In the 1920 case New York Trust Company et al., as Executors of Purdy, v. Eisner, the U.S. Supreme Court was tasked with determining whether a stock dividend could be taxed as income under the Sixteenth Amendment to the Constitution. The court ruled that it could not because such dividends represented a mere rearrangement of capital and did not constitute realized gains or increase in wealth for shareholders. Justice Oliver Wendell Holmes Jr., writing for majority, famously noted that "a stock dividend really takes nothing from property, transfers nothing to it," and thus does not fall within Congress's power to tax income "from whatever source derived." This decision established an important precedent regarding taxation law in relation to corporate dividends.

In the dissenting opinion for New York Trust Company et al., v. Eisner, Justice Oliver Wendell Holmes Jr. disagreed with the majority's interpretation of the Sixteenth Amendment and its application to stock dividends. He argued that a tax on income derived from property should be considered valid even if it indirectly affects the underlying property value. According to him, a stock dividend represents an increase in wealth and thus constitutes taxable income under the Sixteenth Amendment which allows Congress to levy taxes on incomes without apportionment among states or regard to census data. He further criticized his colleagues' reliance on older case law that did not consider changes brought about by this amendment, stating their approach was too narrow and failed to adapt legal principles according to changing circumstances.