and the assumption of no part of the tax by the corporation. An examination of the covenant in each mortgage or issue of corporate bonds or similar obligations is therefore essential.

Examples of Covenants to Pay Taxes. A covenant reading as follows does not require or authorize the corporation to assume any part of the income tax of its bondholders: "Both principal and interest of this bond are payable without deduction for any taxes, assessments or other governmental charges which the company may be required to pay thereon or authorized to retain therefrom under any present or future law or requirement of the United States of America (except any Federal Income Tax) or any State, county, municipality or other governmental subdivision thereof." Many covenants to pay taxes were entered into prior to the enactment of the 1913 Law, and without contemplation of an income tax law requiring collection at 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 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

7 Letter from Treasury Department dated November 21, 1917; I. T. S. 1919, ¶ 621.

F. T.-40

income in excess of the exemptions and deductions allowed by such law. The 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

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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. Other covenants provide that the debtor "will pay the principal and interest of these bonds without deduction for taxes." It is questionable 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 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 indentureshall 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

8 Urquhart v. Marion Hotel Co. (Ark.), 194 S. W. 1. The court referred to the early cases of Haight v. Railroad Co., 6 Wall. 15; Baltimore v. Baltiruore R. R., 10 Wall. 543.

9 Suter v. Jordan Marsh Company, (Mass.), 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 appears to be against 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 the decision might have been different. See, however, Catawissa R. R. Co. v. Phila. & Reading Co., 255 Pa. 269, where the court held that the income tax was "imposed upon rental received by the lessor from the lessee.”

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.10 In another case where a covenant provided that the specified rent should be paid "without any deduction, defalcation or abatement for any tax, 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 impose an obligation upon the lessee to pay the Federal income tax since it was manifestly the intention of the parties, by this covenant, to secure to the grantor the full payment of the yearly rent without any deduction, defalcation or abatement for any taxes, charges or assessments whatsoever.11 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 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 payment or collection of any of which said taxes the 'lessor' may otherwise 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.12 The cases referred to above are cases

*

10 Northern Pennsylvania R. R. Co. v. Philadelphia & Reading Ry. Co., 43 Pa. C. C. 150; aff'd 249 Pa. 326.

11 Van Beil v. Brogan, 65 Pa. Super. 384, reversing 23 D. R. 1055 (Dauphin County Court, Pa. 1914). Erlich v. Brogan, 262 Pa. 362.

12 Little Schuylkill, etc., Co. v. Philadelphia & Reading Ry. Co., 44 P. A. County Ct. Rep. 197, aff'd 69 Pa. Super. 122. Allocatur to the Supreme Court has been denied. 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 accomplish this purpose.

which have been decided under the 1913 or 1916 Laws. Other cases arising under different statutes are referred to in the foot note.13

18 Northern Trust Co. v. Buck, 263 Ill. 222, 104 N. E. 1114, Pettibone v. Smith, 150 Pa. 118, 24 Atl. 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 Atl. 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.

CHAPTER 42

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 internal revenue laws, but to point out certain features of such laws with respect to which questions of constitutionality have been raised, and also to point out briefly a few general principles which may have a bearing upon the constitutionality of provisions of the Revenue Act of 1918. It is a long established principle vital to our constitutional system that a court is not authorized to adjudge a statute unconstitutional where the question as to its constitutionality is at all doubtful, and that unless the statute is plainly and palpably unconstitutional, it will be upheld. Instead of seeking for excuses for holding acts of the legislative power void by reason of their conflict with the constitution the effort should be made to reconcile them, if possible, and not to hold the laws invalid unless the opposition between the constitution and the laws be such that the court feels a clear and strong conviction of their incompatibility with each other.1 Unless it be impossible to avoid it, a general revenue statute should never be declared inoperative in all its parts because a particular part, relating to a distinct subject, is invalid. It is an elementary principle that the same statute may be in part constitutional and in part unconstitutional, and that if the parts are wholly independent of each other that which is constitutional may stand and that which is unconstitutional will be rejected. It is only when different clauses of an act are so dependent upon each other that it is evident the Legislature would not have enacted one of them without the other-as when the two things provided are necessary parts of one system-that the whole Act will fall with the invalidity of one clause. When there is no such connection and de

1 Booth v. Illinois, 184 U. S. 431; Fletcher v. Peck, 6 Cranch 87; Brown v. Wallace, 161 U. S. 591; U. S. v. Delaware & H. Co., 213 U. S. 366.