United States v. Erie Railway

This was an action to recover taxes alleged to be due to the plaintiff on certain interest coupons paid by the defendant in the years 1866, 1867, 1868, and 1869, on bonds previously issued by it; and also certain penalties alleged to be due the plaintiff for failure of the defendant to make returns of the amount of the taxes.

The case was tried in the district court for the southern district of New York upon an agreed statement of facts, of which the following are all that are deemed material to explain the question raised and decided. By this statement it was admitted that prior to September 1, 1866, the defendant had issued sterling coupon bonds to the amount of £800,000, dated September 1, 1865, the principal of which was payable two years after date, drawing interest at 6 per cent. per annum, payable semi-annually on the first days of March and September of each year; and the principal and interest of which were payable in London, England, at the office of Junius S. Morgan & Co., bankers, of London; that after March 1, 1868, and prior to September 1, 1868, the defendant had issued and sold bonds of the same class amounting to £200,000, the principal and interest of which were payable at the same place as the bonds previously issued; that all the bonds with coupons for interest attached were sold directly to J. S. Morgan & Co., J. T. Mackenzie, and Stern Brothers, all foreign bankers, having their places of business in London, and were by them sold to their customers in England and on the continent of Europe; that during the years 1866, 1867, 1868, 1869, the bonds and coupons were all held by non-resident aliens, and not by citizens of the United States, except bonds to the amount of £20,000, and the coupons attached, which were held and owned by a citizen or citizens of the United States residing in Europe; that the amount of interest on all bonds was provided for, and sent forward by the defendant, in one sum or block, to J. S. Morgan & Co., before the dates at which it fell due, and as it fell due was paid by J. S. Morgan & Co., at their banking-house in London, to the holders of the bonds and coupons; that the amount of interest paid in the years mentioned on the above-described bonds was £186,000, of which £4,200 were paid on the £20,000 held by a citizen or citizens of the United States; that the defendant made no returns to the assessor, or to any other officer of the internal revenue of the United States, of the payment of the interest, or any part thereof, nor did it ever pay to the United States, or to any one on their behalf, 5 per cent. tax, or any tax on the interest, or any part thereof; nor did the defendant withhold the tax, or any part thereof, from the amount of the interest, but paid the full amount to the holders of the bonds; and that no assessment was ever made by the plaintiffs, or by any officer of the plaintiffs, on the defendant for any portion of the tax, nor was any demand ever made on the defendant for the payment of the same to the United States until December 31, 1872.

The district court held that the defendant was not liable for a tax on the £181,800 paid for interest upon coupons and bonds owned and held by non-resident aliens, but was liable for the tax on £200 paid for interest on coupons ¶4,200 paid for interest on coupons citizens of the United States; and, also, that the defendant was liable for only one penalty for failure to make return to the revenue officer of the amount paid. Judgment was rendered accordingly.

The action was founded on section 122 of the act of June 30, 1864, (13 St. 284, 285,) as amended by section 9 of the act of July 13, 1866, (14 St. 138, 139.) That section as amended provides as follows:

'That any railroad, canal, turnpike, canal navigation, or slack-water company, indebted for any money for which bonds or other evidence of indebtedness have been issued, payable in one or more years after date, upon which interest is stipulated to be paid, or coupons representing the interest, or any such company that may have declared any dividend in scrip or money due or payable to its stockholders, including non-residents, whether citizens or aliens, as part of the earnings, profits, income, or gains of such company, and all profits of such company carried to the account of any fund, or used for construction, shall be subject to and pay a tax of 5 per centum on the amount of all such interest or coupons, dividends or profits, whenever and wherever the same shall be payable, and to whatsoever party or person the same may be payable, including non-residents, whether citizens or aliens; and said companies are hereby authorized to deduct and withhold from all payments on account of any interest or coupons and dividends due and payable as aforesaid, the tax of 5 per centum; and the payment of the amount of said tax, so deducted from the interest or coupons or dividends, and certified by the president or treasurer of said company, shall discharge said company from that amount of the dividend, or interest, or coupon on the bonds or other evidences of their indebtedness, so held by any person or party whatever, except where said companies may have contracted otherwise. And a list or return shall be made and rendered to the assessor or assistant assessor on or before the tenth day of the month following that in which said interest, coupons, or dividends become due and payable, and as often as every six months; and said list or return shall contain a true and faithful account of the amount of tax, and there shall be annexed thereto a declaration of the president or treasurer of the company, under oath or affirmation, in form and manner as may be prescribed by the commissioner of internal revenue, that the same contains a true and faithful account of said tax. And for any default in making or rendering such list or return, with the declaration annexed, or of the payment of the tax as aforesaid, the company making such default shall forfeit as a penalty the sum of $1,000; and in case of any default in making or rendering said list or return, or of the payment of the tax, or any part thereof, as aforesaid, the assessment and collection of the tax and penalty shall be made according to the provisions of law in other cases of neglect or refusal: provided, that whenever any of the companies mentioned in this section shall be unable to pay the interest on their indebtedness, and shall in fact fail to pay such interest, that in such cases the tax levied by this section shall not be paid to the United States until said companies resume the payment of interest on their on their indebtedness.'

From this judgment the plaintiff carried the case to the circuit court, which affirmed the judgment of the district court. To review this latter judgment a writ of error was taken from this court.

Two questions were presented for determination:

First. Whether the court below erred in holding that the defendant was not liable to pay the alleged tax on the ¶181,800 interest which defendant paid to non-resident alien owners and holders of coupons and bonds. No question was made as to the liability of the defendant to recover the tax on the £4,200 interest paid to American citizens, as adjudged by the court below; and—

Second. Whether the court below erred in holding that the defendant was liable for one penalty only out of the seven which the plaintiff claimed in its complaint.

Solicitor General Phillips, for plaintiff in error.

W. D. Shipman, for defendant in error.

WAITE, C. J.

This judgment is reversed on the authority of Railroad Co. v. Collector, 100 U.S. 595, and the cause is remanded with instructions to enter a judgment in favor of the United States, for the equivalent in lawful money of the United States of the tax of £9,300, with interest at the rate of 6 per cent. per annum from the several-times when the same became due and payable, according to the agreed statement of facts on which the submission was made below. As no claim was made on the argument in this court, either for a penalty or for the currency value of the pounds sterling when the taxes fell due, we have not considered the questions which would have arisen if such a demand had been made. For these reasons the judgment will be without penalties and for the present value of the pounds sterling in lawful money.

BRADLEY, J.