EISNER v. MACOMBER.

Syllabus.

EISNER, AS COLLECTOR OF UNITED STATES

INTERNAL REVENUE FOR THE THIRD DIS-
TRICT OF THE STATE OF NEW YORK, v. MA-
COMBER.

ERROR TO THE DISTRICT CtURT 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. Eimer, 245 U. S.
* 418.
The Revenue Act of September 8, 1916, c. 463, 39 Stat. 756,.plainly
evinces the purpose of Congress to impose such taxes and is to that
extent in conflict with Art. I, § 2, cl. 3, and Art. 1, § 9, cl. 4, of the
Constitution. Pp. 199,217.
These provisions of the Constitution necessarily limit the extension,
by construction, 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.
Income may be defined as the gain derived from capital, from labor,
or from both combined, including profit gained through sale or con-
version of capital. P. 207.
Mere growth or increment of value in a capital investment is not in-
come; income is essentially a gain or profit in itself of exchangeable
value, -proceeding from capital, severed from it, and derived or re-
ceived by the taxpayer for his separate use, benefit and disposal. Id.
A stock dividend--evincing merely a transfer of an accumulated sur-
plus to the capital account of the corporation-takes nothing from
the property of the corporation and adds nothing to that of the share-
holder; A tax on such dividends is a tax on capital iacrease 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.
Alrmed.
 OCTOBER TERM, 1919.

Argument for Plaintiff in Error. 252 U. S.

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. r; Southern Pacific Co. v.
Lowe, 247 U. S. 330, 336; Lynch v. Turrish, 247 U. S. 221,
228; Bailey v. Railroad Co., 22 Wall. 604, 635, 636; Lynch
v. Hornby, 247 U. S. 339, 343.
The right of Congress to tax undivided profits cannot
be destroyed by the issuance of stock certificates to rep-
resent them; and, since the certificates of stock in this case
represent earnings of the corporation accrued subsequently
to March 1, 1913, they are clearly made taxable as in-
come by the Act of 1916, c. 463, 39 Stat. 756. Peabody
v. Eisner, 247 U. S. 347; Bailey v. Railroad Co., 22 Wall.
604, 635; Swan Brewery Co., Ltd., v. Rex, [19141 A. C.
231, 234-236.
Towne v. Eisner, 245 U. S. 418, does not control this.
case. (1) It merely decides that the stock dividends then
before the court, paid out of earnings accrued 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 Congress to tax, as the in-
come 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 the
"term "dividend" in its ordinary acceptation does not in-
clude stock dividends, and that since the Act of 1913 used
the term" dividend" without qualification stock dividends
were not taxable under it. Gibbons v. Mahon, 136 U. S.549,
559,560. (3) TheActof 1916, however, expressly taxes stock
dividends, and hence Towne v. Eisner is not controlling.
 EISNER v. MACOMBER.
189. Argument for Plaintiff in Error.

The case of Lynch v. Hornby, 247 U. S. 339, holding

that cash dividends are to be treated as income for the
year in which received, whether paid out of earnings ac-
cruing before or after March 1, 1913, in view of the reasons
stated for the holding, would not have been inconsistent
with a holding that stock dividends were taxable when
representing earnings accruing after March 1, 1913, but
not taxable when representing earnings accruing before
that,date.
But whether such holdings would have been inconsist-
ent or not, the holding in Lynch v. Hornby is not con-
trolling in this case, since the Act of 1916 makes it plain
that dividends, whether paid in cash or stock, are to be
taxed only when they represent earnings accruing after
March 1, 1913.
While Gibbons v. Mahon, supra, holds that as between
a life tenant and a remainderman stock dividends are not
income, that case arose in the District of Columbia in-
volves no federal question, and is not controlling in similar
cases arising in the state courts. As a matter of fact, most
of the state courts have adopted a different ruling and
hold that stock dividends are income. In the Act of 1916,
therefore, Congress was clearly within its power when it
declared that by "dividends" it meant either cash or
stock dividends in accordance with the meaning of the
term as understood and construed by the courts of most
of the States. Pritchittv. Nashville Trust Co., 96 Tennessee,
472; Thomas v. Gregg, 78 Maryland, 545; McLouth v. Hunt,
154 N. Y. 179; Will of Pabst, 146 Wisconsin, 330; Lord v.
Brooks, 52 N. H. 72; Hite v. Hite, 93 Kentucky, 257;
Moss's Appeal, 83 Pa. St. 264; Parisv. Paris, 10 Ves. Jr.
184; Tax Commissioner v. Putnam, 227 Massachusetts,
522; Matter of Osborne, 209 N. Y. 450; Goodwin v. Mc-
Gaughey, 108 Minnesota, 248.
The ultimate object of corporate business is gain to the
stockholders. This gain always and necessarily first ap-
,192 .. OCTOBER TERM, 1919.

". Argument for Plaintiff in Error. 252 U. S.

pears in the shape of undivided profits which are held in

trust for them. When, later, dividends are declared, the
cash or stock received by a stockholder is the same gain
converted into a concrete form for the convenient pay-
ment, transfer, or definite assignment to him of his share
of the previously undivided profits.
The Government is under no delusions as to the nature
of a stock dividend, or as to what it accomplishes. It
serves to readjust the evidence of ownership by which the
stockholder previously held his share of both capital and
undivided profits. His share of profits is invested for
him in the stock of the company. The profits are segre-
gated from his former capital and he has a separate certif-
icate representing his invested profits or gains. It is, of
course, conceded that this transaction does not, of itself,
make the stockholder richer than he was before. The
Government readily agrees that there has been a mere
change in form of that which already belonged to the stock-
holder and that what was not income before is not income
after a stock dividend. But this contention of defendant
in error proves too much and destroys her case. Her share
of undivided profits which has, by undergoing a mere
change of form, become 198 shares of stock, was itself
income within the power of Congress to tax. Unless its
change of form destroyed its previous character it was still
income. It is defendant in error and not the Government
who must rely upon the change of form for success in this
case. The Government claims the right to tax gains when
wearing a new dress only when they were taxable in their
old dress. The defendant in error's contention cannot
succeed unless the new dress destroys the power to tax
which existed before it was put on.
So far as what they serve to transfer or assign to stock-
holders is concerned, there are but two points of difference
between cash dividends and stock dividends. By a cash
dividend, a corporation transfers to a stockholder his
 EISNER v. MACOMBER.

189. Argument for Plaintiff in Error.

share of corporate earnings in money, while, in the case

of a stock dividend, it first invests the earnings in its busi-
ness and then issues to each stockholder new shares of
stock of the same par value as his share of the earnings or,
to use other words, invests each stockholder's share of the
earnings in its own stock at par and delivers to him the
stock so purchased. In either case, he simply gets, in a
concrete form, the actual gains he has derived from his
invested capital.
The other point of difference is that a cash dividend
may serve either to distribute profits or return capital. A
stock dividend, on the other hand, never contemplates a
reduction in capital but, on the contrary, necessarily im-
plies an increase in capital to be represented by the new
shares. It can never, therefrre, serve to return capital,
but that which, in the form of new stock, it assigns to each
stockholder, is always a share of corporate earnings or
gains. In other words, a cash dividend may or may not
distribute gains, but a stock dividend cannot, under any
circumstances, distribute, assign, or transfer anything
else.
If the constitutional power exists to tax corporate earn-
ings when they are passed to the stockholder by means
of a cash dividend, no reason is perceived why the same
power does not exist to tax the same earnings when they
are passed to him, in an equally concrete form, by means
of a stock dividend.
Stock issued as a dividend is property in every sense
that any other thing of value is property.
The Act of 1916 taxes gains derived from capital in-
vested -in corporate stocks, that is, shares of corporate
gains or profits. It does not tax dividends per se but
merely uses them to indicate the form in which such gains
shall be taxed and to mark the time when the tax shall be
collected. And, in the case of stock dividends, it uses the
stock issued to measure the amount of the gains.
 OCTOBER TERM, 1919.

Argument for Defendant in Error. 252 U. S.

The substance of the Act of 1916 is that no corporate

earnings are taxed as distributed gains which might not
have been taxed as undivided profits when they accrued,
and all such 6arnings which might have been taxed as un-
divided profits are taxed when distributed.
Before a dividend, one certificate is the evidence ot a
stockholder's ownership of a share of capital and also a
share of profits. When he receives a cash dividend the
value of his certificate is reduced and the money reived
measures the gain which his investment has yielded.
When he receives a stock dividend, the par value of his
new certificate measures his gains. As the fruit or result
of his investment, something of value, which is distinct
from his original capital and distinct from the corpora-
tion's ownership of its assets, has come to him.
The fact that a stockholder is no richer immediately
after than immediately before a stock dividend is wholly
unimportant. Neither is he inade richer by a cash divi-
dend.
The important fact is that, assuming the profits have
been earned since March 1, 1913, he has, in either case,
become richer since that date through the earnings of his
invested capital. Congress has seen fit to say that these
earnings may accumulate free from tax until they are de-
livered to him either as cash or in stock. His gain comes,
not from the declaration of a dividend of any kind, but
from what his capital has earned. The only effect of the
dividend is to fix the date upon which, under the law, his
share of corporate earnings, previously accrued, becomes
taxable.

Mr. Charles E. Hughes, with whon Mr. George Welwood

Murray was on the briefs, for defendant in error:
The tax in question is not laid with respect to the tax-
payer's interest in undivided corporate profits as constitu-
ting income to the taxpayer, or upon the "stock dividend"
 EISNER v. MACOMBER.

189. Argument for Defendant in Error.

as the form or dress in which a previous gain or income to

the taxpayer appears. The tax is laid upon the "stock
dividend" as constituting income in itself.
Undivided corporate profits are not income to the stock-
holder. It is of the essence of income that it should be
realized. Potentiality is not enough. Book entries or
opinions of increase are not income. Income necessarily
implies separation and realization. The increase of the
forest is not income until it is cut. The increase in the
value of lands due to the growth and prosperity of the
community is not income until it is realized. Where in-
vestments are concerned, there is no income until there has
been a separate, realized gain. When a corporation earns
profits, it receives money over the amount of its expendi-
tures. The money belongs to the corporation; the profits
are the property of the corporation. If the corporation
distributes its earnings in dividends, properly so-called,
that is, in money, or in property in specie, the stockholder
has realized a gain and that gain is income. The share-
holder has simply his share, his interest, in the corporate
enterprise. The corporation must, of course, pay its in-
come tax upon its profits, but there is no income to the
shareholder unless he receives it. His share interest is a
"capital" interest.
This distinction is not a form or technicality. It is a
vital distinction inherent in corporate organization. The
interest of the shareholder is a distinct interest. The
profits of the corporation are not his profits. This dis-
tinction between the title of a corporation and the interest
of its shareholders in the property of the corporation, in-
cluding its earnings, has been authoritatively established
by two lines of decisions of this court in cases involving
tba power of taxation:
(1) Van Allen v. The Assessors, 3 Wall. 573, 584; People
v. Commissioners, 4 Wall. 244; Bradley v. People, 4 Wall.
459; National Bankf v. Commonwealth, 9 Wall. 353, 358,
 OCTOBER TERM, 1919.

