. Second. That the
defendant be restrained from voluntarily complying with the provisions
of that act by making its returns and statements, and paying the tax.
The bill, therefore, presents two substantial questions for decision:
the right of the plaintiff to relief in the form in which he claims it,
and his right to relief on the merits.
The decisions of this Court hold that the collection of a tax levied by
the government of the United States will not be restrained by its
courts. Cheatham v. United States, 92 U.S. 85; Snyder v.
Marks, 109 U.S. 189. See also Elliott v. Swartwout, 10 Pet.
137; City of Philadelphia v. The Collector, 5 Wall. 720; Hornthall
v. The Collector, 9 Wall. 560. The same authorities have established
the rule that the proper course, in a case of illegal taxation, is to
pay the tax under protest or with notice of suit, and then bring an
action against the officer who collected it. The statute law of the
United States, in express terms, gives a party who has paid a tax under
protest the right to sue for its recovery. Rev.Stat. § 3226.
The act of 1867 forbids the maintenance of any suit "for the
purpose of restraining the assessment or collection of any tax."
The provisions of this act are now found in Rev.Stat. § 3224.
The complainant is seeking to do the very thing which, according to the
statute and the decisions above referred to, may not be done. If the
corporator cannot have the collection of the tax enjoined, it seems
obvious that he cannot have the corporation enjoined from paying it, and
thus do by indirection what he cannot do directly.
It is said that such relief as is here sought has been frequently
allowed. The cases relied on are Dodge v. Woolsey, 18 How. 331,
and Hawes v. Oakland, 104 U.S. 450. Neither of these
authorities, I submit, is in point. In Dodge v. Woolsey, the
main question at issue was the validity of a state tax, and that case
did not involve the act of Congress to which I have referred. Hawes
v. Oakland was a controversy between a stockholder and a
corporation, and had no reference whatever to taxation.
The complainant's attempt to establish a right to relief upon the
ground that this is not a suit to enjoin the tax, but one to enjoin the
corporation from paying it, involves the fallacy already pointed out --
that is, that a party can exercise a right indirectly which he cannot
assert directly -- that he can compel his agent, through process of this
court, to violate an act of Congress.
The rule which forbids the granting of an injunction to restrain the
collection of a tax is founded on broad reasons of public policy, and
should not be ignored. In Cheatham v. United States, 92 U.S. 85,
89, which involved the validity of an income tax levied under an act of
Congress prior to the one here in issue, this court, through Mr. Justice
Miller, said:
If there existed in the courts, state or National, any general power of
impeding or controlling the collection of taxes or relieving the
hardship incident to taxation, the very existence of the government
might be placed in the power of a hostile judiciary. Dows v. The
City of Chicago, 11 Wall. 108. While a free course of remonstrance
and appeal is allowed within the departments before the money is finally
exacted, the general government has wisely made the payment of the tax
claimed, whether of customs or of internal revenue, a condition
precedent to a resort to the courts by the party against whom the tax is
assessed. In the internal revenue branch, it has further prescribed that
no such suit shall be brought until the remedy by appeal has been tried;
and, if brought after this, it must be within six months after the
decision on the appeal. We regard this as a condition on which alone the
government consents to litigate the lawfulness of the original tax. It
is not a hard condition. Few governments have conceded such a right on
any condition. If the compliance with this condition requires the party
aggrieved to pay the money, he must do it.
92 U.S. 85, 89.
Again, in Railroad Tax Cases, 92 U.S. 575, 613, the court said:
That there might be no misunderstanding of the universality of this
principle, it was expressly enacted, in 1867, that "no suit for the
purpose of restraining the assessment or collection of any tax shall be
maintained in any court." Rev.Stat. sect. 3224. And though this was
intended to apply alone to taxes levied by the United States, it shows
the sense of Congress of the evils to be feared if courts of justice
could, in any case, interfere with the process of collecting the taxes
on which the government depends for its continued existence. It is a
wise policy. It is founded in the simple philosophy, derived from the
experience of ages, that the payment of taxes has to be enforced by
summary and stringent means against a reluctant and often adverse
sentiment, and, to do this successfully, other instrumentalities and
other modes of procedure are necessary than those which belong to courts
of justice. See Cheatham v. Norvell, decided at this term; Nicoll
v. United States, 7 Wall. 122; Dows v. Chicago, 11 Wall.
108.
The contention that a right to equitable relief arises from the fact
that the corporator is without remedy unless such relief be granted him
is, I think, without foundation. This court has repeatedly said that the
illegality of a tax is not ground for the issuance of an injunction
against its collection if there be an adequate remedy at law open to the
payer. Dows v. City of Chicago, 11 Wall. 108; Hannewinkle v.
Georgetown, 15 Wall. 547; Board of Liquidation v. McComb, 92
U.S. 531; State Railroad Tax Cases, 92 U.S. 575; Union
Pacific Railway v. Cheyenne, 113 U.S. 516; Milwaukee v. Koeffler,
116 U.S. 219; Pacific Express Co. v. Seibert, 142 U.S. 339 -- as
in the case where the state statute by which the tax is imposed allows a
suit for its recovery after payment under protest. Shelton v. Platt,
139 U.S. 591; Allen v. Pullman's Palace Car Co., 139 U.S. 658.
The decision here is that this court will allow, on the theory of
equitable right, a remedy expressly forbidden by the statutes of the
United States, though it has denied the existence of such a remedy in
the case of a tax levied by a State.
Will it be said that, although a stockholder cannot have a corporation
enjoined from paying a state tax where the state statute gives him the
right to sue for its recovery, yet, when the United States not only
gives him such right, but, in addition, forbids the issue of an
injunction to prevent the payment of Federal taxes, the court will allow
to the stockholder a remedy against the United States tax which it
refuses against the state tax?
The assertion that this is only a suit to prevent the voluntary payment
of the tax suggests that the court may, by an order operating directly
upon the defendant corporation, accomplish a result which the statute
manifestly intended should not be accomplished by suit in any court. A
final judgment forbidding the corporation from paying the tax will have
the effect to prevent its collection, for it could not be that the court
would permit a tax to be collected from a corporation which it had
enjoined from paying. I take it to be beyond dispute that the collection
of the tax in question cannot be restrained by any proceeding or suit,
whatever its form, directly against the officer charged with the duty of
collecting such tax. Can the statute be evaded, in a suit between a
corporation and a stockholder, by a judgment forbidding the former from
paying the tax, the collection of which cannot be restrained by suit in
any court? Suppose, notwithstanding the final judgment just rendered,
the collector proceeds to collect from the defendant corporation the
taxes which the court declares, in this suit, cannot be legally assessed
upon it. If that final judgment is sufficient in law to justify
resistance against such collection, then we have a case in which a suit
has been maintained to restrain the collection of taxes. If such
judgment does not conclude the collector, who was not a party to the
suit in which it was rendered, then it is of no value to the plaintiff.
In other words, no form of expression can conceal the fact that the real
object of this suit is to prevent the collection of taxes
imposed by Congress, notwithstanding the express statutory requirement
that "no suit for the purpose of restraining the assessment or
collection of any tax shall be maintained in any court." Either the
decision of the constitutional question is necessary or it is not. If it
is necessary, then the court, by way of granting equitable relief, does
the very thing which the act of Congress forbids. If it is unnecessary,
then the court decides the act of Congress here asserted
unconstitutional, without being obliged to do so by the requirements of
the case before it.
This brings me to the consideration of the merits of the cause.
The constitutional provisions respecting Federal taxation are four in
number, and are as follows:
1. "Representatives and direct taxes shall be apportioned among
the several States, which may be included within this Union, according
to their respective numbers, which shall be determined by adding to the
whole number of free persons, including those bound to service for a
term of years and excluding Indians not taxed, three-fifths of all other
persons." Art. I, sec. 2, clause 3. (The Fourteenth Amendment
modified this provision, so that the whole number of persons in each
State should be counted, "Indians not taxed" excluded.)
2. "The Congress shall have power to lay and collect taxes,
duties, imposts, and excises, to pay the debts and provide for the
common defence and general welfare of the United States; but all duties,
imposts, and excises shall be uniform throughout the United States."
Art. I, sec. 8, clause 1.
3. "No capitation or other direct tax shall be laid, unless in
proportion to the census or enumeration hereinbefore directed to be
taken." Art. I, sec. 9, clause 4.
4. "No tax or duty shall be laid on articles exported from any
State." Art. I, sec. 9, clause 5.
It has been suggested that, as the above provisions ordain the
apportionment of direct taxes, and authorize Congress to "lay and
collect taxes, duties, imposts, and excises," therefore there is a
class of taxes which are neither direct, and are not duties, imposts,
and excises, and are exempt from the rule of apportionment on the one
hand or of uniformity on the other. The soundness of this suggestion
need not be discussed, as the words, "duties, imposts, and excises,"
in conjunction with the reference to direct taxes, adequately convey all
power of taxation to the Federal government.
It is not necessary to pursue this branch of the argument, since it is
unquestioned that the provisions of the Constitution vest in the United
States plenary powers of taxation, that is, all the powers which belong
to a government as such, except that of taxing exports. The court in
this case so says, and quotes approvingly the language of this court,
speaking through Mr. Chief Justice Chase, in License Tax Cases,
5 Wall. 462, 471, as follows:
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.
In deciding, then, the question of whether the income tax violates the
Constitution, we have to determine not the existence of a power in
Congress, but whether an admittedly unlimited power to tax (the income
tax not being a tax on exports) has been used according to the
restrictions as to methods for its exercise, found in the Constitution.
