Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429 (1895)
In a decision later nullified by the Sixteenth Amendment, the Court held that income taxes are direct taxes and thus must be divided among states according to population.
U.S. Supreme CourtPollock v. Farmers' Loan & Trust Co., 157 U.S. 429 (1895)
Pollock v. Farmers' Loan and Trust Company
Argued March 7, 8. 11, 12, 13, 1895
Decided April 8, 1895.
157 U.S. 429
A court of equity has jurisdiction to prevent a threatened breach of trust in the misapplication or diversion of the funds of a corporation by illegal payments out of its capital or profits.
Such a bill being filed by a stockholder to prevent a trust company from voluntarily making returns for the imposition and payment of a tax claimed to be unconstitutional, and on the further ground of threatened multiplicity of suits and irreparable injury, and the objection of adequate remedy at law not having been raised below or in this court, and the question of jurisdiction having been waived by the United States so far as it was within its power to do so, and the relief sought being to prevent the voluntary action of the trust company, and not in respect to the assessment and collection of the tax, the court will proceed to judgment on the merits.
The doctrine of stare decisis is a salutary one, and is to be adhered to on proper occasions, in respect of decisions directly upon points in issue; but this court should not extend any decision upon a constitutional question if it is convinced that error in principle might supervene.
In the cases referred to in the opinion of the court in this case, beginning with Hylton v. United States, 3 Dall. 171, (February Term, 1796) and ending with Springer v. United States, 102 U. S. 586 (October Term, 1880), taxes on land are conceded to be direct taxes, and in none of them is it determined that a tax on rent or income derived from land is not a tax on land.
A tax on the rents or income of real estate is a direct tax within the meaning of that term as used in the Constitution of the United States.
A tax upon income derived from the interest of bonds issued by a municipal corporation is a tax upon the power of the State and its instrumentalities to borrow money, and is consequently repugnant to the Constitution of the United States.
So much of the act "to reduce taxation, to provide revenue for the government, and for other purposes," 28 Stat. 509, c. 349, as provides for levying taxes upon rents or income derived from real estate, or from the interest on municipal bonds, is repugnant to the Constitution of the United States, and is invalid.
Upon each of the other questions argued at the bar, to-wit: 1, whether the void provision as to rents and income from real estate invalidates
the whole act? 2, whether, as to the income from personal property a such, the act is unconstitutional as laying direct taxes? 3, whether any part of the tax, if not considered as a direct tax, is invalid for want of uniformity on either of the grounds suggested? -- the Justices who heard the argument are equally divided, and, therefore, no opinion is expressed.
This was a bill filed by Charles Pollock, a citizen of the State of Massachusetts, on behalf of himself and all other stockholders of the defendant company similarly situated against the Farmers' Loan and Trust Company, a corporation of the State of New York, and its directors, alleging that the capital stock of the corporation consisted of one million dollars, divided into forty thousand shares of the par value of twenty-five dollars each; that the company was authorized to invest its assets in public stocks and bonds of the United States, of individual States, or of any incorporated city, or county, or in such real or personal securities as it might deem proper, and also to take, accept, and execute all such trusts of every description as might be committed to it by any person or persons or any corporation, by grant, assignment, devise, or bequest, or by order of any court of record of New York, and to receive and take any real estate which might be the subject of such trust; that the property and assets of the company amounted to more than five million dollars, of which at least one million was invested in real estate owned by the company in fee; at least two millions in bonds of the city of New York, and at least one million in the bonds and stocks of other corporations of the United States; that the net profits or income of the defendant company during the year ending December 31, 1894, amounted to more than the sum of $300,000 above its actual operating and business expenses, including losses and interest on bonded and other indebtedness; that, from its real estate, the company derived an income of $50,000 per annum, after deducting all county, state, and municipal taxes, and that the company derived an income or profit of about $60,000 per annum from its investments in municipal bonds.
