Northern Central Railroad Company v. Jackson
ERROR to the Circuit Court for the District of Maryland.
The State of Pennsylvania, by certain acts, as expounded by the Supreme Court of that State,  taxed 'money owing by solvent debtors, whether by promissory note, penal or single bill, bond or judgment,' imposing three mills on the dollar of the principal, payable out of the interest. And where the money was due by a railroad corporation, they made it the duty of the president, or other officer of the company who paid the coupons or interest to the holder, to retain the amount of the tax.
The United States, also, by certain acts, laid what is known as the income tax.
The first tax of this kind was imposed by the act of Congress passed August 5th, 1861.  The 49th section of that act directed that there should be levied and collected upon the annual income of every person residing in the United States, from whatever source derived, a tax of 3 per cent. on the amount of the excess of such income over $800; and upon the income, rents, or dividends, accruing upon property, &c., owned in the United States by any citizen residing abroad, a tax of 5 per cent.
The next act was passed July 1st, 1862,  and the 90th section of it directed that there should be levied and collected a tax of 3 per cent. on the annual income of every person residing in the United States, over $600 and under $10,000; and when exceeding $10,000, a tax of 5 per cent.; and upon the income of citizens residing abroad, a tax of 5 per cent. The next section provided that the portion of income derived from interest on bonds, or other evidences of indebtedness of any railroad company, which should have been assessed and paid by said companies, should be deducted from that prescribed in the previous section; and the 81st section directed that this tax on the bonds and evidences of indebtedness should be paid by the companies, and that they might deduct the same on the payment of interest to the bondholders.
The next act-one more particularly bearing on one part of this case-was that of June 30th, 1864.  This act directed the levy and collection of a tax of 5 per cent. upon the excess of income of every person residing in the United States, or of any citizen residing abroad, over $600 and under $5000; 7 1/2 per cent. over $5000 and not exceeding $10,000; and a tax of 10 per cent. over $10,000. Subsequent sections  provided for the deduction from all payments on account of interest arising out of bonds of railroad companies, as in the act of July 1st, 1862, and enacted that the payment by the company of the said duty so deducted from the interest, should discharge the company from that amount of interest on the bonds 'so held by any person or persons whatever,' except where the companies might have contracted otherwise.
In this state of the statutes of Pennsylvania and of the United States, Jackson, an alien resident in Ireland, brought suit, in the court below, against the Northern Central Railway Company, a company incorporated by the State of Maryland, to recover the amount of certain coupons attached to bonds issued by the company and held by him. The form of them was as follows:
'The Northern Central Railway Company will pay to the bearer, January 1, 1865, thirty dollars, being a half year's interest on bond No. 1827, for one thousand dollars.
'J. S. LIEB, Treasurer.'
The plaintiff proved a demand of payment, at the company's office in Baltimore (where the coupons were payable), and that the company offered to pay the amount of them, deducting a tax of 5 per cent. per annum to the United States, under the acts of Congress; and a further tax of three mills per dollar of the principal of each bond asserted to be due to the State of Pennsylvania, but would not pay more. Offer of such payment was refused. He also gave in evidence charters incorporating the Northern Central Railway Company by the State of Maryland, and by that of Pennsylvania, and rested.
The defendant then gave in evidence the articles of consolidation of four railroad companies, one of which had been incorporated by the State of Maryland, and the three others by the State of Pennsylvania, embracing a line of road extending from Baltimore, in Maryland, to Sunbury, in Pennsylvania, about a third or fourth of the whole road only being in the former State.
This consolidation was entered into by the respective companies in pursuance of acts of the legislatures of the two States; and by means of them the four companies were merged in one, called the Northern Central Railway Company, and was incorporated by the same name by the legislature of each State. The stockholders of the old companies received from the new twice the number of shares held by them in the old, upon the receipt of which the old shares were cancelled, after this company was thus organized and the directors elected. On the 20th of December, 1855, the company executed a mortgage to a board of trustees upon the entire line of its road from Baltimore to Sunbury, including all its property and estate situate within both the States, which mortgage was given to secure the payment of $2,500,000 in bonds, to be issued in amounts therein specified. The bonds were issued by the company accordingly. And it was upon the coupons of a portion of them in the hands of the plaintiff that this suit was brought.
The court below charged, that if the plaintiff, when he purchased the bonds, was a British subject resident in Ireland, and now resided there, he was entitled to recover the amount of the coupons without deductions. It was the correctness of this charge which, after verdict and judgment in accordance with it, was the subject of the question here.
Mr. Bernard Carter, for the railroad company, appellant, contended, that the State of Pennsylvania, as well as the United States, had a right to impose the taxes, and the fact that Jackson was a British subject and resident abroad was unimportant. 
That the taxes in question were not taxes on the person of Jackson, but on his property, which in this case was the debt due to him, as evidenced by the company's bonds. The real or personal property of a non-resident alien, would confessedly be a proper subject for taxation, at the place where it is located, because of the protection and other benefits conferred upon it by the taxing power. Now the alien in this case was the holder of bonds the payment of which was wholly and solely secured to him by property situated here, and while this government extended its protection and its laws over the property, out of which those bonds were to be paid, there was no reason why it should not, for such protection and to the extent of his interest in the property so protected and benefited, demand of the plaintiff (although an alien, and as such excepted from the general income duty imposed by the one section of the act of 1864), an equivalent in the shape of the tax imposed by the subsequent sections. The debt, for the purposes of taxation, had its location here. 
Messrs. W. A. Fisher and G. H. Williams, contra, contended, that the statute of Pennsylvania, rightly construed, did not tax interest; and that even if it did, that State had no right to tax the coupons on bonds where both debtor and creditor were outside her territory, and neither of them her subjects. Such an attempt would be ultra vires.
So, by the true construction of the internal revenue act of Congress of June 30th, 1864, that it was not intended to tax incomes, except of citizens of the United States wherever resident, and of residents, whether citizens or not; that here, too, even if Congress had made an attempt to tax the incomes of foreigners resident in their own countries, it would have been 'ultra vires.'  A corporation in the United States, when it borrows money from a foreigner abroad, creates a debt, whose locality is always the locality of the creditor; and to tax it, or the annual interest due on it, is to tax him, resident abroad and not a subject of the taxing power, for that which, in contemplation of law, is also outside the country.  This plainly was illegal.
Mr. Justice NELSON delivered the opinion of the court.
^1 Maltby v. Railroad Company, 52 Pennsylvania State, 140.
^2 12 Stat. at Large, 309.
^3 12 Stat. at Large 473.
^4 13 Ib. 281, § 116.
^5 §§ 117, 122.
^6 McCulloch v. State of Maryland, 4 Wheaton, 429; Providence Bank v. Billings, 4 Peters, 561; Milne v. Moreton, 12 Wheaton, 358; Harrison v. Sterry, 5 Cranch, 289.
^7 Gordon v. Appeal Tax Court, 3 Howard, 133, 140, 150; Appeal Tax Cases, 12 Gill & Johnson, 117.
^8 McCulloch v. State of Maryland, 4 Wheaton, 429; Union Bank v. The State, 9 Yerger, 501.
^9 The Apollon, 9 Wheaton, 370.