Pollock v. Farmers’ Loan and Trust Co. (1895)

Introduction

The taxation system in the United States has undergone a convoluted and taxing (no pun intended) process in order to arrive at the complex system that grants, yet at the same time curtails the authority of Congress to tax. Pollock v. Farmers Loan and Trust Co (1895) is most certainly a landmark case in this process, as it challenged the constitutionality of direct taxes without the apportionment requirement, as well as the requirement of uniformity on all taxes. Eventually led to the sixteenth amendment in 1913, which gave the government power to an income tax.

In 1894 Congress passed The Revenue Act that imposed a two percent tax on any citizen whose annual income exceeds $4000. As a result, Charles Pollock, a Massachusetts citizen who owned shares of Farmer’s Loan and Trust Company, was obliged to pay the two percent of the revenue he acquired from those shares. The initial decision of the court was in favor of Farmer’s Loan and Trust Company who automatically deducted those taxes from Pollock’s revenue. The next decision was to appeal that decision to the Supreme Court.

Pollock sued on the grounds that the tax on his income was unconstitutional, article I section IX states that “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken…” [1].  Section XIII of article I also states that “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;”. 1 Some of Pollock’s income was from rent on real estate that he owned. The big debate was whether Pollock’s income was a direct one. Knowing this Pollock also argued that even if the tax in considered an indirect tax, the rule of uniformity must apply, and in his case it does not.

According to the Stare Decisis doctrine the Supreme Court must try to rely on precedents made by the Supreme Court, and so they did in this case. Hylton v United States (1796) concluded that a direct tax was a tax on persons and a tax on land. [2] The Justices in Pollock v Farmer’s loan and Trust Co, ended up striking down the Revenue Act of 1894 and ruling in favor of the appellant, Charles Pollock with a 5-4 decision. Justice Fuller in his majority opinion concluded that since tax on land is considered a direct tax, tax on income from land should be considered direct as well. [3]

The decision of the court in this case created a movement, one that will bring about the 16th Amendment, which consequently turns this case moot.

[1] http://www.archives.gov/exhibits/charters/constitution_transcript.html
[2] Johnson, Calvin H. 2007.  “The Four Good Dissenters In Pollock.” Journal Of Supreme Court History 32. no. 2: 162-177. Academic Search Complete. EBSCOhost (Accessed September 30, 2015)
[3] Jensen, Erik M. 2014. “Did the Sixteenth Amendment Ever Matter? Does it Matter Today?.” Northwestern University Law Review 108, no. 3: 799-824. Academic Search Complete, EBSCOhost (accessed October 4, 2015).

 Case Timeline

Background

Article I of the constitution proclaims the majority of powers vested to the legislative branch. It is known that the power of the purse is granted to Congress, however Pollock v Farmers’ Loan and Trust Co. (1895) questions the extent to which this power holds. As is known, the Constitutional text is vague and can be interpreted in different ways. Some Justices prefer to refer to the text as literal as possible, others prefer to consider the intent of those who fathered the constitution rather than the precise language. The power of taxation by congress has been a controversial matter; this is especially true prior to the ratification of the 16th Amendment (1913), which broadened Congress’s ability to impose an income tax. Preceding the 16th Amendment, the only mention of the authority of Congress to collect money through taxation would be found in Article I of the Constitution. Within it the framers intended to set guidelines and distinctions between direct and indirect taxes, as well as how Congress shall impose taxes while refraining from the exploitation of the people. Section 9 of Article I identifies the rule of apportionment, stated that when a direct tax is imposed it must be apportioned[1] according to the population of the States. Section 8 of Article I discusses the rule of uniformity, where a tax must remain consistent across the geographical borders of the United States. Finally, the 4th clause of Section 9 within Article I discusses direct taxation stating that “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken”. This leads us to the main issue in this case.

