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Pollock v. Farmers' Loan & Trust Co.

Supreme Court of the United States · 1895 · Constitutional Law

Constitutional LawFederal TaxationDirect TaxesIntergovernmental Tax ImmunityEquity Jurisdictiondirect taxapportionmentincome tax

Facts

The complainant alleged that the company would breach its duty by voluntarily returning and paying taxes under an unconstitutional federal income tax statute. The company owned real estate and also held real estate and other property in trust, and it received rents and income from that real estate. The bill also alleged that the company owned about two million dollars in New York City municipal bonds yielding annual income and intended to return and pay taxes on that income as well. The relief sought was to prevent the company’s voluntary payment, not to enjoin federal assessment or collection directly.

Issue

Whether the 1894 federal income tax law was unconstitutional insofar as it taxed rents or income from real estate without apportionment, and insofar as it taxed income derived from state or municipal bonds. A threshold issue was whether a court of equity could entertain a shareholder’s suit to restrain the corporation’s voluntary payment of the tax.

Rule

A tax on the rents or income of real estate is, in substance, a tax on the real estate itself and therefore a direct tax subject to the Constitution’s apportionment requirement. The federal government also may not tax income from state or municipal bonds, because such a tax burdens the borrowing power and instrumentalities of the States. Prior decisions control only on the precise points actually decided, and broad dicta will not be extended to sustain a constitutional enactment.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Congress enacts a federal levy on all money received each year from leasing privately owned office buildings. The statute applies nationwide at a flat rate and does not apportion the tax among the states. Nora Bennett, who owns a building in Chicago, challenges the levy.

Is the federal levy constitutional as applied to Nora's lease receipts?

Explanation. The majority held that substance controls over form. A tax on the rents or income of real estate is treated as a tax on the land itself, because rent is the natural incident of ownership. Such a tax is therefore a direct tax and must be apportioned among the states. A flat nationwide levy without apportionment is unconstitutional to that extent.