In 1894, an amendment was attached to the Wilson–Gorman Tariff Act that attempted to impose a federal tax of two percent on incomes over $4,000 (equal to $111,000 in 2016). The federal income tax was strongly favored in the South, and it was moderately supported in the eastern North Central states, but it was strongly opposed in the Far West and the Northeastern States (with the exception of New Jersey). The tax was derided as "un-Democratic, inquisitorial, and wrong in principle".
In Pollock v. Farmers' Loan & Trust Co., the U.S. Supreme Court declared certain taxes on incomes – such as those on property under the 1894 Act – to be unconstitutionally unapportioned direct taxes. The Court reasoned that a tax on income from property should be treated as a tax on "property by reason of its ownership" and so should be required to be apportioned. The reasoning was that taxes on the rents from land, the dividends from stocks, and so forth, burdened the property generating the income in the same way that a tax on "property by reason of its ownership" burdened that property.
After Pollock, while income taxes on wages (as indirect taxes) were still not required to be apportioned by population, taxes on interest, dividends, and rental income were required to be apportioned by population. The Pollock ruling made the source of the income (e.g., property versus labor, etc.) relevant in determining whether the tax imposed on that income was deemed to be "direct" (and thus required to be apportioned among the states according to population) or, alternatively, "indirect" (and thus required only to be imposed with geographical uniformity).
Dissenting in Pollock, Justice John Marshall Harlan stated:
When, therefore, this court adjudges, as it does now adjudge, that Congress cannot impose a duty or tax upon personal property, or upon income arising either from rents of real estate or from personal property, including invested personal property, bonds, stocks, and investments of all kinds, except by apportioning the sum to be so raised among the States according to population, it practically decides that, without an amendment of the Constitution – two-thirds of both Houses of Congress and three-fourths of the States concurring – such property and incomes can never be made to contribute to the support of the national government.
Members of Congress responded to Pollock by expressing widespread concern that many of the wealthiest Americans had consolidated too much economic power.
In Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955), the Supreme Court laid out what has become the modern understanding of what constitutes "gross income" to which the Sixteenth Amendment applies, declaring that income taxes could be levied on "accessions to wealth, clearly realized, and over which the taxpayers have complete dominion". Under this definition, any increase in wealth – whether through wages, benefits, bonuses, sale of stock or other property at a profit, bets won, lucky finds, awards of punitive damages in a lawsuit, qui tam actions – are all within the definition of income, unless the Congress makes a specific exemption, as it has for items such as life insurance proceeds received by reason of the death of the insured party, gifts, bequests, devises and inheritances, and certain scholarships.
On December 22, 2006, a three-judge panel of the United States Court of Appeals for the District of Columbia Circuit vacated its unanimous decision (of August 2006) in Murphy v. Internal Revenue Service and United States. In an unrelated matter, the court had also granted the government's motion to dismiss Murphy's suit against the Internal Revenue Service. Under federal sovereign immunity, a taxpayer may sue the federal government, but not a government agency, officer, or employee (with some exceptions).