APPENDIX 1
Eisner, As CoLLEcToR OF UNITED STATES INTERNAL REVENUE FOR THE THIRD
Districr oF THE STATE OF NEW YORK v. MACOMBER
(252 U. S. 189)
ERROR TO THE DISTRICT COURT OF THE UNITED STATES FOR THE SOUTHERN
DISTRICT OF NEW YORK
No. 318. Argued April 16, 1919; restored to docket for reargument May 19,
1919: reargued October 17, 20, 1919. Decided March 8. 1920
Congress was not empowered by the sixteenth amendment to tax, as income of
the stockholder, without apportionment, a stock dividend made lawfully and
in good faith against profits accumulated by the corporation since March 1,
1913 (p. 201). Towne v. Eisner, 245 U. S. 418.
The revenue act of September 8, 1916 (ec. 463, 39 Stat. 756), plainly evinces the
purpose of Congress to impose such taxes and is to that extent in conflict with
rade, § 2, clause 3, and Article I, § 9, clause 4, of the Constitution, pages
199, 217.
These provisions of the Constitution necessarily limit the extension, by con-
struction, of the sixteenth amendment (p. 205).
What is or is not ‘‘income” within the meaning of the amendment must be
determined in each case according to truth and substance. without regard to
form (p. 206).
[ncome may be defined as the gain derived from capital, from labor, or from both
combined, including profit gained through sale or conversion of capital (p. 207.)
Mere growth or increment of value in a capital investment is not income; income
is essentially a gain or profit in itself of exchangeable value, proceeding from
capital, severed from it, and derived or received by the taxpayer for his sepa-
rate use, benefit, and disposal (Id.).
stock dividend—evincing merely a transfer of an accumulated surplus to the
capital account of the corporation—takes nothing from the property of the
corporation and adds nothing to that of the shareholder; a tax on such divi-
dends is a tax on capital increase and not on income, and to be valid under the
Constitution such taxes must be apportioned according to population in the
several States (p. 208)
Affirmed.
\
The case is stated in the opinion.
Mr. Assistant Attorney General Frierson for plaintiff in error:
Stockholders have such an interest in the earnings and profits of a corporation
that the same are within the power of Congress to tax as income even before they
are divided. (Collector v. Hubbard, 12 Wall. 1; Southern Pacific Co. ». Lowe,
247 U. S. 330, 336; Lynch v. Turrish, 247 U. S. 221, 228; Bailey v. Railroad Co.,
22 Wall. 604, 635, 636; Lynch ». Hornby, 247 U. S. 339, 343.)
The right of Congress to tax undivided profits can not be destroyed by the
issuance of stock certificates to represent them; and, since the certificates of stock
in this case represent earnings of the corporation acerued subsequently to March
1, 1913, they are clearly made taxable as income by the act of 1916 (c. 463, 39
Stat. 756). (Peabody v. Eisner, 247 U. 8. 347; Bailey ». Railroad Co., 22 Wall,
604, 635; Swan Brewery Co. (Ltd.) ». Rex, (1914) A. C. 231, 234-236.)
Towne ». Eisner (245 U. S. 418) does not control this ease. (1) It merely de-
cides that the stock dividends then before the court, paid out of earnings acerued
prior to March 1, 1913, were not income within the meaning of the act of 1913.
Nothing said in the opinion can be construed as challenging the power of Con-
gress to tax, as the income of stockholders, the profits of a corporation even before
they are divided, and much less to tax a certificate of stock issued to represent
such profits. (2) The most that can be said of the opinion is that it holds that
HU
