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the source. In such covenants no specific reference is made to an income tax and the force of the covenant with respect to the present income tax depends upon the general language used therein. One typical form reads as follows:
“Both the principal and interest of this bond are payable without deduction for any tax or taxes, assessment or assessments, or other Governmental charges, which the company may be required or permitted to pay thereon, or to retain therefrom, under any present or future law of the United States, or of any state, county, municipality or other lawful taxing authority thereof."
Whether this form of covenant requires the corporation to pay the income tax of the bondholder, or only such taxes as are imposed on the bond or interest, as such, is an unsettled question. In a recent case decided by the Supreme Court of the State of Arkansas it was held that a clause in bonds issued by a corporation promising payment "without deduction from either such principal or interest, for any tax or taxes, which the Marion Hotel Company may be required to pay or retain therefrom. under any present or future law, the Marion Hotel Company agreeing to pay such tax or taxes," did not require the corporation to pay the Federal income tax of the bondholder which it retained from the payment of interest on the bonds, since the tax is not a tax on the bond, but a personal obligation of the bondholder, arising out of the possession of an income in excess of the exemptions and deductions allowed by such law. The
2 Urquhart v. Marion Hotel Company, 194 8. W. 1. The court referred to the early cases of Haight v. Railroad Co., 6 Wall. (73 U. 8.) 15, 18 L. Ed. 818; Baltimore v. Baltimore R. R., 10 Wall. 543, 19 L. Ed. 1043,
Supreme Court of Massachusetts in deciding whether the income tax came within the terms of a covenant by a lessee to pay “all taxes and assessments
upon or in respect of the rent
howsoever and to whomsoever assessed,” held that the 1913 Law imposed the tax “in respect of the rent” and held that the language quoted was effective to compel the tenant to assume the tax of the landlord to the extent that the law required the amounts thereof to be withheld at the source.
3 Other covenants provide that the debtor "will pay the principal and interest of these bonds without deduction for taxes." It is a question whether or not covenants of this kind are broad enough to include taxes upon the bondholder as well as taxes assessed against the corporation upon the mortgage or bond or interest. Where a lease provided that the lessee should "pay all taxes and assessments—upon the yearly payments herein agreed to be made by the party of the second part to the party of the first part—for the payment or collection of which taxes or assessments the said party of the first part would otherwise be liable or accountable under any lawful authority whatever;" and that the lessee “should pay all taxes, charges, levies, claims, liens and assessments of any and every kind, which during the continuance of the term hereby demised, shall, in pursuance
8 Suter v. Jordan Marsh Company, 113 N. E. 580. The court seemed to rest its decision in this case on the conclusion that the tax was levied upon the separate sources from which a part of the net income was derived. This conclusion seems to be contra to the weight of authority that the tax is on the person and not on his property. If such conclusion had been reached by the court it seems from the opinion that the decision might have been different. See, however, Catawissa R. R. Co. v. Phila. & Reading Co., 255 Pa. of any lawful authority, be assessed or imposed upon the demised premises, or any part thereof-all payments required to be made by the party of the first part during the term of this indenture-shall be assumed and discharged by the party of the second part as if the party of the second part were primarily liable for same,” it was held that the lessee was liable for the income tax of the lessor on the ground that it was the apparent intention of the parties that the lessor should receive the amounts stipulated as rent without deduction by reason of any tax, charge or assessment of any kind and that the language was sufficiently broad to cover the Federal income tax although not enacted at the time the lease was made.4 In another case it was held that where a covenant provided that the specified rent should be paid “without any deduction, defalcation or abatement for any taxes, charges or assessments whatsoever, it being the express agreement of the said parties that the said covenantor, his heirs and assigns, shall pay all taxes whatsoever that shall hereafter be laid, levied or assessed by virtue of any law whatever, as well on the said hereby granted lot and buildings thereon erected or to be erected as on the said yearly rental now charged thereon” it was held that the covenant did not impose an obligation upon the lessee to pay the Federal income tax, but that the parties contemplated a tax measured! by accumulated surplus or property. Again, where a lease provided that the lessee should "pay all taxes, charges and assessments
imposed under any existing or future law on the demised premises, or any
4 Northern Pennsylvania R. R. Co. v. Philadelphia & Reading Ry. Co., 43 Pa. C. C. 150; aff'd 249 Pa. 326.
5 Van Beil v. Brogan, 23 D. R. 1055 (Dauphin County Court, Pa., 1914).
part thereof, or on the business there carried on, or on the gross receipts or net, derived therefrom, or upon the capital stock of the lessor' or the dividends thereon, or upon the franchises of the said company, for the pay. ment or collection of any of which said taxes the ‘lessor' may otherwise be or become liable” it was held that the lessee was not required to pay the Federal income tax on the rental received by the lessor on the ground that such tax was not expressly mentioned and the covenant was not broad enough to discharge all liability for taxes of every kind for which the lessor should become primarily liable.6
The cases referred to above are cases which have been decided under the 1913 or 1916 Laws. Other cases arising under different statutes are referred to in the foot note.?
6 Little Schuylkill etc. Co. v. Philadelphia & Reading Ry. Co., 44 P. A. County Ct. Rep. 197. It seems in this case the intention of the lessor was to have the lessee pay any and all taxes so that the net amount of the rental could be distributed without diminution to the stockholders, but the court held that the language of the covenant was not broad enough to so hold.
7 Northern Trust Co. v. Buck, 263 Ill. 222, 104 N. E. 1114, Pettibone v. Smith, 150 Pa. 118, 24 Atlantic 693; Chicago etc. Ry. v. Kansas City N. W. R. R., 75 Kans. 167, 88 Pac. 1085; Erie, etc., R. R. v. Pennsylvania R. R., 208 Pa. 506, 57 Atlantic 980; Clopton v. Phila. & Reading R. R. Co., 54 Pa. 356; Northern Central R. R. Co. v. Jackson, 7 Wall. 262; U. S. v. Baltimore & Ohio R. R. Co., 17 Wall. 322. See also article in Illinois Law Review, January, 1915.
CONSTITUTIONALITY OF THE LAW
It is not the purpose of this chapter to discuss exhaustively the constitutional questions which might exist with respect to the present laws, but to point out certain features of the law with respect to which questions of constitutionality have been raised.
Power of Congress to Levy Income Taxes. The Sixteenth Amendment to the Federal Constitution authorized Congress "to lay and collect taxes on incomes from whatever source derived, without apportionment." As Chief Justice White has said, this amendment does not confer power to levy income taxes in a generic sense or to limit and distinguish between one kind of income tax and another, but the whole purpose was to relieve all income taxes, when imposed, from apportionment; in short, doing away with the principle upon which the Pollock case 2 was decided. The amendment places no limitation as to the nature and character of the income taxes which it authorizes. Congress derives from the Constitutions its powers “to lay and collect taxes, duties, imposts and excises.” This power is
1 Brushaber v. Union Pacific R. R. Co., 240 U. 8. 1.
2 Pollock v. Farmers Loan and Trust Co., 157 U. 8. 429; 158 U. 8. 601. 8 The Constitution of the United States, Art. 1, $8.