| Pollock v. Farmers' Loan & Trust Co. | ||||||
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Supreme Court of the United States |
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| Argued March 7 – 8, 11–13, 1895 Decided April 8, 1895 |
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| Full case name | Pollock v. Farmers' Loan and Trust Company | |||||
| Citations | 157 U.S. 429 (more) 15 S. Ct. 673; 39 L. Ed. 759; 1895 U.S. LEXIS 2215; 3 A.F.T.R. (P-H) 2557 |
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| Prior history | Appeal from the Circuit Court of the United States for the Southern District of New York | |||||
| Holding | ||||||
| The unapportioned income taxes on interest, dividends and rents imposed by the Income Tax Act of 1894 were, in effect, direct taxes, and were unconstitutional because they violated the rule that direct taxes be apportioned. | ||||||
| Court membership | ||||||
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| Case opinions | ||||||
| Majority | Fuller, joined by Field, Gray, Brewer, Shiras | |||||
| Dissent | White, joined by Harlan, Jackson, Brown | |||||
| Dissent | Harlan | |||||
| Dissent | Brown | |||||
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Superseded by
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| U.S. Const. amend. XVI | ||||||
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Overruled by
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| South Carolina v. Baker, 485 U.S. 505 (1988) | ||||||
Pollock v. Farmers' Loan & Trust Company, 157 U.S. 429 (1895), aff'd on reh'g, 158 U.S. 601 (1895), with a ruling of 5–4, was a landmark case in which the Supreme Court of the United States ruled that the unapportioned income taxes on interest, dividends and rents imposed by the Income Tax Act of 1894 were, in effect, direct taxes, and were unconstitutional because they violated the provision that direct taxes be apportioned. The decision was nullified in 1913 by Amendment XVI to the US Constitution.
Contents |
To raise revenue to fund the Civil War, the income tax was introduced in the United States with the Revenue Act of 1861.[1] It was a flat tax of 3% on annual income above $800. The following year, this was replaced with a graduated tax of 3-5% on income above $600 in the Revenue Act of 1862, which specified a termination of income taxation in 1866. The Socialist Labor Party advocated a graduated income tax in 1887.[2] The Populist Party "demanded a graduated income tax" in its 1892 platform.[3] The Populist Party, led by William Jennings Bryan, advocated the income tax law passed in 1894,[4] and proposed an income tax in its 1908 platform.[5]
The provisions of the Wilson-Gorman Tariff Act of 1894 required that, for a five-year period, any "gains, profits and incomes" in excess of $4,000 would be taxed at 2%. So, in compliance with the Act, the New York-based Farmers' Loan & Trust Company announced to its shareholders that it would not only pay the tax, but also provide to the collector of internal revenue in the Department of the Treasury the names of all people for whom the company was acting and thus were liable for being taxed under the Act.
Charles Pollock was a Massachusetts citizen who owned only ten shares of stock in the Farmers' Loan & Trust Company. He sued the company to prevent the company from paying the tax. Pollock lost in the lower courts but finally appealed to the United States Supreme Court, which agreed to hear the case.
Arguing for the plaintiff Pollock was Joseph Choate, one of the most eminent Wall Street lawyers of his day.[6]
The Court handed down its decision on April 8, 1895, with Chief Justice Melville Fuller delivering the opinion of the Court. He ruled in Pollock's favor, stating that certain taxes levied by the Wilson-Gorman Act, those imposed on income from property, were unconstitutional. The Court treated the tax on income from property as a direct tax. Under the provisions of the Constitution of the United States at that time, such direct taxes were required to be imposed in proportion to states' population. The tax in question had not been apportioned and, therefore, was invalid. As Chief Justice Fuller stated:
A separate holding by the Court in Pollock -- that federal taxation of interest earned on certain state bonds violated the doctrine of intergovernmental tax immunity—was declared by the U.S. Supreme Court in 1988 to have been "effectively overruled by subsequent case law" (see South Carolina v. Baker).
