Statement by Mr. Justice Shiras:
In October, 1899, George T. Murdock, as executor of the last will and testament of Jane H. Sherman, brought an action in the supreme court of the state of New York against John . Ward, collector of internal revenue for the fourteenth district of the state of New York, wherein the plaintiff sought to recover the sum of $36,827.53, which the plaintiff alleged had been unlawfully exacted from him as executor of said estate.
On petition of the defendant the cause was removed into the circuit court of the United States for the southern district on New York.
The complaint contained the following allegations:
The defendant, appearing by Henry L. Burnett, United States attorney for the southern district of New York, demurred to the complaint upon the ground that the complaint did not state facts to constitute a cause of action. [178 U.S. 139, 143] On November 14, 1899, after hearing, the circuit court sustained the demurrer and ordered the complaint to be dismissed, with costs to the defendant. Thereupon a writ of error was allowed to the judgment, and the cause was brought to this court.
Messrs. Charles E. Patterson, Alpheus T. Bulkeley, Charles F. Southmayd, William V. Rose, and Evarts, Choate, & Beaman for plaintiff in error.
Solicitor General Richards for defendant in error.
Mr. Justice Shiras delivered the opinion of the court:
That the tax imposed under the provisions of the revenue act of June 13, 1898, is a direct tax, and therefore void because not apportioned among the states in proportion to their population; that if not a direct tax, but a i mpost, excise, or duty, it is void because the tax levied is not uniform throughout the United States; and that it is not within the province of the constitutional power of the United States to levy a tax upon a right of inheritance or disposition by will, provided for by the laws of the state of New York,-are contentions of the plaintiff in error which have been determined against him in the case of Knowlton v. Moore, 178 U.S. 41 , 20 Sup. Ct. Rep. 747, 44 L. ed. --, just decided by this court. The opinion in that case so fully discusses the arguments urged in support of those propositions that their further consideration is unnecessary.
The remaining question is that presented by the following assignment of error:
The complaint does not set forth the terms of the will, nor attach a copy of it as an exhibit. And it is suggested in the brief of the solicitor general, filed on behalf of the United States, that, as presented by the record, this is not a case where United States bonds have passed from the testatrix to legatees, but where a personal estate of a certain value in money has passed to the executor, to be charged against him as money to be distributed among the beneficiaries under the will; and that, therefore, for aught that appears, the executor may have sold every bond and distributed the proceeds in money; and that, even if legatees entitled to certain sums of money shall have accepted United States bonds in lieu of money, they would take the bonds, not under the will, but as purchasers.
However, the complaint, does allege that the money which is sought to be recovered was assessed against the plaintiff as executor of the deceased 'on account of legacies or distributive shares arising from personal property being in his charge or trust, as such executor as aforesaid, the properties assumed to be assessed for such tax being properties passing from the said Jane H. Sherman,' and was paid by him under duress. Such allegations, taken in connection with that contained in the eighth paragraph, above quoted, to the effect that, of the property taxed, at least one-third part consisted of United States bonds, makes it to sufficiently appear that United States bonds in the hands of the plaintiff as executor or trustee under a will were [178 U.S. 139, 145] included as a portion of the estate passing to the executor, and were assessed and taxed as such portion. It may also be observed that it is the executor or trustee who has in charge the legacies or distributive shares arising from personal property, passing after the passage of the act, from any person possessed of such property, who is the person taxed in respect to such property. Accordingly, we think there is room in this recod for the contention of the plaintiff in error that, as matter of fact, bonds of the United States formed a portion of the property actually assessed; and that, consequently, the court is called upon to determine whether it was obligatory on the executor of Jane H. Sherman to include in his statement to the collector bonds of the United States in his possession and charge as such executor, and whether it was the right and duty of the collector to demand and receive from the executor a sum of money measured by the value of the property in his hands, although composed in part of United States bonds.
Putting aside, as already disposed of in the case of Knowlton v. Moore, the claims that inheritance and legacy taxes imposed by the United Stated in the act of June 13, 1898, are invalid because, as direct taxes, not apportioned, or, as duties, for want of uniformity, or because the taxing power of the United States does not reach such property transmissible under the laws of the states, it is conceded, as we understand the argument of the plaintiff in error, that United States bonds would be proerly included in estimating the amount of an inheritance or legacy tax, were it not for the clauses contained in the United States statutes exempting such bonds from state and Federal taxation. On the other hand, it is not denied by the counsel for the government that it was the intention of those clauses to exempt the bonds and interest thereon from any Federal tax, direct or indirect. What is denied is that there was any intention on the part of Congress, by the clauses mentioned, to exempt the portion of an estate invested in United States bonds from either a state or Federal inheritance tax.
It is claimed by the plaintiff in error, and conceded by the government, that the exemption clause was incorporated into the bonds and became a subsisting contract between the government [178 U.S. 139, 146] and the bondholders. It is further contended on the one side and conceded on the other, that this contract extends to the assigns of the holders. But a legal issue is joined when it is affirmed by the plaintiff in error and denied by the government, that assigns must be interpreted to include those whose title is derived under the inheritance and legacy laws of the states.
It has recently been decided by this court, in the case of Plummer v. Coler, 178 U.S. 115 , 20 Sup. Ct. Rep. 829, 44 L. ed. --, where the question involved was the validity of the inheritance tax law of the state of New York when applied to a legacy consisting of United States bonds containing a clause of exemption from state and Federal taxation, that the conclusion fairly to be drawn from the state and Federal cases is that the right to take property by will or descent is derived from and regulated by municipal law; that, in assessing a tax upon such right or privilege, the state may lawfully measure or fix the amount of the tax by referring to the value of the property passing; and that the incidental fact that such property is composed, in whole or in part, of Federal securities, does not invalidate the tax or the law under which it is imposed.
