City of Philadelphia v. The Collector
ERROR to the Circuit Court for Eastern Pennsylvania; the case being thus:
The Judiciary Act of 1789 limits the jurisdiction of the Federal courts, so far as determined by citizenship, to 'suits between a citizen of the State in which the suit is brought and a citizen of another State.'
An act of 1833,  'to provide further for the collection of duties on imports,' extended the jurisdiction to cases arising under 'the revenue laws of the United States,' where other provision had not been made. And it authorized any person injured, in person or property, on account of any act done 'under any law of the United States for the protection of the revenue or the collection of duties on imports,' to maintain suit in the Circuit Court. It also allowed any person sued in a State court, on account of any act done 'under the revenue laws of the United States,' to remove the cause by a mode which the act itself set forth, into the Circuit Court of the United States.
With the passage of the internal revenue laws, made necessary by the late rebellion, it was doubted by some persons whether this act of 1833 extended to cases under the new enactments. And the internal revenue act of 1864,  by its fiftieth section extended in general words 'the provisions' of the act of 1833 to cases arising under the internal revenue acts.
By an internal revenue act of 1866,  however (§ 67), Congress made provision for removing cases from State courts to the Circuit Court, authorizing such removal in a way which it particularized, 'in any case, civil or criminal, where suit or prosecution shall be commenced in any court of any State against any officer of the United States, . . . or against any person acting under or by authority of any such officer, on account of any act done under color of his office,' &c.
And by the sixty-eighth section, immediately following, it 'repealed' the fiftieth section of the act of 1864, with, however, this proviso:
'Provided, That any case which may have been removed from the courts of any State under said fiftieth section to the courts of the United States, shall be remanded to the State court from which it was so removed, with all the records relating to such cases, unless the justice of the Circuit Court of the United States in which such suit or prosecution is pending shall be of opinion that said case would be removable from the court of the State to the Circuit Court under and by virtue of the provisions of this act.'
With the act of 1833 in force, but before the passage of any of the others, the city of Philadelphia, in October, 1863, sued in a State court the collector of internal revenue of the collection district to which the city belongs, for a return of certain internal revenue taxes paid under protest; the city corporation (constructively) and the collector being citizens of the same State.
The collector assuming that the case was one arising 'under the revenue laws of the United States,' and that it was, therefore, within the act of 1833, removed it by the mode prescribed in that act of 1833 into the Circuit Court. This was in November, 1863. And the Circuit Court having been, apparently, of the same opinion as to the extent of operation of the act of 1833, tried the case twice, the first trial beginning in December, 1863; therefore, before the internal revenue act of 1864, having its fiftieth section, was passed. A new trial was had in October, 1864, and final judgment then given.
The suit thus brought in the State court and removed, was to recover internal revenue taxes accrued under the internal revenue acts of 1862 and 1863, demanded by the collector and paid under protest by the 'Trustees of the Philadelphia Gas Works,' for gas used by the city for its public lamps. Supposing jurisdiction to have existed in the Circuit Court, the question was whether this gas had been 'made and sold' by the trustees to the city, or whether it had been made by the city through its appointees, the trustees, for itself. If the former, it was taxable under the provisions of the revenue acts, which taxed all gas 'made and sold;' if the latter, it came within an exception which exempted articles made by any person 'not for sale, but for his or their own use,' and was not taxable.
The history of 'the Philadelphia Gas Works,' where the gas was made, and their relation to the city of Philadelphia, was this:
They originated in a city ordinance passed in 1835, and which seems to have contemplated the temporary establishment of a quasi corporation which might yet be, or be ultimately, a department of the city goverment. The works were to be and were constructed by means of money subscribed by private individuals, for which they received certificates of stock entitling them to the profits arising from the manufacture and sale of gas. The ordinance provided that the works should be under the exclusive management of trustees elected by the councils of the city; also that the public lamps should be supplied at half the price paid by private consumers. It provided, above all, that the city corporation should have a right to take possession on certain conditions. The original capital was limited to $100,000. The works, with the increase of the city, not being found large enough and needing to be extended, subsequent ordinances were passed authorizing loans, and providing that the money should be borrowed by the city, on the requisition of the trustees, and that obligations of the city should be issued to the loanholders. A sinking fund, as security for the loanholders, was created out of the proceeds of sale of gas before any profits were distributable to the stockholders. The interest on the certificates of loan was declared payable at the office of the gas works. In 1841, under the original ordinance of 1835, reserving to the city the right to take possession, the city did take possession in their own right, and the stock was converted into a 'gas loan,' in which the city was the debtor, and whose interest was, in fact, paid at the city treasury. But the works were continued under the superintendence of the existing trustees; that only change in the relation of the trustees being that they thenceforth were trustees for the city and loanholders, instead of for the stockholders. Several ordinances were subsequently passed, authorizing further loans. They stipulated that, for the further security of the loanholders, the works should be controlled and managed by a board of trustees, elected and constituted as theretofore, who should have the whole control of the works, and of all the funds belonging to them; and that the trustees should pay no part of the funds, nor any of the profits of the works, into the city treasury, but should apply the same in payment of the interest and principal of the loans; a stipulation whose primary design was declared by the Supreme Court of Pennsylvania-on a controversy between some of the holders of the gas loans and the city corporation, which last wished to take into its own control the property, held by the trustees under the various city ordinances, out of their hands, and to elect other trustees, in addition to the number provided by the original ordinance of 1835 -to have been 'to keep the pledge entirely out of the hands of the borrowers (the city), and prevent the funds from being intermingled with other property of the city, and thus exposed to the hazards of expenditure for other objects than those to which it was exclusively designated.'
