Annotation 48 - Article I


Clause 4. Taxes

Direct Taxes

The Hylton Case .--The crucial problem under this section is to distinguish ''direct'' from other taxes. In its opinion in Pollock v. Farmers' Loan & Trust Co., the Court declared: ''It is apparent . . . that the distinction between direct and indirect taxation was well understood by the framers of the Constitution and those who adopted it.'' 1737 Against this confident dictum may be set the following brief excerpt from Madison's Notes on the Convention: ''Mr. King asked what was the precise meaning of direct taxation? No one answered.'' 1738 The first case to come before the Court on this issue was Hylton v. United States, 1739 which was decided early in 1796. Congress has levied, according to the rule of uniformity, a specific tax upon all carriages, for the conveyance of persons, which were to be kept by, or for any person, for his own use, or to be let out for hire, or for the conveying of passengers. In a fictitious statement of facts, it was stipulated that the carriages involved in the case were kept exclusively for the personal use of the owner and not for hire. The principal argument for the constitutionality of the measure was made by Hamilton, who treated it as an ''excise tax,'' 1740 while Madison both on the floor of Congress and in correspondence attacked it as ''direct'' and so void, inasmuch as it was levied without apportionment. 1741 The Court, taking the position that the direct tax clause constituted in practical operation an exception to the general taxing powers of Congress, held that no tax ought to be classified as ''direct'' which could not be conveniently apportioned, and on this basis sustained the tax on carriages as one on their ''use'' and therefore an ''excise.'' Moreover, each of the judges advanced the opinion that the direct tax clause should be restricted to capitation taxes and taxes on land, or that at most, it might cover a general tax on the aggregate or mass of things that generally pervade all the States, especially if an assessment should intervene, while Justice Paterson, who had been a member of the Federal Convention, testified to his recollection that the principal purpose of the provision had been to allay the fear of the Southern States lest their Negroes and land should be subjected to a specific tax. 1742  

From the Hylton to the Pollock Case .--The result of the Hylton case was not challenged until after the Civil War. A number of the taxes imposed to meet the demands of that war were assailed during the postwar period as direct taxes but without result. The Court sustained successively, as ''excises'' or ''duties,'' a tax on an insurance company's receipts for premiums and assessments; 1743 a tax on the circulating notes of state banks, 1744 an inheritance tax on real estate, 1745 and finally a general tax on incomes. 1746 In the last case, the Court took pains to state that it regarded the term ''direct taxes'' as having acquired a definite and fixed meaning, to wit, capitation taxes, and taxes on land. 1747 Then, almost one hundred years after the Hylton case, the famous case of Pollock v. Farmers' Loan & Trust Co. 1748 arose under the Income Tax Act of 1894. 1749 Undertaking to correct ''a century of error,'' the Court held, by a vote of five-to-four, that a tax on income from property was a direct tax within the meaning of the Constitution and hence void because not apportioned according to the census.

Restriction of the Pollock Decision .--The Pollock decision encouraged taxpayers to challenge the right of Congress to levy by the rule of uniformity numerous taxes that had always been reckoned to be excises. But the Court evinced a strong reluctance to extend the doctrine to such exactions. Purporting to distinguish taxes levied ''because of ownership'' or ''upon property as such'' from those laid upon ''privileges,'' 1750 it sustained as ''excises'' a tax on sales on business exchanges, 1751 a succession tax which was construed to fall on the recipients of the property transmitted rather than on the estate of the decedent, 1752 and a tax on manufactured tobacco in the hands of a dealer, after an excise tax had been paid by the manufacturer. 1753 Again, in Thomas v. United States, 1754 the validity of a stamp tax on sales of stock certificates was sustained on the basis of a definition of ''duties, imposts and excises.'' These terms, according to the Chief Justice, ''were used comprehensively to cover customs and excise duties imposed on importation, consumption, manufacture and sale of certain commodities, privileges, particular business transactions, vocations, occupations and the like.'' 1755 On the same day, it ruled, in Spreckels Sugar Refining Co. v. McClain, 1756 that an exaction, denominated a special excise tax, imposed on the business of refining sugar and measured by the gross receipts thereof, was in truth an excise and hence properly levied by the rule of uniformity. The lesson of Flint v. Stone Tracy Co. 1757 was the same. In the Flint case, what was in form an income tax was sustained as a tax on the privilege of doing business as a corporation, the value of the privilege being measured by the income, including income from investments. Similarly,, in Stanton v. Baltic Mining Co., 1758 a tax on the annual production of mines was held to be ''independently of the effect of the oper ation of the Sixteenth Amendment . . . 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.'' 1759  

A convincing demonstration of the extent to which the Pollock decision had been whittled down by the time the Sixteenth Amendment was adopted is found in Billings v. United States. 1760 In challenging an annual tax assessed for the year 1909 on the use of foreign built yachts--a levy not distinguishable in substance from the carriage tax involved in the Hylton case as construed by the Supreme Court--counsel did not even suggest that the tax should be classed as a direct tax. Instead, he based his argument that the exaction constituted a taking of property without due process of law upon the premise that it was an excise, and the Supreme Court disposed of the case upon the same assumption.