It was further alleged that, under and by virtue of the powers
conferred upon the company, it had from time to time taken and executed, and was holding and executing, numerous trusts committed to the company by many persons, copartnerships, unincorporated associations, and corporations, by grant, assignment, devise, and bequest, and by orders of various courts, and that the company now held as trustee for many minors, individuals, copartnerships, associations, and corporations, resident in the United States and elsewhere, many parcels of real estate situated in the various States of the United States, and amounting, in the aggregate, to a value exceeding five millions of dollars, the rents and income of which real estate collected and received by said defendant in its fiduciary capacity annually exceeded the sum of two hundred thousand dollars.
The bill also averred that complainant was and had been since May 20, 1892, the owner and registered holder of ten shares of the capital stock of the company, of a value exceeding the sum of $5,000; that the capital stock was divided among a large number of different persons who, as such stockholders, constituted a large body; that the bill was filed for an object common to them all, and that he therefore, brought suit not only in his own behalf as a stockholder of the company, but also as a representative of and on behalf of such of the other stockholders similarly situated and interested as might choose to intervene and become parties.
It was then alleged that the management of the stock, property, affairs, and concerns of the company was committed under its acts of incorporation to its directors, and charged that the company and a majority of its directors claimed and asserted that, under and by virtue of the alleged authority of the provisions of an act of Congress of the United States entitled, "An act to reduce taxation, to provide revenue for the government, and for other purposes," passed August 15, 1894, the company was liable, and that they intended to pay to the United States before July 1, 1895, a tax of two percentum on the net profits of said company for the year ending December 31, 1894, above actual operating and business expenses, including the income derived from its real estate and
its bonds of the city of New York, and that the directors claimed and asserted that a similar tax must be paid upon the amount of the incomes, gains, and profits, in excess of $4000, of all minors and others for whom the company was acting in a fiduciary capacity. And further, that the company and its directors had avowed their intention to make and file with the collector of internal revenue for the second district of the city of New York a list, return, or statement showing the amount of the net income of the company received during the year 1894 as aforesaid, and likewise to make and render a list or return to said collector of internal revenue, prior to that date, of the amount of the income, gains, and profits of all minors and other persons having incomes in excess of $300, for whom the company was acting in a fiduciary capacity.
The bill charged that the provisions in respect of said alleged income tax incorporated in the act of Congress were unconstitutional, null, and void, in that the tax was a direct tax in respect of the real estate held and owned by the company in its own right and in its fiduciary capacity as aforesaid by being imposed upon the rents, issues, and profits of said real estate, and was likewise a direct tax in respect of its personal property and the personal property held by it for others for whom it acted in its fiduciary capacity as aforesaid, which direct taxes were not in and by said act apportioned among the several States as required by section 2 of article I of the Constitution, and that, if the income tax so incorporated in the act of Congress aforesaid were held not to be a direct tax, nevertheless its provisions were unconstitutional, null and void in that they were not uniform throughout the United States as required in and by section of article I of the Constitution of the United States, upon many grounds and in many particulars specifically set forth.
The bill further charged that the income tax provisions of the act were likewise unconstitutional in that they imposed a tax on incomes not taxable under the Constitution and likewise income derived from the stocks and bonds of the States of the United States and counties and municipalities therein,
which stocks and bonds are among the means and instrumentalities employed for carrying on their respective governments, and are not proper subjects of the taxing power of Congress, and which States and their counties and municipalities are independent of the general government of the United States, and the respective stocks and bonds of which are, together with the power of the States to borrow in any form, exempt from Federal taxation.
Other grounds of unconstitutionality were assigned, and the violation of articles IV and V of the Constitution asserted.
The bill further averred that the suit was not a collusive one to confer on a court of the United States jurisdiction of the case of which it would not otherwise have cognizance, and that complainant had requested the company and its directors to omit and refuse to pay said income tax, and to contest the constitutionality of said act, and to refrain from voluntarily making lists, returns, and statements on its own behalf and on behalf of the minors and other persons for whom it was acting in a fiduciary capacity, and to apply to a court of competent jurisdiction to determine its liability under said act, but that the company and a majority of its directors, after a meeting of the directors at which the matter and the request of complainant were formally laid before them for action, had refused and still refuse, and intend omitting to comply with complainant's demand, and had resolved and determined, and intended to comply with all and singular the provisions of the said act of Congress, and to pay the tax upon all its net profits or income as aforesaid, including its rents from real estate and its income from municipal bonds, and a copy of the refusal of the company was annexed to the complaint.
