Eisner v. Macomber,3 AFTR 3020, 252 US 189,1 USTC ¶32 (US, 1920) Issue
(1) Under the 16th Amendment, does Congress have the power to tax stock dividends received by the Macomber? (2) Are stock dividends considered income?
Mrs. Macomber owned 2,200 shares of Standard Oil Company. In January 1916, Standard Oil Company declared a 50% stock dividend. Mrs. Macomber received an additional 1,100 shares of stock with a $19,877 par value. The shares represented a surplus for Standard Oil Company. The Revenue Act of 1916, allowed the IRS to treat stock dividends as income to the sum of its cash value. Mrs. Macomber argued that the Revenue Act of 1916 was unconstitutional under the 16th Amendment. The Court clarified that the stock dividend was not income to the taxpayer. Holding
The Supreme Court ruled that Macomber was not required to pay taxes upon the stock dividends received. She was relived of her taxes upon the $19,877 from the additional shares. Analysis
(1) The 16th Amendment gave Congress the power to tax “income”, and in the common meaning of the word, “income” did not include unrealized gains that were still the property of the company. The Court stated that the taxpayer had not yet sold the shares, and that her investment was still exposed to business risks that could eliminate the surplus. The taxpayer does not realize increased value in property unless he/she receives “something of exchangeable value proceeding from the property”. Mrs. Macomber had not asked for the additional shares. If the IRS had required her to pay a tax on the stock dividend, she might have had to sell her shares, because there is no wherewithal to pay in the receiving of a stock dividend. A stock dividend is not considered income, and thus it is not subject to tax under the 16th Amendment. (2)A stock dividend occurs when a corporation experiences a surplus and transfers that surplus to a capital stock. The company is performing simple bookkeeping...
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