Not power, it must be borne in mind, but the manner of its use is the
only issue presented in this case. The limitations in regard to the mode
of direct taxation imposed by the Constitution are that capitation and
other direct taxes shall be apportioned among the States according to
their respective numbers, while duties, imposts, and excises must be
uniform throughout the United States. The meaning of the word "uniform"
in the Constitution need not be examined, as the court is divided upon
that subject, and no expression of opinion thereon is conveyed or
intended to be conveyed in this dissent.
In considering whether we are to regard an income tax as "direct"
or otherwise, it will, in my opinion, serve no useful purpose, at this
late period of our political history, to seek to ascertain the meaning
of the word "direct" in the Constitution by resorting to the
theoretical opinions on taxation found in the writings of some
economists prior to the adoption of the Constitution or since. These
economists teach that the question of whether a tax is direct or
indirect depends not upon whether it is directly levied upon a person,
but upon whether, when so levied, it may be ultimately shifted from the
person in question to the consumer, thus becoming, while direct in the
method of its application, indirect in its final results because it
reaches the person who really pays it only indirectly. I say it will
serve no useful purpose to examine these writers because whatever may
have been the value of their opinions as to the economic sense of the
word "direct," they cannot now afford any criterion for
determining its meaning in the Constitution, inasmuch as an
authoritative and conclusive construction has been given to that term,
as there used, by an interpretation adopted shortly after the formation
of the Constitution by the legislative department of the government and
approved by the Executive, by the adoption of that interpretation from
that time to the present without question, and its exemplification and
enforcement in many legislative enactments, and its acceptance by the
authoritative text writers on the Constitution, by the sanction of that
interpretation, in a decision of this court rendered shortly after the
Constitution was adopted, and finally by the repeated reiteration and
affirmance of that interpretation, so that it has become imbedded in our
jurisprudence, and therefore may be considered almost a part of the
written Constitution itself.
Instead, therefore, of following counsel in their references to
economic writers and their discussion of the motives and thoughts which
may or may not have been present in the minds of some of the framers of
the Constitution, as if the question before us were one of first
impression, I shall confine myself to a demonstration of the truth of
the propositions just laid down.
By the act of June 5, 1794, c. 45, 1 Stat. 373, Congress levied,
without reference to apportionment, a tax on carriages "for the
conveyance of persons." The act provided
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 conveying of
passengers, the several duties and rates following;
and then came a yearly tax on every
coach, chariot, phaeton, and coachee, every four-wheeled and every
two-wheeled top carriage, and upon every other two-wheeled carriage,
varying in amount according to the vehicle.
The debates which took place at the passage of that act are meagerly
preserved. It may, however, be inferred from them that some considered
that whether a tax was "direct" or not in the sense of the
Constitution depended upon whether it was levied on the object or on its
use. The carriage tax was defended by a few on the ground that it was a
tax on consumption. Mr. Madison opposed it as unconstitutional,
evidently upon the conception that the word "direct" in the
Constitution was to be considered as having the same meaning as that
which had been attached to it by some economic writers. His view was not
sustained, and the act passed by a large majority -- forty-nine to
twenty-two. It received the approval of Washington. The Congress which
passed this law numbered among its members many who sat in the
convention which framed the Constitution. It is moreover safe to say
that each member of that Congress, even although he had not been in the
convention, had, in some way, either directly or indirectly, been an
influential actor in the events which led up to the birth of that
instrument. It is impossible to make an analysis of this act which will
not show that its provisions constitute a rejection of the economic
construction of the word "direct," and this result equally
follows whether the tax be treated as laid on the carriage itself or on
its use by the owner. If viewed in one light, then the imposition of the
tax on the owner of the carriage, because of his ownership, necessarily
constituted a direct tax under the rule as laid down by economists. So,
also, the imposition of a burden of taxation on the owner for the use by
him of his own carriage made the tax direct according to the same rule.
The tax having been imposed without apportionment, it follows that those
who voted for its enactment must have given to the word "direct"
in the Constitution a different significance from that which is affixed
to it by the economists referred to.
The validity of this carriage tax was considered by this court in Hylton
v. United States, 3 Dall. 171. Chief Justice Ellsworth and Mr.
Justice Cushing took no part in the decision. Mr. Justice Wilson stated
that he had, in the Circuit Court of Virginia, expressed his opinion in
favor of the constitutionality of the tax. Mr. Justice Chase, Mr.
Justice Paterson, and Mr. Justice Iredell each expressed the reasons for
his conclusions. The tax, though laid, as I have said, on the carriage,
was held not to be a direct tax under the Constitution. Two of the
judges who sat in that case (Mr. Justice Paterson and Mr. Justice
Wilson) had been distinguished members of the constitutional convention.
Excerpts from the observations of the justices are given in the opinion
of the Court. Mr. Justice Paterson, in addition to the language there
quoted, spoke as follows, p. 177 (the italics being mine):
I never entertained a doubt that the principal, I will not say the
only, objects that the framers of the Constitution contemplated as
falling within the rule of apportionment were a capitation tax and a tax
on land. Local considerations, and the particular circumstances and
relative situation of the States, naturally lead to this view of the
subject. The provision was made in favor of the Southern States. They
possessed a large number of slaves; they had extensive tracts of
territory, thinly settled and not very productive. A majority of the
States had but few slaves, and several of them a limited territory, well
settled, and in a high state of cultivation. The Southern States, if no
provision had been introduced in the Constitution, would have been
wholly at the mercy of the other States. Congress, in such case, might
tax slaves at discretion or arbitrarily, and land in every part of the
Union after the same rate or measure -- so much a head in the first
instance and so much an acre in the second. To guard them against
imposition in these particulars was the reason of introducing the clause
in the Constitution which directs that representatives and direct taxes
shall be apportioned among the States according to their respective
numbers.
It is evident that Mr. Justice Chase coincided with these views of Mr.
Justice Paterson, though he was perhaps not quite so firmly settled in
his convictions, for he said, p. 176:
I am inclined to think, but of this I do 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 circumstances, and the tax on land. I doubt
whether a tax by a general assessment of personal property within the
United States is included within the term "direct tax."
Mr. Justice Iredell certainly entertained similar views, since he said,
p. 183:
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 poll tax may be
considered of this description. . . . In regard to other articles, there
may possibly be considerable doubt.
These opinions strongly indicate that the real convictions of the
justices were that only capitation taxes and taxes on land were direct
within the meaning of the Constitution, but they doubted whether some
other objects of a kindred nature might not be embraced in that word.
Mr. Justice Paterson had no doubt whatever of the limitation, and
Justice Iredell's doubt seems to refer only to things which were
inseparably connected with the soil, and which might therefore be
considered, in a certain sense, as real estate.
That case, however, established that a tax levied without apportionment
on an object of personal property was not a "direct tax"
within the meaning of the Constitution. There can be no doubt that the
enactment of this tax and its interpretation by the court, as well as
the suggestion in the opinions delivered, that nothing was a direct tax
within the meaning of the Constitution but a capitation tax and a tax on
land, was all directly in conflict with the views of those who claimed
at the time that the word "direct" in the Constitution was to
be interpreted according to the views of economists. This is
conclusively shown by Mr. Madison's language. He asserts not only that
the act had been passed contrary to the Constitution, but that the
decision of the court was likewise in violation of that instrument. Ever
since the announcement of the decision in that case, the legislative
department of the government has accepted the opinions of the justices
as well as the decision itself as conclusive in regard to the meaning of
the word "direct," and it has acted upon that assumption in
many instances, and always with Executive endorsement. All the acts
passed levying direct taxes confined them practically to a direct levy
on land. True, in some of these acts, a tax on slaves was included, but
this inclusion, as has been said by this court, was probably based upon
the theory that these were, in some respects, taxable along with the
land, and therefore their inclusion indicated no departure by Congress
from the meaning of the word "direct," necessarily resulting
from the decision in the Hylton case, and which, moreover, had
been expressly elucidated and suggested as being practically limited to
capitation taxes and taxes on real estate by the justices who expressed
opinions in that case.
These acts imposing direct taxes having been confined in their
operation exclusively to real estate and slaves, the subject matters
indicated as the proper object of direct taxation in the Hylton
case, are the strongest possible evidence that this suggestion was
accepted as conclusive, and had become a settled rule of law. Some of
these acts were passed at times of great public necessity, when revenue
was urgently required. The fact that no other subjects were selected for
the purposes of direct taxation except those which the judges in the
Hylton case had suggested as appropriate therefor seems to me to
lead to a conclusion which is absolutely irresistible -- that the
meaning thus affixed to the word "direct" at the very
formation of the government was considered as having been as irrevocably
determined as if it had been written in the Constitution in express
terms. As I have already observed, every authoritative writer who has
discussed the Constitution from that date down to this has treated this
judicial and legislative ascertainment of the meaning of the word "direct"
in the Constitution as giving it a constitutional significance without
reference to the theoretical distinction between "direct" and "indirect"
made by some economists prior to the Constitution or since. This
doctrine has become a part of the hornbook of American constitutional
interpretation, has been taught as elementary in all the law schools,
and has never since then been anywhere authoritatively questioned. Of
course, the textbooks may conflict in some particulars, or indulge in
reasoning not always consistent, but, as to the effect of the decision
in the Hylton case and the meaning of the word "direct"
in the Constitution resulting therefrom, they are a unit. I quote
briefly from them.
Chancellor Kent, in his Commentaries thus states the principle:
The construction of the powers of Congress relative to taxation was
brought before the Supreme Court in 1796 in the case of Hylton v.
