## Facts

- Charles Pollock, a Massachusetts citizen and minority shareholder of a New York trust company, sued in equity on behalf of himself and similarly situated shareholders.
- The company held substantial real estate and investment assets, including municipal bonds, and earned income from rents, interest, and dividends.
- Pollock sought to enjoin the company and its directors from voluntarily paying the federal Income Tax Act of 1894, alleging the tax was unconstitutional and payment would unlawfully divert corporate funds.
- The case reached the Supreme Court from the federal circuit court in New York.
- In an initial decision, the Court upheld equity jurisdiction and invalidated the tax as applied to income from real estate and to interest on municipal bonds, but the Court was divided on the tax’s application to other income from personal property.
- On rehearing, the Court addressed the remaining provisions and the severability of the income-tax scheme.

## Issues

1. Whether a shareholder may sue in equity to enjoin corporate payment of an allegedly unconstitutional federal tax as a threatened breach of trust.
2. Whether a federal tax on rents or income from real estate is a “direct tax” requiring apportionment under Article I.
3. Whether a federal tax on income from personal property (including stocks and bonds) is a “direct tax” requiring apportionment under Article I.
4. Whether the income-tax provisions of the 1894 Act were severable if unconstitutional as applied to income from property.

## Decision

- The Court held that equity jurisdiction existed to prevent a threatened breach of trust involving illegal diversion of corporate funds through unconstitutional tax payments.
- The Court held that a tax on rents or income from real estate is a direct tax and unconstitutional if unapportioned.
- The Court held that taxes on personal property, and on the income of personal property, are direct taxes and unconstitutional if unapportioned.
- The Court concluded that the income-tax provisions in §§ 27–37 of the 1894 Act constituted a single scheme; because the tax on income from property was unconstitutional and not apportioned, the entire income-tax scheme was invalid.
- The rehearing decision was by a 5–4 vote.

## Legal Principles

- Federal “direct taxes” must be apportioned among the states by population under Article I; unapportioned direct taxes are unconstitutional.
- A tax on income derived from property may be treated as constitutionally equivalent to a tax on the underlying property for purposes of the direct-tax clauses.
- Taxes on real estate are direct taxes; taxes on rents or income from real estate are likewise direct.
- Taxes on personal property, and on income from personal property, are direct taxes requiring apportionment.
- When Congress enacts an inseverable tax scheme, invalidity of the central operative parts can require invalidation of the entire set of provisions.
- A shareholder may seek equitable relief to stop corporate payment of an illegal tax where payment would constitute a threatened breach of trust and misapplication of corporate funds.

## Conclusion

The Court invalidated the 1894 federal income tax provisions, holding that an income tax falling on income from real and personal property was an unapportioned direct tax barred by Article I and that the income-tax sections formed an inseverable scheme requiring complete invalidation.


Pollock v. Farmers’ Loan & Tr. Co., 158 U.S. 601 (1895)