WikiPortallus: Sixteenth Amendment to the United States Constitution.html

Article I, Section 8, Clause 1 grants to the Congress the power to impose taxes, but requires excise taxes to be geographically uniform.⁴

The Constitution states that all direct taxes are required to be apportioned among the states according to population.⁵ This basically refers to a tax on property as well as a capitation.

Income taxes pre-Pollock

In order to raise revenue to fund the Civil War, the income tax was introduced in the United States with the Revenue Act of 1861.⁶ It was a flat rate tax of 3% on annual income above $800. The following year, this was replaced with a graduated tax of 3-5% on income above $600 in the Revenue Act of 1862, which specified a termination of income taxation in 1866. The Socialist Labor Party advocated for a graduated income tax in 1887.⁷ The Populist Party "demanded a graduated income tax" in their 1892 platform.⁸ The Democratic Party, led by William Jennings Bryan, advocated the income tax law passed in 1894,⁹ and proposed an income tax in their 1908 platform.¹⁰

Prior to the U.S. Supreme Court's decision in Pollock v. Farmers' Loan & Trust Co.,157 U.S. 429 (1895), aff'd on reh'g, 158 U.S. 601 (1895) all income taxes had been considered to be excises (indirect taxes) required to be imposed with geographical uniformity; such taxes were not required to be apportioned by state according to population (as are direct taxes).¹¹

The Wilson-Gorman Tariff Act of 1894 attempted to impose a federal tax of 2% on incomes over $4,000. Derided as "un-Democratic, inquisitorial, and wrong in principle,"¹² it was challenged in federal court. Until that time, direct taxes had been deemed to include only capitations, or poll taxes (taxes directly on persons) and taxes imposed on property by reason of its ownership (generally, ordinary ad valorem taxes on property). Until 1895, all income taxes — regardless of the sources of the incomes — had been considered indirect taxes ("excises").¹³

The Pollock case

In the case of Pollock v. Farmers' Loan & Trust Co. the Supreme Court declared certain income taxes — taxes on income from property under the 1894 Act — to be unconstitutionally unapportioned direct taxes. The Court reasoned that a tax on income from property should be treated as a tax on "property by reason of its ownership," and should therefore be required to be apportioned. The reasoning was that taxes on the rents from land, the dividends from stocks and so on burdened the property generating the income in the same way that a tax on "property by reason of its ownership" burdened that property.

After Pollock, while income taxes on wages (as indirect taxes) were still not required to be apportioned by population, taxes on interest, dividends and rent income were required to be apportioned by population. The Pollock ruling made the source of the income (e.g., property versus labor, etc.) relevant in determining whether the tax imposed on that income was deemed to be "direct" (and thus required to be apportioned among the states according to population) or, alternatively, "indirect" (and thus required only to be imposed with geographical uniformity).

From 1895 up to when the Sixteenth Amendment was ratified, while Congress could have re-imposed taxes on income from labor and other non-property sources without apportionment by population, imposing taxes on interest, dividends and rent income would not have been practical (as the dollar amount of income from interest, dividends and rent would virtually never be exactly the same amount for each and every taxpayer in the United States for any year). The Congress was unwilling to impose an income tax on labor and other non-property sources without also imposing a tax on income from property — and taxes on income from property were no longer realistic. The Pollock ruling made imposition of an income tax politically unfeasible from 1895 until the ratification of the Sixteenth Amendment. At the same time, the Congress was reflecting the growing concern among many elements of society that the wealthiest Americans had consolidated too much economic power.¹⁴

Ratification process

On June 16, 1909, President Taft proposed a constitutional amendment in an address to Congress to allow federal income taxes on individuals and an excise tax "upon the privilege of doing business as an artificial entity and of freedom from a general partnership liability enjoyed by those who own the stock."¹⁶¹⁷

On July 12, 1909, the resolution proposing the Sixteenth Amendment was passed by the Sixty-first Congress and submitted to the state legislatures. Support for the income tax was strongest in the western states and opposition was strongest in the northeastern states.¹⁸ The governor of New York, Charles Evans Hughes, who a few years later became a Supreme Court justice, opposed the income tax amendment because he believed "from whatever source derived" implied that passage would confer the federal government with the power to tax state and municipal bonds and thus excessively centralize government power.¹⁹

The presidential election of 1912 was contested between three advocates of an income tax.²⁰ On February 25, 1913, the Secretary of State Philander Knox proclaimed that the amendment had been ratified by the necessary three-fourths of the states, and thus had become part of the Constitution. An income tax, the Revenue Act of 1913 was shortly passed by the Congress.