The United States. By the act of 5th June, 1794, Congress laid a
duty upon carriages for the conveyance of persons, and the question was
whether this was a direct tax within the meaning of the Constitution. If
it was not a direct tax, it was admitted to be rightly laid under that
part of the Constitution which declares that all duties, imposts, and
excises shall be uniform throughout the United States; but if it was a
direct tax, it was not constitutionally laid, for it must then be laid
according to the census under that part of the Constitution which
declares that direct taxes shall be apportioned among the several States
according to numbers. The Circuit Court in Virginia was divided in
opinion on the question, but, on appeal to the Supreme Court, it was
decided that the tax on carriages was not a direct tax within the letter
or meaning of the Constitution, and was therefore constitutionally laid.
The question was deemed of very great importance, and was elaborately
argued. It was held that a general power was given to Congress to lay
and collect taxes of every kind or nature, without any restraint. They
had plenary power over every species of taxable property except exports.
But there were two rules prescribed for their government: the rule of
uniformity and the rule of apportionment. Three kinds of taxes, viz.,
duties, imposts, and excises, were to be laid by the first rule, and
capitation and other direct taxes by the second rule. If there were any
other species of taxes, as the court seemed to suppose there might be,
that were not direct and not included within the words duties, imposts,
or excises, they were to be laid by the rule of uniformity or not as
Congress should think proper and reasonable.
The Constitution contemplated no taxes as direct taxes but such as
Congress could lay in proportion to the census, and the rule of
apportionment could not reasonably apply to a tax on carriages, nor
could the tax on carriages be laid by that rule without very great
inequality and injustice. If two states, equal in census, were each to
pay 8,000 dollars by a tax on carriages, and in one state there were 100
carriages and in another 1,000, the tax on each carriage would be ten
times as much in one state as in the other. While A, in the one state,
would pay for his carriage eight dollars, B, in the other state, would
pay for his carriage eighty dollars. In this way, it was shown by the
court that the notion that a tax on carriages was a direct tax within
the purview of the Constitution, and to be apportioned according to the
census would lead to the grossest abuse and oppression. This argument
was conclusive against the construction set up, and the tax on carriages
was considered as included within the power to lay duties, and the
better opinion seemed to be that the direct taxes contemplated by the
Constitution were only two, viz., a capitation or poll tax and a tax on
land.
1 Kent Com. 254, 256.
Story, speaking on the same subject, 1 Story Const. § 955, says:
Taxes on lands, houses, and other permanent real estate, or on parts or
appurtenances thereof, have always been deemed of the same character,
that is, direct taxes. It has been seriously doubted if, in the sense of
the Constitution, any taxes are direct taxes except those on polls or on
lands. Mr. Justice Chase, in Hylton v. United States, 3 Dall.
171, said:
I am inclined to think that the direct taxes contemplated by the
Constitution are only two, viz: a capitation or poll tax simply, without
regard to property, profession, or other circumstances, and a tax on
land. I doubt whether a tax by a general assessment of personal property
within the United States is included within the term "direct tax."
Mr. Justice Paterson, in the same case, said:
It is not necessary to determine whether a tax on the produce of land
be a direct or an indirect tax. Perhaps the immediate product of land,
in its original and crude state, ought to be considered as a part of the
land itself. When the produce is converted into a manufacture, it
assumes a new shape, etc. Whether "direct taxes," in the sense
of the Constitution, comprehend any other tax than a capitation tax or a
tax on land is a questionable point, etc. I never entertained a doubt
that the principal, I will not say the only, objects that the framers of
the Constitution contemplated, as falling within the rule of
apportionment, were a capitation tax and a tax on land.
And he proceeded to state that the rule of apportionment, both as
regards representatives and as regards direct taxes, was adopted to
guard the Southern States against undue impositions and oppressions in
the taxing of slaves. Mr. Justice Iredell, in the same case, said:
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 poll tax may be considered of this description. The latter is to be
considered so, particularly under the present Constitution, on account
of the slaves in the Southern States, who give a ratio in the
representation in the proportion of three to five. Either of these is
capable of an apportionment. In regard to other articles, there may
possibly be considerable doubt.
The reasoning of the Federalist seems to lead to the same result.
Cooley, in his work on Constitutional Limitations 595, 5th ed.,
marginal paging *480, thus tersely states the rule:
Direct taxes, when laid by Congress, must be apportioned among the
several States according to the representative population. The term "direct
taxes," as employed in the Constitution, has a technical meaning,
and embraces capitation and land taxes only.
Miller on the Constitution 37 thus puts it:
Under the provisions already quoted, the question came up as to what is
a "direct tax," and also upon what property it is to be
levied, as distinguished from any other tax. In regard to this, it is
sufficient to say that it is believed that no other than a capitation
tax of so much per head and a land tax is a direct tax within the
meaning of the Constitution of the United States. All other taxes,
except imposts are properly called excise taxes. Direct taxes, within
the meaning of the Constitution, are only capitation taxes, as expressed
in that instrument, and taxes on real estate.
In Pomeroy's Constitutional Law (§ 281), we read as follows:
It becomes necessary, therefore, to inquire a little more particularly:
what are direct and what indirect taxes? Few cases on the general
question of taxation have arisen and been decided by the Supreme Court
for the simple reason that, until the past few years, the United States
has generally been able to obtain all needful revenue from the single
source of duties upon imports. There can be no doubt, however, that all
the taxes provided for in the internal revenue acts now in operation are
indirect.
This subject came before the Supreme Court of the United States in a
very early case, Hylton v. The United States. In the year 1794,
Congress laid a tax of ten dollars on all carriages, and the rate was
thus made uniform. The validity of the statute was disputed; it was
claimed that the tax was direct, and should have been apportioned among
the states. The court decided that this tax was not direct. The reasons
given for the decision are unanswerable, and would seem to cover all the
provisions of the present internal revenue laws.
Hare, in his treatise on American Constitutional Law (vol. 1, pp. 249,
250), is to the like effect:
Agreeably to section 9 of article I, paragraph 4, "no capitation
or other direct tax shall be laid except in proportion to the census or
enumeration hereinbefore directed to be taken," while section 3 of
the same article requires that representation and direct taxes shall be
apportioned among the several States . . . according to their respective
numbers. Direct taxes in the sense of the Constitution are poll taxes
and taxes on land.
Burroughs on Taxation (p. 502) takes the same view:
Direct taxes -- The kinds of taxation authorized are both direct
and indirect. The construction given to the expression "direct
taxes" is that it includes only a tax on land and a poll tax, and
this is in accord with the views of writers upon political economy.
Ordronaux, in his Constitutional Legislation (p. 225), says:
Congress having been given the power "to lay and collect taxes,
duties, imposts, and excises," the above three provisions are
limitations upon the exercise of this authority:
1st. By distinguishing between direct and indirect taxes as to their
mode of assessment;
2d. By establishing a permanent freedom of trade between the States;
and
3d. By prohibiting any discrimination in favor of particular States
through revenue laws establishing a preference between their ports and
those of the others.
These provisions should be read together, because they are at the
foundation of our system of national taxation.
The two rules prescribed for the government of Congress in laying taxes
are those of apportionment for direct taxes and uniformity for indirect.
In the first class are to be found capitation or poll taxes and taxes on
land; in the second, duties, imposts, and excises.
The provision relating to capitation taxes was made in favor of the
Southern States, and for the protection of slave property. While they
possessed a large number of persons of this class, they also had
extensive tracts of sparsely settled and unproductive lands. At the same
time, an opposite condition, both as to land territory and population,
existed in a majority of the other States. Were Congress permitted to
tax slaves and land in all parts of the country at a uniform rate, the
Southern Slave States must have been placed at a great disadvantage.
Hence, and to guard against this inequality of circumstances, there was
introduced into the Constitution the further provision that "representatives
and direct taxes shall be apportioned among the States according to
their respective numbers." This changed the basis of direct
taxation from a strictly monetary standard, which could not equitably be
made uniform throughout the country, to one resting upon population as
the measure of representation. But for this, Congress might have taxed
slaves arbitrarily and at its pleasure as so much property, and land
uniformly throughout the Union regardless of differences in
productiveness. It is not strange, therefore, that, in Hylton v.
United States, the court said that
the rule of apportionment is radically wrong, and cannot be supported
by any solid reasoning. It ought not, therefore, to be extended by
construction. Apportionment is an operation on States and involves
valuations and assessments which are arbitrary, and should not be
resorted to but in case of necessity.
Direct taxes being now well settled in their meaning, a tax on
carriages left for the use of the owner is not a capitation tax, nor a
tax on the business of an insurance company, nor a tax on a bank's
circulation, nor a tax on income, nor a succession tax. The foregoing
are not, properly speaking, direct taxes within the meaning of the
Constitution, but excise taxes or duties.
Black, writing on Constitutional Law, says:
But the chief difficulty has arisen in determining what is the
difference between direct taxes and such as are indirect. In general
usage, and according to the terminology of political economy, a direct
tax is one which is levied upon the person who is to pay it, or upon his
land or personalty, or his business or income, as the case may be. An
indirect tax is one assessed upon the manufacturer or dealer in the
particular commodity, and paid by him, but which really falls upon the
consumer, since it is added to the market price of the commodity which
he must pay. But the course of judicial decision has determined that the
term "direct," as here applied to taxes, is to be taken in a
more restricted sense. The Supreme Court has ruled that only land taxes
and capitation taxes are "direct," and no others. In 1794,
Congress levied a tax of ten dollars on all carriages kept for use, and
it was held that this was not a direct tax. And so also an income tax is
not to be considered direct. Neither is a tax on the circulation of
state banks, nor a succession tax, imposed upon every "devolution
of title to real estate."
Opinions cited on page 162.
