Eisner V. Macomber - Aftermath

Aftermath

In any event, the success of investors in avoiding tax was short lived. The following year, the Court ruled that capital gains were income, and that they should be recognized as income when the stock was sold. In addition, the exception for stock dividends was narrowed by the Court in such cases as United States v. Phellis, 257 U.S. 156 (1921) (shares in a subsidiary corporation issued to stockholders in the parent corporation were taxable as income); Rockefeller v. United States 257 U.S. 176 (1921) and Cullinan v. Walker 262 U.S. 134 (1923) (increase in capital accumulated by corporations over time were taxable when shares are distributed to stockholders in a successor corporation).

In 1940 the Supreme Court departed from the realization concept described in Eisner v. Macomber when the Court held, in Helvering v. Bruun, 369 U.S. 461 (1940), that "severance" is not an element of realization. In Bruun, a taxpayer-landlord repossessed a property from a tenant—property that had been subject to a 99-year lease—after the tenant failed to pay rent and taxes. The lease had allowed for the tenant to construct a new building or other improvements. The tenant had removed the existing building and had built a new one. The value of the new building as of the date of repossession was $64,245.68. The government contended that the landlord realized a gain of $51,434.25, the difference between the value of the building at the date of repossession and the landlord's basis in the old building of $12,811.43. The landlord argued that there was no realization of the property because no transaction had occurred, and that the improvement of the property that created the gain was unseverable from the landlord's original capital. The Court ruled against the landlord, deciding that the landlord had realized a gain upon repossession of the property, and said that "severance" is no longer an element of realization.