Argument for Defendant in Error. 252 U. S.

359; Owensboro National Bank v. Owensboro, 173 U. S. 664,

680; Evansville Bank v. Britton, 105 U. S. 322; Cleveland
Trust Co. v. Lander, 184 U. S. 111; Home Savings Bank.v.
Des Moines, 205 U. S. 503; Rogers v. Hennepin County,
240 U. S. 184.
(2) Bank of Commerce v. Tennessee, 161 U. S. 134, 146;
Shelby County v. Union & Planters' Bank, 161 U. S. 149,
183-154; Wright v. Georgia R. R. & Bankinig Co., 216 U.
S. 420, 425; Farri'gtonv. Tennessee, 95 U. S. 679; Sturges
v. Carter, 114 U. S. 511; Tennessee v. Whitworth, 117 U.
S. 129; New Orleans v. Houston, 119.U. S. 265; New Or-
leans v. Citizens' Bank, 167 U. S. 371; Powers v. Detroit,
Grand Haven &c. Ry. Co., 201 U. S. 543.
When the question of the nature of the shareholder's
interest in undivided profits came before this court in
Gibbons v. Mahon, 136 U. S. 549, the question was carefully
considered and explicitly determined. The court pointed
out the distinction between the money earned by the cor-
poration and the shareholder's income, and ruled ex-
pressly that the interest of the shareholder in the accumu-
lated earnings of the corporation, as a part of his share
interest, was capital and not income, so long as the earn-
ings were held and invested by the corporation as a part
of its corporate property. See Towne v. Eisner, 245 U.
S. 418.
The case of Collector v. Hubbard, 12 Wall. 1, arose under
a provision that gains and profits of certain companies
should be included in estimating the annual gains, profits
or income of any person entitled to the same, whether
divided or otherwise. The object was to insure the pay-
ment of the tax upon the earnings of the corporation (see
Gibbons v. Mahon, 136 U. S. 549, 560). It was a crude
method of reaching the corporate earnings and was the
only tax imposed with respect to those earnings. A
shareholder was to be taxed upon the increment supposed
to have been added to the value of his share by his pro-
 EISNER v. MACOMBER.

189. Argument for Defendant in Error.

portionate interest in the undivided profits. This, as a

matter of statutory construction, is clear enough. But it
by no means.follows that this increment was income to
the shareholder, when it becomes necessary to distinguish
between a tax on income and a direct tax on the capital
investment.
The Hubbard Case was dealing with the mere fact of
the increment and did not deal with its nature, as the
court in the Gibbons Case was called upon to deal. The
reason why the court in the Hubbard Case was not called
upon to define the nature of the increment, beyond the
fact that it was property, is apparent from the absence of
any controversy over a constitutional question, and from
the opinion entertained at the time with respect to what
was a direct and what was an indirect tax under the
Federal Constitution; accepting the view then enter-
tained of direct and indirect taxes, the decision was
unassailable.
It was not necessary for Mr. Justice Clifford, in the ab-
sence of the debate which about twenty-five years later
took place in Pollock V. Farmers' Loan & Trust Co., 157
U. S.429; 158 U. S. 601, to go further. When, however,
the court had occasion to deal with the precise question,
in Gibbons v. Mahon, it stated its conclusion emphatically,
and without the slightest reservation, that whatever in-
crement there was, through undivided profits held and
invested by the corporation, to the share of the stock-
holder, was capital and not income. But the increment
in the Hubbard Case was nothing but an accretion to cap-
ital. It was not a separated, realized gain. It was not
income. Hence, under the doctrine of the Pollock Cas
and the doctrine now applicable to all cases where a cap-
ital interest is taxed, the tax could not validly, be laid
except as an apportioned direct tax. [Bailey v. Railroad
Co., 22 Wall. 604, and recent cases cited by the Govern-
ment, distinguished.]
 OCTOBER TERM, 1919.

Argument of amici curim. 252 U. S.

Income is the gain, come to fruition, from capital, from

labor, or from both combined. This is sound doctrine
both in law and in economics. Income of a corporation
is not income of a shareholder until distributed. A "stock
dividend" is not income. It does not constitute a distri-
bution of anything; it is a mere readjustment of capital.
Stratton's Independence v. Howbert, 231 U. S. 399, 415;
Doyle v. Mitchell Bros. Co., 247 U. S. 179, 185; Lynch v.
Hornby, 247 U. S. 339, 343; Lynch v. Turrish, 247 U. S.
221, 231; Commissioners of Inland Revenue v. Blott [re-
ported in the London Times of July 25, 1919]; Seligman,
Income Tax, p. 19; "The Economic Nature of the Stock
Dividend," by Fairchild, Bulletin of National Tax Assn.,
vol. III, No. 7, April, 1918, p. 163; Seligman, "Are Stock
Dividends Income," American Economic Review, vol.
IX, No. 3, p. 517; Peabody v. Eisner, 247 U. S. 347;
Towne v. Eisner, 245 U. S. 418, 426; Union Trust Co. v.
Coleman, 126 N. Y. 433, 438.
The tax in question is an income tax and cannot be
sustained as anything else.

Mr. George W. Wickersharn and Mr. Charles Robinson

Smith, by leave of court, filed a brief as amici curie:
The principle laid down by this court in two well-con-
sidered cases (Gibbons v. Mahon, 136 U. S. 549, and
Towne v. Eisner, 245 U. S. 418), that stock dividends rep-
resent capital and do not constitute income is based on
sound economic reasoning.
Although Collector v. Hubbard, 12 Wall. 1, is plainly
distinguishable from the case at bar, it is inconsistent both
with other and later rulings of this court and with sound
economics. It tends to block the way to a consistent, har-
monious and logical system of income taxation and it
should be expressly overruled. As upholding a tax on
property except by apportionment under Art. I, § 2, of the
Constitution, it has been overruled by Pollock v. Farmers'
 EISNER v. MACOMBER.'

189. Opinion of the Court. .

Loan & Trust Co., 157 U. S. 429; 158 U. S. 601. In so far

as it assumes an equivalency between the property and
the income of the corporation and the shares of stock in
the names of the stockholders for taxation purposes, it
has been implicitly overruled by a long series of authorities
in this court. The suggestion that this court has in other
cases cited Collector v. Hubbard or its principle with
approval except upon altogether minor points is er-
roneous.
The stock dividend is in reality not a dividend at all.
It is a mere certified expression of axj undivided surplus
and its capitalization. Whatsoever gain there may be in
either case to the stockholder is a capital gain. Capital
gains (being mere increases in valuation) are not income
until realized. The gains that come with stock dividends
when stock is sold are realized capital gains-the same in
nature and similarly taxable as those gains that are made
with any stock that is sold at an advance. Inasmuch as
undivided corporate earnings cannot be taxed as income
against the stockholder-so the stock certificates issued
merely to represent these may not be so taxed, until the
gain be realized in some form by sale.

MR. JUSTICE PrrNEY delivered the opinion of the

court.

This case presents the question whether, by virtue of

the Sixteenth Amendment, Congress has the power to
tax, as income of the stockholder and without apportion-
ment, a stock dividend made lawfully and in good faith
against profits accumulated by the corporation since
March 1, 1913.
It arises under the Revenue Act of September 8, 1916,
C.463, 39 Stat. 756, et seq., which, in our opinion (notwith-
standing a contention of the Government that will be
 OCTOBER TERM, 1919.

Opinion of the Court. 252 U. S.

noticed), plainly evinces the purpose of Congress to tax

stock dividends as income.'
The facts, in outline, are as follows:
On January 1, 1916, the Standard Oil Company of
California, a corporation of that State, out of an author-
ized capital stock of $100,000,000, had shares of stock
outstanding, par value $100 each, amounting in round
figires to $50,000,000. In addition, it had surplus and
undivided profits invested in plant, property, and business
and required for the purposes of the corporation, amount-
ing to about $45,000,000, of which about $20,000,000 had
been earned prior to March 1, 1913, the balance thereafter.
In January, 1916, in order to readjust the capitalization,
the board of directors decided to issue additional shares
sufficient to constitute a stock dividend of 50 per cent. of
the outstanding stock, and to transfer from surplus ac-
count to capital stock account an amount equivalent to
such issue. Appropriate resolutions were adopted, an
amount equivalent to the par value of the proposed new
stock was transferred accordingly, and the new stock
duly issued against it and divided among the stockholders.
Defendant in error, being the owner of 2,200 shares of
the old stock, received certificates for 1,100 additional
'TITLE I.-INCOME TAX.
PART I.-ON INDIVIDUALS.

Sec. 2 (a)'That, subject only to such exemptions and deductions as

are hereinafter allowed, the net income of a taxable person shall include
gains, profits, and income derived . , also from interest, rent,
dividends, securities, or the transaction of any business carried on for
gain or profit, or gains or profits and income derived from any source
whatever: Provided, That the term "dividends" as used in this title
shall be held to mean any distribution made or ordered to be made by a
corporation, . . . out of its earnings or profits accrued since
March first, nineteen hundred and thirteen, and payable to its share-
-holders, whether in cash or in stock of the corporation, . which
stock dividend shall be considered income, to the amount of its cash
value.
 EISNER v. MACOMBER.

189. Opinion of the Court.

shares, of which 18.07 per cent., or 198.77 shares, par

value $19,877, were treated as representing surplus earned
between March 1, 1913, and January 1, 1916. She was
called upon to pay, and did pay under protest, a tax im-
posed under the Revenue Act of 1916, based upon
a sup-
posed income of $19,877 because of the new shares; and
an appeal to the Commi'ssioner of Internal Revenue having
been disallowed, she brought action against the Collector
to recover the tax. In her complaint she alleged the above
facts, and contended that in imposing such a tax the Rev-
enue Act of 1916 violated Art. I, § 2, cl. 3, and Art. I, § 9,
cl. 4, of the Constitution of the United States, requiring
direct taxes to be apportioned according to population,
and that the stock dividend was not income within the
meaning of the Sixteenth Amendment. A general de-
murrer to the complaint was overruled upon the authority
of Towne v. Eisner, 245 U. S. 418; and, defendant having
failed to plead furtfLer, final judgment went against him.
To review it, the present writ of error is prosecuted.
The case was argued at the last term, and reargued at
the present term, both orally and by additional briefs.
We are constrained to hold that the judgment of the Dis-
trict Court must be affirmed: First, because the question
at issue is controlled by Towne v. Eimer, supra; secondly,
because a reexamination of the question, with the addi-
tional light thrown upon it by elaborate arguments, has
confirmed the view that the underlying ground of that de-
cision is sound, that it disposes of the question here pre-
sented, and that other fundamental considerations lead
to the same result.
. In Towne v. Eisner; the question was whether a stock
dividend made in 1914 against surplus earned prior to
January 1, 1913, was taxable against the stockholder under
the Act of October 3, 1913, c. 16, 38 Stat. 114, 166, which
provided (§ B, p. 167) that net income should include
"dividends," and also "gains or profits and income de-
 OCTOBER TERM, 1919.