Not only have the other departments of the government accepted the
significance attached to the word "direct" in the Hylton
case by their actions as to direct taxes, but they have also relied on
it as conclusive in their dealings with indirect taxes by levying them
solely upon objects which the judges in that case declared were not
objects of direct taxation. Thus, the affirmance by the Federal
legislature and executive of the doctrine established as a result of the
Hylton case has been two-fold.
From 1861 to 1870. many laws levying taxes on income were enacted, as
follows: Act of August 5, 1861, c. 45, 12 Stat. 292, 309, 311; Act of
July 1, 1862, c. 119, 12 Stat. 432, 473, 47; Act of March 3, 1863, c.
74, 12 Stat. 713, 718, 723 Act of June 30, 1864, c. 173, 13 Stat. 223,
281, 285; Act of March 3, 1865, c. 78, 18 Stat. 469, 479, 481; Act of
March 10, 1866, c. 15, 14 Stat. 4, 5; Act of July 13, 1866, c. 184, 14
Stat. 98, 137, 140; Act of March 2, 1867, c. 169, 14 Stat. 471, 477,
480; Act of July 14, 1870, c. 255, 16 Stat. 256, 261.
The statutes above referred to all cover income and every conceivable
source of revenue from which it could result -- rentals from real
estate, products of personal property, the profits of business or
professions.
The validity of these laws has been tested before this court. The first
case on the subject was that of the Pacific Insurance Company v.
Soule, 7 Wall. 433, 443. The controversy in that case arose under
the ninth section of the act of July 13, 1866, 14 Stat. 137, 140, which
imposed a tax on
all dividends in scrip and money, thereafter declared due, wherever and
whenever the same shall be payable, to stockholders, policyholders, or
depositors or parties whatsoever, including nonresidents, whether
citizens or aliens, as part of the earnings, incomes, or gains of any
bank, trust company, savings institution, and of any fire, marine, life,
or inland insurance company, either stock or mutual, under whatever name
or style known or called in the United States or Territories, whether
specially incorporated or existing under general laws, and on all
undistributed sum or sums made or added during the year to their surplus
or contingent funds.
It will be seen that the tax imposed was levied on the income of
insurance companies as a unit, including every possible source of
revenue, whether from personal or real property, from business gains or
otherwise. The case was presented here on a certificate of division of
opinion below. One of the questions propounded was
whether the taxes paid by the plaintiff and sought to be recovered in
this action are not direct taxes within the meaning of the Constitution
of the United States?
The issue, therefore, necessarily brought before this court was whether
an act imposing an income tax on every possible source of revenue was
valid or invalid. The case was carefully, ably, elaborately, and
learnedly argued. The brief on behalf of the company, filed by Mr.
Wills, was supported by another signed by Mr. W. O. Bartlett, which
covered every aspect of the contention. It rested the weight of its
argument against the statute on the fact that it included the rents of
real estate among the sources of income taxed, and therefore put a
direct tax upon the land. Able as have been the arguments at bar in the
present case, an examination of those then presented will disclose the
fact that every view here urged was there pressed upon the court with
the greatest ability, and after exhaustive research, equalled but not
surpassed by the eloquence and learning which has accompanied the
presentation of this case. Indeed, it may be said that the principal
authorities cited and relied on now can be found in the arguments which
were then submitted. It may be added that the case on behalf of the
government was presented by Attorney General Evarts.
The court answered all the contentions by deciding the generic question
of the validity of the tax, thus passing necessarily upon every issue
raised, as the whole necessarily includes every one of its parts. I
quote the reasoning applicable to the matter now in hand:
The sixth question is:
Whether the taxes paid by the plaintiff and sought to be recovered back
in this action are not direct taxes within the meaning of the
Constitution of the United States.
In considering this subject, it is proper to advert to the several
provisions of the Constitution relating to taxation by Congress.
Representatives and direct taxes shall be apportioned among the several
States which shall be included in this Union according to their
respective numbers,
etc.
Congress shall have power to lay and collect taxes, duties, imposts,
and excises, to pay the debt and provide for the common defence and
general welfare of the United States; but all duties, imposts, and
excises shall be uniform throughout the United States.
No capitation or other direct tax shall be laid, unless in proportion
to the census or enumeration hereinbefore directed to be taken.
No tax or duty shall be laid on articles exported from any State.
These clauses contain the entire grant of the taxing power by the
organic law, with the limitations which that instrument imposes.
The national government, though supreme within its own sphere, is one
of limited jurisdiction and specific functions. It has no faculties but
such as the Constitution has given it either expressly or incidentally
by necessary intendment. Whenever any act done under its authority is
challenged, the proper sanction must be found in its charter or the act
is ultra vires and void. This test must be applied in the
examination of the question before us. If the tax to which it refers is
a "direct tax," it is clear that it has not been laid in
conformity to the requirements of the Constitution. It is therefore
necessary to ascertain to which of the categories named in the eighth
section of the first article it belongs.
What are direct taxes was elaborately argued and considered by
this court in Hylton v. United States, decided in the year 1796.
One of the members of the court, Justice Wilson, had been a
distinguished member of the convention which framed the Constitution. It
was unanimously held by the four justices who heard the argument that a
tax upon carriages kept by the owner for his own use was not a direct
tax. Justice Chase said:
I am inclined to think, but of this I do 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 circumstances, and a tax on land.
Paterson, Justice, followed in the same line of remark. He said:
I never entertained a doubt that the principal -- I will not say the
only -- object the framers of the Constitution contemplated as falling
within the rule of apportionment was a capitation tax or a tax on land.
. . . 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. In this way, the terms "direct taxes" and "capitation
and other direct taxes" are satisfied.
The views expressed in this case are adopted by Chancellor Kent and
Justice Story in their examination of the subject. Duties are defined by
Tomlin to be things due and recoverable by law. The term, in its widest
signification, is hardly less comprehensive than "taxes." It
is applied in its most restricted meaning meaning to customs, and in
that sense is nearly the synonym of "imposts."
Impost is a duty on imported goods and merchandise. In a larger sense,
it is any tax or imposition. Cowell says it is distinguished from custom
"because custom is rather the profit which the prince makes on
goods shipped out." Mr. Madison considered the terms "duties"
and "imposts" in these clauses as synonymous. Judge Tucker
thought "they were probably intended to comprehend every species of
tax or contribution not included under the ordinary terms, `taxes and
excises.'"
Excise is defined to be an inland imposition, sometimes upon the
consumption of the commodity and sometimes upon the retail sale;
sometimes upon the manufacturer and sometimes upon the vendor.
The taxing power is given in the most comprehensive terms. The only
limitations imposed are that direct taxes, including the capitation tax,
shall be apportioned, that duties, imposts, and excises shall be
uniform, and that no duties shall be imposed upon articles exported from
any State. With these exceptions, the exercise of the power is, in all
respects, unfettered.
If a tax upon carriages kept for his own use by the owner is not a
direct tax, we can see no ground upon which a tax upon the business of
an insurance company can be held to belong to that class of revenue
charges.
It has been held that Congress may require direct taxes to be laid and
collected in the Territories as well as in the States.
The consequences which would follow the apportionment of the tax in
question among the States and Territories of the Union in the manner
prescribed by the Constitution must not be overlooked. They are very
obvious. Where such corporations are numerous and rich, it might be
light; where none exist, it could not be collected; where they are few
and poor, it would fall upon them with such weight as to involve
annihilation. It cannot be supposed that the framers of the Constitution
intended that any tax should be apportioned the collection of which, on
that principle, would be attended with such results. The consequences
are fatal to the proposition.
To the question under consideration it must be answered that the tax to
which it relates is not a direct tax, but a duty or excise; that it was
obligatory on the plaintiff to pay it.
The other questions certified up are deemed to be sufficiently answered
by the answers given to the first and sixth questions.
This opinion, it seems to me, closes the door to discussion in regard
to the meaning of the word "direct" in the Constitution, and
renders unnecessary a resort to the conflicting opinions of the framers
or to the theories of the economists. It adopts that construction of the
word which confines it to capitation taxes and a tax on land, and
necessarily rejects the contention that that word was to be construed in
accordance with the economic theory of shifting a tax from the shoulders
of the person upon whom it was immediately levied to those of some other
person. This decision, moreover, is of great importance because it is an
authoritative reaffirmance of the Hylton case and an approval of
the suggestions there made by the justices, and constitutes another
sanction given by this court to the interpretation of the Constitution
adopted by the legislative, executive, and judicial departments of the
government, and thereafter continuously acted upon.
Not long thereafter, in Veazie Bank v. Fenno, 8 Wall. 533, 541,
546, the question of the application of the word "direct" was
again submitted to this court. The issue there was whether a tax on the
circulation of state banks was "direct" within the meaning of
the Constitution. It was ably argued by the most distinguished counsel;
Reverdy Johnson and Caleb Cushing representing the bank, and Attorney
General Hoar the United States. The brief of Mr. Cushing again presented
nearly every point now urged upon our consideration. It cited copiously
from the opinions of Adam Smith and others. The constitutionality of the
tax was maintained by the government on the ground that the meaning of
the word "direct" in the Constitution, as interpreted by the
Hylton case, as enforced by the continuous legislative
construction, and as sanctioned by the consensus of opinion already
referred to, was finally settled. Those who assailed the tax there
urged, as is done here, that the Hylton case was not conclusive
because the only question decided was the particular matter at issue,
and insisted that the suggestions of the judges were mere dicta,
and not to be followed. They said that Hylton v. United States
adjudged one point alone, which was that a tax on a carriage was not a
direct tax, and that, from the utterances of the judges in the case, it
was obvious that the general question of what was a direct tax was but
crudely considered. Thus, the argument there presented to this court the
very view of the Hylton case which has been reiterated in the
argument here, and which is sustained now. What did this court say then,
speaking through Chief Justice Chase, as to these arguments? I take very
fully from its opinion:
Much diversity of opinion has always prevailed upon the question, what
are direct taxes? Attempts to answer it by reference to the definitions
of political economists have been frequently made, but without
satisfactory results. The enumeration of the different kinds of taxes
which Congress was authorized to impose was probably made with very
little reference to their speculations. The great work of Adam Smith,
the first comprehensive treatise on political economy in the English
language, had then been recently published; but in this work, though
there are passages which refer to the characteristic difference between
direct and indirect taxation, there is nothing which affords any
valuable light on the use of the words "direct taxes" in the
Constitution.
