Clause 4. No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.
The Hylton Case
The crucial problem under clause 4 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.”1950 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.”1951 The first case to come before the Court on this issue was Hylton v. United States,1952 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,”1953 whereas Madison, both on the ﬂoor of Congress and in correspondence, attacked it as “direct” and therefore void, because it was levied without apportionment.1954 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” that 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 that their Negroes and land should be subjected to a specific tax.1955
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,1956 a tax on the circulating notes of state banks,1957 an inheritance tax on real estate,1958 and finally a general tax on incomes.1959 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.1960 Then, almost one hundred years after the Hylton case, the famous case of Pollock v. Farmers’ Loan & Trust Co.1961 arose under the Income Tax Act of 1894.1962 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,”1963 it sustained as “excises” a tax on sales on business exchanges,1964 a succession tax which was construed to fall on the recipients of the property transmitted rather than on the estate of the decedent,1965 and a tax on manufactured tobacco in the hands of a dealer, after an excise tax had been paid by the manufacturer.1966 Again, in Thomas v. United States,1967 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.”1968 On the same day, in Spreckels Sugar Refining Co. v. McClain,1969 it ruled that an exaction, denominated a special excise tax, that was 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.1970 was the same. In Flint, 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.,1971 a tax on the annual production of mines was held to be “independently of the effect of the operation 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.”1972
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.1973 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.”1974 Having established this proposition, the Court had no difficulty in deciding that the inclusion in the computation of the estate tax of property held as joint tenants,1975 or as tenants by the entirety,1976 or the entire value of community property owned by husband and wife,1977 or the proceeds of insurance upon the life of the decedent,1978 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.”1979 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.”1980
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 Columbia.1981 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.1982
1950 157 U.S. 429, 573 (1895).
1951 J. Madison, The Debates In The Federal Convention Of 1787 435 (G. Hunt & J. Scott eds., Greenwood Press ed. 1970).
1952 3 U.S. (3 Dall.) 171 (1796).
1953 The Works Of Alexander Hamilton 845 (J. Hamilton ed., 1851). “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.”
1954 4 Annals Of Congress 730 (1794); 2 Letters And Other Writings Of James Madison 14 (1865).
1955 3 U.S. (3 Dall.) 171, 177 (1796).
1956 Pacific Ins. Co. v. Soule, 74 U.S. (7 Wall.) 433 (1869).
1957 Veazie Bank v. Fenno, 75 U.S. (8 Wall.) 533 (1869).
1958 Scholey v. Rew, 90 U.S. (23 Wall.) 331 (1875).
1959 Springer v. United States, 102 U.S. 586 (1881).
1960 102 U.S. at 602.
1961 157 U.S. 429 (1895); 158 U.S. 601 (1895).
1962 28 Stat. 509, 553 (1894).
1963 Stanton v. Baltic Mining Co., 240 U.S. 103 (1916); Knowlton v. Moore, 178 U.S. 41, 80 (1900).
1964 Nicol v. Ames, 173 U.S. 509 (1899).
1965 Knowlton v. Moore, 178 U.S. 41 (1900).
1966 Patton v. Brady, 184 U.S. 608 (1902).
1967 192 U.S. 363 (1904).
1968 192 U.S. at 370.
1969 192 U.S. 397 (1904).
1970 220 U.S. 107 (1911).
1971 240 U.S. 103 (1916).
1972 240 U.S. at 114.
1973 232 U.S. 261 (1914).
1974 New York Trust Co. v. Eisner, 256 U.S. 345, 349 (1921).
1975 Phillips v. Dime Trust & S.D. Co., 284 U.S. 160 (1931).
1976 Tyler v. United States, 281 U.S. 497 (1930).
1977 Fernandez v. Wiener, 326 U.S. 340 (1945).
1978 Chase Nat’l Bank v. United States, 278 U.S. 327 (1929); United States v. Manufacturers Nat’l Bank, 363 U.S. 194, 198–201 (1960).
1979 Bromley v. McCaughn, 280 U.S. 124, 136 (1929). See also Helvering v. Bullard, 303 U.S. 297 (1938).
1980 Bromley v. McCaughn, 280 U.S. 124, 140 (1929).
1981 Loughborough v. Blake, 18 U.S. (5 Wheat.) 317 (1820).
1982 De Treville v. Smalls, 98 U.S. 517, 527 (1879).