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CITATION Eisner v Macomber, 252 U.S. 189, 1 USTC ¶32 (1920); 3 A.F.T.R. 3020 ISSUES Does Congress have the power under the Sixteenth Amendment to tax stock dividends as income? FACTS Mrs. Macomber owned 2,200 shares of Standard Oil Company. In 1916, she received 1,100 additional shares of stock as a stock dividend from the company. Of the stock dividend, 198.77 shares, with a par value of $19,877, were treated as representing surplus earned between March 1, 1913, and January 1, 1916. She was called upon to pay tax on the stock dividend under the Revenue Act of 1916 which provided that stock dividends were income. Mrs. Macomber paid the tax under protest and then brought action against the Collector to recover the tax contending that in imposing such a tax, the Revenue Act of 1916 violated U.S. Constitution article 1,§ 2. Cl.3 and article 1, § 9, cl. 4 which required direct taxes be apportioned according to population and that the stock dividend was not income within the meaning of the Sixteenth Amendment. The district court held in favor of Mrs. Macomber. HOLDING The US Supreme Court affirmed the district court’s decision that a stock dividend is not income. The Revenue Act of 1916 subjecting stock dividends to tax was held unconstitutional. ANALYSIS The Court relied upon the reasoning in Towne v. Eisner which held that stock dividends were not taxable as income. In Towne v. Eisner the court stated that “A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interests of the shareholders. Its property is not diminished, and their interests are not increased.” The court held that by treating the stock dividend as income, the United States failed to appraise correctly the force of the term “income” as used in the Sixteenth Amendment.
Citation: Evelyn F. Gregory v. Helvering, 35-1 USTC ¶ 9043, 14 AFTR 1191 Issue(s): (1) Does the Revenue Act of 1928 place more emphasis on substance or form
of a transaction? (2) Is a business purpose required for conducting business reorganizations and receiving a tax exemption?