Ratification (by the requisite thirty-six states) was completed on February 3, 1913 with the ratification by New Mexico. The amendment was subsequently ratified by the following states, bringing the total number of ratifying states to forty-two of the forty-eight then existing:

The following states rejected the amendment without ever subsequently ratifying it:

Pollock overruled

The Amendment overruled the effect of Pollock.²² That essentially means that when imposing an income tax, the Congress may impose the tax on income from any source without having to apportion the total dollar amount of tax collected from each state according to each state's population in relation to the total national population.²³ In Abrams v. Commissioner, the United States Tax Court stated: "Since the ratification of the Sixteenth Amendment, it is immaterial with respect to income taxes, whether the tax is a direct or indirect tax. The whole purpose of the Sixteenth Amendment was to relieve all income taxes when imposed from [the requirement of] apportionment and from [the requirement of] a consideration of the source whence the income was derived."²⁴

Case law

The federal courts' interpretations of the Sixteenth Amendment have changed considerably over time and there have been many disputes about the applicability of the amendment.

The Brushaber case

In Brushaber v. Union Pacific Railroad, 240 U.S. 1 (1916), the Supreme Court ruled that (1) the Sixteenth Amendment removes the Pollock requirement that certain income taxes (such as taxes on income "derived from real property" that were the subject of the Pollock decision), be apportioned among the states according to population;²⁵ (2) the Federal income tax statute does not violate the Fifth Amendment's prohibition against the government taking property without due process of law; (3) the Federal income tax statute does not violate the uniformity clause of Article I, section 8 of the U.S. Constitution (relating to the requirement that excises, also known as indirect taxes, be imposed with geographical uniformity).

The Kerbaugh-Empire Co. case

The Glenshaw Glass case

In Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955), the Supreme Court laid out what has become the modern understanding of what constitutes 'gross income' to which the Sixteenth Amendment applies, declaring that income taxes could be levied on "accessions to wealth, clearly realized, and over which the taxpayers have complete dominion." Under this definition, any increase in wealth—whether through wages, benefits, bonuses, sale of stock or other property at a profit, bets won, lucky finds, awards of punitive damages in a lawsuit, qui tam actions—are all within the definition of income, unless the Congress makes a specific exemption as it has for items such as life insurance proceeds received by reason of the death of the insured party,²⁶ gifts, bequests, devises and inheritances,²⁷ and certain scholarships.²⁸

Income taxation of wages, etc.

The courts have interpreted the Sixteenth Amendment as standing for the rule that the Amendment allows a direct tax on "wages, salaries, commissions, etc. without apportionment."²⁹

The Penn Mutual case

Although the Sixteenth Amendment is often cited as the "source" of the Congressional power to tax incomes, at least one court has reiterated the point made in Brushaber and other cases that the Sixteenth Amendment itself did not grant the Congress the power to tax incomes (a power the Congress has had since 1789), but only removed the requirement, if any, that any income tax be apportioned among the states according to their respective populations. In the Penn Mutual Indemnity case, the United States Tax Court stated:

The Murphy case

On December 22, 2006, a three-judge panel of the United States Court of Appeals for the District of Columbia Circuit vacated³² its own unanimous August 2006 opinion in Murphy v. Internal Revenue Service and United States.³³ The original three judge panel then agreed to rehear the case itself. In its original August 2006 decision, the Court had ruled that 26 U.S.C. § 104(a)(2) was unconstitutional under the Sixteenth Amendment to the extent that the statute purported to tax, as income, a recovery for a non-physical personal injury for mental distress and loss of reputation not received in lieu of taxable income such as lost wages or earnings.

Because the August 2006 opinion was vacated, the full court did not hear the case en banc.

