Five-minute digest
Pollock v. Farmers' Loan & Trust Co.
Summary
The Wilson Tariff Act of 28 August 1894, which became law without President Cleveland's signature, lowered tariff rates and imposed a two percent tax on incomes above $4,000 a year, including rents, interest, dividends and business profits, for the years 1895 through 1899. Charles Pollock, a shareholder of the Farmers' Loan and Trust Company of New York, sued to stop the company from paying the tax, a form of suit that allowed the question to reach the courts before collection. The Constitution requires that any direct tax be apportioned among the states by population; the 1894 tax was not apportioned. At the first hearing, in April 1895, the Court held that a tax on income from land was in effect a tax on the land itself, and so a direct tax, and that the federal government could not tax income from state and municipal bonds. With Justice Jackson absent, the eight justices divided equally on the remaining questions. A rehearing before the full Court followed in May. Those challenging the tax argued that a tax on the income of property is a tax on the property, that the framers required apportionment to protect the states and owners of accumulated wealth from unequal federal burdens, and that Hylton v. United States (1796) had decided only that a carriage tax was an excise. The government argued that for a century Congress and the Court had treated only capitation taxes and land taxes as direct, as Veazie Bank v. Fenno had confirmed, and that an income tax was a duty or excise that need only be uniform. On 20 May 1895 the Court ruled five to four that the tax was void. Chief Justice Fuller held that a tax on the whole income of real estate and of invested personal property is a direct tax, read the Convention's compromise linking representation and direct taxation as a deliberate protection, and explained that any inequality from apportionment was an inequality stipulated for. Because the tax on property income was the larger part of a single scheme, sections 27 to 37 fell entirely, including the tax on wages and business profits. If the Constitution ought to allow such a tax, Fuller wrote, it provides the means of its own amendment. Justice Harlan dissented at length from history and precedent and objected to striking down the whole scheme; Justice White, in a statement of points, defended the settled meaning of direct taxes. The library text contains Fuller's rehearing opinion with excerpts from the Harlan and White dissents, without footnotes; the dissents of Justices Brown and Jackson are not included. Congress proposed an income-tax amendment in 1909, and the Sixteenth Amendment, ratified in February 1913, permits taxes on incomes from whatever source derived without apportionment.
Top Lessons
Defining a direct tax
The Constitution never defines direct taxes. Fuller reasons from the purpose of apportionment and from the economic nature of income from property; the dissenters rely on a century of practice and precedent limiting the term to head and land taxes. The case shows how a single undefined word can carry great consequences.
A compromise built into the Constitution
Fuller treats apportionment as one of the bargains of 1787, like equal representation of the states in the Senate. Even if it produced inequality, he argues, it was an inequality the states had agreed to, and the Court must enforce it.
When part of a law falls
After deciding that the tax on property income was invalid, the Court had to decide whether the rest of the income tax could stand. Fuller concluded that Congress would not have enacted it alone; Harlan replied that the Court should not take from the government the entire revenue because one part failed.
Amendment as the remedy
Fuller wrote that if the Constitution should permit an unapportioned income tax, the instrument defines the way for its amendment. Eighteen years later the people took that path in the Sixteenth Amendment, an example of the constitutional system responding to a judicial decision through its own procedures.
Verified Quotes
“If, in the changes of wealth and population in particular states, apportionment produced inequality, it was an inequality stipulated for, just as the equal representation of the states, however small, in the senate, was stipulated for.”
Frequently cited
“A tax upon one's whole income is a tax upon the annual receipts from his whole property, and as such falls within the same class as a tax upon that property, and is a direct tax, in the meaning of the constitution.”
Frequently cited
“If it be true that the constitution should have been so framed that a tax of this kind could be laid, the instrument defines the way for its amendment.”
“It is appropriate now to say that, however objectionable the law would have been, after the provision for taxing incomes arising from rents was stricken out, I did not then, nor do I now, think it within the province of the court to annul the provisions relating to incomes derived from other specified sources, and take from the government the entire revenue contemplated to be raised by the taxation of incomes, simply because the clause relating to rents was held to be unconstitutional.”
“Whence the 'century of error' is evolved, unless the cases relied on decided that the word 'direct' was not to be considered in its economic sense, does not appear from the argument.”
Medical Lens
The opinions address the constitutional classification of an income tax and the apportionment of direct taxes; there is no medical subject matter.