Pollock v. Farmers Loan Traust Co

• Citation: 157 U.S. 429,39 L.Ed. 759,15 S.Ct. 673
• Decision Date: 08 April 1895
• Docket Number: No. 893,893
• Parties: POLLOCK v. FARMERS' LOAN & TRAUST CO. et al. 1
• Court: United States Supreme Court

157 U.S. 429

15 S.Ct. 673

39 L.Ed. 759

POLLOCK

v FARMERS' LOAN & TRAUST CO. et al.¹

No. 893.

April 8, 1895.

This was a bill filed by Charles Pollock, a citizen of the state of Massachusetts, on behalf of himself and all other stockholders of the defendant company similarly situated, against the Farmesr' Loan & Trust Company, a corporation of the state of New York, and its directors, alleging that the capital stock of the corporation consisted of $1,000,000, divided into 40,000 shares of the par value of $25 each; that the company was authorized to invest its assets in public stocks and bonds of the United States, of individual states, or of any incorporated city or county, or in such real or personal securities as it might deem proper; and also to take, accept, and execute all such trusts of every description as might be committed to it by any person or persons or any corporation, by grant, assignment, devise, or bequest, or by order of any court of record of New York, and to receive and take any real estate which might be the subject of such trust; that the property and assets of the company amounted to more than $5,000,000, or which at least $1,000,000 was invested in real estate owned by the company in fee, at least $2,000,000 in bonds of the city of New York, and at least $1,000,000 in the bonds and stocks of other corporations of the United States; that the net profits or income of the defendant company during the year ending December 31, 1894, amounted to more than the sum of $3,000,000 above its actual operation and business expenses, including lossess and interest on bonded and other indebtedness; that from its real estate the company derived an income of $50,000 per annum, after deducting all county, state, and municipal taxes; and that the company derived an income or profit of about $60,000 per annum fro its investments in municipal bonds.

It was further alleged that under and by virtue of the pow- ers conferred upon the company it had from time to time taken and executed, and was holding and executing, numerous trusts committed to the company by many persons, copartnerships, unincorporated associations, and corpoa tions, by grant, assinment, devise, and bequest, and by orders of various courts, and that the company now held as trustee for many minors, individuals, corpartnerships, associations, and corporations, resident in the United States and elsewhere, many parcels of real estate situated in the various states of the United States, and amounting in the aggregate, to a value exceeding $5,000,000, the rents and income of which real estate collected and received by said defendant in its fiduciary capacity annually exceeded the sum of *200,000.

The bill also averred that complainant was, and had been since May 20, 1892, the owner and registered holder of 10 shares of the capital stock of the company, of a value exceeding the sum of $5,000; that the capital stock was divied among a large number of different persons, who, as such stockholders, constituted a large body; that the bill was filed for an object common to them all, and that he therefore brought suit not only in his own behalf as a stockholder of the company, but also as a representative of and on behalf of such of the other stockholders similarly situated and interested as might choose to intervene and become parties.

It was then alleged that the management of the stock, property, affairs, and concerns of the company was committed, under its acts of incorporation, to its directors, and charged that the company and a majority of its directors claimed and asserted that under and by virtue of the alleged authority of the provisions of an act of congress of the United States entitled 'An act to reduce taxation, to provide revenue for the government, and for other purposes,' passed August 15, 1894, the company was liable, and that they intended to pay, to the United States, before July 1, 1895, a tax of 2 per centum on the net profits of said company for the year ending December 31, 1894, above actual operating and business expenses, including the income derived from its real estate and its bonds of the city of New York; and that the directors claimed and asserted that a similar tax must be paid upon the amount of the incomes, gains, and profits, in excess of $4,000, of all minors and others for whom the company was acting in a fiduciary capacity. And, further, that the company and its directors had avowed their intention to make and file with the collector of internal revenue for the Second district of the city of New York a list, return, or statement showing the amount of the net income of the company received during the year 1894, as aforesaid, and likewise to make and render a list or return to said collector of internal revenue, prior to that date, of the amount of the income, gains and profits of all minors and other persons having incomes in excess of $3,500, for whom the company was acting in a fiduciary capacity.