We are obliged, therefore, to resort to historical evidence, and to
seek the meaning of the words in the use and in the opinion of those
whose relations to the government and means of knowledge warranted them
in speaking with authority.
And, considered in this light, the meaning and application of the rule
as to direct taxes appears to us quite clear.
It is, as we think, distinctly shown in every act of Congress on the
subject.
In each of these acts, a gross sum was laid upon the United States, and
the total amount was apportioned to the several States according to
their respective numbers of inhabitants, as ascertained by the last
preceding census. Having been apportioned, provision was made for the
imposition of the tax upon the subjects specified in the act, fixing its
total sum.
In 1798, when the first direct tax was imposed, the total amount was
fixed at two millions of dollars; in 1813, the amount of the second
direct tax was fixed at three millions; in 1815, the amount of the third
at six millions, and it made an annual tax; in 1816, the provision
making the tax annual was repealed by the repeal of the first section of
the act of 1815, and the total amount was fixed for that year at three
millions of dollars. No other direct tax was imposed until 1861, when a
direct tax of twenty millions of dollars was laid and made annual; but
the provision making it annual was suspended, and no tax, except that
first laid, was ever apportioned. In each instance, the total sum was
apportioned among the States by the constitutional rule, and was
assessed at prescribed rates on the subjects of the tax. These subjects,
in 1798, 1813, 1815, 1816, were lands, improvements, dwelling houses,
and slaves, and, in 1861, lands, improvements, and dwelling houses only.
Under the act of 1798, slaves were assessed at fifty cents on each;
under the other acts, according to valuation by assessors.
This review shows that personal property, contracts, occupations, and
the like have never been regarded by Congress as proper subjects of
direct tax. It has been supposed that slaves must be considered as an
exception to this observation. But the exception is rather apparent than
real. As persons, slaves were proper subjects of a capitation tax, which
is described in the Constitution as a direct tax; as property, they
were, by the laws of some, if not most, of the States classed as real
property, descendible to heirs. Under the first view, they would be
subject to the tax of 1798, as a capitation tax; under the latter, they
would be subject to the taxation of the other years as realty. That the
latter view was that taken by the framers of the acts, after 1798,
becomes highly probable when it is considered that, in the States where
slaves were held, much of the value which would otherwise have attached
to land passed into the slaves. If, indeed, the land only had been
valued without the slaves, the land would have been subject to much
heavier proportional imposition in those States than in States where
there were no slaves, for the proportion of tax imposed on each State
was determined by population, without reference to the subjects on which
it was to be assessed.
The fact, then, that slaves were valued under the acts referred to, far
from showing, as some have supposed, that Congress regarded personal
property as a proper object of direct taxation under the Constitution,
shows only that Congress, after 1798, regarded slaves, for the purposes
of taxation, as realty.
It may be rightly affirmed, therefore, that, in the practical
construction of the Constitution by Congress, direct taxes have been
limited to taxes on land and appurtenances and taxes on polls or
capitation taxes.
And this construction is entitled to great consideration, especially in
the absence of anything adverse to it in the discussions of the
convention which framed and of the conventions which ratified the
Constitution.
This view received the sanction of this court two years before the
enactment of the first law imposing direct taxes eo nomine.
The court then reviews the Hylton case, repudiates the attack
made upon it, reaffirms the construction placed on it by the
legislative, executive, and judicial departments, and expressly adheres
to the ruling in the insurance company case to which I have referred.
Summing up, it said:
It follows necessarily that the power to tax without apportionment
extends to all other objects. Taxes on other objects are included under
the heads of taxes not direct, duties, imposts, and excises, and must be
laid and collected by the rule of uniformity. The tax under
consideration is a tax on bank circulation, and may very well be classed
under the head of duties. Certainly it is not, in the sense of the
Constitution, a direct tax. It may be said to come within the same
category of taxation as the tax on incomes of insurance companies which
this court, at the last term, in the case of Pacific Insurance
Company v. Soule, held not to be a direct tax.
This case was, so far as the question of direct taxation is concerned,
decided by an undivided court, for, although Mr. Justice Nelson
dissented from the opinion, it was not on the ground that the tax was a
direct tax, but on another question.
Some years after this decision, the matter again came here for
adjudication in the case of Scholey v. Rew, 23 Wall. 331, 346.
The issue there involved was the validity of a tax placed by a United
States statute on the right to take real estate by inheritance. The
collection of the tax was resisted on the ground that it was direct. The
brief expressly urged this contention, and said the tax in question was
a tax on land if ever there was one. It discussed the Hylton
case, referred to the language used by the various judges, and sought to
place upon it the construction which we are now urged to give it, and
which has been so often rejected by this court.
This court again, by its unanimous judgment, answered all these
contentions. I quote its language:
Support to the first objection is attempted to be drawn from that
clause of the Constitution which provides that direct taxes shall be
apportioned among the several States which may be included within the
Union according to their respective numbers, and also from the clause
which provides that no capitation or other direct tax shall be laid
unless in proportion to the census or amended enumeration; but it is
clear that the tax or duty levied by the act under consideration is not
a direct tax within the meaning of either of those provisions. Instead
of that, it is plainly an excise tax or duty, authorized by section
eight of article one, which vests the power in Congress to lay and
collect taxes, duties, imposts, and excises, to pay the debts, and
provide for the common defence and general welfare.
Indirect taxes, such as duties of impost and excises and every other
description of the same, must be uniform, and direct taxes must be laid
in proportion to the census or enumeration as remodelled in the
Fourteenth Amendment. Taxes on lands, houses, and other permanent real
estate have always been deemed to be direct taxes, and capitation taxes,
by the express words of the Constitution, are within the same category,
but it never has been decided that any other legal exactions for the
support of the Federal government fall within the condition that, unless
laid in proportion to numbers, the assessment is invalid.
Whether direct taxes, in the sense of the Constitution, comprehend any
other tax than a capitation tax and a tax on land is a question not
absolutely decided, nor is it necessary to determine it in the present
case, as it is expressly decided that the term does not include the tax
on income, which cannot be distinguished in principle from a succession
tax such as the one involved in the present controversy.
What language could more clearly and forcibly reaffirm the previous
rulings of the court upon this subject? What stronger endorsement could
be given to the construction of the Constitution, which had been given
in the Hylton case, and which had been adopted and adhered to by
all branches of the government almost from the hour of its
establishment? It is worthy of note that the court here treated the
decision in the Hylton case as conveying the view that the only
direct taxes were "taxes on land and appurtenance." In so
doing, it necessarily again adopted the suggestion of the justices there
made, thus making them the adjudged conclusions of this court. It is too
late now to destroy the force of the opinions in that case by qualifying
them as mere dicta when they have again and again been expressly
approved by this court.
If there were left a doubt as to what this established construction is,
it seems to be entirely removed by the case of Springer v. United
States, 102 U.S. 86, 602. Springer was assessed for an income tax on
his professional earnings and on the interest on United States bonds. He
declined to pay. His real estate was sold in consequence. The suit
involved the validity of the tax as a basis for the sale. Again every
question now presented was urged upon this court. The brief of the
plaintiff in error, Springer, made the most copious references to the
economic writers, Continental and English. It cited the opinions of the
framers of the Constitution. It contained extracts from the journals of
the convention, and marshalled the authorities in extensive and
impressive array. It reiterated the argument against the validity of an
income tax which included rentals. It is also asserted that the Hylton
case was not authority, because the expressions of the judges in regard
to anything except the carriage tax were mere dicta.
The court adhered to the ruling announced in the previous cases and
held that the tax was not direct within the meaning of the Constitution.
It reexamined and answered everything advanced here, and said, in
summing up the case:
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 complained is within the category of an excise or
duty.
The facts, then, are briefly these: at the very birth of the
government, a contention arose as to the meaning of the word "direct."
The controversy was determined by the legislative and executive
departments of the government. Their action came to this court for
review, and it was approved. Every judge of this court who expressed an
opinion made use of language which clearly showed that he thought the
word "direct" in the Constitution applied only to capitation
taxes and taxes directly on land. Thereafter, the construction thus
given was accepted everywhere as definitive. The matter came again and
again to this court, and, in every case, the original ruling was adhered
to. The suggestions made in the Hylton case were adopted here,
and, in the last case here decided, reviewing all the others, this court
said that direct taxes within the meaning of the Constitution were only
taxes on land and capitation taxes. And now, after a hundred years,
after long-continued action by other departments of the government, and
after repeated adjudications of this court, this interpretation is
overthrown and the Congress is declared not to have a power of taxation
which may at some time, as it has in the past, prove necessary to the
very existence of the government. By what process of reasoning is this
to be done? By resort to theories in order to construe the word "direct"
in its economic sense, instead of in accordance with its meaning in the
Constitution, when the very result of the history which I have thus
briefly recounted is to show that the economic construction of the word
was repudiated by the framers themselves, and has been time and time
again rejected by this court; by a resort to the language of the framers
and a review of their opinions, although the facts plainly show that
they themselves settled the question which the court now virtually
unsettles. In view of all that has taken place and of the many decisions
of this court, the matter at issue here ought to be regarded as closed
forever.
