
    THE COUNTY OF LOGAN ET AL. v. THE UNITED STATES.
    [No. 18316.
    Decided December 2, 1895.]
    
      On the Proofs.
    
    A railroad company declares dividends and withholds the internal-revenue tax thereon from the stockholders as directed by the act 30th June, 1864. It also pays taxes on surplus profits not declared as dividends, but used to improve and augment the corporate property. Subsequently a stock dividend is declared on which no internal-revenue tax is paid. The claimants being exempt from taxation, under the decision of the Supreme Court, as “a portion of the sovereign poioer of a State,” Congress pass an act authorizing the Commissioner of Internal Kevenue to examine their claim for a refund of taxes illegally collected. The Commissioner with the approval of the Secrotary allows a refund both for taxes paid on dividends declared and taxes paid on surplus profits not distributed as dividends, but used to increase and improve the property of the corporation. The Comptroller of the Treasury allows the former, but refuses to allow tho latter. (See City of Louisville v. The United States, ante.)
    I. The Commissioner of Internal Eevenue is not authorized by law to refund a tax on the profits of a railroad corporation which were never distributed or paid over to the shareholders as dividends. (Acts SOth June, 1S64 (13 Stat. L., p. 223, § 122); iZSth February, 1S9S (21 id., p. 477.)
    
      II. The y/cí 1893 (supra) is simply remedial. It does not create a claim or declare a right, but merely relieves certain claims from the bar of a statute of limitations, leaving the rights of the parties to be determined by the internal-xevenue-tax act 1861.
    III. The law of corporations knows no owner of corporate property save the company. To undistributed, unapportioned money which has not become the shareholders by being declared a dividend, a shareholder can assert no right, constitutional, legal, or natural. • IV". The purpose of the Act 18G4 ($$ 120,122) was to impose a.tax on all dividends derived from all corporate bodies, whether the stock was owned by citizens or aliens, by residents or nonresidents; and the policy of the act was to make the corporate bodies collect and pay over the tax. But pirofits not declared as dividends were not the property of any individual shareholder nor entitled to his person.al immunity from taxation.
    Y. There is no law which authorizes the Commissioner of Internal Revenue to refund to one person a tax imposed on the property of another, or which authorizes the refund of a tax which was legally imposed and collectible when it was paid.
    
      The Reporters’ statement of tbe case;
    Tbe following are tbe facts of this case as found by tbe court
    I. Between October 1, 1862, and July 6,1872, tbe county of Logan, Ky., owned some of tbe stock of tbe Louisville and Nashville Bailroad Company, upon which stock tbe company paid cash dividends from time to time, retaining, however, in each of tbe years 1865 to 1871, inclusive, an undistributed surplus. Under tbe internal-revenue laws in force during that period tbe company paid taxes to tbe United States upon its dividends and upon its surplus earnings, the taxes on tbe former being deducted from tbe amount which would otherwise have been paid in full to tbe stockholders, but such deduction was not known to the sinking fund commissioners of tbe county until tbe time bad expired for an application for a refund of tbe taxes so deducted.
    The following is one of tbe returns made by the railroad company, and all were in substantially tbe same form:
    Gapital. Net gains since prior dividend. Hate of dividend declared. Amount of dividend declared. 95 per cent of dividend, being tbe whole amount paid to stockholders, etc. 5 per cent dend retained as excise $5, 527,870. 63 $1,718,068.01 4 per cent and tax. $232, 752.44 $221,114.82 $11,637.62 Profits over dividend declared, $1,485,315.57, 5 per cent of which is. 74,265.78
    