In 1921, the Court cast aside the distinction drawn in Knowlton v. Moore between the right to transmit property on the one hand and the privilege of receiving it on the other, and sustained an estate tax as an excise. ''Upon this point,'' wrote Justice Holmes for a unanimous Court, ''a page of history is worth a volume of logic.'' 1761 This proposition being established, the Court had no difficulty in deciding that the inclusion in the computation of the estate tax of property held as joint tenants, 1762 or as tenants by the entirety, 1763 or the entire value of community property owned by husband and wife, 1764 or the proceeds of insurance upon the life of the decedent, 1765 did not amount to direct taxation of such property. Similarly, it 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.'' 1766 Justice Sutherland, speaking for himself and two associates, urged that ''the right to give away one's property is as fundamental as the right to sell it or, indeed, to possess it.'' 1767  

Miscellaneous .--The power of Congress to levy direct taxes is not confined to the States represented in that body. Such a tax may be levied in proportion to population in the District of Colum bia. 1768 A penalty imposed for nonpayment of a direct tax is not a part of the tax itself and hence is not subject to the rule of apportionment. Accordingly, the Supreme Court sustained the penalty of fifty percent, which Congress exacted for default in the payment of the direct tax on land in the aggregate amount of twenty million dollars that was levied and apportioned among the States during the Civil War. 1769  


[Footnote 1737]   157 U.S. 429, 573 (1895).

[Footnote 1738] J. Madison, The Debates in the Federal Convention of 1787 (G. Hunt & J. Scott eds.) (Greenwood Press ed. 1970), 435.

[Footnote 1739]   3 U.S. (3 Dall.) 171 (1796).

[Footnote 1740] The Works of Alexander Hamilton, J. Hamilton ed. (New York: 1851), 845. ''If the meaning of the word excise is to be sought in the British statutes, it will be found to include the duty on carriages, which is there considered as an excise, and then must necessarily be uniform and liable to apportionment; consequently, not a direct tax.''

[Footnote 1741] 4 Annals of Congress 730 (1794); 2 Letters and Other Writings of James Madison (Philadelphia: 1865), 14.

[Footnote 1742]   3 U.S. (3 Dall.) 171, 177 (1796).

[Footnote 1743] Pacific Insurance Company v. Soule, 74 U.S. (7 Wall.) 433 (1869).

[Footnote 1744] Veazie Bank v. Fenno, 75 U.S. (8 Wall.) 533 (1869).

[Footnote 1745] Scholey v. Rew, 90 U.S. (23 Wall.) 331 (1875).

[Footnote 1746] Springer v. United States, 102 U.S. 586 (1881).

[Footnote 1747] Id., 602.

[Footnote 1748]   157 U.S. 429 (1895); 158 U.S. 601 (1895).

[Footnote 1749] 28 Stat. 509, 553 (1894).

[Footnote 1750] Stanton v. Baltic Mining Co., 240 U.S. 103 (1916); Knowlton v. Moore, 178 U.S. 41, 80 (1900).

[Footnote 1751] Nicol v. Ames, 173 U.S. 509 (1899).

[Footnote 1752] Knowlton v. Moore, 178 U.S. 41 (1900).

[Footnote 1753] Patton v. Brady, 184 U.S. 608 (1902).

[Footnote 1754]   192 U.S. 363 (1904).

[Footnote 1755] Id., 370.

[Footnote 1756]   192 U.S. 397 (1904).

[Footnote 1757]   220 U.S. 107 (1911).

[Footnote 1758]   240 U.S. 103 (1916).

[Footnote 1759] Id., 114.

[Footnote 1760]   232 U.S. 261 (1914).

[Footnote 1761] New York Trust Co. v. Eisner, 256 U.S. 345, 349 (1921).

[Footnote 1762] Phillips v. Dime Trust & S.D. Co., 284 U.S. 160 (1931).

[Footnote 1763] Tyler v. United States, 281 U.S. 497 (1930).

[Footnote 1764] Fernandez v. Wiener, 326 U.S. 340 (1945).

[Footnote 1765] Chase Nat. Bank v. United States, 278 U.S. 327 (1929); United States v. Manufacturers Nat. Bank, 363 U.S. 194, 198 -201 (1960).

[Footnote 1766] Bromley v. McCaughn, 280 U.S. 124, 136 (1929). See also Helvering v. Bullard, 303 U.S. 297 (1938).

[Footnote 1767] Bromley v. McCaughn, 280 U.S. 124, 140 (1929).

[Footnote 1768] Loughborough v. Blake, 18 U.S. (5 Wheat.) 317 (1820).

[Footnote 1769] De Treville v. Smalls, 98 U.S. 517, 527 (1879).

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