Opinion of the Court. 252 U. S.

rived from any source whatever." Suit having been

brought by a stockholder to recover the tax assessed
against him by reason of the dividend, the District Court
sustained a demurrer to the complaint. 242 Fed. Rep.
702. The court treated the construction of the act as in-
separable from the interpretation of the Sixteenth Amend-,
ment; and, having referred to Pollock v. Farmers' Loan &
Trust Co., 158 U. S. 601, and quoted the Amendment,
proceeded very properly to say (p. 704): "It is manifest
that the stock dividend in question cannot be reached by
the Income Tax Act, and could not, even though Congress
expressly declared it to be taxable as income, unless it is
in fact income." It declined, however, to accede to the
contention that in Gibbons v. Mahon, 136*U. S. 549, "stock
dividends" had received a definition sufficiently clear to
be controlling, treated the language of this court in that
case as obiter dictum in respect of the matter then before
it (p. 706), and examined the questiorl as res nova, with
the result stated. When the case came here, after overrul-
ling a motion to dismiss made by the Government upon
the ground that the only question involved was the con-
struction of the statute and not its constitutionality, we
dealt upon the merits with the question of construction
only, but disposed of it upon consideration of the essential
nature of a stock dividend, disregarding the fact that the
one in question 'was based upon surplus earnings that ac-
crued before the Sixteenth Amendment took effect. Not
only so, but we rejected the reasoning of the District
Court, saying (245 U. S. 426): "Notwithstanding the
thoughtful discussion that the case received below we
cannot doubt that the dividend was capital as well for the
purposes of the Incone Tax Law as for distribution be-
tween tenant for life and remainderman. What was said
by this court upon the latter question is equally true for
the former. 'A stock dividend really takes nothing from
the property of the corporation, and adds nothing to the
 EISNER v. MACOMBER.

189. Opinion of the Court.

interests of the shareholders. Its property is not dimin-

ished, and their interests are not increased. . . . The
proportional interest of each shareholder remains the same.
The only change is in the evidence which represents that
interest, the new shares and the original shares together
representing the same proportional interest that the orig-
inal shares represented before the issue of the new ones.'
Gibbons v. Mahon, 136 U. S. 549, 559, 560. In short, the
corporation is no poorer and the stockholder is no richer
than they were before. Logan County v. United States,
169 U. S. 255, 261. If the plaintiff gained any small ad-
vantage by the change, it certainly was not an advantage
of $417,450, the sum upon which he was taxed.
What has happened is that the plaintiff's old certificates
have been split up in effect and have diminished in value
to the extent of the value of the new."
This language aptly answered not only the reasoning of
the District Court but the argument of the Solicitor Gen-
eral in this court, which discussed the essential nature of
a stock dividend. And if, for the reasons thus expressed,
such a dividend is not to be regarded as "income" or
"dividends" within the meaning of the Act of 1913, we
are unable to see how it can be brought within the mean-
ing of "incomes" in the Sixteenth Amendment; it being
very clear that Congress intended in that act to exert its
power to the, extent permitted by the Amendment. In
Toume v. Eisner it was not contended that any construc-
tion of the statute could make it-narrower than the con-
stitutional grant; rather the contrary.
The fact that the. dividend was charged against profits
earned before the Act of 1913 took effect, even-before the
Amendment was adopted, was neither relied upon nor
alluded to in our consideration of the merits in that case.
Not only so, but had we considered that a stock dividend
constituted income in any true sense, it would have been
held taxable under the Act of 1913 notwithstanding it was
 OCTOBER TERM, 1919.

Opinion of the Court. 252 U. S.

based upon profits earned before the Amendment. We

ruled at the same term, in Lynch v. Hornby, 247 U. S. 339,
that a cash dividend extraordinary in amount, and in
Peabody v. Eisner, 247 U. S. 347, that a dividend paid in
stock of another company, were taxable as income al-
though based upon earnings that accrued before adoption
of the Amendment. In the former case, concerning "cor-
porate profits that accumulated before the Act took
effect," we declared (pp. 343-344): "Just as we deem the
legislative intent manifest to tax the stockholder with re-
spect to such accumulations only if and when, and to the
extent that, his interest in them comes to fruition as in-
come, that is, in dividends declared, so we can perceive no
constitutional obstacle that stands in the way of carrying
out this intent when dividends are declared out of a pre-
existing surplus. . . . Congress was at liberty under
the Amendment to tax as income, without apportion-
ment, everything that became income, in the ordinary
sense of the word, after the adoption of the Amendment,
including dividends received in the ordinary course by a
stockholder from a corporation, even though they were
extraordinary in amount and might appear upon analy-
sis to be a mere realization in possession of an inchoate and
contingent interest that the stockholder had in a surplus
of corporate assets previously existing." In Peabody v.
Eisner (pp. 349-350), we observed that the decision of the
District Court in Towne v. Eisner had been reversed "only
upon the ground that it related to a stock dividend which
in fact took nothing from the property of the corporation
and added nothing to the interest of the shareholder, but
merely changed the evidence which represented that in-
terest;" and we distinguished the. Peabody Case from the
Towne Case upon the ground that "the dividend of Balti-
more & Ohio shares was not a stock dividend but a distribu-
tion in specie of a portion of the assets of the Union Pacific."
Therefore, Toume v. Eisner cannot be regarded as turn-
 EISNER v. MACOMBER.

189. Opinion of the Court.

ing upon the point that the surplus accrued to the company
before the act took effect and before adoption of the
Amendment. And what we have quoted from the opinion
in that case cannot be regarded as obiter dictum, it hav-
ing furnished the entire basis for the conclusion reached.
We adhere to the view then expressed, and might rest the
present case there; not because that case in terms decided
the constitutional question, for it did not; but because
the conclusion there reached as to the essential nature of
a stock dividend necessarily prevents its being regarded
as income in any true sense.
Nevertheless, in view of the importance of the matter,
and the fact that Congress in the Revenue Act of 1916
declared (39 Stat. 757) that a "stock dividend shall be
considered income, to the amount of its cash value," we
will deal at length with the constitutional question, in-
cidentally testing the soundness of our previous conclusion.
The Sixteenth Amendment must be construed in con-
nection with the taxing clauses of the original Constitu-
tion and the effect attributed to them before the Amend-
ment was adopted. In Pollock v. Farmers' Loan & Tru st
Co., 158 U. S. 601, under the Act of August 27, 1894, c. 349,
§ 27, 28 Stat. 509, 553, it was held that taxes upon ::ents
and profits of real estate and upon returns from invest-
ments of personal property were in effect direct taxes ipon
the property from which such income arose, impose I by
reason of ownership; and that Congress could not inpose
such taxes without apportioning them among the States
according to population, as required by Art. I, § 2, 11. 3,
and § 9, cl. 4, of the original Constitution.
Afterwards, and evidently in recognition of the libnita-
tion upon the taxing power of Congress thus determined,
the Sixteenth Amendment was adopted, in words lucidly
expressing the object to be accomplished: "The Congress
shall have power to lay and collect taxes on incomes, from
whatever source derived, without apportionment among
 OCTOBER TERM, 1919.

Opinion of the Court. 252 U. S.

the several States, and without regard to any census or

enumeration." As repeatedly held, this did not extend
the taxing power to new subjects, but merely removed the
necessity which otherwise might exist for an apportion-
ment among the States of taxes laid on income. Brush-
aber v. Union Pacific R. R. Co., 240 U. S. 1, 17-19; Stanton
v. Baltic Mining Co., 240 U. S. 103, 112 et seq.; Peck &
Co. v. Lowe, 247 U. S. 165, 172-173.
A proper regard for its genesis, as well as its very clear
language, requires also that this Amendment shall not be
extended by loose construction, so as to repeal or modify,
except as applied to income, those provisions of the Con-
stitution that require an apportionment according to pop-
ulation for direct taxes upon property, real and personal.
This limitation still has an appropriate and important
function, and is not to be overridden by Congress or dis-
regarded by the courts.
In order, therefore, that the clauses cited from Article I
of the Constitution may have proper force and effect,
save only as modified by the Amendment, and that the
latter also may have proper effect, it becomes essential
to distinguish between what is and what is not "income,"
as the term is there used; and to apply the distinction, as
cases arise, according to truth and substance, without re-
gard to form. Congress cannot by any definition it may
adopt conclude the matter, since it cannot by legislation
alter the Constitution, from which alone it derives its
power to legislate, and within whose limitations alone that
power can be lawfully exercised.
The fundamental relation of "capital" to "income"
has been much discussed by economists, the former being
likened to the tree or the land, the latter to the fruit or
the crop; the former depicted as a reservoir supplied from
springs, the latter as the outlet stream, to be measured
by its flow during a period of time. For the present pur-
pose we require only a clear definition of the term "in-
 EISNER v. MACOMBER.

189. Opinion of the Court.

come," s used in common speech, in order to determine

its m~aniiig in the Amendment; and, having formed
also a coiTect judgment as to the nature of a stock
dividend, we. shall fiid it easy to decide the matter at
issue.
After examining dictionaries in common use (Bouv.
L. D.; Standard Dict.; Webster's Internat. Dict.; Century
Dict.), we find little to add to the succinct definition
adopted in two cases arising under the Corporation Tax
Act of 1909 (Stratton's Independence v. Howbert, 231 U. S.
399, 415; Doyle v. Mitchell Bros. Co., 247 U. S. 179, 185)-
"Income may be defined as the gain derived from capital,
from labor, or from both combined," provided it be under-
stood to include profit gained through a sale or conversion
of capital assets, to which it was applied in the Doyle Case
(pp. 183, 185).
Brief as it is, it indicates the characteristic and dis-
tinguishing attribute of income essential for a correct
solution of the present controversy. The Government, al-
though basing its argument upon the definition as quoted,
placed chief emphasis upon the word "gain," which was
extended to include a variety of meanings; while the sig-
nificance of the next three words was either overlooked
or misconceived. " Derived-from-capital";-" the gain-
derived-from--capital," etc. Here we have the essential
matter: not a gain accruing to capital, not a growth or in-
crement of value in the investment; but a gain, a profit,
something of exchangeable value proceeding from the
property, severed from the capital however invested or
employed, and coming in, being "derived," that is, received
or drawn by the recipient (the taxpayer) for his separate
use, benefit and disposal;--that is income derived from
property. Nothing else answers the description.
The same fundamental conception is clearly set forth
in the Sixteenth Amendment-" incomes, from whatever
source derived"-the essential thought being expressed
 OCTOBER TERM, 1919.