Justices John Marshall Harlan, Howell Edmunds Jackson, Edward Douglass White, and Henry Billings Brown dissented from the majority opinion. Justice White argued:
In his dissent, Justice Brown wrote:
The Supreme Court did not rule that all income taxes were direct taxes. Instead, the Court held that although generally income taxes are indirect taxes (excises) authorized by the United States Constitution in Article 1, Section 8, Clause 1, the taxes on interest, dividends and rents under the 1894 Act had a profound effect on the underlying assets. The Court ruled that the tax on dividends, interest and rent should be viewed as a direct tax falling on the property itself rather than as an indirect tax. As direct taxes, these taxes were required to follow the rule of apportionment found in Article 1, Section 2, Clause 3.
The rule of apportionment requires the amount of a direct tax collected to be divided by the number of Representatives in the United States House of Representatives, the quotient is then multiplied by the number of representatives each State has to determine each State's share of the tax which it then needs to lay and collect through its own taxing authority.
Congress has had the power to lay and collect an indirect tax on incomes (such as, wages and salaries) from the beginning of the American Government under the United States Constitution of 1787. The purpose of the Sixteenth Amendment was to prevent the tax on income from property from being considered a direct tax, as Pollock had ruled. The Sixteenth Amendment made the apportionment rule inapplicable to income taxes, including taxes on income derived from property, by providing that Congress has the power to tax incomes from any source without having to apportion the tax by population.
In his dissent to the Pollock decision, Justice Harlan stated:
In a nation where the Federal government was beginning its battle against monopolies and trusts, where the great bulk of wealth was concentrated in the hands of a few, the decision in Pollock was unpopular, much like the decision in United States v. E. C. Knight Co., 156 U.S. 1 (1895) of the same year. The following year, the Democratic Party, which had grabbed hold of the Populist movement, included an income tax plank in its election platform.
Nebraska Republican Senator Norris Brown publicly decried the Court's decision, and instead proposed specific language to remove the Pollock requirement that certain income taxes be apportioned among the states by population. The proposal was later incorporated into the Sixteenth Amendment. Fourteen years would pass, however, before the Amendment was finally passed by Congress in 1909. Upon ratification in 1913, the Amendment effectively made the Pollock decision moot, removing any requirement that taxes on incomes derived from property be apportioned by population.[9][10]
Three years after ratification of the Sixteenth Amendment, the United States Supreme Court rendered its decision in the case of Brushaber v. Union Pacific Railroad. In Brushaber, the Court reviewed the history of the dichotomy between excises (indirect taxes) and direct taxes. The Brushaber Court noted that the 1913 Income Tax Act was written as an indirect tax and did not violate the rule of uniformity, so it was not written as a direct tax and was not subject to the rule of apportionment. The Court summarized what it had decided in Pollock. The Court then went on to state the effect of the Sixteenth Amendment with respect to income taxes:
| “ | [T]he command of the [16th] amendment that all income taxes shall not be subject to the rule of apportionment by a consideration of the source from which the taxed income may be derived forbids the application to such taxes of the rule applied in the Pollock case by which alone such taxes were removed from the great class of excises, duties, and imposts subject to the rule of uniformity and were placed under the other or direct class.[11] | ” |
The Sixteenth Amendment removed the requirement that those income taxes deemed to be direct in substance (e.g., taxes on income from property) be apportioned among the states according to population. Thus, the effect of the Pollock decision had indeed been overturned by the Sixteenth Amendment.[9]
The Court in Brushaber also noted that before Pollock, taxes on income from professions, trades, employments or vocations were excises, they were indirect in both form and substance and thereby had never been apportioned; so they were entitled to be so enforced afterwards.[12] By contrast, with respect to taxes on income from property, the Pollock decision had disregarded form and considered substance alone. Justice White's decision in Brushaber shows how the Sixteenth Amendment was written to prevent consideration of the direct effects of any income tax laid by Congress.
The Supreme Court in Stanton v. Baltic Mining Co. added that the "Sixteenth Amendment conferred no new power of taxation but simply prohibited the previous complete and plenary power of income taxation possessed by Congress from the beginning from being taken out of the category of indirect taxation to which it inherently belonged." 240 U.S. 112 (1916).[13]
This effect was re-affirmed in Bowers v. Kerbaugh-Empire Co., 271 U.S. 170 (1926), in which the United States Supreme Court reviewed Pollock, the Corporation Excise Tax Act of 1909 and the Sixteenth Amendment, and concluded that "[i]t was not the purpose or effect of that amendment to bring any new subject within the taxing power. Congress already had power to tax all incomes."