Direct Taxes and the Sixteenth Amendment

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Article I, Section 9, Clause 4:

No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken.

In 1895, the Supreme Court expanded its interpretation of the meaning of direct taxes in its two decisions in Pollock v. Farmers’ Loan & Trust Co.,1 holding that taxes on real and personal property, and income derived from them, were direct taxes.2 These decisions significantly altered the Court’s direct tax jurisprudence. Considering whether an 1894 act that imposed unapportioned taxes on income derived from both real and personal property were direct taxes,3 the Court adopted two primary holdings on the scope of the Constitution’s “direct tax” clause. First, the Court held that taxes on real estate and personal property are direct taxes.4 Second, the Court held that a tax on income derived from real or personal property—as opposed to income derived from employment or some other source5 —is, in effect, a tax imposed directly on the property itself and is also a direct tax.6 Applying these holdings, the Court held that the provisions before it were unconstitutional because they were unapportioned taxes on income derived from real and personal property.7

The Pollock Court concluded that its holding did not conflict with the Court’s prior decisions interpreting the direct tax language.8 The Court reasoned that each of those decisions had sustained unapportioned taxes as either “excises” or “duties” imposed on a particular use of, or privilege associated with, the property in question, not as a tax on the property itself.9 As to Hylton specifically, the Court determined that it had upheld the unapportioned carriage tax as an “excise” on the “expense” or “consumption” of carriages, rather than as a tax on carriage ownership.10

After the Pollock decision, taxpayers challenged numerous taxes that Congress had treated as excises subject to the rule of uniformity as unconstitutional direct taxes. The Court, however, distinguished taxes levied “because of ownership” or “upon property as such” from those laid upon “privileges.” 11 The Court sustained as “excises” a tax on sales of business exchanges,12 a succession tax construed to fall on the recipients of the property transmitted rather than on the estate of the decedent,13 and a tax on manufactured tobacco in the hands of a dealer, after an excise tax had been paid by the manufacturer.14 In Thomas v. United States,15 the Court sustained a stamp tax on sales of stock certificates based on the definition of “duties, imposts and excises.” 16 The Court explained that these terms “were used comprehensively to cover customers and excise duties imposed on importation, consumption, manufacture and sale of certain commodities, privileges, particular business transactions, vocations, occupations and the like.” 17 On the same day, the Court ruled in Spreckels Sugar Refining Co. v. McClain18 that an exaction on the business of refining sugar and measured by gross receipts was an excise and properly levied under the rule of uniformity. Likewise, in Flint v. Stone Tracy Co.,19 the Court held a tax on a corporation that was measured by income, including investment income, to be a tax on the privilege of doing business as a corporation rather than an income tax. Similarly, in Stanton v. Baltic Mining Co.20 , the Court held a tax on the annual production of mines “is not a tax upon property as such because of its ownership, but a true excise levied on the results of the business of carrying on mining operations.” 21

Pollock's holding and rationale were further limited in several respects.22 Most prominently, Congress passed and the states ratified the Sixteenth Amendment in 1913 in direct response to Pollock's prohibition on the unapportioned taxation of income derived from real or personal property.23 The Sixteenth Amendment authorized Congress “to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states.” 24 Further, while the Court in Pollock held that a tax on income derived from property was indistinguishable from a tax on the property itself, the Court later rejected that reasoning in Stanton v. Baltic Mining Company, upholding an unapportioned tax on a mine’s income as being “not a tax upon property as such . . . , but a true excise levied on the results of the business of carrying on mining operations.” 25 The Court opined:

[T]he Sixteenth Amendment conferred no new power of taxation but simply prohibited the previous complete and plenary power of income taxation possessed by Congress from the beginning from being taken out of the category of indirect taxation to which it inherently belonged and being placed in the category of direct taxation subject to apportionment by a consideration of the sources from which the income was derived, that is by testing the tax not by what it was—a tax on income, but by a mistaken theory deduced from the origin or source of the income taxed.26

Despite these developments, the Supreme Court has not expressly overruled Pollock's central holding that a tax on real or personal property solely because of its ownership is a direct tax.27 In 1920, the Court relied on Pollock in Eisner v. Macomber to hold an unapportioned tax on shares issued as stock dividends unconstitutional.28 There, the Court addressed whether a corporation’s issuance of additional shares to a stockholder as stock dividends was “income” under the Sixteenth Amendment and, if not, whether a tax on those unrealized gains was a direct tax.29 After concluding that the stock dividends were not “income,” 30 the Court relied on Pollock to conclude that the tax was a direct tax.31

The Eisner Court determined that the limitation on Congress’s taxing power identified in Pollock “still has an appropriate and important function . . . not to be overridden by Congress or disregarded by the courts.” 32 The Court observed that the Sixteenth Amendment must be “construed in connection with the taxing clauses of the original Constitution and the effect attributed to them,” including Pollock's holding that “taxes upon property, real and personal,” are direct taxes.33 Applying that limitation, the Court held that the tax before it was unconstitutional because it was an unapportioned tax on personal property.34

In the Supreme Court’s 2012 decision, National Federation of Independent Business v. Sebelius, the Supreme Court upheld the Affordable Care Act individual mandate, known as a “shared responsibility payment,” as a tax under Article I, Section 8, Clause 1 of the Constitution.35 In its ruling, the Court explained that the individual mandate was not a direct tax subject to the rule of apportionment. The Court stated:

A tax on going without health insurance does not fall within any recognized category of direct tax. It is not a capitation. Capitations are taxes paid by every person “without regard to property, profession or any other circumstance.” The whole point of the shared responsibility payment is that it is triggered by specific circumstances—earning a certain amount of income but not obtaining health insurance. The payment is also plainly not a tax on the ownership of land or personal property. The shared responsibility payment is thus not a direct tax that must be apportioned among the several States.36

The Supreme Court further explained that direct taxes are capitation taxes, real estate taxes, and personal property taxes.37 While income taxes are also direct taxes under Pollock, adoption of the Sixteenth Amendment,38 as discussed above, amended the Constitution to permit the federal government to tax income.