      II.. On November 16,1867, tbe directors of tbe said company resolved to make an increase of its capital stock to tbe extent <of 40 per cent, tbe same to be distributed among tbe owners of stock in proportion to tbe amounts owned by them on a certain date, by certificates of stock to be issued tberefor after February 10, 1868. Tbe county of Logan received in 1868 ■certificates for its due proportion of said increase of stock.
    Tbe following is tbe resolution by virtue of wliicb tbe stock dividend was declared and distributed:
    “1867, Nov. 16. Resolved, that an increase of tbe stock of forty per cent be made, tbe same to be distributed among tbe owners of stock in proportion to the amounts owned by them at tbe next closing of tbe books for tbe transfer of stock, by certificates of stock to bo issued by tbe company for whole and fractional shares as tbe same may be due to each, and to be issued alter tbe 10th of February, 1868, and whenever tlio net annual earnings of tbe company shall be sufficient to pay tbe interest accruing upon the indebtedness of tbe company, provide a sinking fund sufficient to pay tbe bonded debt of tbe company as it falls due and to pay 6 per cent on tbe stock so increased by said 40 per cent and upon 10 per cent additional stock, there shall be a further increase of stock of 10 percent, to be distributed as aforesaid; and in like manner there shall be additional distributions of stock at tbe rate of 10 per cent from time to time as the net annual earnings of tbe company shall be sufficient to pay tbe interest on the indebtedness of tbe company, provide a sinking fund as aforesaid, and six per cent on tbe stock so increased .until tbe stock shall amount to ten million of dollars, and such increase of stock from time to time as aforesaid shall be charged on tbe books of tbe company to profit and loss account.”
    At tbe time when tbe stock dividend was declared, November 16, 1867, tbe nominal or par value of tbe capital stock of the Louisville and Nashville Railroad Company was $5,638,600.
    Tbe surplus earnings of tbe road, reported by tbe officers thereof to tbe Internal Revenue Department, prior to tbe year 1868, on which tbe road paid a tax of five per cent—
    Amount in the aggregate to. $2,461,787.17
    Tax paid thereon. 123, 089.36
    2,338, 697.81
    Tbe par value of tbe stock dividend in 1867 was $2,131,500.
    III. Under the Act of February 25, 1893 (27 Stat. L., 477), tbe county of Logan presented a claim to tbe Commissioner of Internal Revenue for a refund of $17,606.14 which amount was made up as follows:
    Tax on casli dividends.-. $9, 615- 47
    Tax on surplus prior to 1868. 6, 747. 89
    Tax on surplus, 1868 and subsequently... 1, 212. 78
    Total. 17,606.14
    It appearing- that the county had sold, May 3, 1879, all its stock in the Louisville and Nashville Railroad Company, the claim for taxes on surplus profits in 1868 and thereafter was subsequently withdrawn.
    IV. The Commissioner of Internal Revenue, on the 28th day of September, 1893, addressed a letter to the Secretary of the Treasury recommending the allowance of said sum, and asking his approval. On the 6th day of October, 1893, the Secretary of the Treasury approved this action and recommendation of the Commissioner, and on the 7th day of October, 1893, it was formally scheduled and allowed by the Commissioner of Internal Revenue, of which notice was given to the proper officers of the Treasury Department. The schedule so made out and the papers in the case were referred to the Fifth Auditor of the Treasury, and passed and approved by him. They then went before the Comptroller, and he refused to issue a warrant for the amount or direct the payment of the same, holding that the allowance of the claim for taxes paid on account of stock dividends was illegal and unauthorized. He thereupon directed the payment of $9,533.54, and refused to pay any other or further sum. This suit is brought to recover the sum of $5,864.21, which was rejected by the Comptroller and which he refuses to pay. The letter of the Commissioner of Internal Revenue and the approval of the Secretary of the Treasury are those annexed to and forming part of the petition in this case.
    V. Prior to the passage of the act 25th February, 1893, the following proceedings had taken place in the Treasury Department relative to the same taxes paid by the same company:
    During the period from October 1, 1862, to July 6,1872, the city of Louisville, Ky., was the owner of a large amount of the stock and bonds of the Louisville and Nashville Railroad Company. Cash dividends were declared upon this stock. There was also a large amount of undistributed surplus belonging to the city, upon which, stock or scrip dividends were issued to the city. These cash dividends and the undistributed surplus which was converted into stock or scrip dividends were held by the officers of the Government to be subject to taxation, and taxes were assessed and collected according to the terms of the statute in force at the time of the respective collections. The taxes were paid by the railroad company, and the amounts so paid were deducted by the company from the sums due and payable to the city of Louisville; that is to say, before paying’ over dividends, the taxes were taken out, and the city received the dividends diminished by the amount of the taxes so paid, and its revenues were lessened to that extent.
    On the 25th day of September, 1890, the sinking fund commissioners of the city of Louisville made application, under the act 16th June, 1890, for the refunding of taxes in the
    following amounts:
    For tax on gross receipts. $18, 240. 59
    For tax on cash dividends.. 24, 801.14
    For tax on undistributed circulars or stock dividends. 21,721.29
    For interest. 815.30
    On these claims the Commissioner of Internal Revenue allowed the following refund, which was approved by the Secretary of the Treasury:
    “Treasury Department,
    “Office of Internal Revenue,
    “ Washington, D. G., January 24,1891.
    