It may be said that in that case we were dealing with the sovereign power of a state to tax property within her own limits; but still the contention had to be met that Federal bonds were not within the taxing power of the state, not only because they were declared to be exempt from state taxation in any form, but because they were means devised by the government to raise money, and that such a purpose might be defeated if the states were permitted to tax the bonds in the hands of their holders. The conclusion, however, was reached, following state and Federal cases cited, that the inheritance or legacy tax law of the state of New York did not expressly, or by necessary implication, propose to tax Federal securities; that the tax was not imposed on the property passing under the state laws, but on the right of transfer by will or under the intestate law of the state; that, whatever the form of the property, the right to succeed to it is created by law, and if it consists of United States bonds the transferee derives his right to take them, as [178 U.S. 139, 147] he does his right to take any other property of the decedent, under the laws of the state, and the state by its statutes makes the right subject to the burden imposed.
A similar distinction has been recognized by several of the state courts, which have held that, while a tax imposed on United States bonds by a state statute would be invalid because beyond the reach of the state's power to tax, yet that a tax upon the franchises or capital stock of a state corporation, measured by the value of its entire property, would be valid, even if the property was composed in whole or in part of Federal securities, because the tax can be regarded as imposed, not on specific property, but on the rights and privileges bestowed by the state. Com. v. Provident Inst. for Savings, 12 Allen, 312; Com. v. Hamilton Mfg. Co. 12 Allen, 300; Coite v. Society for Savings, 32 Conn. 173.
The judgments in those cases, holding that state taxes may be lawfully imposed, the amount of which may be determined by the aggregate amount of the property or capital stock of banking or manufacturing ocmpanies, even if such property or capital stock includes United States bonds issued under a statute declaring them exempt from taxation under state authority, were affirmed by this court. Society for Savings v. Coite, 6 Wall. 594, 18 L. ed. 397; Provident Inst. for Savings Co. v. Massachusetts, 6 Wall. 611, 18 L. ed. 907; Hamilton Mfg. Co. v. Massachusetts, 6 Wall. 632, 18 L. ed. 904.
Without repeating the discussion in the opinion in Plummer v. Coler, and following the conclusion there reached, we are unable to distinguish that case from the present one.
If a state inheritance law can validly impose a tax measured by the amount or value of the legacy, even if that amount includes United States bonds, the reasoning that justifies such a conclusion must, when applied to the case of a Federal inheritance law taxing the very same legacy, bring us to the same conclusion. We must therefore hold that if, as held in Knowlton v. Moore, the tax imposed under the act of June 13, 1898, is not invalid as a direct, unapportioned tax, nor for want of uniformity, nor as an infringement upon the laws of the states regulating wills and descents, then the tax upon legacies or bequests [178 U.S. 139, 148] descendible under and regulated by state laws is valid, even if such legacies incidentally are composed of Federal bonds.
It cannot be denied that the government of the United States has, and has heretofore exercised, the power to tax its own bonds. By the act of July 1, 1862 (12 Stat. at L. 474, chap. 119), there was imposed a tax upon the interest on United States bonds at one half the rate of the tax imposed upon the income of other property; and by the act of June 30, 1864 ( 13 Stat. at L. 281, chap. 173, and 479, chap. 78), the discrimination in favor of the holders of United States bonds was abandoned, and the interest on them was taxed at the like rates as other income.
The argument in this case turns, at last, upon the proposition that, by the exempting clauses in the statutes and on the face of the bonds, the United States entered into a contract with those who should buy and hold the bonds that neither principal nor interest should be taxed.
Whether the United States, in the exercise of the power of taxation, can be estopped by a contract that such power shall not be exercised, we need not consider, because the contract in this case does not, as we view it, mean that a state may not, or the United States may not, tax inheritances and legacies, regardless of the character of the property of which they are composed. That some of the holders of United States bonds may have paid franchise taxes to the states, and others may have paid state or Federal inheritance and eg acy taxes, has nothing to do with the contract between the United States and the bondholders. The United States will have complied with their contract when they pay to the original holders of their bonds, or to their assigns, the interest, when due, in full, and the principal, when due, in full.
These views demand an affirmance of the judgment of the circuit court sustaining the defendant's demurrer to the complaint.
We observe that it appears in the schedule of legacies prepared by the executor in this case, on a form apparently furnished by the collector of internal revenue, that several of the legacies under Mrs. Sherman's will were for sums under $10,000, and which were therefore, under the construction [178 U.S. 139, 149] put by this court on the statute in Knowlton v. Moore, not taxable. It also appears that the theory on which the taxes were computed in respect to legacies over $10,000 was by measuring the tax by the amount of the entire estate, instead of by the amount of each legacy. This method of construing and applying the statute we have held, in Knowlton v. Moore, to be erroneous. Therefore the executor, representing the respective legatees, is entitled to recover back the amount of taxes paid on legacies under $10, 000 and likewise such excess of taxes as was paid by reason of the erroneous interpretation of the statute.
We here meet the formal difficulty that neither the complaint in the circuit court nor the assignments in error in this court apparently questioned the correctness of the construction put upon the statute by the collector. The questions raised and considered only involved the validity of the act, and not its construction if valid.
As however, the parties proceeded on a mutual mistake of law, we think the practical injustice that might result from an affirmance of the judgment may be avoided by reversing the judgment at the cost of the plaintiff in error, and sending the cause back to the circuit court, with directions to proceed therein according to law. And accordingly it so ordered.
Mr. Justice White dissents in respect to the taxibility of the bonds.
Mr. Justice Peckham took no part in the decision of the case.