Charles Pollock was a Massachusetts resident who decided to sue Farmers’ Loan and Trust Company, of which he was a shareholder. The New York based company decided to comply with the Wilson- Gorman Tariff Act of 1894 that enacted a progressive- esque tax (a form of taxation where  taxing authority charges more taxes as the income of the taxpayer increases, thus people who earn more money have to pay), stating that any person whose “gains profit and incomes” are in excess of $4000 shall be subjected to a 2% taxation rate. According to this act, Pollock had a fiduciary obligation to pay the 2%. Pollock sued under the claim that this tax is unconstitutional, claiming that it is a direct tax since it cannot be considered an excise tax, thus it must meet the apportionment requirement. The tax imposed under the Tariff act of 1894 clearly contradicts to apportionment requirement; it is impossible to have both a progressive tax and an apportioned tax, hence its unconstitutionality. 

The controversial issue in Pollock v Farmers’ Loan and Trust Co. is whether an income tax should be considered a direct or indirect tax. Hylton v United States (1796) had established that a direct tax has to be apportioned with proportion to the size of the population (i.e. the state then decides how each person will contribute to the amount owed) as well as a tax on land. The judges, in a very close vote of 5-4 lead by Chief Justice Fuller ruled in favor of Pollock, stating since income tax cannot be categorized as an excise tax, is indeed a direct  tax and must meet the apportionment requirement. Thus nulling the Tariff Act of 1894.

“The Definition of a Progressive Tax” The Economic Times. Accessed December 2, 2015. http://economictimes.indiatimes.com/definition/Progressive-Tax  

Procedural History

Pollock lost the case in the lower courts. The Supreme Court reversed the decision made by the Circuit Court of the United States For the Southern District of New York, only after a second time reviewing it. This case had to be reviewed again after 4-4 tied vote by the justices, since Justice Jackson was away due to an illness (Jackson ended up passing away three months after the case was decided). As a result, Justice Jackson had to travel back to Washington DC to assist with the decision of the Court, where he ended up voting against the appellant. As it turns out, Justice Fields had a change of heart and voted in favor of the appellant the second time around resulting in a 5-4 decision granting Pollock a win in the case.

[1] The apportionment requirement held that direct taxation should be in accordance to the number of population living in each state, for example if one state had double the amount of people than another, than the amount of direct taxation would be doubled as well. This came in favor of southern states, since direct taxation was initially viewed as taxation on people and on land, the southern states who had large amounts of land, and a higher amount of slaves (but not necessarily as high of a population as the northern states) they would have more taxation per capita if the apportionment was not required. Thus the apportionment requirement does not focus on items and/ or people who can be taxed, but on the actual population of the state. https://law.utexas.edu/faculty/calvinjohnson/directtax.pdf

Issues

The first issue presented by Fuller questions the legality of imposing a tax on income or on real estate with the attempt to label said tax as a direct tax. The problem that arises is the unconstitutionality of the income tax brought forth to question by claiming the tax is a direct tax while disregarding the rule of apportionment.[1] This is the first reason for the issue, catered to the objection that could be raised by claiming the tax to be direct, which raises the question of whether or not the tax was considered a direct tax?

If the tax were to be brought forth as an indirect tax, would it be constitutional? The second issue addresses the problem, which is the invalidity of the tax even it was to be brought forth as an indirect tax. The tax is unable to be labeled as indirect because it did not meet the uniformity requirement, which stated that all indirect taxes must be applied “equally and impartially” in all similar situations.[2] Only companies or corporations that profit over $4,000 are subjected to a tax.

If this tax was passed, is justly applied regarding state and municipal bonds? The third issue stated that the tax in question was invalid because it attempted to tax state and municipal bonds, which are “instruments and governmental functions of State governments”[3] which the United States federal government has no authority over.  

