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ficiary and the rate of tax could certainly be ed on by the government. It is, we think, ascertained.

incontrovertible that the taxes which the 3d Further elucidation as to the meaning of section of the act of 1902 directs to be rethe amendatory act of 1901 is unnecessary funded and those which it forbids the colin view of the subsequent legislation of Con- lection of in the future are one and the gress. By the act of April 12, 1902 (32 same in their nature. Any other view would Stat. at L. 96, chap. 500), § 29 of the act destroy the unity of the section, and cause of 1898, as amended on March 2, 1901, was its provisions to produce inexplicable conrepealed, to take effect on July 1. 1902.1 flict. From this it results that the taxes The repealing act, however, saved "all taxes which are directed in the first sentence to or duties imposed by section 29 of the act of be refunded, because they had been wrongJune 13, 1898, and the amendments there fully collected on contingent beneficial interto prior to the taking effect of this act.” On ests which had not become vested prior to June 27, 1902 (32 Stat. at L. 406, chap. July 1, 1902 were taxes levied on such 1160)2 an act was adopted, the 3d section of beneficial interests as had not become vested which reads as follows:

in possession or enjoyment prior to the date "Sec. 3. That in all cases where an execu- named, within the intendment of the subtor, administrator, or trustee shall have sequent sentence. In other words, the statpaid, or shall hereafter pay, any tax upon ute provided for the refunding of taxes col. any legacy or distributive share of personal lected under the circumstances stated, and property under the provisions of the act ap- at the same time forbade like collections in proved June thirteenth, eighteen hundred the future. and ninety-eight, entitled 'An Act to Pro- In view of the text of the act of 1898 and vide Ways and Means to Meet War Expen- the other considerations to which we have ditures, and for Other Purposes,' and amend referred, we have not deemed it necessary ments thereof, the Secretary of the Treasury to advert to a contention made by the govbe, and he is hereby, authorized and direct- ernment in argument, that the true meaned to refund, out of any money in the Treasing of the act of 1898 is shown by the adury, not otherwise appropriated, upon prop- ministrative construction placed upon the er application being made to the Commis- act of July 1, 1862, levying legacy taxes (12 sioner of Internal Revenue, under such rules Stat. at L. 485, chap. 119), of which, in efand regulations as may be prescribed, so fect the act of 1898 was a reproduction. It is much of said tax as may have been col. undoubtedly true that both under the act of lected on contingent beneficial interests 1862 and the act of June 30, 1864 (13 Stat. which shall not have become vested prior at L. 285, chap. 173, U. S. Comp. Stat. 1901, to July first, nineteen hundred and two. p. 2268), there was an administrative con. And no tax shall hereafter be assessed or struction by which vested interests, although imposed under said act, approved June thir- unaccompanied with the right of immediate teenth, eighteen hundred and ninety-eight, possession or enjoyment, were treated as at upon or in respect of any contingent bene- once taxable. Without entering into details ficial interest which shall not become abso- on the subject, we content ourselves with lutely vested in possession or enjoyment saying that it is also true that the correctprior to said July first, nineteen hundred ness of that construction was in effect reand two."

pudiated by legislative action (act of July In view of the provision for refunding we 13, 1866, 14 Stat. at L. 140, chap. 184), and see no escape from the conclusion that this was, moreover, in substance, treated as unstatute was in a sense declaratory of what sound by the reasoning of the opinion in we hold was the true construction of the actClapp v. Mason, 94 U. S. 591, 24 L. ed. 213. of 1898, and which, as we have seen, had Thus, by legislative action and judicial prevailed prior to the amendment of March interpretation, it came to pass that the acts 2, 1901, and which was only departed from of 1862 and 1864 signified exactly what we by the administrative officers under a mis now construe the act of 1898 to mean. It conception of the import of that amendatory was doubtless this concordance of legislative act. There is no suggestion that any prior action and judicial interpretation concernpractice prevailed in the enforcement of the ing the earlier acts which caused the adact of 1898, calling for the enacting of the ministrative department of the government, refunding clause, cxcept the mistaken con- when the act of 1898 was adopted, to interstruction placed on the amendatory act of pret that act, not as the acts of 1862 and 1901. The act of 1902 was, therefore, a leg. 1864 had been originally erroneously interislative affirmance of the construction given preted in administration, but in accord with to the act of 1898, prior to the amendment the subsequent legislative and judicial con. of 1901. It follows that the act of 1902 was, struction which had been placed upon the moreover, a legislative repudiation of the language of those acts, and which language construction of the act of 1898, now insist. 'in effect was repeated in the act of 1898.

