Sixteenth Amendment to the United States Constitution
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Amendment XVI (the Sixteenth Amendment) of the United States Constitution, authorizing income taxes in their present form, was ratified on February 3, 1913. The amendment states:
| The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration. |
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[edit] Background
The U.S. Constitution provides (in part):
- The Congress shall have power To lay and collect Taxes, Duties, Imposts and Excises [ . . . ] but all Duties, Imposts and Excises shall be uniform throughout the United States [ . . . ][1]
The Constitution also provides (in part):
- Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers [ . . . . ][2]
The Constitution further provides:
- No Capitation, or other direct, Tax shall be laid, unless in proportion to the Census or Enumeration herein before directed to be taken.[3]
The power to impose taxes (whether deemed direct or indirect taxes) is granted by Article I, section 8, clause 1. Indirect taxes (or "excises," in the parlance of the text of the Constitution) are required to be geographically uniform, according to Article I, section 8, clause 1 and the court decisions interpreting that provision (see Knowlton v. Moore[4] and Flint v. Stone Tracy Co.[5]).
Until the ratification of the Sixteenth Amendment, all direct taxes were required to be apportioned among the states according to each state's population, per Article I, section 2, clause 3 and Article I, section 9, clause 4. This essentially meant that the dollar amount of direct taxes imposed on the taxpayers in any given state was required to bear a relationship to the total dollar amount of direct taxes imposed in the entire nation that was equal to the ratio of that state's population to the total population of the nation.
[edit] Treatment of income taxes prior to the Pollock case
Prior to the 1895 U.S. Supreme Court decision in the case of Pollock v. Farmers' Loan & Trust Co.[6], all income taxes had been considered to be excises (indirect taxes) required to be imposed with geographical uniformity, but not required to be apportioned among the states according to population.
The Wilson-Gorman Tariff Act of 1894 attempted to impose a federal tax of 2% on incomes over $3,000. Derided by its opponents as "communistic," it was challenged in federal court. Until that time, direct taxes had been deemed to include only capitations, or poll taxes (taxes directly on persons) and property taxes imposed on property by reason of its ownership (generally, ordinary ad valorem property taxes). Until 1895, all income taxes -- regardless of the sources of the incomes -- had been considered indirect taxes ("excises").[7]
[edit] The Pollock case
In the case of Pollock v. Farmers' Loan & Trust Co. the Supreme Court declared that certain income taxes -- taxes on income from property under the 1894 Act -- to be unconstitutional unapportioned direct taxes. The Court reasoned that a tax on income from property should be treated as a tax on "property by reason of its ownership," and should therefore be required to be apportioned. The reasoning was that taxes on the rents from land, the dividends from stocks and so on burdened the property generating the income in the same way that a tax on "property by reason of its ownership" burdened that property.
This meant that, after Pollock, while income taxes on income from labor (as indirect taxes) were still not required to be apportioned by population, taxes on interest, dividends and rent income were required to be apportioned by population. The Pollock ruling made the source of the income (e.g., property versus labor, etc.) relevant in determining whether the tax imposed on that income was deemed to be "direct" (and thus required to be apportioned among the states according to population) or, alternatively, "indirect" (and thus required only to be imposed with geographical uniformity).
During this period from 1895 to 1913 when the Sixteenth Amendment was ratified, while Congress could have re-imposed taxes on income from labor and other non-property sources without apportionment by population, imposing taxes on interest, dividends and rent income would not have been practical (as the income from property in each state would virtually never correspond to the population of that state in relation to the population of the entire nation). The Congress was unwilling to impose an income tax on labor and other non-property sources without also imposing a tax on income from property -- and taxes on income from property were no longer realistic. The Pollock ruling made imposition of an income tax politically unfeasible from 1895 until the ratification of the Sixteenth Amendment. At the same time, Congress was reflecting the growing concern among many elements of society that the wealthiest Americans had consolidated too much economic power.
[edit] Ratification process
In response to these developments, the Sixteenth Amendment was passed by the Sixty-first Congress and submitted to legislatures of the several states on July 12th, 1909. The amendment was the crowning feature of a larger trend of legislative action meant to curb the power of the wealthy. The famous Pujo Committee Hearings, which aired the incestuous relationship between banks and corporate interests, were held during ratification, and the Clayton Antitrust Act was enacted shortly thereafter.
On February 25, 1913, the Republican Secretary of State Philander Knox proclaimed that the amendment had been ratified by the necessary three-quarters of the states ensuring the constitutionality of unapportioned federal income taxes.