    “ Hon. William Windom,
    “ Secretary of the Treasury.
    
    “ Sir : I have the honor to submit herewith for your consideration and advisement the claim of the sinking fund commissioners of the city of Louisville, in the State of Kentucky, for the refunding of taxes collected from the Louisville and Nashville Railroad Company to the amount of $65,578.32.
    “The taxes were collected prior to 1873, and the claim was filed in September, 1890.
    “The claim is therefore barred except so far as the act of June 16,1890 (Public, No. 157), authorizes the adjustment of it. That act directs the adjustment of this claim ‘ to the extent that such taxes were deducted from any dividends due and payable,’ and does not direct the adjustment of the claim to the extent that taxes were deducted from interest or gross receipts.
    “ I have, therefore, only to consider the amount deducted from dividends accruing to the city of Louisville by virtue of its shares of stock in the railroad company.
    
      “The tax on dividends was paid by tbe railroad company under the provisions of section 122 of the act of June 30,1864.
    “So far as this tax was deducted from dividends accruing to the city of Louisville it was unlawfully deducted and paid over to the United States. (See decision of the U. S. Supreme Court in the case of United States v. Railroad Company, 17 Wall., 322.)
    “The amount so deducted from the share of dividends to which the city of Louisville was entitled is found to be $42,514.03, which embraces the sum of $24,801.14 collected on cash dividends and $17,712.89 collected as tax on surplus profits, which were afterward set apart by resolution of the board of directors of the railroad company as the basis of a stock dividend which was declared in 1868.
    
      “I propose to allow the claim for the sum of $42,514.03. “Respectfully, yours,
    “JohN W. Mason,
    “ Commissioner.”
    On the 14th day of February, 1891, the claims so allowed were submitted to Congress by the following correspondence:
    “Treasury Department,
    “Oppice op tiie Secretary,
    “ Washington, D. C., February 14,1891.
    
    “Sir: Deferring to an act for the relief of the board of commissioners of the sinking fund of the city of Louisville, Ky., approved June 16, 1890 (26 Stat., p. 157), which directed the audit and adjustment of the claim of said board of commissioners for internal-revenue taxes, etc., I have the honor to inclose copy of a report made by the First Comptroller in the case, of this date, showing that the sum of $42,514.03 is found due the claimants.
    “As there is no appropriation available for the payment of the claim, the sum found due as shown by the Comptroller’s letter is respectfully submitted for the action of Congress, “Respectfully, yours,
    “A. B. NfcTTLETON,
    
      “Acting Secretary.
    
    “The Speaker op the House op Representatives.”
    “Treasury Department,
    “First Comptroller’s Oppiob,
    “ Washington, February 14, 1891.
    