1 U. S. Comp. St. Supp. 1903, p 278.

*U. S. Comp. St. Supp. 1903, p. 282.


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Concluding, as we do, that there was no tion in bankruptcy, which sum was due and authority under the act of 1898 for taxing

owing the bankrupt under an agreement by the interest of Alfred G. Vanderbilt, given

which, in paying its employees, the corporahim by the residuary clause of the will,

tion was to deduct from their wages the

amount due from suclı employees to the bankconditioned on his attaining the ages of rupt for supplies sold them by him, and to thirty and thirty-five years, respectively, remit to him the amount thus deducted, irreit is unnecessary to determine whether such spective of any indebtedness otherwise due interest was technically a vested remainder,

from him to the corporation. as claimed by counsel for the government. In passing, however, we remark that in a

[No. 232.] case recently decided by the court of appeals of New York (Re Trucy, 179 N. Y. 506, 72 Submitted January 5, 1905. Decided FebN. E. 5:9), it was declared that such in

ruary 20, 1905. terest was a contingent, and not a vested, remainder.

PPEAL from the United States Circuit Coming to apply the construction which

Court of Appeals for the Eighth Circuit we have given the statute to the solution of to review a decree which affirmed, as modithe questions propounded by the Court of fied, an order of the District Court for the Appeals, it follows that the first, second, Eastern District of Arkansas, directing that. and fourth questions are unnecessary to be the claim of a creditor against a bankrupt's answered, and the third question should be estate be expunged unless the creditor pay answered in the negative.

to the trustee in bankruptcy a specified sum, And it is so ordered.

found to have been transferred to the crer itor by the bankrupt, and decided to hav

operated as a voidable preference. Decree (196 U. S. 502)

of both courts reversed, and the cause re WESTERN TIE & TIMBER COMPANY, manded to the District Court, with direc Appt.,

tions to allow the proof of claim, and to

deny any right of set-off, and for further BEN A. BROWN, Trustee of the Estate of proceedings. S. F. Harrison, a Bankrupt.

See same case below, 129 Fed. 728. Appeal in bankruptcy cases-preference

Statement by Mr. Justice White: set-off

This is an appeal from a decree of the 1. The assertion of a right of set-off in a pro-circuit court of appeals for the eighth

ceeding in bankruptcy presents a claim of circuit, affirming, as modified, an order Federal right which will sustain an appeal of the district court of the United from a decision of a circuit court of appeals, States for the eastern district of Arkanrejecting the claim, to the Supreme Court of

claim of the the United States, under the bankrupt act of sas, directing that the July 1, 1898 (30 Stat. at L. 553, chap. 541, Western Tie & Timber Company against the U. S. Comp. Stat. 1901, p. 3432), 25, cl. (0) estate of S. F. Harrison, a bankrupt, be ex1, authorizing such appeals when the question punged unless the company paid to the trusinvolved is one which might have been re- tee in bankruptcy a specified sum, found to viewed on writ of error from the latter court have been transferred to the company by the

to a state court. 2. A sum retained by a corporate creditor with bankrupt, and decided to have operated a

knowledge of the debtor's insolvency, and voidable preference. 129 Fed. 728. within four months of the filing of the peti

The facts were thus found by the circuit tion in bankruptcy, which sum was due and court of appeals: owing the bankrupt under an agreement by “1. On February 24, 1903, a petition to which the corporation, in paying its employees, was to deduct from their wages the rison was a bankrupt was filed in the disployees, was to deduct from their wages the procure an adjudication that S. Frank Haramounts due from such employees to the bank- rison was a bankrupt was filed in the disrupt for supplies furnished them by him, and trict court of the United States for the was to remit to bim tlie amanunt so deducted, eastern district of Arkansas, and Harrison irrespective of any indebtedness otherwise due was then adjudged a bankrupt. by him to the corporation, is not a voidable

“2. The Western Tie & Timber Company preference voder the bankrupt act of July 1, 1898 (30 Stat. at L. 553, chap. 541, U. S.

was a corporation and a creditor of HarComp. Stat. 1901, pp. 3443, 3445), 88 67g, 60b, rison.

rison. It presented a claim against his eswhich must be surrendered before the corpo- tate in bankruptcy of $24,358. The trustee ration cau prove its claim &galost the back-nored to expunge this claim on the ground. rupt's debtor's estate.

that the tie company had secured a voidable 8. A corporate creditor is not entitled to set preference. The district court ordered the

oli, in proving its claim against the bankrupt debtor's estate, a fut retained by it with claim expunged unless the tie company

suto knowledge of the debtor's insolvency, and should pay to the trustee $2,210.73, and an within four months of the filing of the peti.' appeal from this order was taken.

