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Law School Case Brief

Eisner v. Macomber - 252 U.S. 189, 40 S. Ct. 189 (1920)

Rule:

Income may be defined as the gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through a sale conversion of capital assets. 

Facts:

Plaintiff stockholder received certificates for additional shares issued by the corporation as stock dividends. Defendant United States treated those shares as income, and plaintiff paid a tax under protest on the same. Plaintiff brought an action against defendant to recover the tax contending that in imposing such a tax, the Revenue Act of September 8, 191 violated Article 1 of the Constitution, which required direct taxes to be apportioned according to population. The district court held in favor of plaintiff and defendant sought the court's review.

Issue:

Was the contested taxation without apportionment of plaintiff's stock dividend violative of Article 1 of the United States Constitution?

Answer:

Yes.

Conclusion:

The Court held that by treating the dividends as income, defendant failed to appraise correctly the force of the term "income" as the mere issue of a stock dividend made plaintiff no richer than before. Therefore,  Congress did not have the power to tax without apportionment a stock dividend made lawfully and in good faith, as income of the stockholder, and the Act failed as a contravention of Article 1 of the Constitution.

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