    “Sir: The letter of Senator Blackburn, in regard to the claim of the sinking fund commissioners of the city of Louisville, Ky., is respectfully returned with the remark that the act for the relief of the claimant was passed by the Fifty-first Congress at the first session, on the 16th of June, 1890. It directed the Secretary of the Treasury and the Commissioner of Internal Revenue to audit and adjust the claim, which they have done, finding the amount of $42,514.03 dne the claimant, the correctness of which finding is not questioned by this office. In due course, on the 4th instant, this-claim, so adjusted, reached this office for payment. The act requiring the audit and adjustment does not carry an appropriation for the payment of the amount to the claimant,, nor can it be paid out of the permanent annual appropriation,, under section 3689, Revised Statutes.
    “As the present Congress has had this matter under consideration, and referred it for adjustment, I see no impropriety in reporting it at once for an appropriation.
    “Very respectfully,
    “A. C. Matthews,
    
      “Comptroller.
    
    “Hon. A. B. Nettleton,
    
      “Acting Secretary of the Treasury.”
    Under the provision of the Deficiency Appropriation Aetr 3Cth Done, 1891 (26 Stat. L., p. 867), “For payment to the city of Louisville, Kentucky, the amount found due under the act of Congress approved June 16,1890, and reported to Congress in House Ex. Doc. No. 260 of the present session, $42,514.03,” the money was paid to the city by the proper officers of the. Treasury Department.
    
      Mr. Alphonso Hart for the claimant.
    
      Mr. Charles C. Binney (with whom was Mr. Assistant Attorney-General Dodge) for the defendants.
   Nott, J.,

delivered the opinion of the court:

Between October 1, 1862, and November 16,1867, the Louisville and Nashville Railroad Company made certain returns to the Commissioner of Internal Revenue under the Act 30th June, 1864 (13 Stat. L., p. 223), showing the dividends declared and “profits over dividend declared” which had been made by the company. The following is one of these returns:

Opinion of tlic court.

The tax withheld by the company on the “ dividends declared” has been refunded to the claimant under the following statute, and is not now a subject of controversy:

'‘AN ACT for tlie benefit of the State of Kentucky, Logan and Simpson counties and of Louisville, Kentucky, and of Sumner and Davidson counties, Tennessee.

"Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That the Commissioner of In ternalEevenue, wi th the approval of the Secretary of the Treasury, be, and he is hereby, authorized and required to audit and adjust the claims of the sinking fund commissioners of the State of Kentucky, of Logan and Simpson counties in said State, of the city of Louisville, Kentucky, and of Sumner and Davidson counties, Tennessee, for internal-revenue taxes collected on railroad dividends on stock and on interest on railroad bonds owned by said counties and city, respectively, in the Louisville and Kashville Bailroad Company and of said State for internal-revenue taxes collected, and interest on railroad bonds of the railroad from Louisville to Lexington and on dividends on stock of said railroads owned by said State, and due and payable to said boards of sinking fund commissioners, respectively, and to said State, counties, and city, to the extent that such taxes were deducted from any dividends or interest due and payable to such boards, respectively, and which have not been heretofore refunded, and for this purpose, any statute of limitations to the contrary notwithstanding, sections nine hundred and eighty-nine, thirty-two hundred and twenty, thirty two hundred and twenty-six, thirty-two hundred and twenty-seven, and thirty-two hundred and twenty-eight of the United States Be vised Statutes are hereby made applicable and available with the force and effect as if protest and demand for payment had been made within the time prescribed by said sections; and the amounts, when ascertained as aforesaid, and not heretofore refunded shall be paid out of the permanent annual appropriation provided for similar claims allowed within the present fiscal year.

“Approved February 25,1893 (27 Stat. L., p. 477).”

Under this act of 1893 an award was made by the Commissioner of Internal Bevenue and approved by the Secretary of the Treasury, first, of the claimant’s proportional part of the tax paid on cash dividends; second, of the claimant’s proportional part in the profits over dividends upon which the company had paid a tax. The Comptroller of the Treasury allowed the former, and it has been paid and is no longer a subject of controversy; he rejected the latter, and it forms the subject, directly or. indirectly, of the present suit.