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“3. For some years prior to February 24, 1, 1898 (30 Stat. at L. 553, chap. 541, U. S. 1903, the tie company and Harrison had Comp. Stat. 1901, p. 3432), providing that been engaged in removing timber from land from any final decision of a court of apof the former, and converting it into ties, peals, allowing or rejecting a claim under which the company received and sold. For the act, an appeal may be had “where the many months prior to October, 1902, Har- amount in controversy exceeds the sum of rison had owned and conducted stores in the two thousand dollars, and the question invicinity of the places where the work of cut- volved is one which might have been taken ting and hauling the ties was carried on, on appeal or writ of error from the highest and had furnished the laborers engaged in court of a state to the Supreme Court of that work with groceries and other supplies. the United States." These laborers and Harrison were paid by The provision of the Revised Statutes the tie company in this way: Once in two regulating the revision of judgments and or four weeks an inspector sent to the tie decrees of state courts, which is relied company a pay roll, on which the name of upon, in conjunction with the portion of each laborer, the amount he had earned, and the bankruptcy act just quoted, is that porthe value of the supplies he had received tion of g 709 (U. S. Comp. Stat. 1901,

. from Harrison, appeared. The company de- p. 575) which authorizes the re-examina

p ducted from the earnings of each laborer the tion of a final judgment or decree in any value of the supplies the laborer had re- suit in the highest court of a state in which ceived, and sent him a check for the balance. a decision in the suit can be had, "where any At the same time it sent to Harrison a title, right, privilege, or immunity is check for the aggregate amount of the sup-claimed under


statute plies which he had furnished to the laborers. of ... the United States, and the deci

“4. Four months before the filing of the sion is against the title, right, privilege, or petition in bankruptcy, or October 24, 1902, immunity specially set up or claimed, by Harrison owed the tie company more than either party, under such

statute, $20,000.

5. Between December 27, 1902, and Feb- The appellee does not question that this ruary 24, 1903, the company refused to pay appeal is from a decree rejecting a claim, to Harrison, retained and credited on its within the meaning of the statute, and that claim against him $2,210.73, which was due the requisite jurisdictional amount is inhim for supplies he had furnished to the volved, but the particular objection urged is laborers subsequent to November 30, 1902. that a right was not claimed under an act

“6. At all times, when the amounts which of Congress, nor was a right of that nature aggregate $2,210.73 became due and were re- denied by the lower courts. tained by the company, Harrison was in- The objection is not tenable. It clearly solvent, the tie company knew that fact, appears from the record that in the claim and it intended, by retaining these amounts, filed on behalf of the tie company there was to secure to itself a preference over the other embodied, as an integral part thereof, as a creditors of the insolvent, but Harrison proper credit or set-off, the sum retained had no such intention.

from the wages of employees for supplies “7. After the company had retained sev- furnished by the bankrupt, and the rejection eral hundred dollars of the amount due Har- of the claim was based upon the denial of rison for the supplies, it advanced to him the right to set-off. As the right of set-off $75 under a new and further credit." is controlled by the provisions of § 68 of

An appeal to this court was allowed by the bankrupt act, the assertion of such a the presiding circuit judge of the circuit right, in a proceeding in bankruptcy, as court of appeals.

was the case here, is necessarily based upon

those provisions of the act of Congress, and Alessrs. Joseph Wheless, George M. in this case the construction of such statu

. Block, P. H. Sullivan, and Charles Erd for tory provision was undoubtedly involved. appellant.

That the circuit court of appeals understood Messrs. John M. Moore, O. F. Hender- that reliance was had by the tie company son, H. L. Ponder, M. M. Stuckey, and S. M. upon the set-off clauses of the act is shown Stuckey for appellee.

by its opinion, where, after sustaining the

claim of the trustees that the credits in Mr. Justice White, after making the question constituted a preference, it prefforegoing statement, delivered the opinion of aced a particular discussion of the contenthe court:

tion as to a right of set-off by the following Before coming to the merits we dispose of statement: an objection to the jurisdiction.

