The Collector v. Hubbard

ERROR to the Supreme Court of Connecticut; the case being thus:

The 117th section of the Internal Revenue Act of June 30th, 1864, which laid what was known as the income tax, after providing for the collection of an income tax from certain classes of companies specified, and enacting that 'in estimating the annual gains, profits, or income of any person,' revenue from such and such sources 'shall be included and assessed as part of the income of such person.' proceeds:

'And the gains and profits of all companies, whether incorporated or partnership, other than the companies specified in this section, shall be included in estimating the annual gains, profits, or income of any person entitled to the same, whether divided or otherwise.'

With this enactment in force, one Hubbard owned, A.D. 1864, certain shares in two manufacturing companies (being companies other than those previously specified in the section), which in that year made large profits and made dividends of part of them, though not of the whole of them. The excess was not divided, nor had it been in any way set apart from the general assets of the respective corporations, or appropriated for the use of the stockholders, otherwise than as the law would imply from the existence of them. On the contrary, it was part of the case as settled and admitted by the parties:

'That from time to time during said year, and without any intention to defraud the government, unless the investment hereinafter named constituted such fraud by implication of law, said corporations invested said profits in part in real estate, machinery, and raw material, proper for carrying on their business, and in part for the payment of debts incurred in previous years, and the same remained so invested in 1865.'

Hubbard, when making in the year just named his return of income for the preceding year, returned as part of his income the dividends which had been made on his stock, but would not return the undivided profits. The assessor insisted on his returning his proportion of these also, settling the proportion by a reference to the number of shares which he held in the company compared with the whole number into which its capital stock was divided. Under compulsion from the assessor he then did make such return, and under like compulsion did pay, on the 19th August, 1865, the tax accordingly, protesting in due form against the collection. The assessor had given Hubbard due notice of where appeals from the assessment would be held, but Hubbard did not make any appeal, either to the assessor or to the Commissioner of Internal Revenue, according to the provisions of law in that regard, which allowed him to do so, though it did not make his having done so a condition of his bringing suit. On the contrary, relying on his simple payment under protest he brought suit in the Circuit Court of the United States to recover the tax. It was not denied that at the time when he brought that action such a suit could be maintained to recover such a tax illegally paid under protest though no such appeal had been made. However, after Hubbard had thus brought his suit in the Circuit Court, Congress, on the 13th July, 1866, passed an act whose 19th section was thus:

'That no suit shall be maintained in any court for the recovery of any tax alleged to have been erroneously or illegally assessed or collected, until appeal shall have been duly made to the Commissioner of Internal Revenue, according to the provisions of law in that regard, and the regulations of the Secretary of the Treasury established in pursuance thereof, and a decision of said commissioner shall be had thereon, unless such suit shall be brought within six months from the time of said decision, or within six months from the time this act takes effect,' &c.

The suit was called for trial in June, 1867, and in consequence of this enactment and the admitted want of appeal to the commissioner, the Circuit Court dismissed the case.

The plaintiff then, on the 9th of August, 1867, sued the collector in indebitatus assumpsit in one of the State courts of Connecticut, a case as above stated being agreed on, and it being further admitted that the collector had, prior to the bringing of the suit, paid over to the Treasury of the United States the whole amount of the tax collected; a payment over which was made in pursuance of the act of Congress of March 3d, 1865, by which collectors were required to pay daily into the treasury the gross amount of all duties, taxes, and revenue received or collected in virtue of the internal revenue acts, without any abatement or deduction on account of compensation, &c., or claims of any description whatever; the act, however, or other acts containing provisions authorizing a person from whom a tax has been collected to sue the collector for its recovery, and provisions for repayment by the treasurer to the collector of whatever should be thus recovered against him.

In the suit in the State court, the collector set up the fact of his payment over, and more particularly the act of 1866 as a bar to the suit; maintaining, also, as a second ground, that if the suit was not thus barred the tax had been rightly assessed and levied.

The court in which this second suit was brought gave judgment for the plaintiff, and on error to the Supreme Court that judgment was affirmed. The case was now brought here under the 25th section of the Judiciary Act. The questions being:

I. Did the act of Congress of 1866 incapacitate Hubbard from bringing the second suit?

II. If not, were the undivided profits, applied as they had been, 'income' within the meaning of the act of 1864?

Mr. C. E. Perkins, in support of the judgment below:

I. The fact of payment over is plainly no bar to our suit, Congress authorizing suits against collectors to recover taxes illegally paid, and making abundant provision for repayment to the collector if judgment go against him.

Neither is the act of 1866, requiring a previous appeal to the commissioner, a bar.