Opinion of the Court. 252 U. S.

with a conciseness and lucidity entirely in harmony with

the form and style of the Constitution.
Can a stock dividend, considering its essential character,
be brought within the definition? To answer this, regard
must be had to the nature of a corporation and the stock-
holder's relation to it. We refer, of course, to a corpora-
tion such as the one in the case at bar, organized for profit,
and having a capital stock divided into shares to which a
nominal or par value is attributed.
Certainly the interest of the stockholder is a capital
interest, and his certificates of stock are but the evidence
of it. They state the number of shares to which he is en-
titled and indicate their par value and how the stock may
be transferred. They show that he or his assignors, im-
mediate or remote, have contributed capital to the enter-
prise, that he is entitled to a corresponding interest pro-
portionate to the whole, entitled to have the property and
business of the company devoted during the corporate
existence to attainment of the common objects, entitled
to vote at stockholders' meetings, to receive dividends
out of the corporation's profits if and when declared, and,
in the event of liquidation, to receive a proportionate
share of the net assets, if any, remaining after paying cred-
itors. Short of liquidation, or until dividend declared,
he has no right to withdraw any part of either capital or
profits from the common enterprise; on the contrary, his
interest pertains not to any part, divisible or indivisible,
but to the entire assets, business, and affairs of the com-
pany. Nor is it the interest of an owner in the assets
themselves, since the corporation has full title, legal and
equitable, to the whole. The stockholder has the right
to have the assets employed in the enterprise, with the
incidental rights mentioned; but, as stockholder, he has
no right to withdraw, only the right to persist, subject
to the risks of the enterprise, and looking only to divi-
dends for his return. If he desires to dissociate himself
 EISNER v. MACOMBER.
189. Opinion of the Court.

from the company he can do so only by disposing of his

stock.
For bookkeeping purposes, the company acknowledges
a liability in form to the stockholders equivalent to the
aggregate par value of their stock, evidenced by a "cap-
ital stock account." If profits have been made and not
divided they create additional bookkeeping liabilities
under the head of "profit and loss," "undivided profits,"
"surplus account," or the like. None of these, however,
gives to the stockholders as a body, much less to any one
of them, either a claim against the going concern for any
particular sum of money, or a right to any particular por-
tion of the assets or any share in them unless or until the
directors conclude that dividends shall be made and a
part of the company's assets segregated from the common
fund for the purpose. The dividend normally is payable
in money, under exceptional circumstances in some other
divisible property; and when so paid, then only (excluding,
of course, a possible advantageous sale of his stock or wind-
ing-up of the company) does the stockholder realize a
profit or gain which becomes his separate property, and
thus derive income from the capital that he or his prede-
cessor has invested.
In the present case, the corporation had surplus and
undivided profits invested in plant, property, and busi-
ness, and required for the purposes of the corporation,
amounting to about $45,000,000, in addition to outstand-
ing capital stock of $50,000,000. In this the case is not
extraordinary. The profits of a corporation, as they ap-
pear upon the balance sheet at the end of the year, need
not be-in the form of money on hand in excess of what is
required
operationstoofmeet current liabilities and finance current
the company. Often, especially in a growing
business, only a part, sometimes a small part, of the year's
profits is in property capable of division; the remainder
having been absorbed in the acquisition of increased plant,
 OCTOBER TERM, 1919.

Opinion of the Court. 252 U. S.

equipment, stock in trade, or accounts receivable, or in

decrease of outstanding liabilities. When only a part is
available for dividends, the balance of the year's profits
is carried to the credit of undivided profits, or surplus, or
some other account having like significance. If thereafter
the company finds itself in funds beyond current needs
it may declare dividends out of such surplus or undivided
profits; otherwise it may go on for years conducting a
successful business, but requiring more and more working
capital because of the extension of its operations, and
therefore unable to declare dividends approximating the
amount of its profits. Thus the surplus may increase
until it equals or even exceeds the par value of the out-
standing capital stock. This may be adjusted upon the
books in the mode adopted in the case at bar-by declar-
ing a "stock dividend." This, however, is no more than
a book adjustment, in essence not a dividend but rather
the opposite; no part of the assets of the company is sep-
arated from the common fund, nothing distributed except
paper certificates that evidence an antecedent increase
in the value of the stockholder's capital interest resulting
from an accumulation of profits by the company, but
profits so far absorbed in the business as to render it im-
practicable to separate them for withdrawal and distribu-
tion. In order to make the adjustment, a charge is made
against surplus account with corresponding credit to cap-
ital stock account, equal to the proposed "dividend"; the
new stock is issued against this and the certificates de-
livered to the existing stockholders in proportion to their
previous holdings. This, however, is merely bookkeep-
ing that does not affect the aggregate assets of the cor-
poration or its outstanding liabilities; it affects only the
form, not the essence, of the "liability" acknowledged by
the corporation to its own shareholders, and this through
a readjustment of accounts on one side of the balance
sheet only, increasing "capital stock" at the expense of
 EISNER v. MACOMBER.

189. Opinion of the Court.

"surplus" ; it does not alter the preexisting proportionate

interest pf any stockholder or increase the intrinsic value of
his holding or of the aggregate holdings of the other stock-
holders as they stood before. The new certificates simply
increase the number of the shares, with consequent dilu-
tion of the value of each share.
A "stock dividend" shows that the company's accumu-
lated profits have been capitalized, instead of distributed
to the stockholders or retained as surplus available for
distribution in money or in kind should opportunity offer.
Far from being a realization of profits of the stockholder,
it tends rather to postpone such realization, in that the
fund represented by the new stock has been transferred
from surplus to capital, and no longer is available for actual
distribution.
The essential and controlling fact is that the stockholder
has received nothing out of the company's assets for his
separate use and benefit; on the contrary, every dollar of
his original investment, together with whatever accretions
and accumulations have resulted from employment of
his money and that of the other stockholders in the busi-
ness of the company, still remains the property of the
company, and subject to business risks which may result
in iping out the entire investment. Having regard to
the very truth of the matter, to substance and not to form,
he has received nothing that answers the definition of in-
come within the meaning of the Sixteenth Amendment.
Being concerned only with the true character and
effect
of such a dividend when lawfully made, we lay aside the
question whether in a particular case a stock dividend
may be authorized by the local law governing the corpora-
tion, or whether the capitalization of profits may be the
result of correct judgment and proper business policy on
the part of its management, and a due regard for the in-
terests of the stockholders. And we are considering the
taxability of bona fide stock dividends only.
212 OCTOBER TERM, 1919. .
Opinion of the Court. 252 U. S.

We are clear that not only does a stock dividend really

take nothing from the property of the corporation and
add nothing to that of the shareholder, but that the an-
tecedent accumulation of profits evidenced thereby,
while indicating that the shareholder is the richer be-
cause of an increase of his capital, at the same time
shows he has not realized or received any income in the
transaction.
It is said that .a stockholder may sell the new shares ac-
quired in the stock dividend; and so he may, if he can find
a buyer. It is equally true that if he does sell, and in do-
ing so realizes a profit, such profit, like any other, is
income, and so far as it may have arisen since the Six-
teenth Amendment is taxable by Congress without ap-
portionment. The same would be true were he to sell
some of his original shares at a profit. But if a shareholder
sells dividend stock he necessarily disposes of a part of
his capital interest, just as if he should sell a part of
his old stock, either before or after the dividend. What
he retains no longer entitles him to the same proportion
of future dividends as before the sale. His part in the
control of the company likewise is diminished. Thus, if
one holding $60,000 out of a total $100,000 of the capital
st:)ck of a corporation should receive in common with
other stockholders a 50 per cent. stock dividend, and
should sell his part, he thereby would be reduced from a
majority to a minority stockholder, having six-fifteenths
instead of six-tenths of the total stock outstanding. A
corresponding and proportionate decrease in capital in-
terest and in voting power would befall a minority holder
should he sell dividend stock; it being in the nature of
things impossible for one to dispose of any part of such
an issue without a proportionate disturbance of the dis-
tribution of the entire capital stock, and a like diminution
of the seller's comparative voting power-that "right
preservative of rights" in the control of a corporation.
 EISNER v. MACOMBER.

189. Opinion of the Court.

Yet, without selling, the shareholder, unless possessed of

other resources, has not the wherewithal to pay an in-
come tax upon the dividend stock. Nothing could more
clearly show that to tax a stock dividend is to tax a capital
increase, and not income, than this demonstration that
in the nature of things it requires conversion of capital in
order to pay the tax.
Throughout the argument of the Government, in a
variety of forms, runs the fundamental error already men-
tioned-a failure to appraise correctly the force of the
term "income" as used in the Sixteenth Amendment, or
at least to give practical effect to it. Thus, the Govern-
ment contends that the tax "is levied on income derived
from corporate earnings," when in truth the stockholder
has "derived" nothing except paper certificates which,
so far as they have any effect, deny him present participa-
tion in such earnings. It contends that the tax may be
laid when earnings "are received by the stockholder,"
whereas he has received none; that the profits are "dis-
tributed by means of a stock dividend," although a stock
dividend distributes no profits; that under the Act of 1916
"the tax is on th3 stockholder's share in corporate earn-
ings," when in truth a stockholder has no such share, and
receives none in a stock dividend; that "the profits are
segregated from his former capital, and he has a separate
certificate representing his invested profits or gains,"
whereas there has been no segregation of profits, nor has
he any separate certificate representing a personal gain,
since the certificates, new and old, are alike in what they
represent-a capital interest in the entire concerns of the
corporation.
We have no doubt of the power or duty of a court to
look through the form of the corporation and determine
the question of the stockholder's right, in order to ascer-
tain whether he has received income taxable by Congress
without apportionment. But, looking through the form,
 OCTOBER TERM, 1919.

