Pollock v. Farmers' Loan & Trust Co.
15 S. Ct. 912, 1895 U.S. LEXIS 2280, 158 U.S. 601 (1895)
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Rule of Law:
A federal tax on income derived from real or personal property is a direct tax under the U.S. Constitution. Therefore, such a tax is unconstitutional unless it is apportioned among the states according to their respective populations.
Facts:
- Charles Pollock was a citizen of Massachusetts and a shareholder in the Farmers' Loan & Trust Company, a New York corporation.
- The Farmers' Loan & Trust Company owned extensive real estate, municipal bonds, and other personal property.
- The company derived significant income from rents on its real estate and from interest and dividends on its personal property and investments.
- Under the federal Income Tax Act of 1894, the company was required to pay a 2% tax on its net income, including income derived from its real estate and personal property.
- The company informed its shareholders of its intention to voluntarily pay the tax, believing it was legally required to do so.
Procedural Posture:
- Charles Pollock filed a bill in equity in the Circuit Court of the United States for the Southern District of New York to enjoin the Farmers' Loan & Trust Company from voluntarily paying the federal income tax enacted in 1894.
- Pollock alleged that the Income Tax Act of 1894 was unconstitutional.
- The case was appealed directly to the United States Supreme Court.
- The Supreme Court heard initial arguments and, in a prior decision (157 U.S. 429), held that the tax on income from municipal bonds was unconstitutional and that a tax on income from real estate was a direct tax, but was divided on other key issues.
- The Supreme Court granted a rehearing to address the unresolved questions.
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Issue:
Does a federal tax on income derived from real estate and personal property constitute a "direct tax" which is unconstitutional under Article I, Section 9, if not apportioned among the several states according to population?
Opinions:
Majority - Mr. Chief Justice Fuller
Yes, a tax on income from real and personal property is a direct tax that must be apportioned. A tax on the rents or income of real estate is functionally indistinguishable from a tax on the real estate itself. Because a tax on land is indisputably a direct tax, a tax on its income must also be a direct tax. This reasoning extends to personal property; a tax on the income derived from stocks, bonds, and other personalty is equivalent to a direct tax on the personalty itself. As the Income Tax Act of 1894 imposes an unapportioned tax on these sources of income, it is unconstitutional. Because the provisions taxing income from property are a central and inseparable part of the entire income tax scheme, the entire portion of the act relating to income taxes (sections 27-37) is void.
Dissenting - Mr. Justice Harlan
No, a tax on income from property is not a direct tax requiring apportionment. This decision overturns a century of settled precedent, beginning with Hylton v. United States (1796) and consistently affirmed, which held that only capitation taxes and taxes on land are direct taxes. The majority's decision disregards the principle of stare decisis and cripples the national government's essential power to tax, creating a system where wealth from property is favored over income from labor. This ruling dangerously undermines national authority and may provoke a contest between the wealthy and the working classes, sowing 'seeds of hate and distrust.'
Dissenting - Mr. Justice Brown
No, an income tax is not a direct tax requiring apportionment. The constitutional requirement to apportion direct taxes was a political compromise related to slavery and was intended to be construed narrowly. An income tax is inherently incapable of being apportioned by population without producing monstrous inequalities, proving it could not have been what the framers intended as a "direct tax." For nearly a century, the Court's consistent rulings established that an income tax is not a direct tax, and this long line of precedent, which Congress and the people have relied upon, should not be overthrown.
Dissenting - Mr. Justice Jackson
No, an income tax is not a direct tax subject to apportionment. The framers intended the term "direct tax" to apply only to subjects of general distribution throughout the states, such as land and polls, which could be reasonably apportioned; income was not such a subject. Furthermore, any tax that is incapable of apportionment without creating gross injustice cannot be considered a direct tax under the Constitution. The court also erred by striking down the entire income tax scheme; the invalid portions taxing income from property are severable from the valid portions taxing income from professions and vocations.
Dissenting - Mr. Justice White
No. The Court's decision overthrows one hundred years of practice and unanimous precedent establishing that the constitutional term "direct tax" is limited to capitation taxes and taxes on land. The majority's new rule, based on an economic definition, is applied inconsistently, protecting income from property while leaving income from labor exposed. By extending the apportionment requirement, the decision creates a flagrantly unjust system of taxation and effectively paralyzes the government's ability to tax accumulated wealth, reducing it to the helpless condition it suffered under the Articles of Confederation.
Analysis:
The Pollock decision dramatically curtailed Congress's taxing power by classifying income from property as a direct tax requiring apportionment, a method widely seen as impractical and inequitable for an income tax. This ruling created a protected class of wealth, distinguishing between income from property and income from labor, and effectively halted federal income taxation. The decision's significant impact on federal revenue and its creation of perceived economic inequality directly led to a major constitutional change: the ratification of the Sixteenth Amendment in 1913, which explicitly authorized Congress to levy taxes on incomes, from whatever source derived, without apportionment.
