16th Amendment: Text, Income, Realization, and Myths

The 16th Amendment to the U.S. Constitution gives Congress the power to tax income “from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”¹ Ratified on February 3, 1913, it cleared the constitutional obstacle that had blocked a federal income tax and became the foundation for every dollar of income tax the federal government has collected since.

What the Text Actually Says

The amendment is a single sentence, and three phrases in it do the work. “From whatever source derived” reaches every kind of financial gain, not just wages or business profits. “Without apportionment among the several States” removes the old rule that required certain federal taxes to be divided among the states by population. “Without regard to any census or enumeration” makes clear that population counts play no part in how income taxes are calculated.¹

Congress passed the amendment on July 2, 1909, and sent it to the states.² Forty of the 48 states ultimately ratified it, well above the three-fourths threshold required by Article V. The amendment was officially proclaimed on February 3, 1913, nearly four years after Congress sent it out.³

Why the Amendment Was Needed

The amendment exists because of a Supreme Court decision from 1895. Congress had passed a 2% tax on annual incomes above $3,000 as part of the Wilson-Gorman Tariff Act the year before. In Pollock v. Farmers’ Loan & Trust Co., the Court struck it down, ruling that taxing income from property, such as rent and investment returns, was effectively a direct tax on the property itself.⁴ Under the original Constitution, direct taxes had to be apportioned among the states by population, and Congress had not done that. On rehearing later that year, the Court voted 5–4 to invalidate the entire income tax.

Apportionment made a workable income tax mathematically impossible. If a state held 5% of the national population, it owed 5% of any direct tax, regardless of how much its residents actually earned.⁵ Rates could not be tied to what people earned. A populous but modest state would owe the same share as a smaller state full of wealthy residents. Congress could not fix that with ordinary legislation because the Court had drawn a constitutional line. The only route was an amendment, and it took nearly two decades of political effort to get one through.

The 16th Amendment cut the link between income taxes and state population. Two people with identical incomes now pay the same federal rate whether they live in California or Wyoming. That is what made graduated brackets, deductions, and the rest of the modern income tax structure constitutionally possible.

The First Modern Income Tax

Congress moved quickly after ratification. The Revenue Act of 1913 established a 1% tax on net personal income above $3,000, with a graduated surtax reaching 6% on incomes above $500,000.⁶ In 1913 dollars, the $3,000 exemption meant the tax initially reached only the wealthiest sliver of the country.

The IRS produced the first Form 1040 for the 1913 tax year. Returns were due by March 1, and late filers faced penalties from $20 to $1,000.⁷ Because ratification came partway through the year, that first return covered only income received from March 1 through December 31, 1913. The tax has been collected every year since.

What Counts as Income Under the Amendment

The phrase “from whatever source derived” was chosen to prevent taxpayers from carving out categories of gains as beyond Congress’s reach. Wages, investment returns, rent, business profits, royalties, gambling winnings, lawsuit recoveries — the amendment covers them all. The Supreme Court gave the language its working definition in Commissioner v. Glenshaw Glass Co., describing taxable income as “undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.”⁸

The reach extends to illegal gains. In James v. United States, the Court held that embezzled funds are taxable income to the embezzler in the year of the embezzlement.⁹ The tax code does not care whether wealth was earned lawfully; if you gained it and control it, you owe tax on it.

Realization: The Line the Courts Have Drawn

Not every increase in value counts. In Eisner v. Macomber, the Court ruled that stock dividends paid proportionally to all shareholders are not income, because the shareholder has received nothing new. The company simply relabeled part of its surplus as capital stock, and the shareholder’s proportional ownership did not change.¹⁰ Income, the Court said, is “the gain derived from capital, from labor, or from both combined.”

The distinction between realized gains (you sold and pocketed the proceeds) and unrealized gains (the asset went up but you still hold it) has shaped tax law ever since. It is why you generally do not owe income tax simply because your home or retirement account has appreciated. Liability normally arrives when you sell or otherwise convert the asset.

The Supreme Court revisited this territory in 2024 in Moore v. United States. The case involved the Mandatory Repatriation Tax, which taxed American shareholders on profits earned by foreign corporations they controlled, even when those profits had never been distributed. The Court upheld the tax 7–2 on narrow grounds: the foreign corporation had already realized the income, and Congress was attributing it to the American shareholders who controlled the company. The majority pointedly declined to answer whether the Constitution requires income to be realized before Congress can tax it, and it said its decision did not address “taxes on holdings, wealth, or net worth” or “taxes on appreciation.”¹¹ Proposals for a federal wealth tax or a tax on unrealized capital gains would likely face constitutional challenges under the 16th Amendment. For now, the realization question is unresolved.

What the Amendment Did Not Do

The Supreme Court affirmed the amendment’s effect quickly. In Brushaber v. Union Pacific Railroad, decided in 1916, the Court held that the amendment’s purpose was “to relieve all income taxes when imposed from apportionment from consideration of the source whence the income is derived.”¹² The Court also clarified a point that is often misunderstood: the amendment did not create a new taxing power. Congress already had the power to tax income. What the amendment did was remove the apportionment obstacle that Pollock had imposed.

Common Myths About the 16th Amendment

Few constitutional provisions attract as much bad information. The IRS maintains a list of frivolous tax arguments that come up repeatedly, and several center on this amendment.³

“The Amendment Was Never Properly Ratified”

This argument usually points to clerical variations in how state legislatures recorded their votes, or claims that Ohio was not technically a state at the time. Courts have rejected these arguments without exception. Forty states ratified; even setting aside Ohio and every other state with an alleged irregularity, the count exceeds the three-fourths threshold Article V requires.³ A 1953 joint congressional resolution confirmed Ohio’s statehood retroactive to 1803, closing that side door as well.

“The Amendment Doesn’t Reach Wages”

A related claim holds that “income” means only corporate profits or investment returns, not compensation for labor. Every federal court to consider it has rejected it. Brushaber confirmed the amendment’s reach in 1916, and Glenshaw Glass‘s definition of income as any “undeniable accession to wealth” plainly covers pay for work.¹² Filing a return based on this theory exposes the filer to a $5,000 penalty for a frivolous return, on top of the taxes and interest still owed.³

1
Congress.gov. U.S. Constitution – Sixteenth Amendment
2
National Archives. 16th Amendment to the U.S. Constitution: Federal Income Tax (1913)
3
Internal Revenue Service. The Truth About Frivolous Tax Arguments – Section I (D to E)
4
Justia U.S. Supreme Court Center. Pollock v. Farmers’ Loan and Trust Company
5
Congress.gov. Overview of Direct Taxes
6
Internal Revenue Service. Historical Highlights of the IRS
7
Internal Revenue Service. Form 1040 Income Tax Return of Annual Net Income of Individuals
8
Justia U.S. Supreme Court Center. Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955)
9
Justia U.S. Supreme Court Center. James v. United States, 366 U.S. 213 (1961)
10
Justia U.S. Supreme Court Center. Eisner v. Macomber, 252 U.S. 189 (1920)
11
Supreme Court of the United States. Moore et ux. v. United States
12
Justia U.S. Supreme Court Center. Brushaber v. Union Pacific R. Co., 240 U.S. 1 (1916)