Opinion of the Court. 252 U. S.

we cannot disregard the essential truth disclosed; ignore

the substantial difference between corporation and stock-
holder; treat the entire organization as unreal; look upon
stockholders as partners, when they are not such; treat
them as having in equity a right to a partition of the cor-
porate assets, when they have none; and indulge the fic-
tion that they have received and realized a share of the
profits of the company which in truth they have neither
received nor realized. We must treat the corporation as
a substantial entity separate from the stockholder, not
only because such is the practical fact but because it is
only by recognizing such separateness that any dividend-
even one paid in money or property-can be regarded as
income of the stockholder. Did we regard corporation
and stockholders as altogether identical, there would be
no income except as the corporation acquired it; and
while this would be taxable against the corporation as in-
come under appropriate provisions of law, the individual
stockholders could not be separately and additionally
taxed with respect to their several shares even when di-
vided, since if there were entire identity between them
and the company they could not be regarded as receiving
anything from it, any more than if one's money were to
be removed from one pocket to another.
Conceding that the mere issue of a stock dividend
makes the recipient no richer than before, the Govern-
ment nevertheless contends that the new certificates
measure the extent to which the gains accumulated by
the corporation have made him the richer. There are
two insuperable difficulties with this: In the first place, it
would depend upon how long he had held the stock whether
the stock dividend indicated the extent to which he had
been enriched by the operations of the company; unless
he had held it throughout such operations the measure
would not hold true. Secondly, and more important for
present purposes, enrichment through increase in value
4
 EISNER v. MACOMBER.

189. Opinion of the Court.

of capital investment is not income in any proper meaning

of the term.
The complaint contains averments respecting the mar-
ket prices of stock such as plaintiff held, based upon sales
before and after the stock dividend, tending to show
that the receipt of the additional shares did not sub-
stantially change the market value of her entire hold-
ings. This tends to show that in this instance market
quotations reflected intrinsic values-a thing they do
not always do. But we regard the market prices of
the securities as an unsafe criterion in an inquiry such
as the present, when the question must be, not what will
the thing sell for, but what is it in truth and in essence.
It is said there is no difference in principle between a
simple stock dividend and a case where stockholders use
money received as cash dividends to purchase additional
stock contemporaneously issued by the corporation. But
an actual cash dividend, with a real option to the stock-
holder either to keep the money for his own or to reinvest
it in new shares, would be as far removed as possible from
a true stock dividend, such as the one we have under con-
sideration, where nothing of value is taken from the com-
pany's assets and transferred to the individual ownership
of the several stockholders and thereby subjected to their
disposal.
The Government's reliance upon the supposed analogy
between a dividend of the corporation's own shares and
one made by distributing shares owned by it in the stock
of another company, calls for no comment beyond the
statement that the latter distributes assets of the com-
pany among the shareholders while the former does not;
and for no citation of authority except Peabody v. Eisner,
247 U. S. 347, 349-350.
Two recent decisions, proceeding from courts of high
jurisdiction, are cited in support of the position of the
Government.
 OCTOBER TERM, 1919.

Opinion of the Court. 252 U.S.

Swan Brewery Co., Ltd., v. Rex, [1914] A. C. 231, arose
under the Dividend Duties Act of Western Australia,
which provided that "dividend" should include "every
dividend, profit, advantage, or gain intended to be paid
or credited to or distributed among any members or di-
rectors of any company," except, etc. There was a stock
dividend, the new shares being allotted among the share-
holders pro rata; and the question was whether this was a
distribution of a dividend within the meaning of the act.
The Judicial Committee of the Privy Council sustained
the dividend duty upon the ground that, although "in
ordinary language the new shares would not be called a
dividend, nor would the allotment of them be a distribu-
tion of a dividend," yet, within the meaning of the act, such
new shares were an" advantage" to the recipients. There
being no constitutional restriction upon the action of the
lawmaking body, the case presented merely a question of
statutory construction, and manifestly the decision is not
a precedent for the guidance of this court when acting
under a duty to test an act of Congress by the limitations
of a written Constitution having superior force.
In Tax Commissioner v. Putnam (1917), 227 Massa-
chusetts, 522, it was held that the 44th Amendment to
the constitution of Massachusetts, which conferred upon
the legislature full power to tax incomes, "must be inter-
preted as including every item which by any reasonable
understanding can fairly be regarded as income" (pp. 526,
531); and that under it a stock dividend was taxable as
income, the court saying (p. 535): "In essence the thing
which has been done is to distribute a symbol representing
an accumulation of profits, which instead of being paid
out in cash is invested in the business, thus augmenting
its durable assets. In this aspect of the case the substance
of the transaction is no different from what it would be
if a cash dividend had been declared with the privilege of
subscription to am equivalent amount of new shares."
 EISNER v. MACOMBER.

189. Opinion of the Court.

We cannot accept this reasoning. Evidently, in order to

give a sufficiently broad sweep to the new taxing provision,
it was deemed necessary to take the symbol for the sub-
stance, accumulation for distribution, capital accretion
for its opposite; while a case where money is paid into the
hand of the stockholder with an option to buy new shares
with it, followed .by acceptance of the option, was re-
garded as identical in substance with a case where the
stockholder receives no money and has no option. The
Massachusetts court was not under an obligation, like
the one which binds us, of applying a constitutional
amendment in the light of other constitutional provisions
that stand in the way of extending it by construction.
Upon the second argument, the Government, recog-
nizing the force of the decision in Towne v. Eisner, supra,
and virtually abandoning the contention that a stock
dividend increases the interest of the stockholder or other-
wise enriches him, insisted as an alternative that by the
true construction of the Act of 1916 the tax is imposed
not upon the stock dividend but rather upon the stock-
holder's share of the undivided profits previously accumu-
lated by. the corporation; the tax being levied as a matter
of convenience at the time such profits become manifest
through the stock dividend. If so construed, would the
act be constitutional?
That Congress has power to tax shareholders upon
their property interests in the stock of corporations is
beyond question; and that such interests might be
valued in view of the condition of the company, in-
cluding its accumulated and undivided profits, is equally
clear. But that this would be taxation of property
because of ownership, and hence would require appor-
tionment under the provisions of the Constitution, is
settled beyond peradventure by previous decisions of
this court.
The Government relies upon Collectorv. Hubbard(1870),
 OCTOBER TERM, 1919.

Opinion of the Court. 252 U. S.

12 Wall. 1, 17, which arose under § 117 of the Act of June

30, 1864, c. 173, 13 Stat. 223, 282, providing that "the
gains and profits of all companies, whether incorporated or
partnership, other than the companies specified in this
section, shall be included in estimating the annual gains,
profits, or income of any person entitled to the same,
whether divided or otherwise." The court held an in-
dividual taxable upon his proportion of the earnings of a
corporation although not declared as dividends and al-
though invested in assets not in their nature divisible.
Conceding that the stockholder for certain purposes had
no title prior to dividend declared, the court nevertheless
said (p. 18): "Grant all that, still it is true that the owner
of a share of stock in a corporation holds the share with
all its incidents, and that among those incidents is the right
to receive all future dividends, that is, his proportional
share of all profits not then divided. Profits are incident
to the share to which the owner at once becomes entitled
provided he remains a member of the corporation until a
dividend is made. Regarded as an incident to the shares,
undivided profits are property of the shareholder, and
as such are the proper subject of sale, gift, or devise. Un-
divided profits invested in real estate, machhiery, or raw
material for the purpose of being manufactured are in-
vestments in which the stockholders are interested, and
when such profits are actually appropriated to the pay-
ment of the debts of the corporation they serve to in-
crease the market value of the shares, whether held by
the original subscribers or by assignees." In so far as this
seems to uphold the right of Congress to tax without
apportionment a stockholder's interest in accumulated
earnings prior to dividend declared, it must be regarded
as overruled by Pollock v. Farmers'Loan & Trust Co., 158
U. S. 601, 627, 628, 637. Conceding Collector v. Hubbard
was inconsistent with the doctrine of that case, because
it sustained a direct tax upon property not apportioned
 EISNER v. MACOMBER.

189. HOLMES and DAY, JJ., dissenting.

among the States, the Government nevertheless insists

that the Sixteenth Amendment removed this obstacle, so
that now the Hubbard Case is authority for the power of
Congress to levy a tax on the stockholder's share in the
accumulated profits of the corporation even before division
by the declaration of a dividend of any kind. Manifestly
this argument must be rejected, since the Amendment
applies to income only, and what is called the stockholder's
share in the accumulated profits of the company is capital,
not income. As we have pointed out, a stockholder has
no individual share in accumulated profits, nor in any par-
ticular part of the assets of the corporation, prior to divi-
dend declared.
Thus, from every point of view, we are brought irre-
sistibly to the conclusion that neither under the Six-
teenth Amendment nor otherwise has Congress power to
tax without apportionment a true stock dividend made
lawfully and in good faith, or the accumulated profits
behind it, as income of the stockholder. The Revenue
Act of 1916, in so far as it imposes a tax upon the stock-
holder because of such dividend, contravenes the pro-
visions of Article I, § 2, cl. 3, and Article I, § 9, cl. 4, of the
Constitution, and to this extent is invalid notwithstand-
ing the Sixteenth Amendment.
Judgment affirmed.

MR. JusTicE HOLMES, dissenting.

I think that Toune v. Eisner, 245 U. S. 418, was right

in its reasoning and result and that on sound principles
the stock dividend was not income. But it was clearly
intimated in that ease that the construction of the statute
then before the Court might be different from that of the
Constitution. 245 U. S. 425. I think that the word "in-
comes" in the Sixteenth Amendment should be read in
 OCTOBER TERM, 1919.

BRANDEIS and CLARKE, JJ., dissenting. 252 U. S

"a sense most obvious to the common understanding at

the time of its adoption." Bishop v. State, 149 Indiana,
223, 230; State v. Butler, 70 Florida, 102, 133. For it was
for public adoption that it was proposed. McCulloch v.
Maryland, 4 Wheat. 316, 407. The known purpose of
this Amendment was to get rid of nice questions as to
what might be direct taxes, and I cannot doubt that most
people not lawyers would suppose when they voted for
it that they put a question like the present to rest. I am
of opinion that the Amendment justifies the tax. See
Tax Commissioner v. Putnam, 227 Massachusetts, 522,
532, 533.

MR. JUsTIc E DAY concurs in this opinion.

MR. JUSTICE BRAND.I.S, dissenting, delivered the fol-

lowing opinion, in which MR. JUSTICE CLARKE concurred.

