Eisner v. MacOmber

Background

A New York resident who owned shares in the Standard Oil Company of California received a 50% stock dividend in January 1916. Part of the surplus behind that dividend had been earned before March 1, 1913, and part after. The Government assessed an income tax under the Revenue Act of 1916 on the portion of the new shares tied to post‑March 1, 1913 earnings; the shareholder paid under protest and sued to recover the tax.

Reasoning

The central question was whether a bona fide stock dividend is “income” under the Sixteenth Amendment so Congress can tax it without apportionment. The majority held that a true stock dividend is a bookkeeping capitalization of accumulated profits, not a separation of corporate assets to the shareholder. Because the shareholder received only additional certificates and not money or separate property, the issue was capital, not income. The Court relied on Towne v. Eisner and concluded Congress cannot convert capital into taxable income merely by definition in a statute.

Real world impact

As a result, the Court affirmed that Congress may not treat lawful stock dividends issued from corporate surplus as income taxable without apportionment; the 1916 Act’s provision so far as it taxed such dividends is invalid. The decision leaves intact the power to tax cash dividends or profits realized by a shareholder on sale, which the Court acknowledged are taxable when actually received.

Dissents or concurrances

Justice Holmes and Justice Brandeis (with Justice Clarke) dissented. Holmes argued the Amendment should be read as the public understood it and would permit taxing such dividends. Brandeis emphasized financial reality and practical equivalence between stock and cash dividends, arguing Congress lawfully taxed stock dividends representing profits.