Pollock v. Farmers’ Loan and Trust Co., 158 U.S. 601; 15 S. Ct. 912; 39 L. Ed. 1108 (1895)
Facts—Charles Pollock, a citizen of the state of Massachusetts, filed a bill on behalf of himself and all other stockholders of the company against the Farmers’ Loan and Trust Company, a corporation of the state of New York. The bill alleged that the defendant claimed authority under the provisions of the act of August 1894 (a statute providing for the imposition of a tax on incomes in excess of $4,000 received by individuals, associations, or corporations) to pay to the United States a tax of 2 percent on the net profits of money in question including income derived from real estate and bonds of municipal corporations owned by it. Moreover, the bill alleged that such a tax was unconstitutional, in that the income from stocks and bonds of the states of the United States, counties, and municipalities therein is not subject to taxation.
Question—Is this a direct tax? Did any partial unconstitutionality of the 1894 income tax law render it void in its entirety?
Decision—Yes (to both questions).
Reasons—C.J. Fuller (5–4). “If the revenue derived from municipal bonds cannot be taxed because the source cannot be, the same rule applies to revenue from any other source not subject to the tax; and the lack of power to levy any but an apportioned tax on real estate and personal property equally exists as to the revenue therefrom.”
The same statute may be in part constitutional and unconstitutional, and if the parts are wholly independent of each other, that which is constitutional may stand and that which is unconstitutional will be rejected. If they depend on each other for the outcome or purpose of the legislation, then both parts or all of the statute is unconstitutional.
The income from realty formed a vital part of this scheme for taxation. If that were to be stricken out and also all income from invested property, the largest part of the anticipated revenue would be eliminated, and this would leave the burden of the tax to be borne by the professions, trades, and labor. Thus, what was intended as a tax on capital would have remained in sub- stance a tax on occupations and labor. This was not the intention of Congress and the whole law had to be declared unconstitutional.
J. Harlan, J. Brown, J. Jackson, and J. White all authored dissents arguing that the constitutional prohibition of “direct taxes” was limited, that this decision conflicted with precedents, and that the people should consider using the amending process, as they eventually did, to overturn this decision.
Note—During the Civil War, Congress had levied an income tax to finance the war, which the Court upheld in Springer v. United States, 102 U.S. 586 (1881). Pollock reversed this view and the Sixteenth Amendment, in turn, reversed Pollock.