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Historical Perspectives on the Federal Income Tax

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The most direct answer to this question is that, since the ratification of the
Sixteenth Amendment, it makes no practical difference which classification one
gives to the income tax. As stated above, the only distinction between a direct
tax and an indirect tax is that the direct tax must be apportioned. As discussed
below, the Sixteenth Amendment, without classifying the income tax, empowers
Congress to lay and collect taxes on incomes, from whatever source, without
apportionment.  `

Prior to the ratification of the Sixteenth Amendment, the question of classification of the income tax was central to the determination as to its constitutionality. In Pollock v. Farmers' Loan and Trust Company,5 the Supreme Court struck down the Income Tax Act of 1894.6 The 1894 Act imposed a Federal income tax on:

the gains, profits, and income received in the preceding calendar year by every citizen of the United States ...whether said gains, profits, or income be derived from any kind of property, rents, interest, dividends, or salaries, or from any


profession, trade, employment, or vocation carried on in the United States or elsewhere...,

After extensive examination of the history of the constitutional provisions dealing with the Federal taxing power, the Court found that the Constitution had sought to avoid the levy of a burdening tax on accumulations of property, real or personal, except as subject to the "regulation of apportionment." 7   The Court concluded that a tax imposed on the rents or income of real estate was not significantly distinct from a tax on the property itself and was, therefore, a direct tax within the meaning of the Constitution.8

The Pollock Court did not, however, hold that all income taxes were direct taxes. Rather, it held that although income taxes are generally indirect taxes in the nature of excises (subject only to the rule of uniformity), income taxes on the gains derived from investments in real or personal property had so substantial an impact on the underlying assets that they should be viewed as direct taxes falling on the property.  In this respect, the 1894 tax would have been valid to the extent that it was imposed on "gains, profits, or income ...derived from... salaries, or from any profession, trade, employment, or vocation..."9  Nonetheless, on rehearing Pollock, the Court struck down the entire 1894 Act because it believed that to void only the tax on income derived from investments in real and personal property and leave the tax burden solely upon wages and other forms of compensation income would be contrary to the congressional intent.10

Some uncertainty followed in the years after Pollock. The Court held repeatedly that various taxes imposed by the Congress were indirect in nature and could be levied without regard to the rule of apportionment.11

The Sixteenth Amendment to the United States Constitution was ratified in 1913, and provides that:

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.


The Congress immediately took advantage of this perceived clarification of its power and enacted another Federal income tax substantially similar to the 1894 tax.12 The 1913 tax was imposed on:

gains, profits, and income derived from salaries, wages, or compensation for personal service of whatever kind and in whatever form paid, or from professions, vocations, businesses, trade, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in real or personal property, also from interest, rent, dividends, securities, or the transaction of any lawful business carried on for gain or profit, or gains or profits and income derived from any source whatever, including the income from but not the value of property acquired by gift, bequest, devises or descent.

In 1916, the Supreme Court examined the new income tax in light of the Sixteenth Amendment and the other constitutional provisions discussed above and found that it was constitutional in its entirety. The review of the 1913 income tax came in Brushaber v. Union Pacific Railroad Company,13 in which a stockholder of the Union Pacific Railroad Company sought to enjoin the corporation from paying the recently-imposed income tax on the grounds that the tax was unconstitutional. The Supreme Court, in a decision written by Chief Justice White, first noted that the Sixteenth Amendment did not authorize any new type of tax, nor did it repeal or revoke the tax clauses of Article 1 of the Constitution, quoted above. Direct taxes were, notwithstanding the advent of the Sixteenth Amendment, still subject to the rule of apportionment and indirect taxes were still subject to the rule of uniformity. Rather, the Court found that the Sixteenth Amendment sought to restrain the Court from viewing an income tax as a direct tax because of its close effect on the underlying property.

The Court noted that the inherent character of an income tax was that of an indirect tax, stating:

Moreover in addition the conclusion reached in the Pollock Case did not in any degree involve the holding that income taxes generically and necessarily came within the class of direct taxes on property, but on the contrary recognized the fact that taxation on income was in the nature an excise entitled to be enforced as such unless and until it was concluded that to enforce it would amount to accomplishing the result which the requirement as to apportionment of direct taxes was adopted to prevent, in which case the duty would arise to disregard form and consider substance alone and


hence subject the tax to the regulation as to apportionment which otherwise as an excise would not apply to it.14

The language of the Sixteenth Amendment, the Court found in Bruahaber, was solely intended to eliminate:

the principle upon which the Pollock Case was decided, that is, of determining whether a tax on income was direct not by a consideration of the burden placed on the taxed income upon which it directly operated, but by taking into view the burden which resulted on the property from which the income was derived since in express terms the Amendment provides that income taxes, from whatever source derived, shall not be subject to the regulation of apportionment.15

3          Act of August 6, 1861, $ 8, 12 Stat. 295.

4          United States v. Ptasynski, 462 U.S. 74 (1988).

5           157 U.S. 429 (1895), rehearing 158 U.S. 601(1896).

6            28 Stat. 509 (1894).

7         167 U.S. at 681.

8          Id. at 683.

9          28 Stat. 609.

10        168 US. at 637.

11      See, Nicol v. Ames, 173 U.S. 509 (1899) (tax on certain sales and exchanges of property); Knowlton v. Moore, 178 US 41(1900) (estate tax); and Patton v. Brady, 184 US. 609 (1902) (tax on manufactured tobacco); Flint v. Stone Tracy Co., 220 US. 108 (1911) (tax on corporate franchise).

12  38 Stat.166.

13                    240 U.S.1(1916).

14         Id. at 16-17.

15         Id. at 18.

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