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TUESDAY, JUNE 12, 1934


Washington, D.C. The subcommittee met at 10 a.m., Hon. A. C. Shallenberger (chairman) presiding.

Mr. SHALLENBERGER. The committee will be in order. We have had presented to the committee a brief by Mr. Stam, counsel to the Joint Committee on Internal Revenue Taxation, on the legal questions involved here and an answer to that brief by Mr. Donworth, which will be made a part of the record in the order named. (The documents referred to are as follows:)


Washington, May 21, 1934. Memorandum to Mr. Parker.

Reference is made to the statements of Judge Donworth of Seattle, Wash., in the hearings on community-property income, part 4, unrevised committee print, dated May 4, 1934. Judge Donworth contends that an income tax must be based upon ownership, for the reason that it is a direct tax. He admits that an excise or indirect tax does not have to be predicated upon ownership. This is shown by the following extracts from his statement:

“ What is the basis of this whole Federal income tax and the law applicable to it as a national proposition? The basis, of course, is, first, the Constitution of the United States and, second, the interpretation of the Constitution made by the Supreme Court in the case of Pollock v. The Farmers Loan & Trust Co., in 1895.

“In the administration of President Cleveland, Congress passed an incometax law in a general way along the lines of the present law, varying, of course, much in detail. The Supreme Court of the United States held that law unconstitutional, because the Court said-and this touches closely the controverted point-an income tax is a direct' tax and under the Constitution of the United States direct taxes can only be levied by apportionment among States in proportion to the census enumeration (pp. 97-98).

Now, coming more down to date, the Supreme Court has said, since the adoption of the sixteenth amendment, that an income tax is still a direct tax, the same as it always was. The Court still adheres to the authoritative construction of the Constitution that an income tax is a direct tax. That authoritative construction was not overruled by the sixteenth amendment. It was accepted by that amendment.

So, in construing anything relating to an income tax, we must bear in mind what the Supreme Court bears in mind all the time; namely, that the income tax is a direct tax, imposed by reason of ownership and computed in proportion to incomes rather than in proportion to population (p. 98).

“ Later, in the case of Bromley v. McCaughn (280 U.S. 124), the Court sustained the validity of the gift tax imposed by the Revenue Act of 1924, and there held that the gift tax was not an income tax at all, but an excise tax and therefore not within the sixteenth amendment. I think the members of the committee readily see that there is a distinction between an excise tax

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which does not necessarily have regard to ownership, such as an excise on the sale of tobacco or liquor and other things.” (P. 109.)

I do not believe that the decisions of the Supreme Court justify the conclusion that an income tax is a direct tax. In discussing the subject, this memorandum is divided into two parts. Part I deals with the classification of the income tax prior to the sixteenth amendment and part II, with its classification after the passage of that amendment.




Mr. Justice Fuller, in Pollock v. Farmers' Loan & Trust Co. (157 U.S. 557), stated the classification of taxes under the Constitution as follows:

" in the matter of taxation, the Constitution recognizes the two great classes of direct and indirect taxes, and lays down two rules by which their imposition must be governed, namely: the rule of apportionment as to direct taxes, and the rule of uniformity as to duties, imposts, and excises."

The conclusions of the Supreme Court as to whether an income tax was a direct tax before the adoption of the sixteenth amendment are summed up in the second case of Pollock v. Farmers' Loan & Trust Co. (158 U.S. 601), as follows:

“Our conclusions may therefore be summed up as follows:

“First. We adhere to the opinion already announced, that, taxes on real estate being indisputably direct taxes, taxes on the rents or income of real estate are equally direct taxes.

" Second. We are of the opinion that taxes on personal property, or on the income of personal property, are likewise direct taxes.

* Third. The tax imposed by sections 27 to 37, inclusive, of the act of 1894, so far as it falls on the income of real estate, and of personal property, being a direct tax, within the meaning of the Constitution, and therefore unconstitutional and void, because not apportioned according to representation, all those sections, constituting one entire scheme of taxation, are necessarily invalid."

