Pacific Insurance v. Soule 7 Wall. 433, 74 U.S. 433, 19 L. Ed. 95, 1868 U.S. LEXIS 1019, SCDB 1868-023

Pacific Insurance Company v. Soule.

1. When a person whose income or other moneys subject to tax or duty has been received in coined money, makes his return to the assessor, the 9th section of the internal revenue act of July 13, 1866, is to be construed as denying to him the right to return the amount thereof in the currency in which it was actually received,- and to pay the tax or duty thereon in legal tender currency, and is to be construed to require that the difference between coined money and legal tender currency shall be *434added to his return when made in coined money, and that he shall pay the tax or duty upon the amount thus increased. '

2. The income tax or duties laid by $$ 105 and 120.of'the act of june 30, 1864, and the amendment thereto of July 13, 1866, upon,the amounts insured, renewed, or continued by insurance companies upon the gross amounts of premiums received, and assessments made by them, and also upon dividends, undistributed sums, and income, is not “ a direct tax,” but a duty or excise.

On certificate of division from the Circuit Court for California.

The Constitution of the United States* ordains thus:

“ Direct taxes shall be apportioned among the several States . which may be included within the Union, according to their respective numbers.”

With this provision of the Constitution in existende, Congress, by an internal revenue act of June 30, 1864,† amended by act of July 13, 1866, laid a certain tax upon the amounts insured, renewed, or continued by insurance companies; upon the gross amount of premiums received and assessments by them; and a tax also upon dividends, undistributed sums, •• and income, A portion of the ninth section of the internal revenue act of July 13, 1866,‡ and acts amendatory thereto, .provide:

“ That it shall be the duty of all persons required to make returns or lists of income, and articles or objects charged with an internal tax, to declare in such returns or lists whether the several rates and amounts therein contained are stated according to their values in legal tender currency, or according to their values in coined money ; and in case of neglect or refusal so to declare to the satisfaction of the assistant assessor receiving such returns or lists, such assistant assessor is hereby required to make returns or lists of such persons neglecting or refusing, as in cases of persons neglecting or refusing to make the returns or lists required by the acts aforesaid, and to assess the duty *435thereon, and to add thereto the amount of penalties imposed bylaw in cases of such neglect or refusal. And whenever the rates and amounts contained in the returns or lists as aforesaid, shall, be stated in coined money, it shall be the duty of each assessor receiving the same, to reduce such rates and amounts to their equivalent in legal tender currency, according to the value of such coined money in said currency, for the time covered by said returns. And the lists required by law to be furnished to collectors by assessors shall in all cases contain the several amounts of taxes or duties assessed, estimated or valued in legal tender currency only.”

Prior acts of Congress had authorized the issue of United States notes, commonly called legal tender notes. The act first authorizing their issue, an act of February 25, 1862,* enacted—

“Such notes shall be receivable in payment of all taxes, internal duties, excises, debts, and demands of every kind due to the United States (except' duties on imports), and of all claims and demands against the United States, of every kind whatsoever (except for interest on bonds and notes, which shall be paid in coin), and shall also be lawful money and a legal tender in payment of all debts public and private, within the United States (except duties on imports and interest as aforesaid). And such United States notes shall be received the same as coin at their' par value, in payment of any loans that may-be hereafter sold or negotiated by the Secretary of the Treasury, and may be reissued from time to time, as the exigencies of the public interests shall require.

