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    Eisner Vs Macomber TAx

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    Kayee Kat
    1) Mrs. Macomber received stock dividends from Standard Oil in addition to her existing shares and paid tax on the dividends under the Revenue Act of 1916. 2) She argued taxing stock dividends was unconstitutional direct tax not apportioned by population, as stock dividends were not considered income. 3) The Supreme Court affirmed the stock dividend was not income and taxing it was unconstitutional, finding the 16th Amendment only allows taxation of income, not increases in capital value.

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    Eisner Vs Macomber TAx

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    Kayee Kat
    427 views3 pages
    1) Mrs. Macomber received stock dividends from Standard Oil in addition to her existing shares and paid tax on the dividends under the Revenue Act of 1916. 2) She argued taxing stock dividends was unconstitutional direct tax not apportioned by population, as stock dividends were not considered income. 3) The Supreme Court affirmed the stock dividend was not income and taxing it was unconstitutional, finding the 16th Amendment only allows taxation of income, not increases in capital value.

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    Eisner vs Macomber TAx

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    Eisner vs Macomber TAx

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    1) Mrs. Macomber received stock dividends from Standard Oil in addition to her existing shares and paid tax on the dividends under the Revenue Act of 1916. 2) She argued taxing stock dividends was unconstitutional direct tax not apportioned by population, as stock dividends were not considered income. 3) The Supreme Court affirmed the stock dividend was not income and taxing it was unconstitutional, finding the 16th Amendment only allows taxation of income, not increases in capital value.

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    © All Rights Reserved
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    427 views3 pages

    Eisner Vs Macomber TAx

    Uploaded by

    Kayee Kat
    1) Mrs. Macomber received stock dividends from Standard Oil in addition to her existing shares and paid tax on the dividends under the Revenue Act of 1916. 2) She argued taxing stock dividends was unconstitutional direct tax not apportioned by population, as stock dividends were not considered income. 3) The Supreme Court affirmed the stock dividend was not income and taxing it was unconstitutional, finding the 16th Amendment only allows taxation of income, not increases in capital value.

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    Eisner v. Macomber - 252 U.S. 189, 40 S. Ct.

    189 (1920)
    RULE:
    Income may be defined as the gain derived from capital, from labor, or from both
    combined, provided it be understood to include profit gained through a sale conversion
    of capital assets. 
    FACTS:
    Plaintiff stockholder received certificates for additional shares issued by the corporation
    as stock dividends. Defendant United States treated those shares as income, and
    plaintiff paid a tax under protest on the same. Plaintiff brought an action against
    defendant to recover the tax contending that in imposing such a tax, the Revenue Act of
    September 8, 191 violated Article 1 of the Constitution, which required direct taxes to
    be apportioned according to population. The district court held in favor of plaintiff and
    defendant sought the court's review.
    ISSUE:
    Was the contested taxation without apportionment of plaintiff's stock dividend violative
    of Article 1 of the United States Constitution?
    ANSWER:
    Yes.
    CONCLUSION:
    The Court held that by treating the dividends as income, defendant failed to appraise
    correctly the force of the term "income" as the mere issue of a stock dividend made
    plaintiff no richer than before. Therefore,  Congress did not have the power to tax
    without apportionment a stock dividend made lawfully and in good faith, as income of
    the stockholder, and the Act failed as a contravention of Article 1 of the Constitution.

    ACTS:
    1. Mrs. Macomber owned 2,200 share of Standard Oil Company of California
    stock.
    2. In January, 1916, the company declared a stock dividend and Mrs. Macomber
    received an additional 1,100 shares of stock. Of these shares, 198.77 shares, par
    value $19,877, represented surplus earned by the company after March 1, 1913.
    3. The IRS treated the $19,877 as taxable income under the Revenue Act of 1916
    which provided that a stock dividend was considered income to the amount of its
    cash value.
    4. Mrs. Macomber argued that that provision in the Revenue Act of 1916 was
    unconstitutional because it was a direct tax not apportioned per population; since a
    stock dividend was not income, a legislative provision subjecting it to income tax
    was not constitutional under the 16th Amendment.

    5. The District Court held that the stock dividend was not income.

     
    ISSUE: Does Congress have the power under the 16th Amendment to tax
    shareholders on stock dividends received? Are stock dividends considered income
    or capital?
     
    Laws/ References:
    1) 16th Amendment - "The Congress shall have power to lay and collect taxes on
    income, from whatever source derived, without apportionment among the several
    States, and without regard to any census or enumeration."
    2) Revenue Act of 1916 - a "stock dividend shall be considered income, to the
    amount of its cash value."

    3) Brushaber v Union Pacific - in this case, the Supreme Court stated that the 16th
    Amendment "did not extend the taxing power to new subjects, but merely removed the
    necessity which otherwise might exist for an apportionment among the State of taxes
    laid on income." Macomber, 1 USTC ¶32, page 1079. Thus, the item must be income in
    order for Congress to tax it.
    4) The Court suggested that "income," which is not defined in the 16th Amendment,
    was something derived from capital or labor, or from both.

     
    HELD:
    The Supreme Court affirmed the District Court holding for the taxpayer that a
    stock dividend is not income. The Revenue Act of 1916 provision subjecting stock
    dividends to tax was held unconstitutional.
    If a stock dividend is not considered income, it can not be subject to income tax
    under the 16th Amendment. In applying the 16th Amendment, it is important to
    distinguish between capital and income, as only income is subject to income tax.

    A stock dividend reflects the corporation transferring an amount from "surplus"


    (retained earnings) to "capital stock." Such a transaction is merely a bookkeeping
    entry and "affects only the form, not the essence, of the "liability" acknowledged
    by the corporation to its own shareholders ... it does not alter the preexisting
    proportionate interest of any stockholder or increase the intrinsic value of his
    holding or of the aggregate holdings of the other stockholders as they stood before"
    (Macomber, p. 1081). An increase to the value of capital investment is not income.
    Nothing of value has been taken from the corporation and given to the shareholder
    as is the case with a cash dividend.

    In addition, since the shareholder receives no cash, in order to pay any tax on a
    stock dividend, he might have to convert the stock into cash - he has no
    wherewithal to pay from the nature of the transaction. "Nothing could more clearly
    show that to tax a stock dividend is to tax a capital increase, and not income, than
    this demonstration that in the nature of things it requires conversion of capital in
    order to pay the tax" (Macomber, p. 1082).

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