The U.S. Supreme Court case Eisner v. Macomber in 1919 revolved around the issue of whether stock dividends could be taxed as income under the Sixteenth Amendment to the Constitution, which allows Congress to levy an income tax without apportioning it among states or basing it on Census results. The court ruled that a pro-rata stock dividend was not taxable income because it did not constitute realized gain or profit but merely represented a change in form of capital investment; thus, such dividends were excluded from taxation under the federal income tax law at that time. This decision established what is known as "the realization requirement" for taxing purposes - meaning that taxpayers are only required to pay taxes when they actually realize gains from their investments.

In the dissenting opinion for Eisner v. Macomber, Justice Holmes argued that a stock dividend should be considered income and thus taxable under the Sixteenth Amendment. He contended that when a company issues a stock dividend, it is essentially transferring wealth to its shareholders in proportion to their existing holdings. This transfer of wealth increases the shareholder's control over corporate assets and therefore constitutes an economic gain or profit - which fits within his understanding of 'income'. Holmes also pointed out that if such dividends were not taxed, corporations could avoid taxation by issuing new shares instead of cash dividends. His interpretation was based on practical considerations rather than strict legal definitions; he believed tax laws should reflect economic realities rather than formalistic distinctions.