Eisner v. Macomber, 252 US 189 (1920)
Summary: U Eisner v. MacomberThe U.S. Supreme Court has held that, for purposes of the Sixteenth Amendment, “income” is “profit, gain, something of exchangeable value, derived from property separated from capital, whether invested or employed, and derived by being ‘derivative. “. , that is, received or obtained by the recipient (taxpayer) for his separate use, benefit and disposal.’ Macomber introduced the realization requirement for federal income taxes, and the decision continues to be cited in contexts such as cryptocurrency hard forks and the constitutionality of provisions denying deductions to cannabis businesses.
Background: The US Constitution prohibits Congress from imposing an undistributed direct tax.[1] In 1895, the US Supreme Court ruled that Congress’s attempt to tax income uniformly throughout the United States was unconstitutional because of this constitutional prohibition.[2]
On February 3, 1913, the Sixteenth Amendment to the US Constitution was ratified. According to the Sixteenth Amendment, “Congress shall have power to lay and collect taxes on incomes from any source, without apportionment among the several states, and regardless of census or enumeration.”[3] That same year, Congress passed the Revenue Act of 1913, introducing the modern federal personal income tax.[4]
The Revenue Act of 1916 further changed the personal income tax. In relevant part, the Revenue Act of 1916 provided that dividends on shares should be treated as income to the extent of their cash value.[5]
On January 1, 1916, the California Standard Oil Company had a surplus and retained earnings of about $45,000,000, of which approximately $20,000,000 had been received up to March 1, 1913.[6] That month, the company issued a stock dividend of 50% of its outstanding shares, transferring an amount equivalent to the issue from its surplus account to its stockholders’ equity account.[7]
Before the stock dividend, Myrtle H. Macomber owned 2,200 shares of the company’s stock and as a result received an additional 1,100 shares. About 18.07%, or 198.77 shares, with a par value of $19,877, were treated as surplus earned between March 1, 1913, and January 1, 1916.[8] The Bureau of Internal Revenue (then called the Internal Revenue Service) required Ms. Macomber to pay federal income tax on the value of that portion of the stock dividend, which she did under protest.[9]
Holding: The court held that the shareholder did not receive income after receiving the pro rata share dividend. As a result, the congressional statute taxing such stock dividends was unconstitutional.
Justification of the holding: The Court held that the Sixteenth Amendment had to be interpreted in light of the taxation provisions of the Constitution prior to the adoption of the amendment.[10] The Court noted that, prior to the amendment, it had held that Congress could not levy taxes on the rents and profits of real estate, and on income from investments in personal property, without apportioning those taxes among the states according to population, because such taxes were effectively direct taxes on the property that yields such income.[11] The passage of the Sixteenth Amendment simply abolished the requirement that income taxes be apportioned among the states—it did not “extend the power of taxation to new subjects. . . .”[12]
Thus, the court held that the Sixteenth Amendment must be interpreted to preserve the apportionment requirement found elsewhere in the Constitution.[13] To do this, the court had to unravel the meaning of the word “income”.[14]
The court began by discussing the relationship between “capital” and “income,” noting that “the first [had been] likened to a tree or earth, the latter to fruits or crops; the former is depicted as a reservoir inflowing from a source, the latter as an outflow measured by its flow over a period of time.’[15] Based on this, the Court concluded that “‘[i]profit may be defined as profit derived from capital, from labor or from both, provided that it includes profit derived from the sale or conversion of capital assets. . . .”[16]
The court then noted that with stock dividends,
no part of the assets of the company is set aside from the general fund, nothing is distributed except the paper certificates that testify to the previous increase in the value of the stockholder’s equity as a result of the accumulation of profits by the company, but the profits are still absorbed in such a way as to make it impracticable to separate them for withdrawal and distribution . . . . [I]t does not change the existing proportionate share of any shareholder or increase the intrinsic value of his share or the aggregate share of other shareholders as they were before. The new certificates simply increase the number of shares with subsequent dilution of the value of each share.[17]
The court found that under such circumstances,
the shareholder has not received any of the assets of the company for separate use and benefit; on the contrary, every dollar of his original investment, together with any gains and accumulations resulting from the use of his money and the money of other shareholders in the business of the company, remains the property of the company and is subject to business risks which may result in the destruction of all investments. On the very truth of the matter, in substance and not in form, he received nothing that met the definition of income within the meaning of the Sixteenth Amendment.[18]
Thus, the criterion adopted by the Court for defining “income” under the Sixteenth Amendment was “profit, gain, anything of exchangeable value based on property, detached from capital, however invested or employed, and enterbeing “derivative”, ie. received or is drawn recipient (taxpayer) for separate use, benefit and disposal. . . .”[19]
Reaction to the decision: Macomber was the only case in the past century in which the Supreme Court ruled on the federal income tax on constitutional grounds.[20] Although Macomber was never expressly overruled, some argue that it was effectively overruled by the Court’s decision Commissioner v. Glenshaw Glass Co., 348 US 426, 431 (1955)who argued that the term “income” includes “indisputable additions to wealth clearly realized and over which the taxpayers have complete control”.[21] In particular, the court ruled that the definition of “income” in Macomber “Should not have been a touchstone for all future gross income questions.”[22]
The Macomber the decision had its disagreements. Justice Oliver Wendell Holmes held that the term “income” “must be read in the sense most apparent to the common understanding at the time of its adoption.”[23] Holmes opined that “[t]he knows the goal [the Sixteenth] The amendment was to get rid of the pleasant questions as to what might be a direct tax, and I have no doubt that most people who are not lawyers will think, if they vote for it, that they will put a question like the present one.” .[24]
For his part, Justice Louis D. Brandeis argued that cash dividends and stock dividends are equivalent mechanisms for distributing corporate wealth and should be subject to federal income tax equally.[25] A dissenting opinion would allow “the owners of the most successful businesses in America . . . to avoid being taxed on a large part of what is really their income.’[26]
Continued relevance: Macomber the decision continues to be relied upon in various contexts.
