Pollock v. Farmers' Loan & Trust Co.
Encyclopedia
Pollock v. Farmers' Loan & Trust Company, , aff'd on reh'g, , 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 tax
es, 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
.
, the income tax was introduced in the United States with the Revenue Act of 1861
. 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. The Populist Party
"demanded a graduated income tax" in its 1892 platform. The Populist Party, led by William Jennings Bryan
, advocated the income tax law passed in 1894, and proposed an income tax in its 1908 platform.
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.
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
).
, Howell Edmunds Jackson
, Edward Douglass White
, and Henry Billings Brown
dissented from the majority opinion. Justice White argued:
In his dissent, Justice Brown wrote:
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.
. 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:
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 thereby 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 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."
Supreme Court of the United States
The Supreme Court of the United States is the highest court in the United States. It has ultimate appellate jurisdiction over all state and federal courts, and original jurisdiction over a small range of cases...
ruled that the unapportioned income taxes on interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
, dividends and rents imposed by the Income Tax Act of 1894 were, in effect, direct tax
Direct tax
The term direct tax generally means a tax paid directly to the government by the persons on whom it is imposed.-General meaning:In the general sense, a direct tax is one paid directly to the government by the persons on whom it is imposed...
es, 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
Sixteenth Amendment to the United States Constitution
The Sixteenth Amendment to the United States Constitution allows the Congress to levy an income tax without apportioning it among the states or basing it on Census results...
.
Income taxes pre-Pollock
To raise revenue to fund the Civil WarAmerican Civil War
The American Civil War was a civil war fought in the United States of America. In response to the election of Abraham Lincoln as President of the United States, 11 southern slave states declared their secession from the United States and formed the Confederate States of America ; the other 25...
, the income tax was introduced in the United States with the Revenue Act of 1861
Revenue Act of 1861
The Revenue Act of 1861, formally cited as , included the first U.S. Federal income tax statute . The Act, motivated by the need to fund the Civil War , imposed an income tax to be "levied, collected, and paid, upon the annual income of every person residing in the United States, whether such...
. It was a flat tax
Flat tax
A flat tax is a tax system with a constant marginal tax rate. Typically the term flat tax is applied in the context of an individual or corporate income that will be taxed at one marginal rate...
of 3% on annual income above $800. The following year, this was replaced with a graduated tax
Progressive tax
A progressive tax is a tax by which the tax rate increases as the taxable base amount increases. "Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate...
of 3-5% on income above $600 in the Revenue Act of 1862
Revenue Act of 1862
The Revenue Act of 1862 , was passed by the United States Congress to help fund the American Civil War. The Act was signed into law by President Abraham Lincoln, introducing the first progressive rate income tax to the country....
, which specified a termination of income taxation in 1866. The Socialist Labor Party
Socialist Labor Party of America
The Socialist Labor Party of America , established in 1876 as the Workingmen's Party, is the oldest socialist political party in the United States and the second oldest socialist party in the world. Originally known as the Workingmen's Party of America, the party changed its name in 1877 and has...
advocated a graduated income tax in 1887. The Populist Party
Populist Party (United States)
The People's Party, also known as the "Populists", was a short-lived political party in the United States established in 1891. It was most important in 1892-96, then rapidly faded away...
"demanded a graduated income tax" in its 1892 platform. The Populist Party, led by William Jennings Bryan
William Jennings Bryan
William Jennings Bryan was an American politician in the late-19th and early-20th centuries. He was a dominant force in the liberal wing of the Democratic Party, standing three times as its candidate for President of the United States...
, advocated the income tax law passed in 1894, and proposed an income tax in its 1908 platform.
Background information
The provisions of the Wilson-Gorman Tariff ActWilson-Gorman Tariff Act
The Revenue Act or Wilson-Gorman Tariff of 1894 slightly reduced the United States tariff rates from the numbers set in the 1890 McKinley tariff and imposed a 2% income tax. It is named for William L. Wilson, Representative from West Virginia, chair of the U.S. House Ways and Means Committee, and...
of 1894 required that, for a five-year period, any "gains, profits
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...
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
United States Department of the Treasury
The Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue...
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
Massachusetts
The Commonwealth of Massachusetts is a state in the New England region of the northeastern United States of America. It is bordered by Rhode Island and Connecticut to the south, New York to the west, and Vermont and New Hampshire to the north; at its east lies the Atlantic Ocean. As of the 2010...
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
Wall Street
Wall Street refers to the financial district of New York City, named after and centered on the eight-block-long street running from Broadway to South Street on the East River in Lower Manhattan. Over time, the term has become a metonym for the financial markets of the United States as a whole, or...
lawyers of his day.
Decision
The Court handed down its decision on April 8, 1895, with Chief JusticeChief Justice of the United States
The Chief Justice of the United States is the head of the United States federal court system and the chief judge of the Supreme Court of the United States. The Chief Justice is one of nine Supreme Court justices; the other eight are the Associate Justices of the Supreme Court of the United States...
