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The requirement of the Constitution is that no direct tax shall be laid otherwise than by apportionment -- the prohibition is not against direct taxes on land, from which the implication is sought to be drawn that indirect taxes on land would be constitutional, but it is against all direct taxes -- and it is admitted that a tax on real estate is a direct tax. Unless, therefore, a tax upon rents or income issuing out of lands is intrinsically so different from a tax on the land itself that it belongs to a wholly different class of taxes, such taxes must be regarded as falling within the same category as a tax on real estate eo nomine.
Complainant, a stockholder of defendant corporation, sought a decree restraining the corporation from voluntarily complying with the income tax act of August 15, 1894, which sought to levy taxes on the rents or income of real estate and upon municipal bonds. The circuit court declined to enjoin the corporation and entered a decree in favor of defendant. Complainant challenged the decision.
Were the taxes levied on rents or income of real estate and upon municipal bonds valid, thereby justifying the refusal of the circuit court to enjoin the corporation to comply with the income tax act?
On appeal, the Court reversed the decree and held that so far as the income tax act levied a tax on the rents or income of real estate, it was a direct tax in violation of the apportionment requirement of the Constitution and was invalid. Moreover, the Court noted that it was long ago determined that the property and revenues of municipal corporations were not subjects of federal taxation. Thus, tax upon the income derived from municipal bonds was a tax on the power of the states and their instrumentalities to borrow money and was consequently held invalid.