“Finally, it is said that this $2,210.73 was The appeal was prosecuted under clause a credit to Harrisou, and that the company (6) l of § 25 of the bankrupt act of July 'should be permitted to set it off against his

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debt to it, and should be allowed to prove its result of the finding that Harrison had no claim for the balance remaining without re- intention to give the tie company a preferstriction, on the ground that these claims ence, for if Harrison, being insolvent, to the were mutual debts and credits under § 68 knowledge of the company, within the proof the bankrupt law.”

hibited period, gave to the tie company auThe record, we think, sufficiently present. thority to collect the sums due to him by ed a claim of Federal right (Home for In the laborers for goods sold them, with the curabies v. New York, 187 U. S. 157, 47 L. right, or even the option to apply the money ed. 117, 23 Sup. Ct. Rep. 84), and the objecto a prior debt due by Harrison to the comtion to the jurisdiction is therefore over- pany, the necessary result of the transaction ruled.

would have been to create a voidable preferPassing to the merits of the controversy-ence. And if the inevitable result of the

We must, at the outset, in the light of the transaction would have been to create such facts found below, determine the exact rela a preference, then the law would conclution existing between the bankrupt and the sively impute to Harrison the intention to tie company, in order to fix the true import bring about the result necessarily arising of the transactions by which the tie com- from the nature of the act which he did. pany, in making its claim against the bank. Wilson v. City Bank, 17 Wall. 486, 21 L. rupt estate, asserted a right to retain and ed. 727. To give effect, therefore, to the set off the sums which, in its proof of claim, finding that there was no intention on the it described as "deductions from pay rolls." part of Harrison to prefer, we must consider

We think the findings establish that Har- that the authority given by him to the tie rison sold the goods, not to the tie company, coinpany to collect from the laborers did but to the laborers, and therefore the result not give that company the right, or endow of the sale was to create an indebtedness it with the option, when it had collected, to for the price alone between Harrison and retain the money for its exclusive benefit, the employees. This is not only the neces- and to the detriment of the other creditors sary consequence of the facts stated, but of Harrison. likewise conclusively flows from the nature The result of the facts found, then, is of the proof of claim made by the tie com- this: Harrison sold his goods to the laborpany, since that proof, so far as the items ers, and agreed with the tie company that concerning the price of the goods sold to the that company, when it paid the laborers, employees are concerned, based the indebted should deduct the amount due by the laness by the tie company to Harrison, not borers from the wages which the tie company upon any supposed original obligation on owed them, and, after making the deduction, the part of the tie company towards Har should remit to Harrison the amount thus rison to pay for the goods, but upon the deducted, irrespective of any indebtedness “deductions from pay rolls,” made by the otherwise due by Harrison to the tie comtie company in paying its employees. The pany. Did this give rise to a voidable prefeffect of this was to trace and limit the erence within the intendment of $$ 57g and origin of the debt due by the tie company to 60% of the bankrupt act? Harrison solely to the fact that the tie com- In view of the necessary result of the find. pany had deducted, in paying its employees, ings which we have previously pointed out, money due to Harrison by the employees, it is, we think, beyond doubt that the agreewhich, from the fact of the deduction, the ment was not voidable preference within tie company had become bound to pay to the meaning of the statute, since, considerHarrison. We think, also, the facts founding the agreement alone, it brought about establish that the course of dealing between no preference whatever. This leaves only Harrison and the tie company concerning for consideration the question whether the the deductions from pay rolls was that the tie company was entitled to prove its claim, tie company, when it made the deductions, as it sought to do, for the balance owing, was under an obligation to remit the money after crediting as a set-off the "deductions collected from the laborers for account of from pay rolls,” to which we have referred. Harrison to him, irrespective of any debt Now, as we have seen, from the facts found, which he might owe the tie company. This it must be that the agreement between Harfollows from the finding that, although rison and the tie company obligated the latthere was a debt existing between Harrison ter, when it made the deductions from pay and the tie company, the course of dealing rolls, to remit to Harrison the amount of between them was that when the tie com- such deductions, irrespective of the account pany made deductions from the wages of between itself and Harrison. It follows the laborers of sums of money due by them that as to such deductions the tie company to Harrison the tie company regularly re- stood towards Harrison in the relation of a mitted the proceeds of the deductions to trustee; and, therefore, the case was not one Harrison. This conclusion, moreover, is the of mutual credits and debts, within the

