Eisner V. Macomber - Dissents

Dissents

In the dissent, Justice Louis Brandeis took issue with the majority's interpretation of income. He argued the Sixteenth Amendment authorized Congress to tax “incomes, from whatever source derived”, and the authors of the amendment “intended to include thereby everything which by reasonable understanding can fairly be regarded as income”, and that “Congress possesses the power which it exercised to make dividends representing profits, taxable as income, whether the medium in which the dividend is paid be cash or stock, and that it may define, as it has done, what dividends representing profits shall be deemed income”.

He noted that in business circles, cash dividends and stock dividends were treated identically. In effect, he argued that a stock dividend is really a cash dividend, since it is really two-step affair, consisting of 1. a cash distribution, 2. subsequently used to purchase additional shares through the exercise of stock subscription rights. Brandeis saw no reason why two essentially identical transactions should be treated differently for tax purposes.

Justice Brandeis' effort to construct, or read in, a cash distribution was strained and unconvincing. The plain fact is that Mrs. Macomber did not receive, and could not have obtained, a cash payment from Standard Oil. Had she wished to substitute cash in an amount equivalent to the value of the stock dividend, she would have had to sell the dividend shares to other investors. No other cash source was made available. —Marvin Chirelstein, Federal Income Taxation, A Law Student's Guide