The Supreme Court did not hold in the Pollock case that a tax on incomes from professions, trades, employments, or vocations was a direct tax. This is brought out by Mr. Justice White in Brushaber v. Union Pacific Railroad Co. (240 U.S. 1), in which in referring to the Pollock case, he said :

Moreover, in addition, the conclusion reached in the Pollock case did not in any degree involve holding that income taxes generically and necessarily came within the class of direct taxes on property, but, on the contrary, recognized the fact that taxation on income was in its nature an excise entitled to be enforced as such unless and until it was concluded that to enforce it would amount to accomplishing the result which the requirement as to apportionment of direct taxation was adopted to prevent, in which case the duty would arise to disregard form and consider substance alone, and hence subject the tax to the regulation as to apportionment which otherwise as an excise would not apply to it. Nothing could serve to make this clearer than to recall that in the Pollock case, insofar as the law taxed incomes from other classes of property than real estate and invested personal property, that is, income from professions, trades, employments, or vocations (158 U.S. 637), its validity was recognized ; indeed, it was expressly declared that no dispute was made upon that subject, and attention was called to the fact that taxes on such income had been sustained as excise taxes in the past (id. p. 635). The whole law was, however, declared unconstitutional on the ground that to permit it to thus operate would relieve real estate and invested personal property from taxation and would leave the burden of the tax to be borne by professions, trades, employments, or vocations; and in that way what was intended as a tax on capital would remain, in substance, a tax on occupations and labor' (id. p. 637), a result which, it was held, could not have been contemplated by Congress."

In view of the foregoing, it seems clear that prior to the adoption of the sixteenth amendment a tax on incomes from real and personal property was regarded as a direct tax under the Constitution, but that a tax on incomes from professions, trades, employments, or vocations was regarded as an indirect tax or excise.


Shortly after the decisions of the Supreme Court in the Pollock v. Farmers' Loan & Trust Co, cases, the sixteenth amendment was adopted. This amendment reads as follows:

“The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."

The decisions of the Supreme Court rendered after that amendment seem clearly to justify the conclusion that the effect of the sixteenth amendment is to take an income tax on incomes from real and personal property out of the category of direct taxes and to put it in the indirect class of excises, duties, and imposts. As pointed out before, the Supreme Court has never held that'a tax on incomes from salaries, trades, avocations, or employments is a direct tax.

The first case I wish to cite to justify the conclusion that the income tax is no longer a direct tax in the constitutional sense is that of Brushaber v. Unión Pacific Railroad Co. (240 U.S. 1), in which it was contended that the incometax provisions of the Revenue Act of 1913 violated the sixteenth amendment.

In that case, the Supreme Court traced the history leading up to the adoption of the sixteenth amendment and stated that the income tax of 1894 was held unconstitutional in the Pollock case for the following reasons:

Concluding that the classification of direct was adopted for the purpose of rendering it impossible to burden by taxation accumulations of property, real or personal, except subject to the regulation of apportionment, it was held that the duty existed to fix what was a direct tax in the constitutional sense so as to accomplish this purpose contemplated by the Constitution (157 U.S. 581). Coming to consider the validity of the tax from this point of view, while not questioning at all that in common understanding it was direct merely on income and only indirect on property, it was held that, considering the substance of things, it was direct on property in a constitutional sense, since to burden an income by a tax was, from the point of substance, to burden the property from which the income was derived, and thus accomplish the very thing which the provision as to apportionment of direct taxes was adopted to prevent." [Italics ours.]

The Court, after quoting the sixteenth amendment, then goes on to state:

“ It is clear on the face of this text that it does not purport to confer power to levy income taxes in a generic sense—an authority already possessed and never questioned—or to limit and distinguish between one kind of income taxes and another, but that the whole purpose of the amendment was to relieve all income taxes when imposed from apportionment from a consideration of the source whence the income was derived. Indeed, in the light of the history which we have given and of the decision in the Pollock case, and the ground upon which the ruling in that case was based, there is no escape from the conclusion that the amendment was drawn for the purpose of doing away for the future with the principle upon which the Pollock case was decided; that is, of determining whether a tax on income was direct not by a consideration of the burden placed on the taxed income upon which it directly operated, but by taking into view the burden which resulted on the property from which the income was derived, since in express terms the amendment provides that income taxes, from whatever source the income may be derived, shall not be subject to the regulation of apportionment. From this in substance it indisputably arises, first, that all the contentions which we have previously noticed concerning the assumed limitations to be implied from the language of the amendment as to the nature and character of the income taxes which it authorizes find no support in the text and are in irreconcilable conflict with the very purpose which the amendment was adopted to accomplish. Second, that the contention that the amendment treats a tax on income as a direct tax, although it is relieved from apportionment and is necessarily therefore not subject to the rule of uniformity as such rule only applies to taxes which are not direct, thus destroying the two great classifications which have been recognized and enforced from the beginning, is also wholly without foundation since the command of the amendment that all income taxes shall not be subject to apportionment by a consideration of the sources from which the taxed income may be derived forbids the application to such taxes of the rule applied in the Pollock case by which alone such taxes were removed from the great class of excises, duties, and imposts subject to the rule of uniformity, and were placed


