Stanton V. Baltic Mining Co.
In Parker v. Commissioner, tax protester Alton M. Parker, Sr., challenged the levying of tax upon individual income, based on language in the U.S. Supreme Court decision in Stanton v. Baltic Mining Co., to the effect 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 " The United States Court of Appeals for the Fifth Circuit rejected Parker's argument, and stated that Parker's proposition is "only partially correct, and in its critical aspect, is incorrect. The Court of Appeals re-affirmed that the Congress has the power to impose the income tax, and stated that the Sixteenth Amendment "merely eliminates the requirement that the direct income tax be apportioned among the states." The court ruled that Parker had raised a "frivolous" appeal.
Tax protesters argue that in light of this language, the income tax is unconstitutional in that it is a direct tax and that the tax should be apportioned (divided equally amongst the population of the various states).
The above quoted language in Stanton v. Baltic Mining Co. is not a holding of law in the case. (Compare Ratio decidendi, Precedent, Stare decisis and Obiter dictum for a fuller explanation.)
The quoted language regarding the "complete and plenary power of income taxation possessed by Congress from the beginning" is a reference to the power granted to Congress by the original text of Article I of the U.S. Constitution. The reference to "being taken out of the category of indirect taxation to which it belonged" is a reference to the effect of the 1895 Court decision in Pollock v. Farmers' Loan & Trust Co., where taxes on income from property (such as interest income and dividend income) — which, like taxes on income from labor, had always been considered indirect taxes (and therefore not subject to the apportionment rule) — were, beginning in 1895, treated as direct taxes. The Sixteenth Amendment overruled the effect of Pollock, making the source of the income irrelevant with respect to the apportionment rule, and thereby placing taxes on income from property back into the category of indirect taxes such as income from labor (the Sixteenth Amendment expressly stating that Congress has power to impose income taxes regardless of the source of the income, without apportionment among the states, and without regard to any census or enumeration).
The Court noted that the case "was commenced by the appellant as a stockholder of the Baltic Mining Company, the appellee, to enjoin the voluntary payment by the corporation and its officers of the tax assessed against it under the income tax section of the tariff act of October 3, 1913." On a direct appeal from the trial court, the U.S. Supreme Court affirmed the lower court's decision, which had dismissed Stanton's motion (i.e., had rejected Stanton's request) for a court order to prevent Baltic Mining Company from paying the income tax.
Stanton argued that the tax law was unconstitutional and void under the Fifth Amendment to the United States Constitution in that the law denied "to mining companies and their stockholders equal protection of the laws and deprive them of their property without due process of law." The Court rejected that argument. Stanton also argued that the Sixteenth Amendment "authorizes only an exceptional direct income tax without apportionment, to which the tax in question does not conform" and that therefore the income tax was "not within the authority of that Amendment." The Court also rejected this argument. Thus, the U.S. Supreme Court, in upholding the constitutionality of the income tax under the 1913 Act, contradicts those tax protesters arguments that the income tax is unconstitutional under either the Fifth Amendment or the Sixteenth Amendment.
Read more about this topic: Tax Protester Sixteenth Amendment Arguments, Sixteenth Amendment Effectiveness