252 U.S. 189 (1920), Supreme Court of the United States
Eisner v. Macomber is a foundational case in federal income tax and constitutional law that shaped the meaning of "income" under the Sixteenth Amendment.
Whether a pro rata stock dividend, representing a capitalization of surplus that leaves each shareholder's proportionate interest in the corporation unchanged, constitutes "income" within the meaning of the Sixteenth Amendment and is therefore taxable without apportionment.
For Sixteenth Amendment purposes, "income" denotes a gain derived from capital, from labor, or from both combined, and requires realization—a severance from capital—so that it is available for the taxpayer's separate use and benefit. The Amendment removed the apportionment requirement only for taxes that are, in fact, laid on income as so understood; it did not broaden the taxing power to permit non-apportioned direct taxes on capital. A pro rata stock dividend, which merely evidences the reallocation of corporate surplus into capital without altering the shareholder's proportionate ownership, is not income.
No. A pro rata stock dividend that capitalizes corporate surplus and leaves the shareholder's proportionate interest unchanged is not "income" under the Sixteenth Amendment; Congress may not tax it as income without apportionment.
Eisner v. Macomber is pivotal for three reasons. First, it constitutionalized a realization requirement for income by insisting on a severance from capital before a gain becomes taxable without apportionment. Second, it confirmed that the Sixteenth Amendment did not expand the nature of the taxing power to reach capital; it only eliminated apportionment for true income taxes. Third, it shaped statutory law: today, Internal Revenue Code § 305 generally excludes pro rata stock dividends from gross income (with exceptions), reflecting Macomber's core holding. Although later decisions—especially Commissioner v. Glenshaw Glass Co. (1955) and Koshland v. Helvering (1936)—narrowed Macomber's reach and adopted a broader, more functional notion of income and realization, Macomber remains a touchstone in debates over realization, mark-to-market taxation, and the constitutional limits of federal taxing power.