[1] Pollock v. Farmers Trust and Loan Co. 1895. SOURCE:https://supreme.justia.com/cases/federal/us/157/429/case.html
[2] Ibid pg. 3
[3] Francis R. Jones, “POLLOCK V. FARMERS’ LOAN AND TRUST COMPANY.” Harvard Law
Review 9.3 (1895): 30‐43. Business Source Complete. Accessed September 30, 2015, doi:10.2307/1321669

Holdings

A five-four court holding decided that taxes on income from personal property were direct taxes, just as taxes on land were direct taxes, therefore the court held that an income tax was unconstitutional.[4]

Chief Justice Fuller: Yes. He concluded that just as taxes on real estate are direct taxes, taxes on the rents or income of real estate are also direct taxes.[5] “Taxes on personal property or the on the income of personal property, are likewise direct taxes.”[6] The tax imposed by sections of the Act of 1894 taxes income of real estate and of personal property as a direct tax, according to the Constitution, but is void because it avoids apportioning according to population.[7]

Justice Harlan: No. Held that the primary purpose of taxation by the government was to provide for the general welfare of the people.[8]

Justice Brown: No. Dissent stated that the definition of the direct tax should not only be addressing regarding the income tax, “but to every tax burden of which is borne,” by the person paying it, which ultimately does not follow what the framers had in mind.[9]

Justice Jackson: No. In his dissent, Jackson elaborated on the question, “whether a tax on incomes received from land and personality is a “direct tax,” and subject to the rule of apportionment.”[10]

Justice White: No. White references many intellectuals of the day in order to state his opinion, which is, that direct taxes were not only taxes on land and capitation and that the interpretation of Hylton was misled.[11]

Justice Paterson: Yes. He believed the term “taxes” was intended to be interpreted broadly, which would allow Congress “plenary authority in all cases of taxation.”[12]

Justice Chase: Yes. “The great object of the Constitution was to give Congress a power to lay taxes adequate to the exigencies of government; but they were to observe two rules in imposing them, namely, the rule of uniformity, when they laid duties, imposts, or excises, and the rule of apportionment according to the census, when they laid any direct tax. . . . The Constitution evidently contemplated no taxes as direct taxes, but only such as Congress could lay in proportion to the census.[13]

Justice Iredell: Yes. Taxes must be uniform and apportioned as stated in the Constitution, and the tax cannot meet the requirements they shall be unconstitutional.[14]

Justice Wilson: Yes. Wilson cited Hylton v. United States in order to contrast the differences between a direct tax on carriages (made in favor of southern states) in the Hylton case and the direct tax on real estate or income in Pollock.[15]

[4]  “Supreme Court Case Pollock v. Farmers Trust and Loan Co. 1895.” American History: From Revolution to Reconstruction and Beyond.” Accessed October 24, 2015. http://www.let.rug.nl/usa/documents/1876-1900/supreme-court-case-pollock-v-farmers-loan-and-trust-co-1895.php
[5] Ibid., “Mr. Chief Justice Fuller delivered the opinion of the court”
[6] Ibid., “Mr. Chief Justice Fuller delivered the opinion of the court”
[7] Ibid., “Mr. Chief Justice Fuller delivered the opinion of the court”
[8] Pollock v. Farmers Trust and Loan Co. 1895. Pg. 73
[9] https://www.law.cornell.edu/supremecourt/text/158/601#writing-USSC_CR_0158_0601_ZD. “Mr. Justice Brown dissenting.” Accessed October 24, 2015
[10] Ibid., “Mr. Justice Jackson dissented.”
[11] Ibid., “Mr. Justice White dissented:”
[12] Ibid., “Mr. Justice Paterson said.”
[13] Ibid., “Mr. Justice Chase said.”
[14] Ibid., “Mr. Justice Iredell said.”
[15] Ibid., “Mr. Wilson said.”

Majority Opinion

The issue the Supreme Court faced was if the income tax was a direct tax in violation of the constitution. The holding states the income taxes were direct and unconstitutional because they did not meet the apportionment rule.