The injustice and harm which must always result from overthrowing a
long and settled practice sanctioned by the decisions of this court
could not be better illustrated than by the example which this case
affords. Under the income tax laws which prevailed in the past for many
years, and which covered every conceivable source of income, rentals
from real estate, and everything else, vast sums were collected from the
people of the United States. The decision here rendered announces that
those sums were wrongfully taken, and thereby, it seems to me, creates a
claim in equity and good conscience against the government for an
enormous amount of money. Thus, from the change of view by this court,
it happens that an act of Congress, passed for the purpose of raising
revenue in strict conformity with the practice of the government from
the earliest time and in accordance with the oft-repeated decisions of
this court, furnishes the occasion for creating a claim against the
government for hundreds of millions of dollars; I say creating a claim
because, if the government be in good conscience bound to refund that
which has been taken from the citizen in violation of the Constitution,
although the technical right may have disappeared by lapse of time, or
because the decisions of this court have misled the citizen to his
grievous injury, the equity endures, and will present itself to the
conscience of the government. This consequence shows how necessary it is
that the court should not overthrow its past decisions. A distinguished
writer aptly points out the wrong which must result to society from a
shifting judicial interpretation. He says:
If rules and maxims of law were to ebb and flow with the taste of the
judge, or to assume that shape which in his fancy best becomes the
times; if the decisions of one case were not to be ruled by, or depend
at all upon, former determinations in other cases of a like nature, I
should be glad to know what person would venture to purchase an estate
without first having the judgment of a court of justice respecting the
identical title which he means to purchase? No reliance could be had
upon precedents; former resolutions upon titles of the same kind could
afford him no assurance at all. Nay, even a decision of a court of
justice upon the very identical title would be nothing more than a
precarious temporary security; the principle upon which it was founded
might, in the course of a few years, become antiquated; the same title
might be again drawn into dispute; the taste and fashion of the times
might be improved, and, on that ground, a future judge might hold
himself at liberty (if not consider it his duty) to pay as little regard
to the maxims and decisions of his predecessor as that predecessor did
to the maxims and decisions of those who went before him.
Fearne on Contingent Remainders, London ed. 1801, p. 264.
The disastrous consequences to flow from disregarding settled decisions
thus cogently described must evidently become greatly magnified in a
case like the present, when the opinion of the court affects fundamental
principles of the government by denying an essential power of taxation
long conceded to exist and often exerted by Congress. If it was
necessary that the previous decisions of this court should be
repudiated, the power to amend the Constitution existed, and should have
been availed of. Since the Hylton case was decided, the
Constitution has been repeatedly amended. The construction which
confined the word "direct" to capitation and land taxes was
not changed by these amendments, and it should not now be reversed by
what seems to me to be a judicial amendment of the Constitution.
The finding of the court in this case, that the inclusion of rentals
from real estate in an income tax makes it direct to that extent is, in
my judgment, conclusively denied by the authorities to which I have
referred and which establish the validity of an income tax in itself.
Hence, I submit, the decision necessarily reverses the settled rule
which it seemingly adopts in part. Can there be serious doubt that the
question of the validity of an income tax in which the rentals of real
estate are included is covered by the decisions which say that an income
tax is generically indirect, and that, therefore, it is valid without
apportionment? I mean, of course, could there be any such doubt were it
not for the present opinion of the court? Before undertaking to answer
this question, I deem it necessary to consider some arguments advanced
or suggestions made.
1st. The opinions of Turgot and Smith and other economists are cited,
and it is said their views were known to the framers of the
Constitution, and we are then referred to the opinions of the framers
themselves. The object of the collocation of these two sources of
authority is to show that there was a concurrence between them as to the
meaning of the word "direct." But in order to reach this
conclusion, we are compelled to overlook the fact that this court has
always held, as appears from the preceding cases, that the opinions of
the economists threw little or no light on the interpretation of the
word "direct" as found in the Constitution. And the whole
effect of the decisions of this court is to establish the proposition
that the word has a different significance in the Constitution from that
which Smith and Turgot have given to it when used in a general economic
sense. Indeed, it seems to me that the conclusion deduced from this line
of thought itself demonstrates its own unsoundness. What is that
conclusion? That the framers well understood the meaning of "direct."
Now it seems evident that the framers, who well understood the meaning
of this word, have themselves declared in the most positive way that it
shall not be here construed in the sense of Smith and Turgot. The
Congress which passed the carriage tax act was composed largely of men
who had participated in framing the Constitution. That act was approved
by Washington, who had presided over the deliberations of the
convention. Certainly Washington himself, and the majority of the
framers, if they well understood the sense in which the word "direct"
was used, would have declined to adopt and approve a taxing act which
clearly violated the provisions of the Constitution if the word "direct,"
as therein used, had the meaning which must be attached to it if read by
the light of the theories of Turgot and Adam Smith. As has already been
noted, all the judges who expressed opinions in the Hylton case
suggested that "direct," in the constitutional sense, referred
only to taxes on land and capitation taxes. Could they have possibly
made this suggestion if the word had been used as Smith and Turgot used
it? It is immaterial whether the suggestions of the judges were dicta
or not. They could not certainly have made this intimation, if they
understood the meaning of the word "direct" as being that
which it must have imported if construed according to the writers
mentioned. Take the language of Mr. Justice Paterson:
I never entertained a doubt that the principal, I will not say the
only, objects that the framers of the Constitution contemplated a
falling within the rule of apportionment were a capitation tax and a tax
on land.
He had borne a conspicuous part in the convention. Can we say that he
understood the meaning of the framers, and yet, after the lapse of a
hundred years, fritter away that language, uttered by him from this
bench in the first great case in which this court was called upon to
interpret the meaning of the word "direct?" It cannot be said
that his language was used carelessly or without a knowledge of its
great import. The debate upon the passage of the carriage tax act had
manifested divergence of opinion as to the meaning of the word "direct."
The magnitude of the issue is shown by all contemporaneous authority to
have been deeply felt, and its far-reaching consequence was appreciated.
Those controversies came here for settlement and were then determined
with a full knowledge of the importance of the issues. They should not
be now reopened.
The argument, then, it seems to me, reduces itself to this: that the
framers well knew the meaning of the word "direct;" that so
well understanding it, they practically interpreted it in such a way as
to plainly indicate that it had a sense contrary to that now given to it
in the view adopted by the court. Although they thus comprehended the
meaning of the word and interpreted it at an early day, their
interpretation is now to be overthrown by resorting to the economists
whose construction was repudiated by them. It is thus demonstrable that
the conclusion deduced from the premise that the framers well understood
the meaning of the word "direct," involves a fallacy. In other
words, that it draws a faulty conclusion, even if the predicate upon
which the conclusion is rested be fully admitted. But I do not admit the
premise. The views of the framers cited in the argument conclusively
show that they did not well understand, but were in great doubt as to,
the meaning of the word "direct." The use of the word was the
result of a compromise. It was accepted as the solution of a difficulty
which threatened to frustrate the hopes of those who looked upon the
formation of a new government as absolutely necessary to escape the
condition of weakness which the Articles of Confederation had shown.
Those who accepted the compromise viewed the word in different lights,
and expected different results to flow from its adoption. This was the
natural result of the struggle which was terminated by the adoption of
the provision as to representation and direct taxes. That warfare of
opinion had been engendered by the existence of slavery in some of the
States, and was the consequence of the conflict of interest thus brought
about. In reaching a settlement, the minds of those who acted on it were
naturally concerned in the main with the cause of the contention, and
not with the other things which had been previously settled by the
convention. Thus, whilst there was in all probability clearness of
vision as to the meaning of the word "direct" in relation to
its bearing on slave property, there was inattention in regard to other
things, and there were, therefore, diverse opinions as to its proper
signification. That such was the case in regard to many other clauses of
the Constitution has been shown to be the case by those great
controversies of the past which have been peacefully settled by the
adjudications of this court. Whilst this difference undoubtedly existed,
as to the effect to be given the word "direct," the consensus
of the majority of the framers as to its meaning was shown by the
passage of the carriage tax act. That consensus found adequate
expression in the opinions of the justices in the Hylton case,
and in the decree of this court there rendered. The passage of that act,
those opinions, and that decree, settled the proposition that the word
applied only to capitation taxes and taxes on land.
Nor does the fact that there was difference in the minds of the framers
as to the meaning of the word "direct" weaken the binding
force of the interpretation placed upon that word from the beginning.
For, if such difference existed, it is certainly sound to hold that a
contemporaneous solution of a doubtful question, which has been often
confirmed by this court, should not now be reversed. The framers of the
Constitution, the members of the earliest Congress, the illustrious man
first called to the office of Chief Executive, the jurists who first sat
in this court, two of whom had borne a great part in the labors of the
convention, all of whom dealt with this doubtful question, surely
occupied a higher vantage ground for its correct solution than do those
of our day. Here, then, is the dilemma: if the framers understood the
meaning of the word "direct" in the Constitution, the
practical effect which they gave to it should remain undisturbed; if
they were in doubt as to the meaning, the interpretation long since
authoritatively affixed to it should be upheld.
