Eisner v.

Macomber
case brief Eisner v. Macomber
FACTS -Mrs. Macomber owned 2,200 shares in Standard Oil. Standard Oil declared a 50% stock dividend and she
received 1,100 additional shares, of which about $20,000 in par value represented earnings accumulated by the
companyrecapitalized rather than distributedsince the effective date of the original tax law. -Current statute
expressly included stock dividends in income, and the government contended that those certificates should be
taxed as income to Mrs. Macomber as though the corporation had distributed money to her. -Mrs. Macomber sued
Mr. Mark Eisner, the Collector of Internal Revenue, for a refund.
ISSUE -Whether in legal or accounting terms the stock dividend was to be regarded as a taxable event.
HOLDING -This stock dividend was not a realization of income by the taxpayer-shareholder for purposes of the
Sixteenth Amendment RULES -"We are clear that not only does a stock dividend really take nothing from the
property of the corporation and add nothing to that of the shareholder, but that the antecedent accumulation of
profits evidenced thereby, while indicating that the shareholder is richer because of an increase of his capital, at
the same time shows he has not realized or received any income in the transaction."
ANALYSIS -In Towne v. Eisner, court stated that stock dividends were not income, as nothing of value was received
by Towne - the company was not worth any less than it was when the dividend was declared, and the total value of
Towne's stock had not changed. -Although the Eisner v. Macomber Court acknowledged the power of the Federal
Government to tax income under the Sixteenth Amendment, the Court essentially said this did not give Congress
the power to tax as income anything other than income, i.e., that Congress did not have the power to re-define
the term income as it appeared in the Constitution: -Throughout the argument of the Government, in a variety of
forms, runs the fundamental error already mentioned, a failure to appraise correctly the force of the term
"income" as used in the Sixteenth Amendment, or at least to give practical effect to it. Thus, the Government
contends that the tax "is levied on income derived from corporate earnings," when in truth the stockholder has
"derived" nothing except paper certificates which, so far as they have any effect, deny him [or "her" in this case,
Mrs. Macomber] present participation in such earnings. It [the government] contends that the tax may be laid
when earnings "are received by the stockholder," whereas [s]he has received none; that the profits are "distributed
by means of a stock dividend," although a stock dividend distributes no profits; that under the Act of 1916 "the tax
is on the stockholder's share in corporate earnings," when in truth a stockholder has no such share, and receives
none in a stock dividend; that "the profits are segregated from his [her] former capital, and [s]he has a separate
certificate representing his [her] invested profits or gains," whereas there has been no segregation of profits, nor
has [s]he any separate certificate representing a personal gain, since the certificates, new and old, are alike in
what they representa capital interest in the entire concerns of the corporation.
CONCLUSION The Court ordered that Macomber be refunded the tax she overpaid. - See more at:
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