Pollock v. Farmers' Loan and Trust
(1895)
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Rule of Law:
A federal tax on the income derived from real property is a direct tax and is therefore unconstitutional unless apportioned among the states by population. Similarly, a federal tax on the income derived from municipal bonds is unconstitutional as it impermissibly burdens the borrowing power of the states.
Facts:
- Charles Pollock, a stockholder in the Farmers' Loan & Trust Company, sought to prevent the company from paying the newly enacted federal income tax.
- The Farmers' Loan & Trust Company, a New York corporation, held substantial assets, including real estate, personal property, and municipal bonds of the city of New York.
- The company derived significant annual income from these assets, including rents from its real estate and interest from the municipal bonds.
- Congress passed the Income Tax Act of 1894, which imposed a 2% tax on the net income of corporations, including income from all sources.
- The directors of the Farmers' Loan & Trust Company announced their intention to voluntarily comply with the Act and pay the tax on all of its income, including that from its real estate and municipal bonds.
Procedural Posture:
- Charles Pollock filed a stockholder's bill in equity in the United States Circuit Court for the Southern District of New York.
- The suit sought to enjoin the Farmers' Loan & Trust Company from voluntarily paying the income tax levied under the Act of August 15, 1894.
- The Circuit Court, upon the pleadings, dismissed the bill for want of equity.
- Pollock, the complainant, appealed the dismissal directly to the Supreme Court of the United States.
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Issue:
Does the Income Tax Act of 1894, by levying a tax on income derived from real estate and municipal bonds without apportionment among the states, impose an unconstitutional direct tax and improperly tax a state instrumentality?
Opinions:
Majority - Chief Justice Fuller
Yes, the Act imposes an unconstitutional direct tax in part and improperly taxes state instrumentalities. A tax on the rents or income of real estate is indistinguishable in substance from a tax on the real estate itself. Because a tax on real estate is universally considered a direct tax, a tax on its income must also be treated as a direct tax, which the Constitution requires to be apportioned among the states by population. Furthermore, the federal government lacks the power to tax the instrumentalities of a state; municipal bonds are such an instrumentality, as they are a means for the state to exercise its governmental powers. A tax on the interest from these bonds operates as a tax on the state's power to borrow money and is consequently repugnant to the Constitution.
Dissenting - Justice White
No, the Act does not impose an unconstitutional direct tax. A century of precedent, beginning with Hylton v. United States and affirmed in cases like Springer v. United States, has definitively established that only capitation taxes and taxes on land itself are considered 'direct taxes' under the Constitution. An income tax, regardless of the source of the income, has consistently been held to be an indirect tax in the nature of an excise or duty. By treating a tax on rentals as a direct tax on land, the majority's opinion overthrows a long and consistent line of decisions and denies a power to Congress that has been conceded for one hundred years. The Court should not disregard settled precedent, as doing so introduces instability and confusion into constitutional law.
Dissenting - Justice Harlan
No as to real estate income; Yes as to municipal bond income. Justice Harlan concurred with Justice White that a tax upon the income from land is not a direct tax within the meaning of the Constitution and should be upheld based on precedent. However, he concurred with the majority that the federal government cannot tax the instrumentalities of the states. Therefore, a tax imposed directly upon interest derived from bonds issued by a municipal corporation is an unconstitutional burden upon the exercise of the powers of that corporation.
Analysis:
This decision dramatically curtailed the federal government's power to tax, effectively invalidating the 1894 income tax by defining income from property as a direct tax. In so doing, the Court departed from a century of precedent that had narrowly construed the meaning of 'direct tax.' The ruling created a significant obstacle to progressive taxation and highlighted the difficulty of raising federal revenue, ultimately leading to a major constitutional change. The public and political backlash against this decision was a primary impetus for the ratification of the Sixteenth Amendment in 1913, which explicitly granted Congress the power to lay and collect taxes on incomes, from whatever source derived, without apportionment.
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