Financiers, with the aid of lawyers, devised long ago

two different methods by which a corporation can, with-
out increasing its indebtedness, keep for corporate pu.
poses accumulated profits, and yet, in effect, distribute
these profits among its stockholders. One method is a
simple one. The capital stock is increased; the new stock
is paid up with the accumulated profits; and the new
shares of paid-up stock are then distributed among the
stockholders pro rata as a dividend. If the stockholder
prefers ready money to increasing his holding of the stock
in the company, he sells the new stock received as a divi-
dend. The other method i. slightly more complicated.
Arrangements are made for an increase of stock to be
offered to stockholders pro rata at par and, at the same
time, for the payment of a cash dividend equal to the
amount which the stockholder will be required to pay to
 EISNER v MACOMBEI.
189. BRANDEis and CLARKE, JJ., dissentin.

the company, if he avails himself of the right to subscribe

for his pro rata of the new stock. If tht stockholder takes
the new stock, as is expected, he may endorse the divi-
dend check received to the corporation and thus pay for
the new stock. In order to ensure that all the new stock
so offered will be taken, the price at which it is offered is
fixed far below what it is believed will be its market value.
If the stockholder prefers ready money to an increase of
his holdings of stock, he may sell his right to take new
stock pro rata, which is evidenced by an assignable in-
strument. In that event the purchaser of the rights re-
pays to the corporation, as the subscription price of the
new stock, an amount equal to that which it had paid as
a cash dividend to the stockholder.
Both of these methods of retaining accumulated profits
while in effect, distributing them as a dividend had been
in common use in the United States for many years prior
to the adoption of the Sixteenth Amendment. They were
recognized equivalents. Whether a particular corporation
employed one or the other method was determined some-
times by requirements of the law under which the corpora-
tion was organized; sometimes it was determined by
preferences of the individual officials of the corporation;
and sometimes by stock market conditions. Whichever
method Was employed the resultant distribution of the
new stock was commonly referred to as a stock dividend.
How these two methods have been employed may be il-
lustrated by the action in this respect (as reported in
Moodys Manual, 1918 Industrial, and the Commercial
and Financial Chronicle), of some of the Stafidard Oil
companies, since the disintegration pursuant to the de-
cision of this court in 1911. Standard Oil Co. v. United
States, 221 U. S. 1.
(a) Standard Oil Co. (of Indiana), an Indiana cor-
poration. It had on.December 31, 1911, $1,000,000 cap-
ital stock (all common), and a large surplus. On May 15,
 OCTOBER TERM, 1919.

BRANDEsm and CLARKE, JJ., dissenting. 252 U. S.

1912, it increased its capital stock to $30,000,000, and

paid a simple stock dividend of 2900 per cent. in stock.1
(b) Standard Oil Co. (of Nebraska), a Nebraska cor-
poration. If had on December 31, 1911; $600,000 capital
stock (all common), and a substantial surplus. On April 15,
1912, it paid a simple stock dividend of 33 1/3 per cent.,
increasing the outstanding capital to $800,000. During
the calendar year 1912 it paid cash dividends aggregating
20 per cent.; but it earned considerably more, and had at
the close of the year again a substantial surplus. On
June 20, 1913, it declared a further stock dividend of 25
per cent., thus increasing the capital to $1,000,000.2
(c) The Standard Oil Co. (of Kentucky), a Kentucky
corporation. It had on December 31, 1913, $1,000,000
capital stock (all common), and $3,701,710 surplus. Of
this surplus $902,457 had been earned during the calendar
year 1913, the net profits of that year having been $1,002,-
457 and the dividends paid only $100,000 (10 per cent.).
On December 22, 1913, a cash dividend of $200 per share
was declared payable on February 14, 1914, to stock-
holders of record January 31, 1914; and these stockholders
were offered the right to subscribe for an equal amount of
new stock at par and to apply the cash dividend in pay-
ment therefor. The outstanding stock was thus in-
creased to $3,000,000. During the calendar years 1914,
1915 and 1916, quarterly dividends were paid on this
stock at an annual rate of between 15 per cent. and 20 per
cent., but the company's surplus increased by $2,347,614,
so that on December 31, 1916, it had a large surplus over
its $3,000,000 capital stock. On December 15, 1916, the
company issued a circular to the stockholders, saying:
"The company's business for this year has shown a
I Moodys, p. 1544; Commercial and Financial Chronicle, Vol. 94,
p. 831; Vol. 98, pp. 1005, 1076.
' Moodys, p. 1548; Commercial and Financial Chronicle, Vol. 94,
p. 771; Vol. 96, p. 1428; Vol. 97, p. 1434; Vol. 98, p. 1541.
 EISNER v. MACOMBER.

189. BRANDmis and CLARKm, JJ., dissenting.

very good increase in volume and a proportionate in-

crease in profits, and it is estimated that by Jan. 1, 1917,
the company will have a surplus of over $4,000,000. The
board feels justified in stating that if the proposition to
increase the capital stock is acted on favorably, it will be
proper in the near future to declare i cash dividend of
100%; and to allow the stockholders the privilege pro
rata according to their holdings, to purchase the new
stock at par, the plan being to allow the stockholders, if
they desire, to use their cash dividend to pay for the new
stock."
The increase of stock was voted. The company then
paid a cash dividend of 100 per cent., payable May 1,
1917, again offering to such stockholders the right to sub-
scribe for an equal amount of new stock at par and to
apply the cash dividend in payment therefor.
Moodys Manual, describing the transaction with ex-
actness, says first that the stock was increased from
$3,000,000 to $6,000,000, "a cash dividend of 100%,
payable May 1, 1917, being exchanged for one share of
new stock, the equivalent of a 100% stock dividend." But
later in the report giving, as customary in the Manual,
the dividend record of the company, the Manual says:
"A stock dividend of 200% was paid Feb. 14, 1914, and
one of 100% on May 1, 1917." And in reporting specif-
ically the income account of the company for a series of
years ending December 31, covering net profits, dividends
paid and surplus for the year, it gives, as the aggregate of
dividends for the year 1917, $660,000; (which was the
aggregate paid on the quarterly cash dividend-5 per
cent. January and April; 6 per cent. July and October);
and adds in a note: "In addition a stock dividend of 100%
was paid during the year." 1 The Wall Street Journal of
Moodys, p. 1547; Commercial and Financial Chronicle, Vol. 97,
pp. 1589, 1827, 1903; Vol. 98, pp. 76, 457; Vol. 103, p. 2348. Poor's
Manual of Industrials (1918), p. 2240, in giving the "Comparative
 OCTOBER TERM, 1919.

BRANmps and CLARKE, JJ., dissenting. 252 U. S.

May 2, 1917, p. 2, quotes the 1917 "High" price for Stand-

ard Oil of Kentucky as "375 Ex. Stock Dividend."
It thus appears that among financiers and investors the
distribution of the stock by whichever method effected
is called a stock dividend; that the two methods by which
accumulated profits are legally retained for corporate
purposes and at the same time distributed as dividends
are recognized by them to be equivalents; and that the
financial results to the corporation and to the stockholders
of the two methods are substantially the same--unless a
difference results from the application of the federal in-
come tax law.
Mrs. Macomber, a citizen and resident of New York,
was, in the year 1916, a stockholder in the Standard Oil
Company (of California), a corporation organized under
the laws of California and having its principal place of
business in that State. During that year she received
from the company a stock dividend representing profits
earned since March 1, 1913. The dividend was paid by
direct issue of the stock to her according to the simple
method described above, pursued also by the Indiana and
Nebraska companies. In 1917 she was taxed under the
federal law on the stock dividend so received at its par
value of $100 a share, as income received during the year
1916. Such a stock dividend is income as distinguished
from capital both under the law of New York and under
the law of California; because in both States every divi-
dend representing profits is deemed to be income whether
paid in cash or in stock. It had been so held in New York,
where the question arose as between life-tenant and re-
mainderman, Lowry v: Farmers' Loan & Trust Co., 172 N.
Y. 137; Matter of Osborne, 209 N. Y. 450; and also, where
the question arose in matters of taxation. People v. Glynn,
Income Account" of the company describes the 1914 dividend as
"Stock Dividend paid (200%)-$2,000,000"; and describes the 1917
dividend as "$3,000,000 special cash dividend."
 EISNER v., MACOMBER.

189. BRaNDEIs and CrAxE, JJ., dissenting.

130 App. Div. 332; 198 N. Y. 605. It has been so held

in California, where the question appears to have arisen
only in controversies between life-tenant and remainder-
man. Estate of DuLfill, 58 Cal. Dec. 97; 180 California,
748.
It is conceded that if the stock dividend paid to Mrs.
Macomber had been made by the more complicated method
pursued by the Standard Oil Company of Kentucky, that
is, issuing rights to take new stock pro rata and paying to
each stockholder simultaneously a dividend in cash suf-
ficient in amount to enable him to pay for this pro rata
of new stock to be purchased-the dividend so paid to
him would have been taxable as income, whether he re-
tained the cash or whether he returned it to the corpora-
tion in payment for his pro rata of new stock. But it is
contended that, because the simple method was adopted
of having the new stock issued direct to the stockholders
as paid-up stock, the new stock is not to be deemed in-
come, whether she retained itor converted it into cash by
sale. If such a different result can flow merely from the
difference in the method pursued, it must be because Con-
gress is without power to tax as income of the stockholder
either the stock received under the latter method or the
proceeds of its sale; for Congress has, by the provisions in
the Revenue Act of 1916, expressly declared its purpose
to make stock dividends, by whichever method paid,
taxable as income.
The Sixteenth Aminendment proclaimed February 25,
1913, declares:
"The Congress shall have power to lay and collect taxes
on incomes, from whatever source derived, without ap-
portionment among the several States, and without re-
gard to any eensus or enumeration."
.The Revenue Act of September 8, 1916, c. 463, 39 Stat.
756, 757, provided:
"That the term 'dividends' as used in this title shall
 OCTOBER TERM, 1919.

BRDEIS and CLARKE, JJ., dissenting. 252 U. S.

be held to mean any distribution made or ordered to be

made by a corporation, . . . out of its earnings or
profits accrued since March first, nineteen hundred and
thirteen, and payable to its shareholders, whether in
cash or in stock of the corporation . . . which
stock dividend shall be considered income, to the amount
of its cash value."
Hitherto powers conferred upon Congress by the Con-
stitution have been liberally construed, and have been
held to extend to every means appropriate to attain the
end sought. In determining the scope of the power the
substance of the transaction, not its form has been re-
garded. Martin v. Hunter, 1 Wheat. 304, 326; McCulloch
v. Maryland, 4 Wheat. 316, 407, 415; Brown v. Mary-
land, 12 Wheat. 419, 446; Craig v. Missouri, 4 Pet. 410,
433; Jarrolt v. Moberly, 103 U. S. 580, 585, 587; Legal
Tender Case, 110 U. S. 421, 444; Burrow-Giles Lithographic
Co. v. Sarony, 111 U. S. 53, 58; United States v. Realty
Co., 163 U. S. 427, 440, 441, 442; South Carolinav. United
States, 199 U. S. 437, 448-9. Is there anything in the
phraseology of the Sixteenth Amendment or in the nature
of corporate dividends which should lead to a departure
from these rules of construction and compel this court to
hold, that Congress is powerless to prevent a result so ex-
traordinary as that here contended for by the stockholder?
First: The term "income" when applied to the invest-
ment of the stockholder in a corporation, had, before the
adoption of the Sixteenth Amendment been commonly
understood to mean the returns from time to time received
by the stockholder from gains or earnings of the corpora-
tion. A dividend received by a stockholder from a corpora-
tion may be either in distribution of capital assets or in dis-
tribution of profits. Whether it is the one or the other is
in no way affected by the medium in which it is paid, nor
by the method or means through qhich the particular
thing distributed as a dividend was procured. If the
 EISNER v. MACOMBER.