"With these acts in force, the Pacific Insurance Company, a corporation engaged in the business of insurance in California, made returns upon the amounts insured, renewed, &c., by it, upon its premiums, and assessments, and finally upon its dividends, undistributed sums, and income; all as required by the statute; the correctness of all the returns being .conceded. The different sources of income thus returned had been received by the company in coined money *436(the currency of California), and the amounts as returned were the amounts in that form of currency. The aggregate tax under the statute upon this sum of coin was $5376. The assessor then (against the protest of the insurance, company) added to the amounts, as returned, the difference in value between legal tender currency and coined money during the time covered by the returns; and fixing .the tax upon the sum as thus increased, the aggregate amount of the tax came to $7365. The'collector demanded payment of this sum. The company refused to pay the $7365, but tendered the $5376 in legal tender notes. The .collector refusing this, and having seized and being about to sell the insurance' company’s property,, the company paid the larger sum, $7365, under protest. The suit- below was to recover back the amount wrongly paid. The case coming on to be heard upon demurrer, the court was divided in opinion upon seven questions, reducible, as this court considered, in substance to these two:

1. Whether that portion of the ninth section of the internal revenue act of July, 1866, above quoted, “is to be construed as merely,providing a rule as to the currency in which accounts, returns, and lists are t.o be stated, with a view to uniformity in keeping the accounts of internal revenue, or whether, it is to be construed as denying to a person who. has received in coined money, incomes'or other moneys subject to tax or duty, the right to return the amount thereof in the currency in which it was actually received, and to pay the tax or duty thereon in legal tender currency, and be construed tb require that the difference between coined money and legal tender currency shall be added to his return when made in coined money, and that he shall pay the tax or duty upon the amount thus increased?”

2. (Sixth in the series.) Whether the taxes paid by the plain, tiff, and sought to be recovered back in this action, are not direct taxes within tho meaning of the Constitution ?

Mr. Wills, for the Insurance Company :

As to the first question. The undertaking made between the government and the citizen, by Congress, when issuing *437the notes- called legal tenders; was that in, all transactions between the government and the citizen, other than in two excepted cases- stated, the paper dollar should be equivalent to the coin dollar, and in nothing is this contract - made more expressly than in regard to the subject of internal taxation in all its branches. In other words, the government, as the taxing power, agrees that it. will receive at par the notes issued by it as a debtor, in .payment of all internal taxes, due to it as the taxing power. It is therefore estopped from regarding them as below par, for any purpose relating to the subject'of internal-taxation, -including the assessment as well as the payment of that class of taxes.

The portion of the ninth section of the Internal Revenue Act of 1866 in question canúot therefore be held to deny to any man' who actually receives his income -in coin — a form in which income is universally received in California where this case comes from — the right to pay his tax on ,such income, in notes of the government, at the value expressed on their face.

.As' to the second quéstion. The ordinary test of the difference between- direct and indirect taxes, is whether the tax falls ultimately on the tax-payer, or whether,.through, the taxpayer, it falls ultimately on the consumer. If it falls ultimately on the tax-payer, then it is direct in its nature, as in the case of poll taxes and land taxes. If, on the contrary, it falls, ultiriia'tely on the consumer, then it is an indirect tax. ,

Such is the iest, as laid down by all writers on the subject.. Adam Smith, who was the great knd universally received authority on political economy,- in the day. when the Federal Constitution was framed, sets forth a tax on a person’s revenue to be a direct tax.* Mill,† Say,‡ J. R. McCulloch,§ Lieber,ǁ among political economists, do the same in specific *438language. Mr. Justice Bouvier, in his learned Law Dictionary, defines a capitation tax, “A poll tax; an imposition which is yearly laid on each person according to his estate and ability.”

[The counsel quoting a learned brief of Mr. W. O'. Bartlett, then went into an examination of the opinions of Chief Justices Ellsworth and Marshall, Oliver Wolcott, Madison, and others, to show that in their opinion, a tax like the present one would fall within the nature of a direct tax.]

Indeed, it is obvious that an income tax, levied on the profits of any business, does not, fall ultimately on the consumer or patron of that business, in any other sense than that in which a poll tax or land tax may be said ultimately to fall, or be charged over by the payer of those taxes upon the persons with whom and for whom they do business, or to whom they rent their lands. The refinement which would argue otherwise, abolishes the whole distinction, and under it all taxes may be regarded as direct-or indirect, at pleasure.

