Eisner, Internal Revenue Collector v. MacOmber

Background

A woman who owned stock in the Standard Oil Company of California received a 50% stock dividend in January 1916. The company had about $50,000,000 in outstanding capital and about $45,000,000 in surplus and undivided profits, some earned after March 1, 1913. The shareholder was assessed federal tax on the portion of the new shares treated as coming from post‑March 1, 1913 profits, paid the tax under protest, and sued to recover it. The tax was based on the Revenue Act of 1916, which declared stock dividends taxable as income to the shareholder.

Reasoning

The Court, relying on an earlier decision (Towne v. Eisner), held that a true stock dividend is essentially a bookkeeping capitalization of accumulated profits, not a distribution of assets to a shareholder for separate use. The majority defined “income” as a gain actually derived and received by the taxpayer for separate use. Because the shareholder received only additional certificates and no separate portion of corporate assets, she had not realized income under the Sixteenth Amendment. The Court therefore concluded that Congress could not tax such bona fide stock dividends as shareholder income without apportionment, and it affirmed the judgment against the tax.

Real world impact

The decision prevents the federal government from treating lawful stock dividends issued out of corporate surplus as taxable income to shareholders unless those dividends are converted into cash or other realized gain. If a shareholder sells the new shares and realizes a profit, that profit is taxable. The ruling invalidates the part of the 1916 law that sought to tax bona fide stock dividends as income.

Dissents or concurrances

Two justices dissented. Justice Holmes urged a broader, commonsense reading of “incomes” and would have upheld the tax. Justice Brandeis argued stock dividends are economically equivalent to cash distributions and that Congress may tax them to prevent avoidance.