Pollock v. Farmers' Loan & Trust Co.

Pollock v. Farmers' Loan & Trust Co.
Supreme Court of the United States
Argued March 7–8, 11–13, 1895 Decided April 8, 1895
Full case name	Charles 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
Case history
Prior	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
Chief Justice Melville Fuller Associate Justices Stephen J. Field · John M. Harlan Horace Gray · David J. Brewer Henry B. Brown · George Shiras Jr. Howell E. Jackson · Edward D. White
Case opinions
Majority	Fuller, joined by Field, Gray, Brewer, Shiras
Dissent	White, joined by Harlan, Jackson, Brown
Dissent	Harlan
Dissent	Brown
Superseded by
U.S. Const. amend. XVI
Overruled by
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 The decision was superseded in 1913 by the Sixteenth Amendment to the United States Constitution. A separate holding regarding the taxation of interest income on certain bonds was overruled by the Supreme Court in 1988 in the case of South Carolina v. Baker.

Income taxes pre-Pollock

President Thomas Jefferson abolished the Federal income tax during his first term in office. He stated, in his Second Inaugural Address on March 4, 1805, "The suppression of unnecessary offices, of useless establishments and expenses, enabled us to discontinue our internal taxes. These, covering our land with officers and opening our doors to their intrusions, had already begun that process of domiciliary vexation which once entered is scarcely to be restrained from reaching successively every article of property and produce. If among these taxes some minor ones fell which had not been inconvenient, it was because their amount would not have paid the officers who collected them, and because, if they had any merit, the State authorities might adopt them instead of others less approved.
"The remaining revenue on the consumption of foreign articles is paid chiefly by those who can afford to add foreign luxuries to domestic comforts, being collected on our seaboard and frontiers only, and incorporated with the transactions of our mercantile citizens, it may be the pleasure and the pride of an American to ask, What farmer, what mechanic, what laborer ever sees a taxgatherer of the United States?"
To raise revenue to fund the Civil War, the income tax was re-introduced in the United States with the Revenue Act of 1861. It was a flat tax of 3% on annual income above $800 (equal to $27,000 in 2023). The following year, this was replaced with a graduated tax of 3–5% on income above $600 (equal to $18,000 in 2023) 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. The Populist Party "demanded a graduated income tax" in its 1892 platform. William Jennings Bryan, a Democrat who supported cooperation with the Populists, was among those Congressional Democrats who advocated the income tax law passed in 1894. As a three-time Democratic candidate for president, Bryan advocated an income tax and wrote that advocacy into the Democrats' platform in 1908.

Background information

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 (equal to $141,000 in 2023) 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.

Decision

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:

First. We adhere to the opinion already announced—that, taxes on real estate being indisputably direct taxes, taxes on the rents or income of real estate are equally direct taxes.

Second. We are of opinion that taxes on personal property, or on the income of personal property, are likewise direct taxes.

Third. The tax imposed by sections 27 to 37, inclusive, of the act of 1894, so far as it falls on the income of real estate, and of personal property, being a direct tax, within the meaning of the constitution, and therefore unconstitutional and void, because not apportioned according to representation, all those sections, constituting one entire scheme of taxation, are necessarily invalid.

The decrees hereinbefore entered in this court will be vacated. The decrees below will be reversed, and the cases remanded, with instructions to grant the relief prayed.

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).

Dissent

Justices John Marshall Harlan, Howell Edmunds Jackson, Edward Douglass White, and Henry Billings Brown dissented from the majority opinion. Justice White argued:

It is, I submit, greatly to be deplored that after more than 100 years of our national existence, after the government has withstood the strain of foreign wars and the dread ordeal of civil strife, and its people have become united and powerful, this court should consider itself compelled to go back to a long repudiated and rejected theory of the constitution, by which the government is deprived of an inherent attribute of its being—a necessary power of taxation.

In his dissent, Justice Brown wrote:

The decision involves nothing less than the surrender of the taxing power to the moneyed class. By resuscitating an argument that was exploded in the Hylton Case, and has lain practically dormant for a hundred years, it is made to do duty in nullifying, not this law alone, but every similar law that is not based upon an impossible theory of apportionment. Even the spectre of socialism is conjured up to frighten Congress from laying taxes upon the people in proportion to their ability to pay them.

Subsequent history

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, which Pollock had ruled was direct, from therefore having to be apportioned. It achieved this by declaring that Congress could tax income from any source without apportionment.

In his dissent to the Pollock decision, Justice Harlan stated:

When, therefore, this court adjudges, as it does now adjudge, that Congress cannot impose a duty or tax upon personal property, or upon income arising either from rents of real estate or from personal property, including invested personal property, bonds, stocks, and investments of all kinds, except by apportioning the sum to be so raised among the States according to population, it practically decides that, without an amendment of the Constitution—two-thirds of both Houses of Congress and three-fourths of the States concurring—such property and incomes can never be made to contribute to the support of the national government.

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.

Subsequent court treatments of Pollock and the Sixteenth Amendment

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 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.

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.

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 therefore had never been apportioned; so they were entitled to be so enforced afterwards. 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).

This effect was re-affirmed in Bowers v. Kerbaugh-Empire Co., 271 U.S. 170 (1926), in which the 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."

See also

• Hylton v. United States, 3 U.S. 171 (1796)
• United States v. E. C. Knight Co., 156 U.S. 1 (1895)

Further reading

• Jones, Francis R. (1895). "Pollock v. Farmers' Loan and Trust Company". Harvard Law Review. 9 (3): 198–211. doi:10.2307/1321669. JSTOR 1321669.