Eisner, Internal Revenue Collector v. MacOmber
The Supreme Court ruled that a stock dividend paid out of a corporation's profits is not "income" to the shareholder under the Sixteenth Amendment, so Congress could not tax it without apportioning the tax among the states by population.
The decision drew a lasting constitutional line between capital and income, holding that a shareholder must actually receive something of separate, disposable value before a gain can be taxed as income — a distinction that shaped federal income tax law for decades afterward.
“The essential and controlling fact is that the stockholder has received nothing out of the company's assets for his separate use and benefit”
The majority's core reasoning for why a stock dividend is not taxable income.
How it got here: A federal district court overruled the government's demurrer and ruled for Macomber based on an earlier decision; the government appealed directly to the Supreme Court.
The Case in Depth
What happened
Standard Oil Company of California issued a 50% stock dividend in 1916, converting about $25 million of accumulated surplus into new shares distributed to existing shareholders. Myrtle Macomber, who owned 2,200 shares, received 1,100 new shares, a portion of which represented profits earned after March 1, 1913. The federal government taxed her on the value of that portion under the Revenue Act of 1916, and she paid under protest before suing to recover the money.
The question before the Court
Could Congress tax a stock dividend as income to the shareholder, without dividing the tax among the states by population?
The Court's answer
No — the Court ruled that a stock dividend representing a corporation's accumulated profits is not "income" to the shareholder within the meaning of the Sixteenth Amendment. Because the shareholder's proportional ownership stays exactly the same and nothing of value leaves the company for the shareholder's separate use, the transaction is really a capital rearrangement, not a receipt of income.
Since the Sixteenth Amendment only removes the apportionment requirement for taxes on true income, a tax on something that isn't income still counts as a direct tax on property, which the Constitution requires Congress to divide among the states by population. Because the 1916 tax law tried to tax this stock dividend without doing that, the Court held it unconstitutional as applied, and let the shareholder keep her refund.
Curious how the Court got there? See the step-by-step legal reasoning →
Why it matters
Corporations could reorganize retained profits into additional shares without triggering an immediate tax bill for their shareholders, encouraging companies to reinvest earnings rather than pay cash dividends. The ruling also fixed a constitutional definition of "income" that later Congresses and courts had to work within when writing and interpreting federal tax law.
What changes now
The judgment for the shareholder was affirmed, meaning the tax on her stock dividend was invalid and she was entitled to a refund. This was a final merits decision, not a remand for further fact-finding. The ruling became a foundational precedent for how "income" is defined under the Sixteenth Amendment, guiding later tax litigation over what kinds of gains Congress can tax without apportionment.
What this does not decide
The Court expressly limited its ruling to bona fide stock dividends made lawfully and in good faith, setting aside questions about whether a particular stock dividend was authorized by state corporate law or reflected sound business judgment. It also left open whether Congress could tax a shareholder's undivided share of corporate profits before any dividend is declared.
Concurrences and dissents
Dissent — Justice Holmes
“I cannot doubt that most people not lawyers would suppose when they voted for it that they put a question like the present to rest.”Holmes's argument that ordinary voters intended the Sixteenth Amendment to cover cases like this one.
Justice Holmes agreed that a stock dividend was not "income" under the earlier statute at issue in Towne v. Eisner, but argued the word "incomes" in the Sixteenth Amendment should be read the way ordinary voters understood it when they ratified the amendment. He believed the public intended to put questions like this one to rest, and so would have upheld the tax.
Dissent — Justice Brandeis
Justice Brandeis argued that stock dividends and cash dividends reinvested in new shares are economically equivalent methods of distributing corporate profits, and that Congress could tax either as income regardless of the mechanical form chosen. He contended the majority's distinction elevated form over substance and would let profitable companies shield much of shareholders' real income from taxation.
How the Court got there
The legal reasoning, step by step
- The Court defined income as "the gain derived from capital, from labor, or from both combined" — meaning a shareholder must actually receive something of exchangeable value, separated from the underlying investment, before it counts as taxable income.
- Applying that definition, the Court examined what a stock dividend actually does: it simply relabels part of a corporation's retained profits as capital stock on the books, without transferring any money or property out of the company to the shareholder.
- Because the shareholder's proportional ownership interest in the company stays exactly the same before and after the dividend — only the number of paper shares changes — the Court concluded the shareholder receives nothing new that they can spend or dispose of separately from their existing investment.
- The Court then turned to the constitutional structure itself: the Sixteenth Amendment only removed the apportionment requirement for taxes on "income"; it did not expand Congress's power to reach any gain Congress chose to call income, so a tax on something that is not truly income still had to be apportioned among the states as a direct tax on property.
- Since a stock dividend is, in substance, a capital rearrangement rather than a receipt of income, the Court held that taxing it without apportionment exceeded the power granted by the Sixteenth Amendment and violated the Constitution's apportionment clauses for direct taxes.
Doctrinal impact
Cases affected by this decision
Reaffirms Towne v. Eisner (245 U.S. 418)
The Court relies on and adopts its earlier reasoning that a stock dividend takes nothing from the corporation and adds nothing to the shareholder.
Reaffirms Gibbons v. Mahon (136 U.S. 549)
The Court reuses this case's description of a stock dividend as merely changing evidence of ownership, not creating new value.
Overrules Collector v. Hubbard (12 Wall. 1)
The Court treats this earlier decision, allowing taxes on undivided corporate profits, as already overruled by Pollock.