Pollock V. Farmers' Loan & Trust Co. - Subsequent History

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 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 (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, which Pollock had ruled was direct, from therefore having to be apportioned. It achieved this by declaring that Congress could tax income from any source without apportionment.

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., 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.