Pollock v. Farmers' Loan & Trust Co.

Infobox SCOTUS case
Litigants=Pollock v. Farmers' Loan & Trust Co.
ArgueDate=March 7–8
ArgueDateB=11–13
ArgueYear=1895
DecideDate=April 8
DecideYear=1895
FullName=Pollock v. Farmers' Loan and Trust Company
USVol=157
USPage=429
Citation=15 S. Ct. 673; 39 L. Ed. 759; 1895 U.S. LEXIS 2215; 3 A.F.T.R. (P-H) 2557
Prior=Appeal from the Circuit Court of the United States for the Southern District of New York
Subsequent=
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.
SCOTUS=1894-1895
Majority=Fuller
JoinMajority=Field, Gray, Brewer, Shiras
Dissent=White
JoinDissent=Harlan, Jackson, Brown
Dissent2=Harlan
Dissent3=Brown
LawsApplied=
Overruled=U.S. Const. amend. XVI

"Pollock v. Farmers' Loan & Trust Company", 157 U.S. 429, [ [http://laws.findlaw.com/us/157/429.html Full text of the first decision courtesy of Findlaw.com] ] "aff'd on reh'g", 158 U.S. 601 [ [http://caselaw.lp.findlaw.com/scripts/getcase.pl?navby=case&court=us&vol=158&page=601 Full text of the second decision courtesy of Findlaw.com] ] (1895) was an important Supreme Court of the United States case in which the court 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 rule that direct taxes be apportioned.

Factual background of the case

The provisions of the Wilson-Gorman Tariff Act of 1894 had stated 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 enjoin it 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. [Irons, Peter. "A People's History of the Supreme Court." New York, Penguin, 1999, p. 244.]

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, to the extent 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]

Justices John Marshall Harlan, Jackson, White and 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. [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...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. [Ibid., p. 245.]

Response: The Sixteenth Amendment ratification

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 from the beginning of the American Government under the United States Constitution in 1787. The purpose of the Sixteenth Amendment was to prevent the income tax from being taken out of the category of indirect taxation, to which it inherently belonged, and misapplied as a direct tax (as was done with "Pollock"). 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. [Harlan dissent to "Pollock" decision [http://www.law.cornell.edu/supct/html/historics/USSC_CR_0158_0601_ZD.html] ]

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 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.cite journal |last=Bittker |first=Boris I. |authorlink=Boris Bittker|coauthors= |year=1987 |month= |title=Constitutional Limits on the Taxing Power of the Federal Government |journal=The Tax Lawyer |volume=41 |issue=1 |pages=3 |issn=08904898 |url= |accessdate= |quote= ("Pollock" case "was in effect reversed by the sixteenth amendment").]

ubsequent 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, thus 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, and thusly were entitled to be so enforced afterwards. [ [http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=US&vol=240&invol=1#17 FindLaw for Legal Professionals - Case Law, Federal and State Resources, Forms, and Code ] ] 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 Company" 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). [Howard Zaritsky, Legislative Attorney American Law Division, "Some Constitutional Questions Regarding The Federal Income Tax Laws" Report No. 79-131 A, (Congressional Research Service Report for Congress) May 25, 1979.]

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."

ee also

* "United States v. E. C. Knight Co.", 156 U.S. 1 (1895)

References