The amendment was ratified by 42 states in all: Alabama on August 10, 1909, Kentucky on February 8, 1910, South Carolina on February 19, Illinois on March 1, Mississippi on March 7, Oklahoma on March 10, Maryland on April 8, Georgia on August 3, Texas on August 16, Ohio on January 19, 1911, Idaho on January 20, Oregon on January 23, Washington on January 26, Indiana and Montana on January 30, California and Nevada on January 31, South Dakota on February 3, Nebraska on February 9, North Carolina on February 11, Colorado on February 15, North Dakota on February 17, Kansas on February 18, Michigan on February 23, Iowa on February 24, Missouri on March 16, Maine on March 31, Tennessee on April 7, Arkansas on April 22, Wisconsin on May 26, New York on July 12, Arizona on April 6, 1912, Minnesota on June 11, Louisiana on June 28, West Virginia on January 31, 1913, New Mexico on February 3 (the 36th state to ratify), Delaware and Wyoming on February 3, New Jersey on February 4, Vermont on February 19, Massachusetts on March 4, and New Hampshire on March 7. Arizona and New Hampshire ratified after an earlier rejection. Ratification was rejected by Rhode Island on April 29, 1910, Utah on March 9, 1911 Connecticut on June 28, 1911, and Florida on May 31, 1913. Virginia and Pennsylvania failed to complete action on the amendment.[8]
[edit] Interpretation
The Amendment -- which overrules the effect of Pollock -- essentially means that when imposing an income tax, the Congress may impose the tax on income from any source without having to apportion the total dollar amount of tax collected from each state according to each state's population in relation to the total national population.
The Supreme Court's interpretation of the Sixteenth Amendment has evolved and adapted considerably over time. Many disputes about the applicability of the amendment to specific types of income spring from reliance on the language of out-dated interpretations and overturned decisions.
[edit] Early decisions
In Brushaber v. Union Pacific Railroad,[9], the Supreme Court indicated that the Sixteenth Amendment did not give the Congress a new power to tax incomes, as Congress already had that power. Although an income tax on income from property had been deemed (under Pollock, above) to be a direct tax, and an income tax on wages, etc., had been deemed to be an indirect tax (an excise), the Court in Brushaber decided that, after the Sixteenth Amendment, the Constitution allows Congress to tax any incomes without apportionment among the states by population (and without regard to any census or enumeration) regardless of the source of the income -- that is, regardless of whether the particular income tax is deemed direct (such as a tax on income from property) or indirect (i.e., an excise, such as a tax on income from labor). The Sixteenth Amendment made the distinction between a direct tax and an indirect tax constitutionally irrelevant with respect to the apportionment of income taxes by removing the apportionment requirement for income taxes. In Brushaber, the Court upheld the validity of the Federal income tax statute under the U.S. Constitution as amended by the Sixteenth Amendment.
In the Supreme Court case of Bowers, Collector v. Kerbaugh-Empire Co.,[10], Mr. Justice Butler stated:
It was not the purpose or the effect of that amendment to bring any new subject within the taxing power. Congress already had the power to tax all incomes. But taxes on incomes from some sources had been held to be "direct taxes" within the meaning of the constitutional requirement as to apportionment. [cites omitted] The Amendment relieved from that requirement and obliterated the distinction in that respect between taxes on income that are direct taxes and those that are not, and so put on the same basis all incomes "from whatever source derived". [cites omitted] "Income" has been taken to mean the same thing as used in the Corporation Excise Tax of 1909 (36 Stat. 112), in the Sixteenth Amendment, and in the various revenue acts subsequently passed. [cites omitted] After full consideration, this court declared that income may be defined as gain derived from capital, from labor, or from both combined, including profit gained through sale or conversion of capital.
Although the Sixteenth Amendment is often cited as the "source" of the Congressional power to tax incomes, at least one court has reiterated the point made in Brushaber and other cases that the Sixteenth Amendment itself did not grant the U.S. Congress the power to tax incomes (a power Congress has had since the late 1700s), but only removed the requirement, if any, that any income tax be apportioned among the states according to population:
In dealing with the scope of the taxing power the question has sometimes been framed in terms of whether something can be taxed as income under the Sixteenth Amendment. This is an inaccurate formulation [ . . . ] and has led to much loose thinking on the subject. The source of the taxing power is not the Sixteenth Amendment; it is Article I, Section 8, of the Constitution.[11]
[edit] Modern interpretation
In Commissioner v. Glenshaw Glass Co.,[12], the Supreme Court laid out what has become the modern understanding of what constitutes 'income' to which the Sixteenth Amendment applies, declaring that income taxes could be levied on "accessions to wealth, clearly realized, and over which the taxpayers have complete dominion." Under this definition, any increase in wealth—whether through wages, benefits, bonuses, sale of stock or other property at a profit, bets won, lucky finds, awards of punitive damages in a lawsuit, qui tam actions—are all within the definition of income, unless Congress makes a specific exemption as it has for items such as life insurance proceeds received by reason of the death of the insured party[13], gifts, bequests, devises and inheritances[14], and certain scholarships. [15]
[edit] Recent rulings
On August 22, 2006 the United States Court of Appeals for the District of Columbia Circuit ruled in Murphy v. Internal Revenue Service[16] and United States [Murphy v. United States]) that is unconstitutional under the Sixteenth Amendment to the extent that the statute purports to tax, as income, a recovery for a non-physical personal injury for mental distress and loss of reputation not received in lieu of taxable income such as lost wages or earnings. The Court stated:
At the outset, we reject the Government’s breathtakingly expansive claim of congressional power under the Sixteenth Amendment -- upon which it founds the more far-reaching arguments it advances here. The Sixteenth Amendment simply does not authorize the Congress to tax as “incomes” every sort of revenue a taxpayer may receive. As the Supreme Court noted long ago, the “Congress cannot make a thing income which is not so in fact.”