189. BRANDEIs and CLARKE, JJ., dissenting.

dividend is declared payable in cash, the money with

which to pay it is ordinarily taken from surplus cash in
the treasury. But (if there are profits legally available
for distribution and the law under which the company
was incorporated so permits) the company may raise the
money by discounting negotiable paper; or by selling
bonds, scrip or stock of another corporation then in the
treasury; or by selling its own bonds, scrip or stock then
in the treasury; or by selling its own bonds, scrip or
stock issued expressly for that purpose. How the money
shall be raised is wholly a matter of financial manage-
ment. The manner in which it is raised in no way affects
the question whether the dividend received by the stock-
holder is income or capital; nor can it conceivably affect
the question whether it is taxable as income.
Likewise whether a dividend declared payable from
profits shall be paid in cash or in some other medium is
also wholly a matter of financial management. If some
other medium is decided upon, it is also wholly a question
of financial management whether the distribution shall be,
for instance, in bonds, scrip or stock of another corporation
or in issues of its own. And if the dividend is paid in its
own issues, why should there be a difference in result de-
pendent upon' whether the distribution was made from
such securities then in the treasury or from others to be
created and issued by the company expressly for that pur-
pose? So far as the distribution may be made from its
own issues of bonds, or preferred stock created expressly
for the purpose, it clearly would make no difference in the
decision of the question whether the dividend was a dis-
tribution of profits, that the securities had to be created
expressly for the purpose of distribution. If a dividend
paid in securities of that nature represents a distribution
of profits Congress may, of course, tax it as income of the
stockholder. Is the result different where the security
distributed is common stock?
 OCTOBER TERM, 1919.

BRANDEiS and CLARKE, JJ., dissenting. 252 U. S.

Suppose that a corporation having power to buy and

sell its own stock, purchases, in the interval between its
regular dividend dates, with monies derived from current
profits, some of its own common stock as a temporary
investment, intending at the time of purchase to sell it
before the next dividend date and to use the proceeds in
paying dividends, but later, deeming it inadvisable either
to sell this stock or to raise by borrowing the money nec-
essary to pay the regular dividend in cash, declares a
dividend payable in this stock :-Can anyone doubt that
in such a case the dividend in common stock would be
ipcome of the stockholder and constitutionally taxable
as such? See Green v. Bissell, 79 Connecticut, 547; Le-
land v. Hayden, 102 Nassachusetts, 542. And would it
not likewise be income of the stockholder subject .to taxa-
tion if the purpose of the company in buying the stock so
distributed had been from the beginning to take it off the
market and distribute it among the stockholders as a
dividend, and the company actually did so? And pro-
ceeding a short step further: Suppose that a corporation
decided to capitalize some of its accumulated profits by
creating additional common stock and selling the same to
raise working capital, but after the stock has been issued
and certificates therefor are delivered to the bankers for
sale, general financial conditions make it undesirable to
market the stock and the company concludes that it is
wiger to husband, for working capital, the cash which it
had intended to use in paying stockholders a dividend,
and, instead, to pay the dividend in the common stock
which it had planned to sell: Would not the stock so dis-
tributed be a distribution of profits-and, hence, when
received, be income of the stockholder and taxable as
such? If this be conceded, why should it not be equally
income of the stockholder, and taxable as such, if the
common stock created by capitalizing profits, had been
originally created for the express purpose of being dis-
 EISNER v. MACOMBER.

189. BRANDEIS and CLARKE, JJ., dissenting.

tributed as a dividend to the stockholder who afterwards

received it?
Second: It has been said that a dividend payable in
bonds or preferred stock created for the purpose of dis-
tributing profits may be income and taxable as such, but
that the case is different where the distribution is in com-
mon stock created for that purpose. Various reasons- are
assigned for making this distinction. One is that the
proportion of the stockholder's ownership to the aggregate
number of the shares of the company is not changed by
the distribution., But that is equally true where the divi.-
dend is paid in itsbonds or in its preferred stock. Further-
more, neither maintenance nor change in the proportion-
ate ownership of a stockholder in a corporation has any
bearing upon the question here involved. Another reason
assigned is that the value of the old stock held is reduced
approximately by the value of the new stock received, so
that the stockholder after receipt of the stock dividend
has no more than he had before it was paid. That is
equally true whether the dividend be paid in cash or in
other property, for instance, bonds, scrip or preferred
stock of the company. The payment from 'profits of a
large cash dividend, and even a small one, customarily
lowers the then market value of stock because the undi-
vided property represented by each share has been cor-
respondingly reduced. The argument which appears to
be most strongly urged for the stockholders is, that when
a stock dividend is made, no portion of the assets of the
company is thereby segregated for the stockholder. But
does the issUe of new bonds or of preferred stock created
for use as a dividend result in any segregation of assets for
the stockholder? In each case he receives a piece of paper
which entitles him to certain rights in the undivid d
property: Clearly segregation of assets in a physical
sense is not an essential of income. The year's gains of a
partner are taxable as income, although there, likewise, no
 OCTOBER TERM, 1919.

BRumxs and CLARKE, JJ., dissenting. 252 U. S.

segregation of his share in the gains from that of his part-

ners is had.
The objection that there has been no segregation is
presented also in another form. It is argued that until
there is a segregation, the stockholder cannot know
whether he has really received gains; since the gains may
be invested in. plant or merchandise or other property and
perhaps be later lost. But is not this equally true of the
share of a partner in the year's profits of the firm or, in-
deed, of the profits of the individual who is engaged in
business alone? And is it not true, also, when dividends
are paid in cash? The gains of a business, whether con-
ducted by an individual, by a firm or' by a corporation,
are ordinarily reinvested in large part. Many a cash
dividend honestly declared as a distribution of profits,
proves later to have been paid out of capital, because
errors in forecast prevent -correct ascertainment of values.
Until a business adventure has been completely liqui-
dated, it can never be determined with certainty whether
there have been profits unless the returns have at least
exceeded the capital originally invested. Business men,
dealing with the problem practically, fix necessarily peri-
ods and rules for determining whether there -have been-
net profits-that is income or gains. They protect thbm-
selves from being seriously misled by adopting a system
of depreciation charges and reserves. Then, they act upon
their own determination, whether profits have been made.
Congress in legislating has wisely adopted their practices
as its own rules of action.
Third: The Government urges that it would have been
within the power of Congress to have taxed as income of
the stockholder his pro rata share of undistributed profits
earned, even if no stock dividend representing it had been
paid. Strong reasons may be assigned for such a view.
See Collector v. Hubbard, 12 Wall. 1. The undivided share
of a partner in the year's undistributed profits of his firm
 EISNER v. MACOMBER.

189. BRANDEIS and CT-A x , JJ., dissenting.

is taxable as income of the partner, although the share in

the gain is not evidenced by any action taken by the firm.
Why may not the stockholder's interest in the gains of
the company? The law finds no difficulty in disregarding
the corporate fiction whenever that is deemed necessary
to attain a just result. Linn & Lane Timber Co. v. United
States, 236 U. S. 574; see Morawetz on Corporations, 2d
ed., §§ 227-231; Cook on Corporations, 7th ed., §§ 663,
664. The stockholder's interest in the property of the
corporation differs, not fundamentally but in form only,
from the interest of a partner in the property of the firm.
There is much authority for the proposition that, under
our law, a partnership or joint stock company is just as
distinct and palpable an entity in the idea of the law, as
distinguished from the individuals composing it, as is a
corporation. 1 No reason appears, why Congress, in leg-
islating under a grant of power so comprehensive as that
authorizing the levy of an income tax, should be limited
by the particular view of the relation of the stockholder
to the corporation and its property which may, in the ab-
sence of legislation, have been taken by this court. But
we have no occasion to decide the question whether Con-
gress might have taxed to the stockholder his undivided
share of the corporation's earnings. For Congress has in
this act limited the income tax to that share of the stock-
holder in the earnings which is, in effect, distributed by
means of the stock dividend paid. In other words, to
render the stockholder taxable there must be both earn-
ings made and a dividend paid. Neither earnings without
dividend-nor a dividend without earnings-subjects the

'See "Some Judicial Myths," by Francis M. Burdick, 22 Harvard

Law Review, 393, 394-396; The Firm as a Legal Person, by. William
Hamilton Cowles, 57 Cent. L. J., 343, 348; The Separate Estates of
Non-Bankrupt Partners, by J. D. Brannan, 20 Harvard Law Review,
589-592; compare Harvard Law Review, Vol. 7, p. 426; Vol. 14, p. 222;
Vol. 17; p. 194.
 OCTOBER TERM, 1919.

BRAimEis and CLARxE, JJ., dissenting. 252 U. S.

stockholder to taxation under the Revenue Act of 1916.

Fourth: The equivalency of all dividends representing
profits, whether paid in cash or in stock, is so complete that
serious question of the taxability of stock dividends
would probably never have been made, if Congress had
undertaken to tax only those dividends which represented
profits earned during theyear in which the dividend was
paid or in the year preceding. But this court, construing
liberally not only the constitutional grant of power but
also the Revenue, Act of 1913, held that Congress might
tax,, and had taxed, to the stockholder dividends received
during the year, although earned by the company long
before; and even prior to the adoption of the Sixteenth
Amendment. Lynch v. Honby, 247 U. S. 339.1 That
rule, if indiscriminatingly applied to all stock dividends
representing profits earned, might, in view of corporate
practice, have worked considerable hardship, and have
raised serious questions. Many corporations, without
legally capitalizing any part of their profits, had assigned
definitely some part or all of the annual balances remain-
ing after paying the usual cash dividends, to the uses. to
which permanent capital is ordinarily applied. Some of
the corporations doing this, transferred such balances on
their books to "Surplus" account,--distinguishing be-
tween such permanent "Surplus" and the "Undivided
Profits" account. Other corporations, without this
formality, had assumed that the annual accumulating
balances carried as undistributed profits were to be treated
as capital permanentty invested in the business. And
still others, without definite assumption of any kind, had
'The hardship supposed to have resulted from such a decision has
been removed in the Revenue Act of 1916, as amended, by providing
in § 31 (b) that such cash dividends shall thereafter be exempt from
taxation, if before they are made, all earnings made since February 28,
1913, shall have been distributed. Act of October 3, 1917, c. 63, § 1211,
40 Stat. 338; Act of February 24, 1919, c. 18, § 201 (b), 40 Stat. 1059.
 EISNER v. MACOMBER.

