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The tax provided for in section 122 of the internal-revenue act is an annual income tax, and its subject is the interest paid and profits earned by the company for each year, and year by year, and is not laid on any of those funds which came into being before the time prescribed in the act. In the ordinary execution of the law it was contemplated that the funds to be taxed, and the tax imposed upon them, should be concurrent as to each fiscal year the tax to be levied upon the income for the year ending on the thirty-first of December, next preceding the assessment, and no tax accrues upon the fund except for the year in which the fund itself accrued. In reference to a dividend declared as of earnings for the current year, and paid as such to stockholders, whether in money or in scrip, the law conclusively presumes that a dividend declared and paid is a dividend earned.
A fund taxed in one year as the profits of a railroad company, used for construction, or carried to the account of any fund, has been taxed once for all, and cannot, as part of the earnings of the company, be assessed a second time.
The profits that this year have been taxed as undivided, and invested in any corporate asset, if in the succeeding year it is embraced in a dividend declared and payable to stockholders, have already borne all the burden imposed by the law, and cannot again be subjected to an assessment for a new tax, nor can it be both in succession,-one year a tax upon the income of the corporation, and the next upon the same fund as the income of the individual. Where a railroad company issued to its stockholders certificates declaring that each stockholder is entitled to 80 per cent. of the amount of the capital stock held by him, payable ratably out of its future earnings, with dividend thereon at the same rates and times as on the shares of the capital stock, and that they may be, at the option of the company, convertible into stock of the company, whenever the company shall be authorized to increase its capital stock to an amount sufficient for such conversion, held, that the issue of such certificates was a scrip dividend, within the meaning of section 122 of the internal-revenue act of 1864, but as it appears the earnings expended accrued during the period of 15 years, of which only six years were covered by the income tax law, the tax should be apportioned pro rata, and be assessed upon the amount of earnings assumed to have accrued during the period when they were subject to the tax.
In Error to the Circuit Court of the United States for the Northern District of New York.
Richard Crowley and S. F. Phillips, Sol. Gen., for plaintiff in error. Joseph H. Choate and Sidney T. Fairchild, for defendant in error. MATTHEWS, J. On December 19, 1868, the New York Central Railroad Company, afterwards merged by consolidation into a new corporation, the defendant in error, adopted a preamble, resolutions, and certificate, of which the following is a copy:
BAILEY V. NEW YORK CENT. & H. R. R. CO.
"Whereas, this company has hitherto expended of its earnings for the purpose of constructing and equipping its road, and in the purchase of real estate and other properties, with a view to the increase of its traffic, moneys equal in amount to 80 per cent. of the capital stock of the company; and whereas, the several stockholders of the company are entitled to evidence of such expenditure, and to reimbursement of the same at some convenient future period; now, therefore,
"Resolved, that a certificate, signed by the president and treasurer of this company, be issued to the stockholders, severally, declaring that such stockholder is entitled to 80 per cent. of the amount of the capital stock held by him, payably ratably with the other certificates issued under this resolution, at the option of the company, out of its future earnings, with dividends thereon at the same rates and times as dividends shall be paid on the shares of the capital stock of the company, and that such certificates may be, at the option of the company, convertible into stock of the company whenever the company shall be authorized to increase its capital stock to an amount sufficient for such conversion.
"Resolved, that such certificates be delivered to the stockholders of this company at the Union Trust Company, in the city of New York, on the presentation of their several certificates of stock, and that the receipt of the certificate provided for in these resolutions shall be indorsed on the stock certificate."
The certificate issued under this authority reads as follows:
"Under a resolution of the board of directors of this company, passed December 19, 1868, of which the above is a copy, the New York Central Railroad Company hereby certifies that being the holder of
shares of the capital stock of said company, is entitled to dollars, payable ratably with the other certificates issued under said resolution, at the pleasure of the company, out of its future earnings, with dividends thereon at the same rates and times as dividends shall be paid upon the shares of the capital stock
of said company.
This certificate may be transferred on the books of the company on the surrender of this certificate.
"In witness whereof the said company has caused this certificate to be signed by its president and treasurer, this nineteenth day of December, 1868."
The resolution was carried into effect by an issue of the contemplated certificates to the amount of $23,036,000, being 80 per cent. of its authorized capital of $28,795,000. Dividends were regularly paid to the holders of these certificates, equal to those declared and paid upon the capital stock, until the certificates were redeemed at par in the stock of the consolidated corporation, as then authorized by law. This consolidation took place in 1872. On March 3, 1870, an assessment was made by the proper officer of the internal revenue of a tax of 5 per cent. upon the amount of these certificates, being $1,151,800, with a penalty of $1,000 added, under section 122 of the
internal-revenue act of 1864. 13 St. at Large, 284. From this assessment the railroad company appealed successively to the commissioner of internal revenue and the secretary of the treasury, upon which appeal a decision was rendered reducing the assessment to the sum of $460,720. This decision was based upon the ground that the issue of the certificates was a scrip dividend within the meaning of the 122d section of the internal-revenue act of 1864; but that as it had been made to appear that the earnings stated in the resolution to have been expended, accrued during the entire period of 15 years, from 1853 to 1868, of which only six years were covered by the income-tax law, which first took effect in September, 1862, the tax should be apportioned pro rata, by remitting nine-fifteenths, and assessing the tax upon the sum of $9,214,400, the amount of earnings assumed to have accrued during the period when they were subject to the tax. The assessment upon this sum being $460,720, with a penalty of 5 per cent., being $23,036, and interest at the rate of 1 per cent. per month, amounting to $64,153.48, were exacted by the collector, and paid under protest. To recover back these sums as illegally exacted, the defendant in error brought this action against the collector of internal revenue who had collected them.
