Eisner v. Macomber case brief

Eisner v. Macomber

FACTS

-Mrs. Macomber owned 2,200 shares in Standard Oil. Standard Oil declared a 50% stock dividend and she received 1,100 additional shares, of which about $20,000 in par value represented earnings accumulated by the company—recapitalized rather than distributed—since the effective date of the original tax law.
-Current statute expressly included stock dividends in income, and the government contended that those certificates should be taxed as income to Mrs. Macomber as though the corporation had distributed money to her.
-Mrs. Macomber sued Mr. Mark Eisner, the Collector of Internal Revenue, for a refund.

ISSUE

-Whether in legal or accounting terms the stock dividend was to be regarded as a taxable event.

HOLDING

-This stock dividend was not a realization of income by the taxpayer-shareholder for purposes of the Sixteenth Amendment

RULES
-"We are clear that not only does a stock dividend really take nothing from the property of the corporation and add nothing to that of the shareholder, but that the antecedent accumulation of profits evidenced thereby, while indicating that the shareholder is richer because of an increase of his capital, at the same time shows he has not realized or received any income in the transaction."

ANALYSIS
-In Towne v. Eisner, court stated that stock dividends were not income, as nothing of value was received by Towne - the company was not worth any less than it was when the dividend was declared, and the total value of Towne's stock had not changed.
-Although the Eisner v. Macomber Court acknowledged the power of the Federal Government to tax income under the Sixteenth Amendment, the Court essentially said this did not give Congress the power to tax as income anything other than income, i.e., that Congress did not have the power to re-define the term income as it appeared in the Constitution:
-Throughout the argument of the Government, in a variety of forms, runs the fundamental error already mentioned, a failure to appraise correctly the force of the term "income" as used in the Sixteenth Amendment, or at least to give practical effect to it. Thus, the Government contends that the tax "is levied on income derived from corporate earnings," when in truth the stockholder has "derived" nothing except paper certificates which, so far as they have any effect, deny him [or "her" — in this case, Mrs. Macomber] present participation in such earnings. It [the government] contends that the tax may be laid when earnings "are received by the stockholder," whereas [s]he has received none; that the profits are "distributed by means of a stock dividend," although a stock dividend distributes no profits; that under the Act of 1916 "the tax is on the stockholder's share in corporate earnings," when in truth a stockholder has no such share, and receives none in a stock dividend; that "the profits are segregated from his [her] former capital, and [s]he has a separate certificate representing his [her] invested profits or gains," whereas there has been no segregation of profits, nor has [s]he any separate certificate representing a personal gain, since the certificates, new and old, are alike in what they represent—a capital interest in the entire concerns of the corporation.

CONCLUSION
The Court ordered that Macomber be refunded the tax she overpaid.