2d. Nor do I think any light is thrown upon the question of whether the
tax here under consideration is direct or indirect by referring to the
principle of "taxation without representation" and the great
struggle of our forefathers for its enforcement. It cannot be said that
the Congress which passed this act was not the representative body fixed
by the Constitution. Nor can it be contended that the struggle for the
enforcement of the principle involved the contention that representation
should be in exact proportion to the wealth taxed. If the argument be
used in order to draw the inference that, because in this instance, the
indirect tax imposed will operate differently through various sections
of the country, therefore that tax should be treated as direct, it seems
to me it is unsound. The right to tax, and not the effects which may
follow from its lawful exercise, is the only judicial question which
this court is called upon to consider. If an indirect tax, which the
Constitution has not subjected to the rule of apportionment, is to be
held to be a direct tax because it will bear upon aggregations of
property in different sections of the country, according to the extent
of such aggregations, then the power is denied to Congress to do that
which the Constitution authorizes, because the exercise of a lawful
power is supposed to work out a result which, in the opinion of the
court, was not contemplated by the fathers. If this be sound, then every
question which has been determined in our past history is now still open
for judicial reconstruction. The justness of tariff legislation has
turned upon the assertion, on the one hand, denied on the other, that it
operated unequally on the inhabitants of different sections of the
country. Those who opposed such legislation have always contended that
its necessary effect was not only to put the whole burden upon one
section, but also to directly enrich certain of our citizens at the
expense of the rest, and thus build up great fortunes to the benefit of
the few and the detriment of the many. Whether this economic contention
be true or untrue is not the question. Of course, I intimate no view on
the subject. Will it be said that, if tomorrow the personnel of this
court should be changed, it could deny the power to enact tariff
legislation which has been admitted to exist in Congress from the
beginning, upon the ground that such legislation beneficially affects
one section or set of people to the detriment of others within the
spirit of the Constitution, and therefore constitutes a direct tax?
3d. Nor, in my judgment, does any force result from the argument that
the framers expected direct taxes to be rarely resorted to, and, as the
present tax was imposed without public necessity, it should be declared
void.
It seems to me that this statement begs the whole question, for it
assumes that the act now before us levies a direct tax, whereas the
question whether the tax is direct or not is the very issue involved in
this case. If Congress now deems it advisable to resort to certain forms
of indirect taxation which have been frequently, though not
continuously, availed of in the past, I cannot see that its so doing
affords any reason for converting an indirect into a direct tax in order
to nullify the legislative will. The policy of any particular method of
taxation, or the presence of an exigency which requires its adoption, is
a purely legislative question. It seems to me that it violates the
elementary distinction between the two departments of the government to
allow an opinion of this court upon the necessity or expediency of a tax
to affect or control our determination of the existence of the power to
impose it.
But I pass from these considerations to approach the question whether
the inclusion of rentals from real estate in an income tax renders such
a tax to that extent "direct" under the Constitution, because
it constitutes the imposition of a direct tax on the land itself.
Does the inclusion of the rentals from real estate in the sum going
to make up the aggregate income from which (in order to arrive at
taxable income) is to be deducted insurance, repairs, losses in
business, and four thousand dollars exemption, make the tax on income so
ascertained a direct tax on such real estate?
In answering this question, we must necessarily accept the
interpretation of the word "direct" authoritatively given by
the history of the government and the decisions of this court just
cited. To adopt that interpretation for the general purposes of an
income tax, and then repudiate it because of one of the elements of
which it is composed, would violate every elementary rule of
construction. So also, to seemingly accept that interpretation and then
resort to the framers and the economists in order to limit its
application and give it a different significance is equivalent to its
destruction, and amounts to repudiating it without directly doing so.
Under the settled interpretation of the word, we ascertain whether a tax
be direct or not by considering whether it is a tax on land or a
capitation tax. And the tax on land, to be within the provision for
apportionment, must be direct. Therefore we have two things to take into
account: is it a tax on land, and is it direct thereon or so immediately
on the land as to be equivalent to a direct levy upon it? To say that
any burden on land, even though indirect, must be apportioned is not
only to incorporate a new provision in the Constitution, but is also to
obliterate all the decisions to which I have referred by construing them
as holding that, although the Constitution forbids only a direct tax on
land without apportionment, it must be so interpreted as to bring an
indirect tax on land within its inhibition.
It is said that a tax on the rentals is a tax on the land, as if the
act here under consideration imposed an immediate tax on the rentals.
This statement, I submit, is a misconception of the issue. The point
involved is whether a tax on net income, when such income is made up by
aggregating all sources of revenue and deducting repairs, insurance,
losses in business, exemptions, etc., becomes, to the extent to which
real estate revenues may have entered into the gross income, a direct
tax on the land itself. In other words, does that which reaches an
income, and thereby reaches rentals indirectly, and reaches the land by
a double indirection, amount to direct levy on the land itself? It seems
to me the question, when thus accurately stated, furnishes its own
negative response. Indeed, I do not see how the issue can be stated
precisely and logically without making it apparent on its face that the
inclusion of rental from real property in income is nothing more than an
indirect tax upon the land.
It must be borne in mind that we are dealing not with the want of power
in Congress to assess real estate at all; on the contrary, as I have
shown at the outset, Congress has plenary power to reach real estate
both directly and indirectly. If it taxes real estate directly, the
Constitution commands that such direct imposition shall be apportioned.
But because an excise or other indirect tax, imposed without
apportionment, has an indirect effect upon real estate, no violation of
the Constitution is committed, because the Constitution has left
Congress untrammeled by any rule of apportionment as to indirect taxes
-- imposts, duties, and excises. The opinions in the Hylton
case, so often approved and reiterated, the unanimous views of the text
writers, all show that a tax on land, to be direct, must be an
assessment of the land itself, either by quantity or valuation. Here
there is no such assessment. It is well also to bear in mind, in
considering whether the tax is direct on the land, the fact that, if
land yields no rental, it contributes nothing to the income. If it is
vacant, the law does not force the owner to add the rental value to his
taxable income. And so it is if he occupies it himself.
The citation made by counsel from Coke on Littleton, upon which so much
stress is laid, seems to me to have no relevancy. The fact that, where
one delivers or agrees to give or transfer land with all the fruits and
revenues, it will be presumed to be a conveyance of the land in no way
supports the proposition that an indirect tax on the rental of land is a
direct burden on the land itself.
Nor can I see the application of Brown v. Maryland, 1 Wheat.
419; Weston v. Charleston, 2 Pet. 449; Dobbins v. Erie
County Commissioners, 16 Pet. 435; Almy v. California, 24
How. 169; Cook v. Pennsylvania, 97 U.S. 566; Railroad Co. v.
Jackson, 7 Wall. 262; Philadelphia &c. Steamship Co. v.
Pennsylvania, 122 U.S. 326; Leloup v. Mobile, 127 U.S. 640;
Postal Telegraph Co. v. Adams, 155 U.S. 688. All these cases
involve the question whether, under the Constitution, if no power
existed to tax at all, either directly or indirectly, an indirect tax
would be unconstitutional. These cases would be apposite to this if
Congress had no power to tax real estate. Were such the case, it might
be that the imposition of an excise by Congress which reached real
estate indirectly would necessarily violate the Constitution, because as
it had no power in the premises, every attempt to tax directly or
indirectly would be null. Here, on the contrary, it is not denied that
the power to tax exists in Congress, but the question is, is the tax
direct or indirect in the constitutional sense?
But it is unnecessary to follow the argument further, for, if I
understand the opinions of this court already referred to, they
absolutely settle the proposition that an inclusion of the rentals of
real estate in an income tax does not violate the Constitution. At the
risk of repetition, I propose to go over he cases again for the purpose
of demonstrating this. In doing so, let it be understood at the outset
that I do not question the authority of Cohens v. Virginia or
Carroll v. Lessee of Carroll, or any other of the cases referred
to in argument of counsel. These great opinions hold that an
adjudication need not be extended beyond the principles which it
decides. Whilst conceding this, it is submitted that, if decided cases
do directly, affirmatively, and necessarily, in principle, adjudicate
the very question here involved, then, under the very text of the
opinions referred to by the court, they should conclude this question.
In the first case, that of Hylton, is there any possibility by
the subtlest ingenuity to reconcile the decision here announced with
what was there established?
In the second case, Insurance Company v. Soule, the levy was
upon the company, its premiums, its dividends, and net gains from all
sources. The case was certified to this court, and the statement made by
the judges in explanation of the question which they propounded says: "The
amount of said premiums, dividends, and net gains were truly stated in
said lists or returns." Original Record, p. 27.
It will thus be seen that the issue there presented was not whether an
income tax on business gains was valid, but whether an income tax on
gains from business and all other net gains was constitutional. Under
this state of facts, the question put to the court was:
Whether the taxes paid by the plaintiff, and sought to be recovered
back in this action, are not direct taxes within the meaning of the
Constitution of the United States.
This tax covered revenue of every possible nature, and it therefore
appears self-evident that the court could not have upheld the statute
without deciding that the income derived from realty, as well as that
derived from every other source, might be taxed without apportionment.
It is obvious that, if the court had considered that any particular
subject matter which the statute reached was not constitutionally
included, it would have been obliged by every rule of safe judicial
conduct to qualify its answer as to this particular subject.
It is impossible for me to conceive that the court did not embrace in
its ruling the constitutionality of an income tax which included rentals
from real estate, since, without passing upon that question, it could
not have decided the issue presented. And another reason why it is
logically impossible that this question of the validity of the inclusion
of the rental of real estate in an income tax could have been overlooked
by the court is found in the fact to which I could have already
adverted, that this was one of the principal points urged upon its
attention, and the argument covered all the ground which has been
occupied here -- indeed, the very citation from Coke upon Littleton now
urged as conclusive was there made also in the brief of counsel. And
although the return of income involved in that case was made "in
block," the very fact that the burden of the argument was that to
include rentals from real estate in income subject to taxation made such
tax pro tanto direct seems to me to indicate that such rentals
had entered into the return made by the corporation.