In Chief Justice Fuller’s opinion he states “First. That the law in question, in imposing a tax on the income or rents of real estate, imposes a tax upon the real estate itself, and in imposing a tax on the interest or other income of bonds or other personal property held for the purposes of income or ordinarily yielding income, imposes a tax upon the personal estate itself; that such tax is a direct tax, and void because imposed without regard to the rule of apportionment, and that, by reason thereof, the whole law is invalidated.” The majority ruled that the tax was indeed a direct tax and as a direct tax it had to be apportioned among the states. In Pollock’s case the tax was not apportion making it void and making the law invalidated. “A tax upon property holders in respect of their estates, whether real or personal, or of the income yielded by such estates, and the payment of which cannot be avoided, are direct taxes”

“Second, That the law is invalid because imposing indirect taxes in violation of the constitutional requirement of uniformity, and there in also in violation of the implied limitation upon taxation that all tax laws must apply equally, impartially, and uniformly to all similarly situated.” The Majority also found that there imposing of indirect taxes was in violation of the constitutional requirement of uniformity. The law taxed companies at a higher rate than the incomes of individuals. It exempts the act of taxation of similar companies that have similar property and carrying on business to those expressly taxed. It derived individuals there income shared from certain companies with the exemption of 4,000 that was granted to others with similar property; this exemption existing specifically for the benefit of its members. The exemptions were arbitrary and justified no purpose and as a result invalidated the whole enactment. Thus ruling taxes on personal property or the income of personal property is a direct tax.

“Third, That the law is invalid so far as imposing a tax upon income received from state and municipal bonds.” The tax imposed by sections 27 through 37 of the act of 1894 fall under the income of real estate and personal property making them a direct tax according to the constitution. This means they are unconstitutional and void because they are not apportioned according to representation. Resulting in all those sections, constituting one entire scheme of taxation, are invalid

“Pollock v. Farmers’ Loan & Trust Company 158 U.S. 601 (1895).” Justia Law. Web. 26 Oct. 2015.Contains the court majority opinion for Pollock v Farmers Loan and Trust Co.
“Supreme Court Case Pollock v. Farmer’s Loan and Trust Co. 1895.” Web. 26 Oct. 2015.University Document with valuable information on Chief Justice Fullers opinion of the court.

Separate Opinions

The majority Opinion  was written by Chief Justice Fuller. In the opinion he stated that the  founders predicted that state expenditures (i.e. cities, counties) would be subjected to direct taxation on “accumulated property,” whereas indirect taxes would be implemented by the Federal government. If the federal government were to levy a direct tax it would have to be done out of necessity and should not be excised unfairly or discriminatorily.[16] The Constitution prohibits direct taxation, unless ascertained by a census with respect to apportionment.  However, the problem at hand is whether Congress can lay a direct tax on an individual without regard to state lines.[17] Justice Fuller noted the main issue to be that the income tax being levied was unapportioned and thus in violation of the Constitution.

The dissenting opinion was written by Justice Harlan. Justice Harlan, who was fiercely against the court’s holding of the case, and stated, “a tax on income derived from real property ought not to be, and until now has never been, regarded by any court as a direct tax on such property within the meaning of the Constitution.”[18]  Harlan cited the Hylton case in order to acknowledge how that case created an understanding that taxes on income from real property can be collected only by apportioning states.[19] Harlan claimed that the government must evolve for the preservation of the Union, and the Pollock case will set Congress back, and will limit the Federal government if a vital time were to arise.[20] The apportionment requirement does a great injustice to the nation, while only benefiting few particular states.[21]  Harlan’s concluding statement was that he “cannot assent to an interpretation of the Constitution that impairs and cripples the just powers of the National Government in the essential matter of taxation, and at the same time discriminates against the greater part of the people of our country.”[22]

[16] “Supreme Court Case Pollock v. Farmers Trust and Loan Co. 1895.” American History: From Revolution to Reconstruction and Beyond.” Accessed October 24, 2015. http://www.let.rug.nl/usa/documents/1876-1900/supreme-court-case-pollock-v-farmers-loan-and-trust-co-1895.php
[17] Ibid., (see above)
[18] Ibid., (see above)
[19] Ibid., (see above)
[20] Ibid., (see above)
[21] Ibid., (see above)
[22]Ibid., (see above)