But, if the distinction is recognized (and it must be, for the Constitution makes it), then it follows, that an income tax is, and always heretofore has been, regarded as being a flirect tax, as much so as a poll tax or as a laud tax. If it be a direct tax,, then the Constitution is imperative that it shall be apportioned.

If it be argued that an income tax cannot be apportioned, then, it cannot be levied; for louly such direct taxes can be levied as can be apportioned.

But -an income tax can be apportioned as easily as any other direct tax; first, by determining the amount to be raised from incomes throughout the United States, and then by ascertaining the proportion to be paid by the people of each State. An income tax, in the matter of its apportionment, is not embarrassed by any other difficulties than those which grow out of apportionment, in the admitted eases of poll taxes and land taxes.

Mr. JEvaris, Attorney-General, contra:

It was clearly the object of the act, to compel-parties tc *439pay the legal percentage on their incomes, estimating them at their value in legal tender currency. If the reduction of . all incomes to a legal tender standard was intended for iio other purpose than to establish a uniform system in keeping the accounts of the internal revenue department, it is difficult to understand, first, why, in case of refusal, to declare m which currency the income return is made, the assessor should be entitled to disregard the return, and exact, over and above the regular income tax, a penalty of twenty-five per cent.; and why “the lists required by law to be furnished to collectors by assessors” are required “in all cases to contain the several amounts^of taxes assessed, estimated or valued in legal tender currency only?” If the collector’s lists are to .contain these amounts, these are the amounts to be collected and paid. This is evident from other provisions of the internal revenue law. Thus, by section 20 of act of June 30, 1864, as amended by act of July 13, 1866,* as soon as the assessment has become perfect, the agsessor is to make out the list and send it to the colléctor, and this list is the guide • of the collector in the. collection of the tax; and by section 34 of same act, as amended,† the collector is charged with the amount of taxes as stated on the face of the lists, and credited with the amount of his collections.

The collector’s duty is plain: to collect'-the amount set forth in the assessment list., The corresponding duty of the party taxed is equally clear, tíamely, to pay this amount.

The language of the law is in harmpny with the obvious" intention of those who framed it, which was to adopt one uniform standard for the computation, assessment and pay-, ment of taxes of this description.

The other question is one which seems settled by the case of Hylton v. United States, unanimously decided after able argument.‡

Eeply:

It is undoubtedly to dicta of the judges in Hylton v. *440 United- States, to the effect that a capitation tax and a tax or land are the principal, if not the only, direct taxes within the meaning ,of the Constitution, that the general acquiescence in the unapporticned income tax is, in. a great degree, attributable. . The case was as follows: Hylton kept one hundred and twenty-five chariots; they were taxed by the United States, and the Supreme Court held that the tax was indirect, and did not require to be laid according to the rule of apportionment. The decision of the' particular case before the court was probably correct.. It is impossible that a man could have kept so many carriages for himself and his family only to ride in; and, although he is stated in the report of the case to have kept them for his own use, it is presumed that the use referred to was the conveyance of passengers for hire; in other words, that the one hundred and twenty-five chariots pertained to a line of stage-coaches. If this •was the fact, the tax was indirect; for the tax-payer could charge it all over, to his.passengers by making a slight addition to their fare. But although the decision of the case before the court appears, for the reason stated, .to have been correct, positions were taken, in the opinions of the judges delivered on the occasion, which are wholly untenable.

The court, at the time, was without a chief justice. Mr. Ellsworth was sworn in on the day of the decision, and took ho part in it; and the case was decided at a very early day, and before the Supreme Court had acquired the high position vyhieh it afterwards attained. One of the judges, in delivering his opinion, speaks of it as a “ discourse;” they all evince tome want of knowledge of the subject which they discuss. The.se discourses shine in the light shed back upon them by the great intellect which for so many years illuminated the decisions of this tribunal — the illustrious Marshall: — with whose grandeur of fame we naturally associate ideas of the Supreme Court.