Melville Fuller
Melville Fuller
Melville Weston Fuller was the eighth Chief Justice of the United States between 1888 and 1910.-Early life and education:...
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. [158 U.S. 601, 638]
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
South Carolina v. Baker
South Carolina v. Baker, 485 U.S. 505 , is a case in which the Supreme Court of the United States ruled that section 310 of the Tax Equity and Fiscal Responsibility Act of 1982 does not violate the Tenth Amendment to the United States Constitution...
).
Dissent
Justices John Marshall HarlanJohn Marshall Harlan
John Marshall Harlan was a Kentucky lawyer and politician who served as an associate justice on the Supreme Court. He is most notable as the lone dissenter in the Civil Rights Cases , and Plessy v...
, Howell Edmunds Jackson
Howell Edmunds Jackson
Howell Edmunds Jackson was an American jurist and politician. He served on the United States Supreme Court, in the U.S. Senate, United States Court of Appeals for the Sixth Circuit, and the Tennessee House of Representatives. He authored notable opinions on the Interstate Commerce Act and the...
, Edward Douglass White
Edward Douglass White
Edward Douglass White, Jr. , American politician and jurist, was a United States senator, Associate Justice of the United States Supreme Court and the ninth Chief Justice of the United States. He was best known for formulating the Rule of Reason standard of antitrust law. He also sided with the...
, and Henry Billings Brown
Henry Billings Brown
Henry Billings Brown was an associate justice of the Supreme Court of the United States from January 5, 1891, to May 28, 1906. He was the author of the opinion for the Court in Plessy v...
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. [158 U.S. 638]
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 socialismSocialismSocialism is an economic system characterized by social ownership of the means of production and cooperative management of the economy; or a political philosophy advocating such a system. "Social ownership" may refer to any one of, or a combination of, the following: cooperative enterprises,...
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 ConstitutionUnited States Constitution
The Constitution of the United States is the supreme law of the United States of America. It is the framework for the organization of the United States government and for the relationship of the federal government with the states, citizens, and all people within the United States.The first three...
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
United States House of Representatives
The United States House of Representatives is one of the two Houses of the United States Congress, the bicameral legislature which also includes the Senate.The composition and powers of the House are established in Article One of the Constitution...
, 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:
-
- 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.
United States v. E. C. Knight Co.
United States v. E. C. Knight Co., 156 U.S. 1 , also known as the "Sugar Trust Case,'" was a United States Supreme Court case that limited the government's power to control monopolies...
, 156 U.S. 1
Case citation
Case citation is the system used in many countries to identify the decisions in past court cases, either in special series of books called reporters or law reports, or in a 'neutral' form which will identify a decision wherever it was reported...
(1895) of the same year. The following year, the Democratic Party, which had grabbed hold of the Populist
Populism
Populism can be defined as an ideology, political philosophy, or type of discourse. Generally, a common theme compares "the people" against "the elite", and urges social and political system changes. It can also be defined as a rhetorical style employed by members of various political or social...
movement, included an income tax plank in its election platform.
Nebraska
Nebraska
Nebraska is a state on the Great Plains of the Midwestern United States. The state's capital is Lincoln and its largest city is Omaha, on the Missouri River....
Republican Senator Norris Brown
Norris Brown
Norris Brown was a Senator from Nebraska.Brown was born in Maquoketa, Iowa. The son of William Henry Harrison and Eliza Ann Phelps Brown, he attended Jefferson Iowa Academy and graduated with a law degree from the University of Iowa College of Law in Iowa City, Iowa, in 1883. He was admitted to...
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
Sixteenth Amendment to the United States Constitution
The Sixteenth Amendment to the United States Constitution allows the Congress to levy an income tax without apportioning it among the states or basing it on Census results...
. Fourteen years would pass, however, before the Amendment was finally passed by Congress
United States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....
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 RailroadBrushaber v. Union Pacific Railroad
Brushaber v. Union Pacific Railroad, 240 U.S. 1 , was a landmark United States Supreme Court case in which the Court upheld the validity of a tax statute called the Revenue Act of 1913, also known as the Tariff Act, Ch. 16, 38 Stat. 166 Brushaber v. Union Pacific Railroad, 240 U.S. 1 (1916), was a...
. 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:
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 thereby 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.
Stanton v. Baltic Mining Co.
Stanton v. Baltic Mining Co., 240 U.S. 103 , was a case decided by the Supreme Court of the United States.- History of the case :Plaintiff John R...
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.
Bowers v. Kerbaugh-Empire Co.
Bowers v. Kerbaugh-Empire Co., 271 U.S. 170 , was a case in which the United States Supreme Court held that no taxable income arose from the repayment in German marks of loans that had originally been made in U.S...
, 271 U.S. 170
Case citation
Case citation is the system used in many countries to identify the decisions in past court cases, either in special series of books called reporters or law reports, or in a 'neutral' form which will identify a decision wherever it was reported...
(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."