Eisner v. Macomber, 252 U.S. 189 (1920), was a landmark United States Supreme Court case that addressed the issue of the taxation of stock dividends. The case arose when the respondent, Charles Macomber, challenged the constitutionality of a provision in the 1916 Revenue Act that taxed stock dividends as income.
At the time, the respondent owned a significant number of shares in a corporation that had declared a stock dividend. He argued that the provision in the Revenue Act that treated the stock dividend as income for tax purposes was unconstitutional because it violated the Due Process Clause of the Fifth Amendment. The respondent argued that the stock dividend did not represent a true increase in wealth, and therefore could not be taxed as income.
The petitioner, Daniel Eisner, was the Commissioner of Internal Revenue and was responsible for enforcing the provision of the Revenue Act at issue. He argued that the provision was constitutional and that the stock dividend constituted a true increase in wealth that could be taxed as income.
The Supreme Court ultimately ruled in favor of the petitioner, holding that the provision in the Revenue Act was constitutional and that stock dividends could be taxed as income. In its decision, the Court acknowledged that stock dividends were not the same as cash dividends, but noted that they still represented a true increase in wealth for the shareholder. The Court also noted that the tax on stock dividends was not a direct tax on the shareholder's property, but rather a tax on the shareholder's income.
The decision in Eisner v. Macomber has had a significant impact on the taxation of stock dividends in the United States. It established the principle that stock dividends can be taxed as income and has helped to shape the modern tax code with regard to the taxation of corporate distributions to shareholders.
"Should US Tax Law Be Constitutionalized? Centennial Reflections on Eis" by Reuven S. Avi
Many a cash dividend honestly declared as a distribution of profits, proves later to have been paid out of capital, because errors in forecast prevent correct ascertainment of values. They were recognized equivalents. Then they act upon their own determination whether profits have been made. Eisner, The case was argued at the last term, and reargued at the present term, both orally and by additional briefs. His share of profits is invested for him in the stock of the company.
TaxConnectionsMoments In Tax History: Income, An Origin Story
I think that Towne v. The stockholder has the right to have the assets employed in the enterprise, with the incidental rights mentioned; but, as stockholder, he has no right to withdraw, only the right to persist, subject to the risks of the enterprise, and looking only to dividends for his return. This act implied that Congress was empowered to create taxes on stock dividends. Likewise whether a dividend declared payable from profits shall be paid in cash or in some other medium is also wholly a matter of financial management. It surely is not clear that the enactment exceeds the power granted by the Sixteenth Amendment. Compare Harvard Law Review, Vol.
Eisner v. Macomber :: 252 U.S. 189 (1920) :: Justia US Supreme Court Center
In each case, he receives a piece of paper which entitles him to certain rights in the undivided property. In January, 1916, in order to readjust the capitalization, the board of directors decided to issue additional shares sufficient to constitute a stock dividend of 50 per cent. It arises under the Revenue Act of September 8, 1916, c. Putnam, Swan Brewery Co. The objection that there has been no segregation is presented also in another form. The new certificates simply increase the number of the shares, with consequent dilution of the value of each share. The essential and controlling fact is that the stockholder has received nothing out of the company's assets for his separate use and benefit; on the contrary, every dollar of his original investment, together with whatever accretions and accumulations have resulted from employment of his money and that of the other stockholders in the business of the company, still remains the property of the company, and subject to business risks which may result in wiping out the entire investment.
The Sixteenth Amendment proclaimed February 25, 1913, declares: "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration. The Government relies upon Collector v. Farmers' Loan Trust Co. If this be conceded, why should it not be equally income of the stockholder, and taxable as such, if the common stock created by capitalizing profits had been originally created for the express purpose of being distributed as a dividend to the stockholder who afterwards received it? Defendant in error, being the owner of 2,200 shares of the old stock, received certificates for 1,100 additional shares, of which 18. The tenant had removed the existing building and built a new one.
There are two insuperable difficulties with this. What he retains no longer entitles him to the same proportion of future dividends as before the sale. Eisner, the Collector of the Internal Revenue Service at the time, had demanded that all stockholders pay taxes on these dividends. In dismissing the appeal these words of the Chief Justice of the Supreme Court of Western Australia were quoted p. Macomber had been made by the more complicated method pursued by the Standard Oil Company of Kentucky -- that is, issuing rights to take new stock pro rata and paying to each stockholder simultaneously a dividend in cash sufficient in amount to enable him to pay for this pro rata of new stock to be purchased -- the dividend so paid to him would have been taxable as income, whether he retained the cash or whether he returned it to the corporation in payment for his pro rata of new stock. As we have pointed out, a stockholder has no individual share in accumulated profits, nor in any particular part of the assets of the corporation, prior to dividend declared. The hardship supposed to have resulted from such a decision has been removed in the Revenue Act of 1916, as amended, by providing in § 31 b that such cash dividends shall thereafter be exempt from taxation, if before they are made, all earnings made since February 28, 1913, shall have been distributed.
Tax Law Be Constitutionalized? The safety of our institutions depends in no small degree on a strict observance of this salutary rule. New York, NY: Foundation Press. The government's reliance upon the supposed analogy between a dividend of the corporation's own shares and one made by distributing shares owned by it in the stock of another company calls for no comment beyond the statement that the latter distributes assets of the company among the shareholders, while the former does not, and for no citation of authority except Peabody v. During that year, she received from the company a stock dividend representing profits earned since March 1, 1913. A corresponding and proportionate decrease in capital interest and in voting power would befall a minority holder should he sell dividend stock, it being in the nature of things impossible for one to dispose of any part of such an issue without a proportionate disturbance of the distribution of the entire capital stock and a like diminution of the seller's comparative voting power -- that "right preservative of rights" in the control of a corporation. His share interest is a "capital" interest.
The question was, in essence, what shall the intention of the testator be presumed to have been? Sarony, United States v. United States, First: The term "income" when applied to the investment of the stockholder in a corporation, had, before the adoption of the Sixteenth Amendment, been commonly understood to mean the returns from time to time received by the stockholder from gains or earnings of the corporation. They were generated by the stocks. The board feels justified in stating that, if the proposition to increase the capital stock is acted on favorably, it will be proper in the near future to declare a cash dividend of 100 percent and to allow the stockholders the privilege pro rata according to their holdings, to purchase the new stock at par, the plan being to allow the stockholders, if they desire, to use their cash dividend to pay for the new stock. Many of them, such as Mrs. The gains of a business, whether conducted by an individual, by a firm or by a corporation, are ordinarily reinvested in large part.
The tax is laid upon the "stock dividend" as constituting income in itself. JUSTICE CLARKE concurs in this opinion. Far from being a realization of profits of the stockholder, it tends rather to postpone such realization, in that the fund represented by the new stock has been transferred from surplus to capital, and no longer is available for actual distribution. If this be conceded, why should it not be equally income of the stockholder, and taxable as such, if the common stock created by capitalizing profits, had been originally created for the express purpose of being distributed as a dividend to the stockholder who afterwards received it? If the constitutional power exists to tax corporate earnings when they are passed to the stockholder by means of a cash dividend, no reason is perceived why the same power does not exist to tax the same earnings when they are passed to him, in an equally concrete form, by means of a stock dividend. During the calendar year 1912, it paid cash dividends aggregating 20 percent, but it earned considerably more, and had at the close of the year again a substantial surplus.