An action will lie upon an award of the Commissioner of Internal Revenue, and it can be attacked only for fraud, mistake, or want of jurisdiction. The statute under which the Commissioner acted, this act of 1893, authorizes and requires him to audit and adjust the claim for “internal-revenue taxes collected on railroad dividends on stock, and on interest,” “ to the extent that such tax was deducted from any dividends or interest due and payable to such boards, respectively.” The question then is, Was the Commissioner of Internal Revenue authorized to make this refund of a tax on moneys which were profits, but which were never distributed or paid over to the shareholders as dividends? Or, stated differently, Were these taxes deducted “from any dividend or interest due and payable to such boards ? ”

The distribution upon which the Commissioner of Internal Revenue acted, and which is now relied upon to uphold his action, was a stock dividend ordered by the directors of the company November 16th, 1867:

“Resolved, That an increase of the stock of forty per cent be made, the same to be distributed among the owners of stock in proportion to the amounts owned by them at the next closing of the books for the transfer of stock, by certificates of stock to be issued by the company for whole and fractional shares, as the same may be due to each,” etc.

No deduction of the tax from the scrip dividends of the claimant was ever made in terms. If there was a deduction, it is merely inferable from these facts: (1) That a payment of the tax diminished the amount of the profits of the company; (2) that a stock dividend may be assumed to represent profits not distributed in dividends; (3) that the claimant would have received more stock if the profits had not been diminished by the payment of a tax from which a municipal corporation was exempt, it being, under the decision of the Supreme Court in the case of The United States v. Baltimore and Ohio Railroad (17 Wall. R., 322) “a portion of the sovereign power of a State.”

Here it should be premised that the act of 1893 is simply remedial. It does not create a claim or declare a right. All that it does, or assumes to do, is to relieve the claim from the bar of a statute of limitations. It does not empower the Commissioner to refund money which he could not have refunded if the claimant had applied to him in due time and the act of 1893 bad never been passed. The exemption of the claimant and the right to a refund must be determined by the act of 1864,. under authority of which the tax was imposed and, legally or illegally, collected.

The act of 1864 provides (§ 122) that “ any railroad” that may declare “ 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 five per centum on the amount of all such interest, or coupons, dividends, or profits, whenever the same shall he payable; and said companies are hereby authorized to deduct and withhold from all payments, on account of any interest, or coupons and dividends due and, payable as aforesaid, the duty of five per centum.” The act of 1893 uses substantially the same language — “taxes deducted from any dividends or interest due and payable” — and manifestly refers to the same thing. That is to say, the thing referred to by the act of 1893 is the tax deducted and withheld from a dividend due and payable as prescribed and authorized by the act of 1864. What right, then, had the claimant under the act of 1864 to a refund of the 5 per cent tax paid on profits which were not distributed as dividends, but retained by the company for its own corporate purposes'?

The law of corporations knows no owner of corporate property save the company. No. individual or body, corporate or political, can, as a shareholder, set up a personal immunity or privilege and say that it holds stock in a company on other terms and conditions than other shareholders, and ask recognition in law for its exceptional property rights. When a man or a community or a body politic voluntarily enters a corporation and becomes a stockholder he gains the advantage of nonpersonal liability, and in consideration thereof surrenders control and ownership of the money which he so invests. It is no longer his; it has become the property of the corporation. How the corporation may use it or what it may pay him back is his concern, or a question between him and it. The rest of the world knows him not as a fractional part of the corporate whole, and deals only with the legal entity of the corporate body. To undistributed, unapportioned money which is not his and which is the corporation’s he can assert no right, constitutional, legal, or natural.

The act of 1864 (§§ 120, 122) recognized, this principle of corporations. The purpose of the statute was to impose a tax on all dividends derived from all corporate bodies in the United States, whether the stock was owned by men, women, or children, by citizens or aliens, by residents or nonresidents; and the policy of the act was to make the corporate bodies collect and pay over the tax. When a dividend was declared, the money which had been the corporation’s became the several shareholders’, and the company, eo instanti, became the agent or instrumentality of the Government to collect the tax.

