This section contains the nature of the case and procedural background.

Macomber (P) owned 2,200 share of stock in Standard Oil. The par value was $100. Standard had earned profits substantially in excess of the amounts paid out as dividends on the common stock. Those retained earnings were labeled as earned surplus. Dividends can only be paid from earned surplus. In 1916, Standard declared a 50% stock dividend. Thus, P got another 1,100 shares, and the earned surplus was capitalized as par value on the new stock issued. The market value before the dividend was about $360 and after the stock dividend, the price of each share fell to about $250. The price fell by 30%, and there was no significant wealth effect to P. The government sought to impose a tax based on the par value of the new shares rather than market value. The government wanted to tax 18.07 percent of the $100 times the 1,100 shares or $19,877.

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