Peabody v. Eisner

Background

This dispute was between a shareholder who owned 1,100 shares of Union Pacific common stock and the government’s tax collector under the Federal Income Tax Act of October 3, 1913. Union Pacific held large amounts of Baltimore & Ohio stock and on March 2, 1914 declared an extra dividend: $3 cash, $12 par value of B&O preferred, and $22.50 par value of B&O common per share. The shareholder received $3,300 in cash, 132 B&O preferred shares, and 247 B&O common shares, reported $4.12 per Union Pacific share ($4,532 total) as taxable income, and paid tax. The government later made an additional assessment, which the shareholder paid under protest and then sued to recover.

Reasoning

The question was whether the additional cash and Baltimore & Ohio stock distributed in March 1914, to the extent they exceeded the $4.12 already reported, were taxable income of the shareholder for 1914. The Court treated the B&O shares as a distribution in specie — a distribution of corporate assets — rather than a mere stock dividend that changes only the form of ownership. The opinion distinguishes earlier cases that involved stock dividends and notes decisions that were reversed for special reasons. The Court explained the ordinary shareholder’s interest changes when directors declare dividends and that the shareholder cannot control that discretion. Applying that principle, the Court concluded the distribution was properly treated as income to the shareholder and affirmed the lower court’s judgment.

Real world impact

The ruling means that when a corporation pays out cash or other companies’ stock from its assets, recipients in similar positions may be treated as receiving taxable income in the year of distribution. The decision relies on the ordinary distinction between stock dividends and distributions in specie, and it affirms the tax assessment in this case.