The U.S. Supreme Court case Towne v. Eisner in 1917 revolved around the issue of whether a stock dividend could be considered income for tax purposes under the Sixteenth Amendment to the Constitution, which allowed Congress to levy an income tax without apportioning it among states or basing it on Census results. The plaintiff, Towne, argued that his receipt of additional shares as a stock dividend from Standard Oil Company did not constitute taxable income because he had not sold or realized any gain from them; they merely represented a reorganization of his existing investment in the company. On appeal by Eisner, Collector of United States Internal Revenue for New York's Third District, who contended that such dividends were indeed taxable as income regardless if they were sold or not, Justice Holmes delivered the opinion for a unanimous court ruling in favor of Towne stating "a stock dividend really takes nothing from property and adds nothing to reachability by creditors." Thus establishing that unsold stock dividends are not subject to federal taxation.

In the dissenting opinion for Towne v. Eisner, Justice Holmes disagreed with the majority's interpretation of a stock dividend as not being income and therefore not taxable under the Sixteenth Amendment. He argued that such dividends do represent an increase in wealth for shareholders and should be considered income. According to him, when a company issues a stock dividend, it is essentially converting undistributed profits into capital; this increases each shareholder’s interest in the company without changing their proportional ownership stake. This increased value of shares held by shareholders due to issuance of additional shares from retained earnings was seen by Justice Holmes as realizable gain or profit which constitutes 'income' within meaning of tax laws and hence should be subject to taxation.