Perhaps the most influential Macomber introduced a realization requirement for federal income tax. Under the implementation requirement, federal income tax can generally be assessed only when there is a change in the taxpayer’s relationship to the property.[27] While the debate continues as to whether the implementation requirement is a constitutional requirement (as Macomber allusions to) or a matter of administrative convenience, it remains an important aspect of the federal income tax to this day.[28]
The decision was recently cited as giving authority to the idea that cryptocurrency hard forks should not be taxed.[29] Macomber has also been used in constitutionality challenges Section 280Edenial of credits and deductions for cannabis businesses[30] and Section 965repatriation tax.[31]
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[1] See Const. art. I, § 9, ch. 4.
[2] Pollock v. Farmers’ Loan & Trust Co .157 US 429 (1895).
[4] Revenue Act of 1913, Pub. L. No. 63-16, 38 Stat. 166 (1913).
[5] Revenue Act of 1916, Pub. L. No. 64-271, § 2(a), 39 Stat. 756, 757 (1916).
[6] Eisner v. Macomber252 US 189, 200 (1920).
[7] Macomber252 US at 200.
[8] Macomber252 US at 200-01.
[9] identifier. on 201.
[10] identifier on 205.
[11] identifier. (quoting pollock18. US 601).
[12] Macomber252 US at 206.
[13] identifier
[14] identifier Notably, the court ruled that Congress’s definition of income did not resolve the issue because Congress could not amend the Constitution by simple legislation. identifier
[15] identifier
[16] identifier at 206-07 (citing Stratton’s Independence v. Houbert231 US 399, 415 (1913) and Doyle v. Mitchell Bros. Co.247 US 179, 185 (1918)).
[17] Macomber252 U.S. at 210-11.
[18] identifier on 211.
[19] identifier on 209.
[20] Reuven Avi Jonah, Should US tax law be constitutionalized? A Century of Reflections on Eisner v. Macomber (1920), 16 Duke J. Const. L. & Pub. Poles 65, 66 (1921).
[21] Reuven Avi Jonah, Should US tax law be constitutionalized? A Century of Reflections on Eisner v. Macomber (1920), 16 Duke J. Const. L. & Pub. Polls 65, 67 (1921).
[22] Glenshaw Glass348 U.S. at 431.
[23] Macomber252 U.S. at 219 (Holmes, J., dissenting).
[24] identifier at 220 (Holmes, J., dissenting).
[25] identifier at 221, 237-38 (Brandeis, J., dissenting).
[26] identifier at 237 (1920) (Brandeis, J., dissenting).
[27] Alice G. Aubrey and Richard C. Greenstein, Definition of income11 Fla. Tax Rev. 295, 336 (2011).
[28] In cases where the implementation requirement is not constitutional, to see Helvering v. Horst, 311 US 112, 116 (1940) (“[T[he rule that income is not taxable until realized . . . [is] based on administrative convenience. . . .” and Helvering v. Griffiths, 318 US 371, 393-94 (1943)(stating that Horst “undermined even more the original theoretical foundations of the decision of Art Eisner v. Macomber.”).
[29] David G. Chamberlain, Branching out faith in cryptocurrency: the event of tax defaults, 24 Fla. Tax. Rev. 651 (2021).
[30] Beckett Cantley and Jeffrey Dietrich, The Cannabis Conundrum: Constitutional and Political Issues in Marijuana Taxationy, 10 Legis. & Pol’y Brief 39, 57-58 (2021).
[31] See Moore v. United States, No. 20-36122 (9th Cir. June 7, 2022) (record here).