1. The act was prospective only. It was not intended to affect the rights of parties already vested. Courts refuse to give statutes a retroactive construction, unless the intention is so clear and positive as by no possibility to admit of any other construction. It would be grossly unjust to us to apply this rule. At the time when the act was passed we had a suit pending in the Circuit Court. It was not reached for trial till June, 1867, more than six months after the act took effect. The court then dismissed the case because the act took away its jurisdiction, and we were deprived of any redress. A construction which would bring about such a result should be avoided.

2. The act only refers to proceedings in courts of the United States.

3. It is a kind of statute of limitations, and it is set up as a bar to an action in a State court arising at common law. But Congress has no power to pass acts barring such suits. It is only when causes of action arise under laws of the United States that that body can prohibit or limit proceedings in State courts. This case does not so arise. One citizen of Connecticut has here money belonging to another citizen, for which, by the laws of Connecticut, an action of indebitatus assumpsit will lie. Congress cannot affect this right of action. As soon as the money was illegally collected and paid under duress, a right to recover it vested in the plaintiff with which Congress could not interfere.

II. As to the merits. The internal revenue enactment says expressly that only the gains and profits to which a stockholder is 'entitled' shall be returned. In no possible sense of the word is a stockholder entitled as income to moneys spent by the corporation during the year in paying its debts and preparing for its future business. This is a Connecticut corporation, and the question of the right of a stockholder to their property should be and is fixed by Connecticut law. In Phelps v. Farmers' Bank, the court say:

'The profits of a bank, no matter when made, until separated from the stock by declaring a dividend, are mere increment and augmentation of the stock. They are properly stock themselves, composing a part of the stock of the bank, and will pass with the stock under that name either by contract, bequest, or levy of execution.'

The rule is the same in other States.

In Minot v. Paine, a Massachusetts case, the court say:

'The net earnings of a railroad corporation remain the property of the company as fully as its other property till the directors declare a dividend. A shareholder has no title to them prior to the dividend being declared. . . . The money in the hands of the directors may be income to the corporation, but it is not so to a stockholder till a dividend is made; and where the company invest it in buildings and machinery, or in railroad tracks, depots, rolling stock, or any other permanent improvements for enlarging or carrying on their legitimate business, it never becomes income to the shareholder.'

In Goodwin v. Hardy, a case in Maine, the court say:

'The stockholders have no claim to a dividend until it is declared. Until that time it belongs to the corporation precisely as any other property it may own.'

If these cases are good law they are decisive.

Apart from decisions, this is the only reasonable construction. How can a stockholder be entitled to money which the corporation has used in paying off its debts? The same principle applies to replacing wornout machinery, buying new, and purchasing raw material to carry on the business.

Mr. Akerman, Attorney-General, and Mr. Bristow, Solicitor-General, contra:

I. As to the bar.

1. The act of 1866 does not act retrospectively in barring this suit, for the suit was not brought until after it was passed.

2. It bars, by its terms, suits in 'any court,' and interpreted in accordance with its purposed meaning it is constitutional.

3. The plaintiff had no vested right to recover by the principles of the common law the money illegally taken by the collector; for acts of Congress compelled the collector to pay the money immediately to the government. No promise can be implied to refund in such a case. The whole right to sue came by necessary implication from the revenue laws, and the authirity to sue could at any time be qualified or even taken away by Congress, which gave it.

II. As to the merits. It was the design of Congress to tax the undivided gains and profits made by all corporations, as well as those which are divided among the stockholders. This appears by considering the 117th section of the act of 1864 in connection with the 120th and 122d of the same act. The corporations mentioned in the 120th section are banks, trust companies, and insurance companies, and the tax is thereby made to cover not only 'dividends,' but also 'all undistributed sums, or sums made or added during the year to their surplus or contingent funds.' Those mentioned in the 122d section are railroad, canal, turnpike, canal-navigation, and slack-water companies; and the tax is thereby made to cover, not only gains and profits divided, but, in addition, 'all profits of such company carried to the account of any fund or used for construction.' All other corporations not specified in those sections are covered by the 117th section, which expressly declares that the gains and profits thereof shall be included in estimating the annual gains, profits, or income of any person entitled to the same, whether divided or otherwise.

The purpose is the same in each of these sections, the only difference being in the mode of offectuating it. Where the gains and profits are those made by a corporation specified in either the 120th or the 122d sections, the tax thereon is collected directly from the corporation, whether such gains and profits are divided or not. Where they are the gains and profits made by any corporation included in the 117th section, the tax thereon is collected directly from the stockholders, or persons entitled thereto, whether the same are divided or otherwise. In all cases the entire annual gains and profits of every corporation, divided or undivided, seem to be within the aim and purview of the statute as objects of taxation.

The decisions cited on the other side, if pertinent at all to the question of an income tax, which they are not, are not strong enough to control an enactment which includes 'all gains and profits,' 'whether divided or otherwise;' that is to say, whether divided or undivided.

Mr. Justice CLIFFORD delivered the opinion of the court.