It was also alleged that, if the company and its directors, as they proposed and had declared their intention to do, should pay the tax out of its gains, income, and profits, or out of the gains, income, and profits of the property held by it in its fiduciary capacity, they will diminish the assets of the company and lessen the dividends thereon and the value of the shares; that voluntary compliance with the income tax provisions would expose the company to a multiplicity of suits, not only by and
on behalf of its numerous shareholders, but by and on behalf of numerous minors and others for whom it acts in a fiduciary capacity, and that such numerous suits would work irreparable injury to the business of the company, and subject it to great and irreparable damage, and to liability to the beneficiaries aforesaid, to the irreparable damage of complainant and all its shareholders.
The bill further averred that this was a suit of a civil nature in equity; that the matter in dispute exceeded, exclusive of costs, the sum of five thousand dollars, and arose under the Constitution or laws of the United States, and that there was furthermore a controversy between citizens of different States
The prayer was that it might be adjudged and decreed that the said provisions known as the income tax incorporated in said act of Congress passed August 1, 1894, are unconstitutional, null, and void; that the defendants be restrained from voluntarily complying with the provisions of said act and making the lists, returns, and statements above referred to, or paying the tax aforesaid, and for general relief.
The defendants demurred on the ground of want of equity, and the cause having been brought on to be heard upon the bill and demurrer thereto, the demurrer was sustained and the bill of complaint dismissed with costs, whereupon the record recited that the constitutionality of a law of the United States was drawn in question, and an appeal was allowed directly to this court.
An abstract of the act in question will be found in the margin. *
By the third clause of section two of Article I of the Constitution, it was provided:
"Representatives and direct taxes shall
be apportioned among the several States which may be included within this Union, according to their respective numbers,
which shall be determined by adding to the whole number of free persons, including those bound to service for term of
years, and excluding Indians not taxed, three-fifths of all other persons."
This was amended by the second section of the
Fourteenth Article, declared ratified July 28, 1868, so that the whole number of persons in each State should be counted,
Indians not taxed excluded, and the provision, as thus amended, remains in force.
The actual enumeration was prescribed to be made within three years after the first meeting of Congress and within every subsequent term of ten years, in such manner as should be directed.
Section 7 requires "all bills for raising revenue shall originate in the House of Representatives."
The first clause of section 8 reads thus:
"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."
And the third clause thus:
"To regulate commerce with foreign nations, and among the several States, and with the Indian tribes."
The fourth, fifth, and sixth clauses of section are as follows:
"No capitation, or other direct, tax shall be laid, unless in proportion to the census or enumeration hereinbefore directed to be taken."
"No tax or duty shall be laid on articles exported from any State."
"No preference shall be given by any regulation of commerce or revenue to the ports of one State over those of another; nor shall vessels bound to, or from, one State, be obliged to enter, clear, or pay duties in another."
It is also provided by the second clause of section 10 that
"no State shall, without the consent of the Congress, lay any imposts or duties on imports or exports, except what may be
absolutely necessary for executing its inspection laws;"
and, by the third clause, that "no State shall, without the consent of Congress, lay any duty of tonnage."
The first clause of section 9 provides:
"The migration or importation of such persons as any of the States now existing shall think proper to admit shall not be prohibited by the Congress prior to the year one thousand eight hundred and eight, but a tax or duty may be imposed on such importations, not exceeding ten dollars for each person."
Article V prescribes the mode for the amendment of the Constitution, and concludes with this proviso:
"Provided that no amendment which may be made prior to the year one thousand eight hundred and eight shall in any manner affect the first and fourth clauses in the ninth section of the first article. "