1: 158 U.S. 601 (1895) [hereinafter Pollock II]; 157 U.S. 429 [hereinafter Pollock I]. Pollock came to the Court twice. In Pollock I, the Court invalidated the tax at issue insofar as it was a tax upon income derived from real property, but the Court was equally divided on whether income derived from personal property was a direct tax. 157 U.S. at 583, 586. In Pollock II, on petitions for rehearing, the Court held that a tax on income derived from personal property was also a direct tax. 158 U.S. at 637. For simplicity, this essay refers to the two decisions collectively as the “Pollock” decision.
2: Pollock II, 158 U.S. 601; Pollock I, 157 U.S. 429.
3: Pollock II, 158 U.S. at 618; Pollock I, 157 U.S. at 558; see Act of Aug. 27, 1894, ch. 349, 28 Stat. 509.
4: Pollock II, 158 U.S. at 628; Pollock I, 157 U.S. at 580–81.
5: The Court stated that its holding did not extend to income or other gains derived from “business, privileges, or employments.” Pollock II, 158 U.S. at 635.
6: Pollock I, 157 U.S. at 581 ( “An annual tax upon the annual value or annual user of real estate appears to us the same in substance as an annual tax on the real estate, which would be paid out of the rent or income.” ); Pollock II, 158 U.S. at 628 (applying “the same reasoning . . . to capital in personalty held for the purpose of income, or ordinarily yielding income, and to the income therefrom” ).
7: Pollock II, 158 U.S. at 637; Pollock I, 157 U.S. at 583.
8: Pollock II, 158 U.S. at 626–27; Pollock I, 157 U.S. at 574–80.
9: Pollock II, 158 U.S. at 626–27; Pollock I, 157 U.S. at 574–80.
10: Pollock II, 158 U.S. at 627 ( “What was decided in the Hylton Case was, then, that a tax on carriages was an excise, and therefore an indirect tax.” ).
11: Stanton v. Baltic Mining Co., 240 U.S. 103 (1916); Knowlton v. Moore, 178 U.S. 41, 80 (1900).
12: Nicol v. Ames, 173 U.S. 509 (1899).
13: Knowlton, 178 U.S. at 41.
14: Patton v. Brady, 184 U.S. 608 (1902).
15: 192 U.S. 363 (1904).
16: Id. at 369.
17: Id. at 370.
18: 192 U.S. 397 (1904)
19: 220 U.S. 107 (1911).
20: 240 U.S. 103 (1916).
21: Stanton, 240 U.S. at 114 (citing Stratton’s Independence v. Howbert, 231 U.S. 399 (1913)).
22: Erik M. Jensen, The Taxing Power, the Sixteenth Amendment, and the Meaning of “Incomes,” 33 Ariz. St. L.J. 1057, 1073 (2001).
23: Id.; Boris I. Bittker, Constitutional Limits on the Taxing Power of the Federal Government, 41 Tax Law. 3 (1987).
24: U.S. Const. amend. XVI (emphasis added).
25: 240 U.S. 103, 112–14 (1916).
26: Id. at 112–13 (citing Brushaber v. Union Pac. R.R., 240 U.S. 1 (1916)).
27: See Union Elec. Co. v. United States, 363 F.3d 1292, 1299 (Fed. Cir. 2004) ( “We agree that Pollock has never been overruled, though its reasoning appears to have been discredited.” ); see also NFIB, 567 U.S. at 571 ( “In 1895, [in Pollock II,] we expanded our interpretation [of direct taxes] to include taxes on personal property and income from personal property, in the course of striking down aspects of the federal income tax. That result was overturned by the Sixteenth Amendment, although we continued to consider taxes on personal property to be direct taxes” (citations omitted)).
28: Eisner v. Macomber, 252 U.S. 189, 219 (1920).
29: Id. at 201–19.
30: Id. at 201–17. Eisner defined “income” as “the gain derived from capital, labor, or from both combined.” Id. at 207 (internal quotation marks omitted).
31: 252 U.S. at 218–19.
32: Id. at 206.
33: Id. at 205–06; id. at 218–19.
34: Id. at 219. In 1921, the Court sustained an estate tax as an excise in New York Trust Co. v. Eisner, 256 U.S. 345, 349 (1921). The Court further held that including certain property in computing an estate tax does not constitute a direct tax on the following such property: (1) property held as joint tenants or as tenants by the entirety; or (2) the entire value of community property owned by a husband and wife; or (3) life insurance proceeds. Philips v. Dime Trust & S.D. Co., 284 U.S. 345, 349 (1921) (joint tenants); Tyler v. United States, 281 U.S. 497 (1930) (tenants by the entirety); Fernandez v. Wiener, 326 U.S. 340 (1945) (community property); Chase Nat’l Bank v. United States, 278 U.S. 327 (1929) (insurance proceeds); United States v. Manufacturers Nat’l Bank, 363 U.S. 194, 198–201 (1960) (insurance proceeds). Similarly, the Court upheld a graduated tax on gifts as an excise, saying that it was “a tax laid only upon the exercise of a single one of those powers incident to ownership, the power to give the property owned to another.” Bromley v. McCaughn, 280 U.S. 124, 136 (1929). See also Helvering v. Bullard, 303 U.S. 297 (1938).
35: Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519 (2012).
36: Id. at 571.
37: Id.
38: See Amdt16.1 Overview of Sixteenth Amendment, Income Tax.