## Facts

- Myrtle H. Macomber owned 2,200 shares of Standard Oil Co. of California.
- The corporation declared a 50% stock dividend from profits accumulated after March 1, 1913, issuing new shares pro rata to all shareholders.
- Macomber received 1,100 additional shares but no cash or other property, and her proportional ownership interest in the corporation did not change.
- The Revenue Act of 1916 treated stock dividends as taxable income, and the Collector assessed an income tax on the value of Macomber’s new shares.
- Macomber paid the tax under protest and sued for a refund, asserting the stock dividend was not “income” under the Sixteenth Amendment and that any such levy would be a direct tax requiring apportionment.
- The U.S. District Court for the Southern District of New York ruled for Macomber; the Collector sought Supreme Court review by writ of error.

## Issues

1. Whether Congress, under the Sixteenth Amendment, may tax a pro rata stock dividend as “income” to the shareholder without apportionment.
2. Whether a tax on such a stock dividend is, in substance, a direct tax on capital requiring apportionment under Article I.

## Decision

- The Supreme Court affirmed the judgment for Macomber.
- Congress lacked power under the Sixteenth Amendment to tax, as income and without apportionment, a lawful pro rata stock dividend issued from accumulated corporate profits.
- The Court treated a true stock dividend as a recapitalization that neither removes assets from the corporation nor provides the shareholder with a separated gain for personal use.
- Because the shareholder’s proportional interest is unchanged and nothing is distributed for separate disposal, the dividend does not constitute constitutionally taxable income.

## Legal Principles

- “Income” for Sixteenth Amendment purposes depends on “truth and substance,” not form.
- Income is a gain derived from capital or labor (or both) that is realized as something of exchangeable value and “severed” from the capital for the taxpayer’s separate use, benefit, and disposal.
- Mere appreciation or internal reallocation of corporate surplus into capital, without distribution of cash or property to shareholders, is not income to the shareholder.
- A tax on a pro rata stock dividend, where no gain is separated from capital, is in substance a tax on capital and therefore falls within Article I apportionment limits rather than the Sixteenth Amendment’s income-tax authorization.

## Conclusion

The Court held that a pro rata stock dividend does not produce shareholder “income” within the Sixteenth Amendment because it reflects no realized, separated gain; taxing it as income without apportionment was unconstitutional.


Eisner v. Macomber, 252 U.S. 189 (1920)