Did the money, termed “profits over dividends declared” in the tax return and “profits of such companies carried to the account of any funds or used for construction” in the statute, ever pass to the individual shareholders and become their property, subject to their personal liabilities on the one hand, and entitled to their personal immunities on the other? It remained in the hands of the company and was applied to its business purposes — to improving, increasing, and augmenting the corporate property. It might have been distributed as dividends, but was not. Equitably and morally it may have been the property of the shareholders, and they might have been entitled to receive it, but they elected through their representatives, the directors, to reinvest it in an enlargement of their corporate property, and the reinvestment was as much their act as if they had voluntarily, each and all, paid in the money. In time they elected to issue to themselves evidences of their augmented capital, and these evidences came in the form of stock dividends. In bodies corporate, as in bodies politic, the majority rules, and rules through representatives, and the acts of the majority are the acts of all. If originally the shareholders in this railroad comj>any had elected not to enlarge their business and increase their capital, but to distribute among themselves all of the profits which the company had made, some of them would have received their dividends after the payment of the tax, and some would have received it, or would have been entitled to receive it, without the deduction of the tax; but the latter can not now say that they should recover a proportional part of a corporate tax for the reason that it was imposed upon profits, and that if their share of such profits had been paid over to them they would not have been liable to pay a tax upon it. The distinction between tbe two cases of dividends and profits is this, that in the one the shareholder became the owner of the money and was then illegally taxed upon it; in the other, the shareholder was not the owner of the money and the tax imposed upon it was legally imposed and properly paid by the company.

The committees of Congress that reported and recommended the passage of the bill have said in their reports that the only question before them was, “ Whether the municipalities named in this bill should be relieved from the bar of the statutes of limitations;” and the ground of the appeal to Congress was that these municipalities were ignorant of the fact that a tax had been deducted from their dividends, and of the law as subsequently declared by the Supreme Court in United States v. Railroad Company (17 Wallace, 322). But if the municipalities' had known of the payment of the tax on these reserved profits or "undistributed sums,” and of the law as subsequently declared by the Supreme Court, of what would it availed them ? They could not have asked for a refund at the time when the tax was paid, because the profits had not been turned into a dividend by the company, but had been retained by a corporate body for corporate purposes. They could not have asked for a refund in 1867, when the stock dividend was issued, because more than two years had elapsed since the payment of the tax, and no tax was then paid on the scrip dividend. Furthermore, had there been no statute of limitations, the Commissioner of Internal Be venue could not in 1865, or in 1867, have made a refund, for the money was legally collected when the tax was paid, and the tax could not have been invalidated, in whole or in part, by an act of the company done long after the collection. Neither could the Commissioner have held that the distribution of a stock dividend in 1867 was in legal effect the distribution of a cash dividend in 1865. If these municipalities, by reason of their exemption from Federal taxation, are entitled to a refund of their ju’oportioual part of this corporate tax merely because the money might have been distributed in dividends when it was not, they are entitled to a refund of their proportional part of every Federal tax which was paid by the company; for every tax was paid out of profits, and lessened profits, and to that extent diminished the dividends which the municipalities might have received.

A natural person holding stock in a corporation can not say on one day, “ I am only a stockholder and am exempt from personal responsibility for tbe corporate acts of the company,” and on another day, “ I am part owner of the corporate property, and entitled to have my proportional part recognized'and treated as if it were my specific property.” Bodies politic stand upon no different footing when they buy and sell in the marts of commerce or become investors in corporate property. They can not say to-day, “We have assumed no liability on behalf of this company save such as is common to our fellow-shareholders,” and to-morrow, “Our immunity from taxation demands that our proportional part of the corporate property be expempt from taxation also; and if it be ascertained and segregated and set over to ns at any time by the act of the corporation, we can retroactively go back and demand a refund of our proportional part of a tax which was paid when our proportional part of the thing taxed was the property of the corporation.” The crucial question in this case is, Who was the owner of the property tvhen the tax was collected? and the controlling fact in the case is that the undistributed, profits of the company were not the property of the claimant when the tax on them was paid. It was not the claimants’ property that was taxed; and there is. no law which authorizes a refund to one person of a tax imposed on another person’s property, or which authorizes the refund of a tax which was legally imposed and collectible when it was paid.

The judgment of the court is that the petition of the claimants be dismissed.  