On the first trial of the case, the circuit court charged the jury that the assessment was wholly illegal and void, the certificates not being a scrip dividend within the meaning of the law, and furnishing no basis for the assessment of any tax whatever, and that consequently their verdict must be for the plaintiff. There was a verdict accordingly, and the judgment thereon was reversed, and a new trial awarded, upon a writ of error, by this court, in a decision reported in 22 Wall. 604. The second trial, in the circuit court, resulted in a verdict and judgment for the plaintiff below for $499,432.68. To reverse that judgment is the object of the present writ of error.
The principal questions presented arise upon exceptions of the plaintiff in error to the charge of the circuit judge to the jury, and to his refusal to give certain instructions as requested. The substance of of the charge upon the main point was that while the certificates constituted a scrip dividend, which justified the assessment and constituted a complete prima facie defense to the action, nevertheless it was competent for the plaintiff to show what amount of the earnings of the company, accruing from September 1, 1862, to December 19, 1868, was represented by and included in the certificates; and that this amount alone being subject to the tax, the plaintiff was entitled to recover all in excess of that which had been exacted and paid. The
BAILEY V. NEW YORK CENT. & H. R. R. CO.
opposing proposition of the defendant below, the request to give: which as a charge to the jury was refused, was that the certificates. were conclusive upon the railroad company of the amount of a scrip dividend subject to taxation without deduction.
The counsel for the plaintiff in error now contend that their position is established by the former decision of this court in this cause, already referred to, as reported in 22 Wall. 604. The actual and precise judgment of the court upon the former writ of error is, however, completely satisfied by the charge of the circuit court now in question; for the ruling on the first trial, held to be erroneous, was that the certificates constituted no basis whatever for taxation as a scrip dividend, and were not to be admitted or considered even as a prima facie defense to the action. The reversal at that time did not and could not, upon the record then presented, anticipate and prejudge the question now raised, whether those certificates were conclusive as to the amount of the taxable earnings represented by them. And there is nothing in the opinion of the court then pronounced which, properly understood, requires any conclusion to the contrary. In that opinion the nature of these certificates is described, and their character as scrip dividends defined. It is there stated that "interest certificates of the kind were issued as evidence to the stockholders that an equal amount of the earnings of the company beyond current expenses had been expended for the objects stated in the preamble of the certificates, and to show that the respective stockholders were entitled to reimbursement of such expenditure at some convenient future period, and also to show that the stockholders were entitled to dividends on the same whenever dividends were paid on the shares of the capital stock; and that the certificates were to be paid out of the future earnings of the company, or to be converted, at the option of the company, into stock, if thereafter authorized to exercise that function. "Such a paper, therefore, by whatever name it may be called, is, upon its face, evidence for each stockholder, to persons with whom he may have dealings, of the amount of the previous net earnings of the company; that such net earnings have been expended in constructing and equipping the railroad, and in the purchase of real estate and other properties appertaining to the same; and that the holders of the certificates will be entitled to dividends whenever dividends are paid upon the capital stock."
These certificates were considered to be a dividend declared, as of profits which had been, at some previous time, earned and converted
into capital by an investment in permanent improvements of the railroad, and it was as representing such earnings that they were considered the subject of a tax. Whether those profits had been earned since or before the passage of the act of congress imposing such a tax, does not appear from any recital in the certificates, and they were dealt with by the government itself upon the footing of not being taxable beyond the amount represented by them, which had actually been earned after the taking effect of the law. The treasury department, as has already been stated, reduced the assessment to six-fifteenths of the face of the certificates, upon the hypothesis that an equal proportion of the whole amount had accrued during each of the 15 years since the organization of the company, in 1853; and, in view of this reduction, Mr. Justice CLIFFORD, in the opinion referred to, added: "Whether or not they are liable for the whole amount is not a question in this case."
The question having thus been left open, it is now contended by the counsel for the plaintiff in error that, by the reason and terms of the law, the certificates are taxable as a scrip dividend upon the full nominal amount thereof. ⠀
The 122d section of the internal-revenue act of 1864, (13 St. at Large, 284,) under which the question arises, is as follows:
"Sec. 122. And be it further enacted 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 interest, or any such company that may have declared any dividend in scrip or money due or payable to its stockholders 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 duty of 5 per centum on the amount of all such interest, or coupons, dividends, or profits, whenever the same shall be payable," etc.
It is now urged in argument, by the counsel for the plaintiff in error, that, upon the express terms of this section, the certificates in question, being a declaration of a dividend as part of the earnings, profits, income, or gains of the railroad company, are taxable upon the amount thereof without deduction; that the policy as well as the language of the act fixes the charge upon the declaration itself when made effectual as between the company and its stockholders, and, for the purposes of taxation, concludes both as to the amount subject to the tax; and that the rule is reasonable as furnishing an obvious standard and the only safe criterion for the assessment of the tax to prevent fraudulent evasions; and, consequently, that when such a