The Court also stated:
In sum, every indication is that damages received solely in compensation for a personal injury are not income within the meaning of that term in the Sixteenth Amendment. First, as compensation for the loss of a personal attribute, such as well-being or a good reputation, the damages are not received in lieu of income. Second, the framers of the Sixteenth Amendment would not have understood compensation for a personal injury -- including a nonphysical injury -- to be income. Therefore, we hold § 104(a)(2) unconstitutional insofar as it permits the taxation of an award of damages for mental distress and loss of reputation.
The Murphy ruling is mandatory precedent only in the District of Columbia.
[edit] Tax protester arguments regarding ratification
The article Tax protester constitutional arguments covers this topic in considerably more detail, including details on the specific arguments made against ratification.
Some tax protesters, conspiracy investigators, and others opposed to income taxes cite what they contend is evidence that the Sixteenth Amendment was never "properly ratified." One such argument is that because the legislatures of various states passed resolutions of ratification with different capitalization, spelling of words, or punctuation marks (e.g. semi-colons instead of commas) from the text proposed by Congress, those states' ratifications were invalid. A related argument is that various states illegally violated procedural requirements of their constitutions when passing their ratification resolutions. Another argument made by some tax protesters regards Ohio, one of the states listed as ratifying the amendment. They contend that because Congress did not pass an official proclamation recognizing Ohio's date of admission (1803) to statehood until 1953 (see Ohio Constitution), Ohio was not a state until 1953 (and, therefore, could not have ratified the Sixteenth Amendment). These and similar arguments have been universally rejected by the courts.
[edit] Notes
- ^ U.S. Const., art. I, § 8, cl. 1.
- ^ U.S. Const., art. I, § 2, cl. 3.
- ^ U.S. Const., art. I, § 9, cl. 4.
- ^ 178 U.S. 41 (1900).
- ^ 220 U.S. 107 (1911).
- ^ , aff'd on reh'g, .
- ^ Quoting the United States Supreme Court: "Again the situation is aptly illustrated by the various acts taxing incomes derived from property of every kind and nature which were enacted beginning in 1861, and lasting during what may be termed the Civil War period. It is not disputable that these latter taxing laws were classed under the head of excises, duties, and imposts because it was assumed that they were of that character inasmuch as, although putting a tax burden on income of every kind, including that derived from property real or personal, they were not taxes directly on property because of its ownership.” Brushaber v. Union Pac. Railroad, 240 U.S. 1, at 15 (1916) (italics added).
- ^ United States Government Printing Office, Analysis and Interpretation of the Constitution; Annotations of Cases Decided by the Supreme Court of the United States; Senate Document No. 103-6; 1992 Edition.[1]
- ^ .
- ^ .
- ^ Penn Mutual Indemnity Co. v. Commissioner, 32 T.C. 653 at 659 (1959).
- ^ .
- ^ .
- ^ .
- ^ .
- ^ 460 F.3d 79, 2006-2 U.S. Tax Cas. (CCH) paragr. 50,476, 2006 WL 2411372 (D.C. Cir. Aug. 22, 2006). In an unrelated matter, the Court also granted the government's motion to dismiss Murphy's suit against the defendant "Internal Revenue Service." Under the doctrine of Sovereign immunity the rule is that a taxpayer may sue The United States of America itself, not a government agency, officer, or employee (with few exceptions). The Court stated: "Insofar as the Congress has waived sovereign immunity with respect to suits for tax refunds under , that provision specifically contemplates only actions against the 'United States.' Therefore, we hold the IRS, unlike the United States, may not be sued eo nomine in this case." One exception to this rule is found in the United States Tax Court where the taxpayer sues the Commissioner of Internal Revenue.
[edit] External links
- National Archives: 16th Amendment
- CRS Annotated Constitution: 16th Amendment
- Emory University School of Law website lists proposal and ratification details for amendments to the United States Constitution
- Brushaber Decision Supreme Court opinion on the apportionment clause of the Constitution.
- Stanton Decision no new power of taxation
- Tax protester arguments & refutations:
- IRS pamphlet: The Truth About Frivolous Tax Arguments
- "The Law That Never Was" — Bill Benson's website disputing its ratification
- Frauds and Scams site describing failure of Benson-inspired arguments in court
- What Is Taxable Income?
- Tax Protester FAQ Daniel Evans' extensive FAQ refuting tax protester arguments
- 16th Amendment Intent and Purpose
- America: Freedom to Fascism (Full Length Movie)
