Eisner vs. Macomber

A stock dividend does not constitute taxable "income" under the Sixteenth Amendment because it is not a gain derived from capital, severed from it, and received by the taxpayer for separate use and disposal. Therefore, a tax on such dividends is a direct tax requiring apportionment.

Following the ratification of the Sixteenth Amendment (1913), Congress passed the Revenue Act of 1916, which sought to tax stock dividends as income. This case tested the constitutional limits of Congress's power to define and tax income without apportionment.

• Filed in the U.S. District Court for the Southern District of New York.
• The District Court held the tax unconstitutional.
• The U.S. Supreme Court noted probable jurisdiction and affirmed the lower court's decision.

• The respondent, Myrtle H. Macomber, was a shareholder of Standard Oil Company of California.
• The company declared a stock dividend, distributing additional shares to existing shareholders proportionally from its accumulated profits earned after March 1, 1913.
• Macomber received additional shares but no cash or other property.
• The petitioner, Eisner (as Collector of Internal Revenue), sought to tax the stock dividend as income under the 1916 Act.
• Macomber paid the tax under protest and sued for a refund.

• The Sixteenth Amendment authorized Congress to tax income from whatever source derived, without apportionment.
• A stock dividend is economically equivalent to a cash dividend followed by a reinvestment of proceeds, thus constituting realized income.
• The form of the dividend (stock vs. cash) should not control; the substance is an increase in the shareholder's wealth.

• A stock dividend is not "income" because the shareholder's proportional interest in the corporation remains unchanged; no property is separated from the corporate entity.
• The dividend represents a mere bookkeeping transfer from surplus to capital account, conferring no new benefit to the shareholder.
• Taxing it as income is a direct tax on property, requiring apportionment under Article I of the Constitution.

• Procedural Issues: N/A
• Substantive Issues:
  • Whether a stock dividend constitutes "income" within the meaning of the Sixteenth Amendment, taxable without apportionment.
  • Whether the Revenue Act of 1916, insofar as it taxes stock dividends as income, is constitutional.

• Procedural: N/A
• Substantive:
  • Yes, the SC ruled the tax unconstitutional. A stock dividend is not "income" under the Sixteenth Amendment.
  • Reasoning: Income requires a gain derived from capital that is severed from it and received by the taxpayer. A stock dividend changes only the form of the shareholder's interest (more shares of the same proportional value) but does not sever any gain or confer new property. It is a gain in capital value, not realized income. Therefore, taxing it is a direct tax on property and must be apportioned.

• Definition of "Income" under the Sixteenth Amendment — The SC established a substantive definition: "Income may be defined as the gain derived from capital, from labor, or from both combined, including profit gained through sale or conversion of capital." The key elements are:
  1. Gain or profit.
  2. Derived/severed from capital.
  3. Received by the taxpayer for separate use, benefit, and disposal.
  4. Distinction Between Income and Capital — Mere increase in value of an investment is not income; it becomes income only upon realization (e.g., sale, conversion, or distribution that severs it from the capital asset).
  5. Apportionment Requirement for Direct Taxes — Taxes on property (as opposed to income) are direct taxes and must be apportioned among the states by population.

• "Income may be defined as the gain derived from capital, from labor, or from both combined, including profit gained through sale or conversion of capital."
• "Mere growth or increment of value in a capital investment is not income; income is essentially a gain or profit, in itself, of exchangeable value, proceeding from capital, severed from it, and derived or received by the taxpayer for his separate use, benefit, and disposal."
• "A stock dividend, evincing merely a transfer of an accumulated surplus to the capital account of the corporation, takes nothing from the property of the corporation and adds nothing to that of the shareholder..."

• Towne v. Eisner (1918) — Cited and followed. The SC had previously held that a stock dividend was not income under the 1913 Act, reinforcing the distinction between capital and income.

• U.S. Constitution, Article I, §2, cl. 3 & Article I, §9, cl. 4 — The apportionment clauses for direct taxes.
• Sixteenth Amendment — Empowers Congress to tax income from whatever source without apportionment. The SC limited its scope by defining "income."
• Revenue Act of 1916, c. 463, 39 Stat. 756 — The statute imposing the tax on stock dividends. Held unconstitutional as applied.

• Justice Brandeis (Dissenting) — Argued for a more pragmatic, economic substance approach. He contended that a stock dividend could be a real economic benefit, especially if the shareholder could sell the new shares. He criticized the majority's formalistic definition of income as outdated and unworkable for modern corporate finance.