Why did the Supreme Court declare the 1894 Act unconstitutional?

The 1894 Revenue Act had been challenged in court because it characterized dividends paid by a (federally-connected) investment fund as taxable "gains, profits, or income".

In its 1895 Pollock decision, the Court invalidated the 1894 Act, declaring that both the shares in the fund and the dividend payments from them were property, therefore the tax on those particular items was, in effect, a direct tax, and therefore impermissible because it was not apportioned among the states:

"...the tax imposed by sections 27 to 37, inclusive, of the act of 1894, so far as it falls on the income of real estate and of personal property, being a direct tax within the meaning of the Constitution, ... all those sections constituting an entire scheme of taxation are necessarily invalid." (Pollock v. Farmer's Loan and Trust, 157 U.S. 429) (1895)

In other words, the source of the payments to be taxed mattered, even though the activity was federally connected. If the source was property (the shares, bonds, or real estate), the payments from that source could not be the subject of an indirect tax, as all knew the income tax was (and still is).

The rest of the Act did not depart from the framework established by the Revenue Act of 1862 and would have stood had not Congress, in the Court's eyes, overreached.