On July 3, 2007, the Court (through the original three-judge panel) ruled (1) that the taxpayer's compensation was received on account of a non-physical injury or sickness; (2) that gross income under section 61 of the Internal Revenue Code³⁴ does include compensatory damages for non-physical injuries, even if the award is not an "accession to wealth," (3) that the income tax imposed on an award for non-physical injuries is an indirect tax, regardless of whether the recovery is restoration of "human capital," and therefore the tax does not violate the constitutional requirement of Article I, section 9, that capitations or other direct taxes must be laid among the states only in proportion to the population; (4) that the income tax imposed on an award for non-physical injuries does not violate the constitutional requirement of Article I, section 8, that all duties, imposts and excises be uniform throughout the United States; (5) that under the doctrine of sovereign immunity, the Internal Revenue Service may not be sued in its own name.³⁵

The Court stated that "[a]lthough the 'Congress cannot make a thing income which is not so in fact,' [ . . . ] it can label a thing income and tax it, so long as it acts within its constitutional authority, which includes not only the Sixteenth Amendment but also Article I, Sections 8 and 9."³⁶ The court ruled that Ms. Murphy was not entitled to the tax refund she claimed, and that the personal injury award she received was "within the reach of the congressional power to tax under Article I, Section 8 of the Constitution" -- even if the award was "not income within the meaning of the Sixteenth Amendment".³⁷ See also the Penn Mutual case cited above.

On April 21, 2008, the Supreme Court declined to review the decision of the Court of Appeals.³⁸

Tax protester Sixteenth Amendment arguments

Some tax protesters opposed to income taxes cite arguments about the validity or applicability of the Sixteenth Amendment.