under the other or direct class. This must be unless it can be said that although the Constitution, as a result of the amendment, in express terms excludes the criterion of source of income, that criterion yet remains for the purpose of destroying the classifications of the Constitution by taking an excise out of the class to which it belongs and transferring it to a class in which it cannot be placed consistently with the requirements of the Constitution. Indeed, from another point of view, the amendment demonstrates that no such purpose was intended, and on the contrary shows that it was drawn with the object of maintaining the limitations of the Constitution and harmonizing their operation. We say this because it is to be observed that although from the date of the Hylton case, because of statements made in the opinions in that case, it had come to be accepted that direct taxes in the constitutional sense were confined to taxes levied directly on real estate because of its ownership, the amendment contains nothing repudiating or challenging the ruling in the Pollock case that the word 'direct' had a broader significance, since it embraced also taxes levied directly on personal property because of its ownership, and therefore the amendment at least impliedly makes such wider sig. nificance a part of the Constitution, a condition which clearly demonstrates that the purpose was not to change the existing interpretation except to the extent necessary to accomplish the result intended; that is, the prevention of the resort to the sources from which a taxed income was derived in order to cause a direct tax on the income to be a direct tax on the source itself, and thereby to take an income tax out of the class of excises, duties, and imposts, and place it in the class of direct taxes."

Another case in support of the contention that the income tax is no longer a direct tax is that of Stanton v. Baltic Mining Co. (240 U.S. 103). In that case, which also involved the constitutionality of the income-tax provisions of the act of 1913, it was still contended that the income tax was a direct tax. In disposing of this contention, the Court made the following statement :

But, aside from the obvious error of the proposition, intrinsically considered, it manifestly disregards the fact that by the previous ruling it was settled that the provisions of the 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. Mark, of course, in saying this we are not here considering a tax not within the provisions of the sixteenth amendment; that is, one in which the regulation of apportionment or the rule of uniformity is wholly negligible because the tax is one entirely beyond the scope of the taxing power of Congress, and where consequently no authority to impose a burden, either direct or indirect, exists. In other words, we are here dealing solely with the restriction imposed by the sixteenth amendment on the right to resort to the source whence an income is derived in a case where there is power to tax for the purpose of taking the income tax out of the class of indirect, to which it generically belongs, and putting it in the class of direct, to which it would not otherwise belong, in order to subject it to the regulation of apportionment

The Supreme Court also reaffirmed its conclusion that the income tax was not a direct tax in the case of Tyee Realty Co. v. Anderson (240 U.S. 115).

This same contention was also disposed of in Cook v. Tait (286 Fed. 409), affirmed 265 U.S. 47, in which the District Court made the following statement:

“Upon the assumption that an income tax is a direct tax, and is levied upon property outside the United States, the plaintiff's reasoning is clear and simple. It is true that, if sound, it carries us farther than is necessary for a decision of this case, for apparently it would deny the right to tax so much of the income of a resident as comes from property located in foreign lands. One adverse criticism upon it is that it is clearly established that since the adoption of the sixteenth amendment, an income tax is never a direct tax. The effect of that change in the Constitution was to take a tax upon income derived from sources which had therefore made it a direct tax out of that category, and put it in the class of excises, duties, and imposts. Brushaber v. Union Pacific R.R. Co. (240 U.S. 1-19, 36 Sup. Ct. 236, 60 L. Ed. 493, Ann. Cas. 1917B, 713; L.R.A. 1917D, 414; Stanton v. Baltic Mining Co. (240 U.S. 103–112, 36 Sup. Ct. 278, 60 L. Ed. 546)



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