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meaning of the set-off clause of the bank. I alleged set-off eliminated. The result will rupt law. Libby v. Hopkins, 104 U. S. 303, be that the tie company will be a creditor of 26 L. ed. 769. And, irrespective of the trust the estate for the whole amount of its claim, relation which the findings establish, it is and will be, at the same time, a debtor to equally clear from the general considera- the estate for the amount of the deductions tions that the right to set-off did not exist. from the pay rolls collected by it, the court To allow the set-off under the circumstances below, of course, having power to take such disclosed would violate the plain intendment steps as may be lawful to protect the estate of the inhibition contained in clause (2) | in respect to the payment of dividends to the of § 68 of the bankrupt act, which forbids | tie company, in the event that company does the allowance to any debtor of a bankrupt not discharge its obligations to the bankrupt of a set-off or counter-claim which "was estate. purchased by or transferred to him after the The decree of both courts are reversed filing of the petition, or within four months and the case is remanded to the District before such filing, with a view to such use, Court with directions to allow the proof of and with knowledge or notice that such claim, rejecting the alleged set-off, and for bankrupt was insolvent, or had committed further proceedings in conformity with this an act of bankruptcy.” That is to say, opinion. whether or not the trust relation was engendered, the result would still be that the

(196 U. S. 599) tie company, within the prohibited period, GUS G. COULTER, S. W. Hager, and C. B. and with knowledge of the insolvency of

Hill, Appts., Harrison, acquired the claims of the latter against the laborers, with a view to using LOUISVILLE & NASHVILLE RAILROAD the same by way of payment or set-off, so

COMPANY. as to obtain an advantage over the other creditors, which it was not lawfully entitled Courtsconflict of jurisdiction between to do.

state and Federal courts-injunction As we have concluded that, under the find- against state

state taxation-inequality in ings, there was no voidable preference, we valuation. think the court below erred in refusing to allow the tie company to prove its claim, 1. A Federal court cannot enjoin the collection unless it surrendered the sums which it

of a franchise tax assessed under the author.

ity of a state because of inequality in valuaowed Harrison and his bankrupt estate.

tion as compared with other taxable property, Section 57g of the bankrupt act, as amended nor can it order the state treasurer to issue a by the act of February 5, 1903 (32 Stat. at receipt in full to the complainant, which has L. 799, chap. 487),1 empowering the court to paid so much of the tax as it thinks was compel creditors to surrender preferences

justly due. as a prerequisite to the proof of claims 2. The Federal Constitution does not forbid

state taxation of the franchise of a domestic against the estate of the bankrupt, relates

corporation at a different rate than is assessed only to those creditors "who have received

upon the tangible property in the state. preferences voidable under section sixty, 3. Inequality in valuation for taxation of a subdivision 1.But it also is demonstrated, franchise, as compared with other taxable from what we have said, that the tie com- property, must be systematic and intentional pany was not entitled to prove its claim as in order to justify a Federal court in enjoin. it sought to do, embracing, as it did, the as

ing the apportionment and certification of the

tax to the several counties, where the assesssertion of a right to set-off, and thus ex

ment does not appear to have been made on tinguish the sum which it owed to the bank

such a different scale of values from that rupt estate, resulting from the deductions adopted elsewhere as to deny the equal protecfrom pay rolls. Whilst, therefore, because tion of the laws guaranteed by U. S. Const.

14th Amend., which was the only ground inof the error in imposing the condition of

voked to sustain the Federal jurisdiction. prerequisite surrender of the alleged preference, the judgment below was erroneous,

[No. 244.] nevertheless the court was correct in refusing to allow the alleged set-off, and in re- Argued November 29, 30, 1904. Decided fusing to permit proof to be made which em

February 20, 1905. braced and asserted such set-off. It follows that although the judgment below must be PPEAL from the Circuit Court of the

A reversed for the reasons stated, the case United States for the Eastern District should be remanded with directions to dis- of Kentucky to review a decree which reregard the alleged claim of set-off, to reject strained, for inequality in valuation for any proof of claim asserting the same, and taxation, the apportionment and certificato permit a claim to be filed for the gross tion to the several counties of a tax imposed indebtedness to the tie company, with the on the franchise of a domestic corporation,

1 U. S. Comp. St. Supp. 1903, p. 415.


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