The gas used by the city for its public lamps was manufactured at these works; and under different ordinances, specifically providing for the price payable for gas supplied to the public lamps, a process of payment was regularly gone through with at stated intervals, though practically the matter was, in a good degree, a provision by the city for the support of works whose income paid the interest on, and provided a sinking fund for final redemption of its own 'gas loans,' held by various creditors.
The court below was of opinion that the gas was 'made and sold,' and that it was taxable.
Mr. Ashton, for the collector:
1. The case of Insurance Company v. Ritchie,  latelyadjudged, decides that the jurisdiction of the Cricuit Courts, in original suits between citizens of the same State, in internal revenue cases, conferred by the 50th section of the act of June 30th, 1864, was taken away by the 68th section of the act of July 13th, 1866, and that all original suits, pending at the passage of this last act, fell. This 68th section, however, saves (under certain conditions) 'any case which may have been removed from the courts of any State, under said 50th section.' It saves none, removed otherwise. But the present suit was not so removed. It was removed under the act of 1833, which was assumed by the collector to extend to such cases. In fact it was removed, and once tried, months before the act having that 50th section was passed. Unless, therefore, the act of 1833 extends to cases of internal revenue, must not this case fall? The matter is suggested.
2. As to the merits: If all the loans, for the payment of which the trustees appointed by the city, primarily hold and manage the gas works, were paid off, no new ones being contracted, the works, and all right over their products, would become the city's, and the tax might not be chargeable; but at present there is a clear trust for the holders of the gas loan; and the city has to elect trustees who will manage them in subordination to their obligations to those creditors. The gas is 'sold' for their benefit, and by the arrangements between the city and its creditors, it must be so sold. The decision of the Supreme Court of Pennsylvania, when the city wished to act as owners, concludes this case.
Messrs. Lynd (City Solicitor), W. L. Hirst, and Richard Ludlow, contra:
1. The question of jurisdiction seems not to be must pressed. If the court below was right in taking jurisdiction under the act of 1833, as it did, the case is plain. Neither the act of 1864 nor that of 1866 has anything to do with the matter.
2. As respects the main question: Taxing statutes, confessedly, are to be strictly construed. Hence the manufacturers or producers of gas, subject to taxation, must be private individuals, or private corporations, who pursue the business of making gas as a source of profit.
Nowhere in the law is it provided that a city, or town, or state, engaged in the manufacture of taxable articles, shall pay a tax; for no city or state is known to be in the exercise of any but municipal functions-functions exercised for the public good and not for pecuniary aggrandizement. The gas used by the city of Philadelphia is made under the direction of and by an especial department of the municipal government. The trustees of her gas works are chosen at stated periods by the city councils, the legislative department of the city. The trustees are mere managers; elected by the city; having no title whatever. Really and practically the gas works are a city affair. The city owes for them and owns them. There are no stockholders, and the 'payment' relied on to make the case 'a sale' and to take it out of that of a person manufacturing for himself is simply a payment by one hand into another and back. The city pays the gas works and the gas works hand the payment back to the city to pay interest on its gas debt.
The internal revenue acts were made for the purpose of taxing the revenues and the incomes of the country. Nowhere does it appear that subsidies were to be levied upon states, or towns, or that any business but that which was clearing a profit should pay a tax. These facts are evident from the whole language and import of the acts themselves, sufficiently known to all. Land itself was not to be taxed, but its products in kind and specie. The manufacturer was not to pay for the amount of his stock, nor for his accumulation of raw material, but for the results of his skill and labor from which he gets wealth.
Mr. Justice CLIFFORD delivered the opinion of the court.
^1 4 Stat. at Large, 632.
^2 13 Id. 241.
^3 14 Id. 172.
^4 Western Saving Fund Society v. The City of Philadelphia, 31 Pennsylvania State, 178.
^5 Supra, p. 541.