Again, in the case of Scholey v. Rew, the tax in question was
laid directly on the right to take real estate by inheritance, a right
which the United States had no power to control. The case could not have
been decided, in any point of view, without holding a tax upon that
right was not direct, and that, therefore, it could be levied without
apportionment. It is manifest that the court could not have overlooked
the question whether this was a direct tax on the land or not, because,
in the argument of counsel, it was said, if there was any tax in the
world that was a tax on real estate which was direct, that was the one.
The court said it was not, and sustained the law. I repeat that the tax
there was put directly upon the right to inherit, which Congress had no
power to regulate or control. The case was therefore greatly stronger
than that here presented, for Congress has a right to tax real estate
directly with apportionment. That decision cannot be explained away by
saying that the court overlooked the fact that Congress had no power to
tax the devolution of real estate, and treated it as a tax on such
devolution. Will it be said of the distinguished men who then adorned
this bench that, although the argument was pressed upon them that this
tax was levied directly on the real estate, they ignored the elementary
principle that the control of the inheritance of realty is a state, and
not a Federal, function? But even if the case proceeded upon the theory
that the tax was on the devolution of the real estate, and was therefore
not direct, is it not absolutely decisive of this controversy? If to put
a burden of taxation on the right to take real estate by inheritance
reaches realty only by indirection, how can it be said that a tax on the
income, the result of all sources of revenue, including rentals, after
deducting losses and expenses, which thus reaches the rentals
indirectly, and the real estate indirectly through the rentals, is a
direct tax on the real estate itself?
So it is manifest in the Springer case that the same question
was necessarily decided. It seems obvious that the court intended in
that case to decide the whole question, including the right to tax
rental from real estate without apportionment. It was elaborately and
carefully argued there that, as the law included the rentals of land in
the income taxed, and such inclusion was unconstitutional, this,
therefore, destroyed that part of the law which imposed the tax on the
revenues of personal property. Will it be said, in view of the fact
that, in this very case, four of the judges of this court think that the
inclusion of the rentals from real estate in an income tax renders the
whole law invalid, that the question of the inclusion of rentals was of
no moment there, because the return there did not contain a mention of
such rentals? Were the great judges who then composed this court so
neglectful that they did not see the importance of a question which is
now considered by some of its members so vital that the result in their
opinion is to annul the whole law, more especially when that question
was pressed upon the court in argument with all possible vigor and
earnestness? But I think that the opinion in the Springer case
clearly shows that the court did consider this question of importance,
that it did intend to pass upon it, and that it deemed that it had
decided all the questions affecting the validity of an income tax in
passing upon the main issue, which included the others as the greater
includes the less.
I can discover no principle upon which these cases can be considered as
any less conclusive of the right to include rentals of land in the
concrete result, income, than they are as to the right to levy a general
income tax. Certainly the decisions which hold that an income tax, as
such, is not direct decide on principle that to include the rentals of
real estate in an income tax does not make it direct. If embracing
rentals in income makes a tax on income to that extent a direct tax on
the land, then the same word in the same sentence of the Constitution
has two wholly distinct constitutional meanings, and signifies one thing
when applied to an income tax generally and a different thing when
applied to the portion of such a tax made up in part of rentals. That is
to say, the word means one thing when applied to the greater and another
when applied to the lesser tax.
My inability to agree with the court in the conclusions which it has
just expressed causes me much regret. Great as is my respect for any
view by it announced, I cannot resist the conviction that its opinion
and decree in this case virtually annuls its previous decisions in
regard to the powers of Congress on the subject of taxation, and is
therefore fraught with danger to the court, to each and every citizen,
and to the republic. The conservation and orderly development of our
institutions rests on our acceptance of the results of the past and
their use as lights to guide our steps in the future. Teach the lesson
that settled principles may be overthrown at any time, and confusion and
turmoil must ultimately result. In the discharge of its function of
interpreting the Constitution, this court exercises an august power. It
sits removed from the contentions of political parties and the
animosities of factions. It seems to me that the accomplishment of its
lofty mission can only be secured by the stability of its teachings and
the sanctity which surrounds them. If the permanency of its conclusions
is to depend upon the personal opinions of those who, from time to time,
may make up its membership, it will inevitably become a theatre of
political strife, and its action will be without coherence or
consistency. There is no great principle of our constitutional law, such
as the nature and extent of the commerce power, or the currency power,
or other powers of the Federal government, which has not been ultimately
defined by the adjudications of this court after long and earnest
struggle. If we are to go back to the original sources of our political
system, or are to appeal to the writings of the economists in order to
unsettle all these great principles, everything is lost and nothing
saved to the people. The rights of every individual are guaranteed by
the safeguards which have been thrown around them by our adjudications.
If these are to be assailed and overthrown, as is the settled law of
income taxation by this opinion, as I understand it, the rights of
property, so far as the Federal Constitution is concerned, are of little
worth. My strong convictions forbid that I take part in a conclusion
which seems to me so full of peril to the country. I am unwilling to do
so without reference to the question of what my personal opinion upon
the subject might be if the question were a new one, and was thus
unaffected by the action of the framers, the history of the government,
and the long line of decisions by this court. The wisdom of our
forefathers in adopting a written Constitution has often been impeached
upon the theory that the interpretation of a written instrument did not
afford as complete protection to liberty as would be enjoyed under a
Constitution made up of the traditions of a free people. Writing, it has
been said, does not insure greater stability than tradition does, while
it destroys flexibility. The answer has always been that, by the
foresight of the fathers, the construction of our written Constitution
was ultimately confided to this body, which, from the nature of its
judicial structure, could always be relied upon to act with perfect
freedom from the influence of faction and to preserve the benefits of
consistent interpretation. The fundamental conception of a judicial body
is that of one hedged about by precedents which are binding on the court
without regard to the personality of its members. Break down this belief
in judicial continuity, and let it be felt that, on great constitutional
questions, this court is to depart from the settled conclusions of its
predecessors and to determine them all according to the mere opinion of
those who temporarily fill its bench, and our Constitution will, in my
judgment, be bereft of value, and become a most dangerous instrument to
the rights and liberties of the people.
In regard to the right to include in an income tax the interest upon
the bonds of municipal corporations, I think the decisions of this court
holding that the Federal government is without power to tax the agencies
of the state government embrace such bonds, and that this settled line
of authority is conclusive upon my judgment here. It determines the
question that, where there is no power to tax for any purpose whatever,
no direct or indirect tax can be imposed. The authorities cited in the
opinion are decisive of this question. They are relevant to one case and
not to the other because, in the one case, there is full power in the
Federal government to tax, the only controversy being whether the tax
imposed is direct or indirect, while, in the other, there is no power
whatever in the Federal government, and therefore the levy, whether
direct or indirect, is beyond the taxing power.
Mr. Justice Harlan authorizes me to say that he concurs in the views
herein expressed.
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| HARLAN,
J., Dissent
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| MR.
JUSTICE HARLAN, further dissenting.
I concur so entirely in the general views expressed by Mr. Justice
White in reference to the questions disposed of by the opinion and
judgment of the majority that I will do no more than indicate, without
argument, the conclusions reached by me after much consideration. Those
conclusions are:
1. Giving due effect to the statutory provision that "no suit for
the purpose of restraining the assessment or collection of any tax shall
be maintained in any court," Rev.Stat. § 324, the decree below
dismissing the bill should be affirmed. As the Farmers' Loan and Trust
Company could not itself maintain a suit to restrain either the
assessment or collection of the tax imposed by the act of Congress, the
maintenance of a suit by a stockholder to restrain that corporation and
its directors from voluntarily paying such tax would tend to defeat the
manifest object of the statute, and be an evasion of its provisions.
Congress intended to forbid the issuing of any process that would
interfere in anywise with the prompt collection of the taxes imposed.
The present suits are mere devices to strike down a general revenue law
by decrees, to which neither the government nor any officer of the
United States could be rightfully made parties of record.
2. Upon principle and under the doctrines announced by this court in
numerous cases, a duty upon the gains, profits, and income derived from
the rents of land is not a "direct" tax on such land within
the meaning of the constitutional provisions requiring capitation or
other direct taxes to be apportioned among the several States according
to their respective numbers determined in the mode prescribed by that
instrument. Such a duty may be imposed by Congress without apportioning
the same among the States according to population.
3. While property, and the gains, profits, and income derived from
property, belonging to private corporations and individuals are subjects
of taxation for the purpose of paying the debts and providing for the
common defence and the general welfare of the United States, the
instrumentalities employed by the States in execution of their powers
are not subjects of taxation by the general government any more than the
instrumentalities of the United States are the subjects of taxation by
the States, and any tax imposed directly upon interest derived from
bonds issued by a municipal corporation for public purposes, under the
authority of the State whose instrumentality it is, is a burden upon the
exercise of the powers of that corporation which only the State creating
it may impose. In such a case it is immaterial to inquire whether the
tax is, in its nature or by its operation, a direct or an indirect tax,
for the instrumentalities of the States -- among which, as is well
settled, are municipal corporations, exercising powers and holding
property for the benefit of the public -- are not subjects of national
taxation, in any form or for any purpose, while the property of private
corporations and of individuals is subject to taxation by the general
government for national purposes. So it has been frequently adjudged,
and the question is no longer an open one in this court.
Upon the several questions about which the members of this court are
equally divided in opinion, I deem it appropriate to withhold any
expression of my views, because the opinion of the Chief Justice is
silent in regard to those questions.
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