Notes

^ U.S. Const., art. I, § 8, cl. 1.
^ U.S. Const., art. I, § 2, cl. 3.
^ U.S. Const., art. I, § 9, cl. 4.
^ see Knowlton v. Moore 178 U.S. 41 (1900) and Flint v. Stone Tracy Co. 220 U.S. 107 (1911)
^ Article I, Section 2, Clause 3 and Article I, Section 9, Clause 4
^ http://www.findingdulcinea.com/news/on-this-day/July-August-08/On-this-Day--Congress-Enacts-First-Income-Tax.html
^ Socialist Labor Party Platform [1]
^ Populist Party Platform, 1892[2]
^ Speeches of William Jennings Bryan, pp. 159-179 [3]
^ 1908 Democratic party platform [4]
^ Commentary, James W. Ely, Jr., on the case of Springer v. United States, in answers.com, at [5]
^ "Mr. Cockran's Final Effort", New York Times (1894-01-31).
^ "Again the situation is aptly illustrated by the various acts taxing incomes derived from property of every kind and nature which were enacted beginning in 1861, and lasting during what may be termed the Civil War period. It is not disputable that these latter taxing laws were classed under the head of excises, duties, and imposts because it was assumed that they were of that character inasmuch as, although putting a tax burden on income of every kind, including that derived from property real or personal, they were not taxes directly on property because of its ownership.” Brushaber v. Union Pac. Railroad, 240 U.S. 1 (1916), at 15
^ See the quotes from Theodore Roosevelt at Tax History Museum
^ Justice Harlan's dissenting opinion in Pollock
^ Taft Address of June 16, 1909 (American Presidency Project)[6]
^ President Taft Presidential addresses[7]
^ [8] The Ratification of the Federal Income Tax Amendment, John D. Buenker
^ [9] The Sixteenth Amendment: The Historical Background, Arthur A. Ekirch, Jr.
^ Adam Young, "The Origin of the Income Tax", Ludwig von Mises Institute, Sept. 7, 2004
^ Amendments to the Constitution of the United States of America, United States Government Printing Office
^ Boris I. Bittker, Constitutional Limits on the Taxing Power of the Federal Government, The Tax Lawyer, Fall 1987, Vol. 41, No. 1, p. 3 (American Bar Ass'n) (Pollock case "was in effect reversed by the sixteenth amendment").
^ Findlaw: Sixteenth Amendment, History and Purpose of the Amendment.
^ 82 T.C. 403, CCH Dec. 41,031 (1984).
^ "As construed by the Supreme Court in the Brushaber case, the power of Congress to tax income derives from Article I, Section 8, Clause 1, of the original Constitution rather than from the Sixteenth Amendment; the latter simply eliminated the requirement that an income tax, to the extent that it is a direct tax, must be apportioned among the states." Boris I. Bittker, Martin J. McMahon, Jr. & Lawrence A. Zelenak, Federal Income Taxation of Individuals, ch. 1, paragr. 1.01[1][a], Research Institute of America (2d ed. 2005), as retrieved from 2002 WL 1454829 (W. G. & L.).
^ 26 U.S.C. § 101.
^ 26 U.S.C. § 102.
^ 26 U.S.C. § 117.
^ Parker v. Commissioner, 724 F.2d 469, 84-1 U.S. Tax Cas. (CCH) paragr. 9209 (5th Cir. 1984) (closing parenthesis in original has been omitted). For other court decisions upholding the taxability of wages, salaries, etc. see United States v. Connor, 898 F.2d 942, 90-1 U.S. Tax Cas. (CCH) paragr. 50,166 (3d Cir. 1990); Perkins v. Commissioner, 746 F.2d 1187, 84-2 U.S. Tax Cas. (CCH) paragr. 9898 (6th Cir. 1984); White v. United States, 2005-1 U.S. Tax Cas. (CCH) paragr. 50,289 (6th Cir. 2004), cert. denied, ____ U.S. ____ (2005); Granzow v. Commissioner, 739 F.2d 265, 84-2 U.S. Tax Cas. (CCH) paragr. 9660 (7th Cir. 1984); Waters v. Commissioner, 764 F.2d 1389, 85-2 U.S. Tax Cas. (CCH) paragr. 9512 (11th Cir. 1985); United States v. Buras, 633 F.2d 1356, 81-1 U.S. Tax Cas. (CCH) paragr. 9126 (9th Cir. 1980).
^ Penn Mutual Indemnity Co. v. Commissioner, 32 T.C. 653 at 659 (1959), aff'd, 277 F.2d 16, 60-1 U.S. Tax Cas. (CCH) paragr. 9389 (3d Cir. 1960).
^ Penn Mutual Indemnity Co. v. Commissioner, 277 F.2d 16, 60-1 U.S. Tax Cas. (CCH) paragr. 9389 (3d Cir. 1960) (footnotes omitted).
^ Order, Dec. 22, 2006, Murphy v. Internal Revenue Service and United States, United States Court of Appeals for the District of Columbia Circuit.
^ 460 F.3d 79, 2006-2 U.S. Tax Cas. (CCH) paragr. 50,476, 2006 WL 2411372 (D.C. Cir. August 22, 2006). In an unrelated matter, the Court had also granted the government's motion to dismiss Murphy's suit against the defendant "Internal Revenue Service." Under the doctrine of sovereign immunity the rule is that a taxpayer may sue The United States of America itself, not a government agency, officer, or employee (with few exceptions). The Court had stated: "Insofar as the Congress has waived sovereign immunity with respect to suits for tax refunds under 28 U.S.C. § 1346(a)(1), that provision specifically contemplates only actions against the 'United States.' Therefore, we hold the IRS, unlike the United States, may not be sued eo nomine in this case." One exception to this rule is found in the United States Tax Court where the taxpayer sues the Commissioner of Internal Revenue (Murphy v. United States)
^ 26 U.S.C. § 61 (Murphy v United States, on rehearing)
^ Opinion on rehearing, July 3, 2007, Murphy v. Internal Revenue Service and United States, case no. 05-5139, United States Court of Appeals for the District of Columbia Circuit, 2007-2 U.S. Tax Cas. (CCH) paragr. 50,531 (D.C. Cir. 2007)
^ Opinion on rehearing, July 3, 2007, p. 16, Murphy v. Internal Revenue Service and United States, case no. 05-5139, United States Court of Appeals for the District of Columbia Circuit, 2007-2 U.S. Tax Cas. (CCH) paragr. 50,531 (D.C. Cir. 2007).
^ Opinion on rehearing, July 3, 2007, p. 5-6, Murphy v. Internal Revenue Service and United States, case no. 05-5139, United States Court of Appeals for the District of Columbia Circuit, 2007-2 U.S. Tax Cas. (CCH) paragr. 50,531 (D.C. Cir. 2007).
^ SCOTUSblog

Sixteenth Amendment to the United States Constitution.html

Contents

Text

Other Constitutional provisions regarding taxes

Income taxes pre-Pollock

The Pollock case