The bill charged that the provisions in respect of said alleged income tax incorporated in the act of congress were unconstututional, null, and void, in that the tax was a direct tax in respect of the real estate held and owned by the company in its own right and in its fiduciary capacity as aforesaid, by being imposed upon the rents, issues, and profits os said real estate, and was likewise a direct tax in respect of its personal property and the personal property held by it for others for whom it acted in its fiduciary capacity as aforesaid, which direct taxes were not, in and by said act, apportioned among the several states, as required by section 2 of article 1 of the constitution; and that, if the income tax so incorporated in the act of congress aforesaid were held not to be a direct tax, nevertheless its provisions were unconstitutional, null, and void, in that they were not uniform throughout the United States, as required in and by section 8 of article 1 of the constitution of the United States, upon many grounds and in many particulars specifically set forth.

The bill further charged that the income-tax provisions of the act were likewise unconstitutional, in that they imposed a tax on incomes not taxable ud er the constitution, and likewise income derived from the stocks and bonds of the states of the United States, and counties and municipalities therein which stocks and bonds are among the means and instrumentalities employed for carrying on their repective governments, and are not proper subjects of the taxing power of congress, and which states and their counties and muncipalities are independent of the general government of the United States, and the respective stocks and bonds of which are, together with the power of the states to borrow in any form, exempt from federal taxation.

Other grounds of unconstitutionality were assigned, and the violation of articles 4 and 5 of the constitution asserted.

The bill further averred that the suit was not a collusive one, to confer on a court of the United States jurisdiction of the case, of which it would not otherwise have cognizance and that complainant had requested the company and its directors to omit and to refuse to pay said income tax, and to contest the constiutionality of said act, and to refrain from voluntarily making lists, returns, and statements on its own behalf and on behalf of the minors and other persons for whom its was acting in a fiduciary capacity, and to apply to a court of competent jurisdiction to determine its liability under said act; but that the company and a majority of its directors, after a meeting of the directors, at which the matter and the request of complainant were formally laid before them for action, had rejused, and still refuse, and intend omitting, to comply with complainant's demand, and had resolved and determined and intended to comply with all and singular the provisions of the said act of congress, and to pay the tax upon all its net profits or income as aforesaid, including its rents from real estate and its income from municipal bonds, and a copy of the refusal of the company was annexed to the complaint.

It was also alleged that if the company and its directors, as they propered and had declared their intention to do, should pay the tax out of its gains, income, and profits, or out of the gains, income, and profits of the property held by it in its fiduciary capacity they will diminish the assets of the company and lessen the dividends thereon and the value of the shares; that voluntary compliance with the income-tax provisions would expose the company to a multiplicity of suits, not only by and on behalf of its numerous shareholders, but by and on behalf of numberous minors and others for whom it acts in a fiduciary capacity, and that such numerous suits would work irreparable injury to the business of the company, and subject it to great and irreparable damage, and to liability to the beneficiaries aforesaid, to the irreparable damage of complainant and all its shareholders.

The bill further averred that this was a suit of a civil nature in equity; that the matter in dispute exceeded, exclusive of costs, the sum of $5,000, and arose under the constitution or laws of the United States; and that there was furthermore a controversy between citizens of different states.

The prayer was that it might be adjudged and decreed that the said provisions known as the income tax incorporated in said act of congress passed August 15, 1894, are unconstitutional, null, and void; that the defendants be restrained from volunarily complying with the provisions of said act, and making the list, returns, and statements above referred to, or paying the tax aforesaid; and for general relief.

The defendants demurred on the ground of want of equity, and, the cause having been brought on to be heard upon the bill and demurrer thereto, the demurrer was sustained, and the bill of complaint dismissed, with costs, whereupon...