Significance / Impact

Even though the Court ruled in Springer v. U.S (1881) that the Civil War income tax was within the category of an excise or duty, due to the precedent set by the Hylton (1796) decision, chief justice Fuller ruled in favor of the appellant in Pollock v Farmers Trust and Loan Co (1895), and stated that income tax, as well as any tax on income from property is a direct tax, and must meet the apportionment requirement. Many had expected the court to have used the Springer precedent rather than the Hylton precedent.3  

This decision not only overturned the Revenue Act of 1894 just one year after it was passed, deeming it unconstitutional, it also shocked many scholars and legislatures of that time.3 Taxation on income would be a major source of revenue for the federal government, as well as greatly help to reduce any national debt accrued in previous wars.2 The court had insinuated that a tax just on income (rather on income from property which was directed at the wealthiest people) would have had a chance to be deemed constitutional.3 Congress has always had the power to tax income, so long as it met the apportionment requirement.3 After the astounding decision in Pollock, great efforts for an addition of an amendment to the constitution began to take place, an amendment in favor of taxation on income with the dismissal of the requirement for apportionment.

In 1909 the 16th amendment was drafted, in 1913 it was finally ratified and added to the constitution.3  The 16th amendment shall read: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”1 With the ratification of this amendment, Congress was no longer obliged to consider the apportionment requirement ONLY when it concerned taxation on income. Congress was now allowed to tax citizens on all types of income, including income on property.3

Interest, rent, dividends, and royalties could be reached by the income tax after ratification of the Amendment but only because o f the Amendment. The Amendment really did matter legally in 1913.3 The 16th Amendment still matters today because it is a primary source of federal revenue and prevents the federal government from seeking a different way to raise revenues from its citizens.3 In addition to that, Hylton and Pollock are technically still the law, thus without the 16th Amendment an unapportioned tax on income would be unconstitutional thus, depriving the government of one of its main sources of revenue. The ratification of the Amendment has caused the main issues in the case, and the controversy over the decision in the case moot.3

Interestingly, Chief Justice Roberts favorably cited Pollock in his majority opinion of the National Federation of Independent Business v. Sebelius (2012), agreeing with the decision of the court in Pollock that a tax on income from property, as well as capitation taxes are to only taxes to be considered direct taxes. Thus in the case of NFIB, the penalty for people failing to comply with the Affordable Care Act is considered a tax, which cannot be viewed as a direct tax and as a result does not need be apportioned.3 This was the first time in decades that the apportionment requirement and Pollock were mentioned in a Supreme Court decision. Thus, proving that Pollock as well as the 16th Amendment are still significant to the Constitution.


Text of Case Opinions

Syllabus

Majority Opinion (Fuller)

Dissenting Opinion (White)

 


 External Resource Links

  1. http://www.archives.gov/exhibits/charters/constitution_transcript.html This is a link to the constitution, all of the amendments, it also states any changes and ratifications made to the constitution since its creation.
  2. https://law.utexas.edu/faculty/calvinjohnson/directtax.pdf This is a PDF that helps in understanding the apportionment requirement, as well as other matters in the case.
  3. http://www.oxfordreference.com/view/10.1093/oi/authority.20110803100525435. This link offers insight on the background information in the Springer v. U.S case.
  4. https://www.oyez.org/cases/1987/94%20ORIG This link outlines the case of South Carolina v. Baker.
  5. https://www.oyez.org/cases/1789-1850/3us171 This link outline the case of Hylton v. U.S.
  6. http://www.innocencerevealed.com/innocence_revealed/references/Court_Cases/POLLOCK_V_FARMERS_1895.pdf This link describes the case from its inception in the Circuit Court

Major Statute Under Review

Federal Income Tax Act


Important Precedents

Hylton v. United States (1796) 

Springer vs. U.S. (1881)


Important Subsequent Cases

South Carolina v. Baker(1988)


 

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