189. BwA'nEw and CLARKE, JJ., dissenting.

so used undivided profits for capital purposes. To have

made the revenue law apply retroactively so as to reach
such accumulated profits, if and whenever it should be
deemed desirable to capitalize them legally by the issue
of additional stock distributed as a dividend to stock-
holders, would have worked great injustice. Congress
endeavored in the Revenue Act of 1916 to guard against
any serious hardship which might otherwise have arisen
from making taxable stock dividends representing ac-
cumulated profits. It did not limit the taxability to stock
dividends representing profits earned within the tax year
or in the year preceding; but it did limit taxability to
such dividends representing profits earned since March
1, 1913. Thereby stockholders were given notice that
their share also in undistributed profits accumulating
thereafter was at some time to be taxed as income. And
Congress sought by § 3 to discourage the postponement
of distribution for the illegitimate purpose of evading lia-
bility to surtaxes.
Fifth: The decision of this court, that earnings made
before the adoption of the Sixteenth Amendment but
paid out in cash dividend after its adoption were taxable
as income of the stockholder, involved a very liberal con-
struction of the Amendment. To hold now that earnings
both made and paid out after the adoption of the Six-
teenth Amendment cannot be taxed as income of the
stockholder, if paid in the form of a stock dividend,
involves an exceeding narrow construction of it. As said
by Mr. Chief Justice Marshall in Brown v. Maryland,
12 Wheat. 419, 446: "To construe the power so as to
impair its efficacy, would tend to defeat an object, in
the attainment of which the American public took, and
justly took, that strong interest which arose from. a full
conviction of its necessity."
No decision heretofore rendered by this court requires
us to hold that Congress, in providing for the taxation of
 OCTOBER TERM, 1919.

BRANDEIs and CLARxE, JJ., dissenting., 252 U. S.

stock dividends, exceeded the power conferred upon it by

the Sixteenth Amendment. The two cases mainly relied
upon to show that thiswas beyond the power of Congress
are Towne v. Eisner, 245 U. S. 418, which involved a
question not of constitutional power but of statutory con-
struction, and Gibbons v. Mahon, 136 U. S. 549, which
involved a question arising between life-tenant and re-
mainderman. So far as concerns Towne v. Eisner, we
have only to bear in mind what was there said (p. 425):
"But it is not necessarily true that income means the
same thing in the Constitution and the [an] act." I Gib-
bons v. Mahon is even less an authority for a narrow
construction of the power to tax incomes conferred by the
Sixteenth Amendment. In that case the court was re-
quired to determine how, in the ,dministration of an es-
tate in the District of Columbia, a stock dividend, repre-
senting profits, received after the decedent's death, should
be disposed of as between life-tenant and remainderman.
Tfie question was in essence: What shall the intention of
the testator be presumed to have been? On this question
there was great diversity of opinion and practice in the
courts of English-speaking countries. Three well-defined
rules were then competing for acceptance; two of these
involve an arbitrary rule of distribution, the third equi-
table apportionment. See Cook on Corportions, 7th ed.,
§§ 552-558.
1. The so-called English rule, declared in 1799, by
Brander v. Brander, 4 Ves. Jr. 800, that a dividend rep-

ICompare Rugg, C. J., in Tax Commissioner v. Putnam, 227 Massa-

chusetts, 522, 533: "However strong such an argument might be when
urged as to the interpretation of a statute, it is not of prevailing force
as to the broad considerations involved in the interpretation of an
amendment to the Constitution adopted under the conditions preced-
ing and attendant upon the ratification of the Forty-fourth Amend-
ment."
 EISNER v. MACOMBER.

189. BRArmws and CLARKE, JJ., dissenting.

resenting profits, whether in cash, stock or other property,

belongs to the life-tenant if it was a regular or ordinary
dividend, and belongs to the remainderman if it was an
extraordinary dividend.
2. The so-called Massachusetts rule, deelared in 1868
by Minot v. Paine, 99 Massachusetts, 101, that a dividend
representing profits, whether regular, ordinary or extraor-
dinary, ifin cash belongs to the life-tenant, and if in stock
belongs to the remainderman.
3. The so-called Pennsylvania rule declared in 1857
by Earp's Appeal, 28 Pa. St. 368, that where a stock divi-
dend is paid, the court shall inquire into the circumstances
under which the fund had been earned and accumulated
out of which the dividend, whether a regular, an ordinary
or an extraordinary one, was paid. If it finds that the
stock dividend was paid out of profits earned since the
decedent's death, the bto0k dividend belongs to the life-
tenant; if the court finds that the stock dividend was
paid from capital or from profits earned before the dece-
dent's death, the stock dividend belongs to the remainder-
man.
This court adopted in Gibbons v. Mahon as the rule of
administration for the District of Columbia the so-called
Massachusetts rule, the opinion being delivered in 1890
by Mr. Justice Gray. Since then the same question has
come up for decision in many of the States. The so-
called Massachusetts rule, although approved by this
court, has found favor in only a few States. The so-called
Pennsylvania rule, on the other hand, has been adopted
since by so many of the States (including New York and
California), that it has come to be known as the "Ameri-
can Rule." Whether, in view of these facts and the prac-
tical results of the operation of the two rules as shown by
the experience of the thirty years which have elapsed since
the decision in Gibbons v. Mahon, it might be desirable
for this court to reconsider the question there decided, as
 OCTOBER TERM, 1919.

BRANDEIS and CLARKE, JJ., dissenting. 252 U. S.

some other courts have done (see 29 Harvard Law Review,

551), we have no occasion to consider in this case. For,
as this court there pointed out (p. 560), the question in-
volved was one" between the owners of successive interests
in particular shares," and not, as in Bailey v. Railroad Co.,
22 Wall. 604, a question "between the corporation and
the government, and [which] depended upon the terms
of a statute carefully framed to prevent corporations from
evading payment of the tax upon their earnings."
We have, however, not merely argument, we have ex-
amples which should convince us that "there is no inher-
ent, necessary and immutable reason why stock dividends
should always be treatedi'as capital." Tax Commissioner
v. Putnam, 227 Massachusetts, 522, 533. The Supreme
Judicial Court of Massachusetts hs steadfastly adhered,
despite ever-renewed protest, to the rule that every stock
dividend is, as between life-tenant and remainderman,
capital and not income. But in construing the Massa-
chusetts Income Tax Amendment, which is substantially
identical with the Federal Amendment, that court held
th at the legislature was thereby empowered to levy an
income tax upon stock dividends representing profits.
The courts of England have, with some relaxation, ad-
hered to their rule that every extraordinary dividend is,
as between life-tenant and remainderman, to be deemed
capital. But in 1913 the Judicial Committee of the Privy
Council held that a stock dividend representing accumu-
lated profits was taxable like an ordinary cash dividend,
Swan Brewery Co., Ltd., v. Rex, [1914] A. C. 231. In dis-
missing the appeal these words of the Chief Justice of
the Supreme Court of Western Australia were quoted
(p. 236), which show that the facts involved were identical
with those in the case At bar: "Had the company distrib-
uted the 101,450L among the shareholders and had the
shareholders repaid such sums to the company as the
price of the 81,160 new shares, the duty on the 101,450.
 EISNER v. MACOMBER.

189. BRANDis and CLARKE, JJ., dissenting.

would clearly have been payable. Is not this virtually

the effect of what was actually done? I think it is."
Sixth: If stock dividends representing profits are held
exempt from taxation under the Sixteenth Amendment,
the owners of the most successful businesses in America
will, as the facts in this case illustrate, be able to escape
taxation on a large part of what is actually their income.
So far as their profits are represented by stock received as
dividends they will pay these taxes not upon their income
but only upon the income of their income. That such a re-
sult was intended by the people of the United States when
adopting the Sixteenth Amendment is inconceivable.
Our sole duty is to ascertain their intent as therein ex-
pressed.' In terse, comprehensive language befitting the
Constitution, they empowered Congress "to lay and col-
lect taxes on incomes, from whatever source derived."
They intended to include thereby everything which by
reasonable understanding can fairly be regarded as in-
come. That stock dividends representing profits are so
regarded, not only by the plain people but by investors
and financiers, and by most of the courts of the country,
is shown, beyond peradventure, by their acts and by their
utterances. It seems to me clear, therefore, that Congress
possesses the power which it exercised to make dividends
representing profits, taxable as income, whether the me-
dium in which the dividend is paid be cash or stock, and
that it may define, as it has done, what dividends refre-

1 Compare Rugg, C. J., Tax Commissioner v. Putnam, 227 MassE chu-

setts, 522, 524: "It is a grant from the sovereign people and not th3 ex-
ercise of a delegated power. It is a statement of general principle- and
not a specification of details. Amendments to such a charter of go''ern-
ment ought to be construed in the same spirit and according to the
same rules as the original. It is to be interpreted as the Constitution
of a State and not as a statute or an ordinary piece of legislation. Its
words must be given a construction adapted to carry into effe t its
purpose."
 OCTOBER TERM, 1919.,

BRANDEIS and CLARKE, JJ., dissenting. 252 U. S.

senting profits shall be deemed income. It surely is not

clear that the enactment exceeds the power granted by
the Sixteenth Amendment. And, as this court has so
often said, the high prerogative of declaring an act of
Congress invalid, should never be exercised except in a
clear case. 1 "It is but a decent respect due to the wisdom,
the integrity and the patriotism of the legislative body,
by which any law is passed, to presume in favor of its
validity, until its violation of the Constitution is proved
beyond all reasonable doubt." Ogden v. Saunders, 12
Wheat. 213, 270.

MR. JUSTICE CLARKE concurs in this opinion.

I "It is our duty, when required in the regular course of judicial

proceedings, to declare an act of Congress void if not within the legis-
lative power of the United States; but this declaration should never be
made except in a clear case. Every possible presumption is in favor
of the validity of a statute, and this continues until the contrary is
shown beyond a rational doubt. One branch of the government can-
not encroach on the domain of another without danger. The safety
of our institutions depends in no small degree on a strict observance of
'his salutary rule." Sinking-Fund Cases, 99 1f. S. 700, 718 (1878).
See also Legal Tender Cases, 12 Wall. 457, 531 (1870); Trade-Mark
Cases, 100 U. S. 82, 96 (1879). See American Doctrine of Constitu-
tional Law, by James B. Thayer, 7 Harvard Law Review, 129, 142.
"With the exception of the extraordinary decree rendered in the
Dred Scott Case, . . . all of the acts or the portions of the acts
of Congress invalidated by the courts before 1868 related to the or-
ganization of courts. Denying the power of Congress to make notes
legal tender seems to be the first departure from this rule." Haines,
American Doctrine of Judicial Supremacy, p. 288. The first legal ten-
der decision was overruled in part two years later (1870), Legal Tender
Cases, 12 Wall. 457; and again in 1883, Legal Tender Case, 110 U. S. 421.