Copy pasted this from some obscure node on the 'net =]
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In 1894, Congress adopted an income tax act which was declared
unconstitutional in Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429, 15
S.Ct. 673, aff. reh., 158 U.S. 601, 15 S.Ct. 912 (1895). The Pollock Court
found that the income tax was a direct tax which could only be imposed if
the tax was apportioned; since this tax was not apportioned, it was found
unconstitutional. In an effort to circumvent this decision, the 16th
Amendment was proposed by Congress in 1909 and allegedly ratified by the
states in 1913. As a result, various opinions arose regarding the legal
effect of the amendment. Some factions contended that the 16th Amendment
simply eliminated the apportionment requirement for one specific direct tax
known as the income tax, while others asserted that the amendment simply
withdrew it from the direct tax category and placed the income tax in the
indirect, excise tax class. These competing contentions and interpretations
were apparently resolved in Brushaber v. Union Pacific Railroad Co., 240
U.S. 1, 36 S.Ct. 236 (1916).[1] Rather than attempt a determination of what
the Court held in this case, it is more important to learn what various
courts have subsequently declared Brushaber to mean.
A little more than a week after the opinion in Brushaber, similar issues
were present for decision in Stanton v. Baltic Mining Co., 240 U.S. 103,
112-13, 36 S.Ct. 278 (1916), which involved the question of whether an
inadequate depletion allowance for a mining company constituted a direct tax
on the company's property. As to Baltic's contention that "the 16th
Amendment authorized only an exceptional direct income tax without
apportionment," the Court rejected it by stating that this contention:
"... manifestly disregards the fact that by the previous ruling it was
settled that the provisions of the 16th 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."
The Court clearly held that income taxes inherently belonged to the
indirect/excise tax class, but had been converted by Pollock to direct taxes
by considering the source of the income; the 16th Amendment merely banished
the rule in Pollock. See also Tyee Realty Co. v. Anderson, 240 U.S. 115, 36
S.Ct. 281 (1916), decided the same day.
However, the victory of defining what the 16th Amendment meant was short
lived and later decisions commenced a course which appears to have changed
the meaning of Brushaber, or at least provided fertile grounds for an
entirely different and opposite construction of it. In William E. Peck and
Co. v. Lowe, 247 U.S. 165, 172-73, 38 S.Ct. 432, 433 (1918), which involved
a tax imposed on export earnings, the Court seemed to indicate that what was
accomplished by the amendment was the elimination of the apportionment
requirement for the direct tax known as the income tax, an argument rejected
in Baltic:
"The Sixteenth Amendment, although referred to in argument, has no real
bearing and may be put out of view. As pointed out in recent decisions, it
does not extend the taxing power to new or excepted subjects, but merely
removed all occasion, which otherwise might exist, for an apportionment
among the states of taxes laid on income, whether it be derived from one
source or another."
The drift away from the position of the Court that the income tax via
the 16th Amendment fell within the excise tax category became more
pronounced with the decision in Eisner v. Macomber, 252 U.S. 189, 206, 40
S.Ct. 189 (1920), which involved the application of this tax to a stock
dividend. Here, the Court plainly stated what many lawyers and some judges
today think was accomplished by means of this amendment: the elimination of
the apportionment requirement for the direct tax known as the income tax. In
deciding this case, the Court quoted the amendment and then redeclared its
meaning:
"As repeatedly held, this did not extend the taxing power to new subjects,
but merely removed the necessity which otherwise might exist for an
apportionment among the states of taxes laid on income. Brushaber....," 252
U.S., at 206.
"A proper regard for its genesis, as well as its very clear language,
requires also that this amendment shall not be extended by loose
construction, so as to repeal or modify, except as applied to income, those
provisions of the Constitution that require an apportionment according to
population for direct taxes upon property, real and personal."
Is this the resurfacing of the argument that "the 16th Amendment authorized
only an exceptional direct income tax without apportionment" condemned in
Baltic?
From a study of Brushaber, it is thus possible for someone to rely upon
those portions of the two phrases at the beginning and ending of 240 U.S. 19
to believe that "the 16th Amendment authorized only an exceptional direct
income tax without apportionment." If one fell into that error, this belief
would be magnified by the above highlighted portions of Eisner. Confusion
abounds as to the correct interpretation of Brushaber, and this is obvious
because various courts of this nation have relied upon this line of
authority to reach diametrically opposing results.
The state courts have been particularly split over the nature of an
income tax and whether it constitutes a direct property tax or an
indirect/excise, which is not imposed on property.
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