Franklin Hugh Money

Anne Scheiber spent twenty-three years reading other people's tax returns for the United States government, and in twenty-three years she was never promoted once.

She had a law degree. Her work was not in question. She retired in nineteen forty-four, at fifty-one, having never earned more than four thousand dollars in a year.

She died in January of nineteen ninety-five, at a hundred and one. Her estate was twenty-two million dollars.

This episode is about how the second number came out of the first. It teaches four things: dividend reinvestment, what a stock split does to a position you already own, why an unrealized gain is the cheapest money in the tax code, and what happens to fifty years of gains when the person holding them dies and leaves them to a charity.

Start with the room she worked in.

She was born in New York in eighteen ninety-three, one of a large family of Jewish immigrants. She trained as a bookkeeper. She put herself through a law degree at George Washington University at a time when very few women held one, and then she took a low-level auditing job at what was then the Bureau of Internal Revenue and stayed in it for the rest of her working life.

The job was this: read the returns of people with money, and check the arithmetic.

So for twenty-three years she looked directly at the private accounts of wealthy Americans. Not a summary of them. The actual documents. She saw what they owned, what it paid them, and which line of the return the money arrived on.

What she learned there is not complicated, and it is the whole lesson. The wealthy people whose returns crossed her desk were not, for the most part, being paid a salary. They owned pieces of companies, and the companies sent them money for owning them.

A salary is taxed the year you earn it, in full, and then it is gone. A share of stock keeps paying, and the gain on the share itself is not taxed at all until you sell it. She was in a position to observe the difference every single day, in numbers, for twenty-three years, while receiving a salary and no promotions.

Her lawyer, Benjamin Clark, said later that she believed she was held back because she was a woman. She was also a Jew in the federal civil service of the nineteen twenties and thirties. She did not leave a statement about that part. She left an estate, and the estate says a great deal.

She had tried the market once before, in the depths of the Depression, and the reported account is that she handed a large part of her savings to a younger brother who was starting out as a broker, and that his firm failed and took the money with it. Whether the loss was total is a question we will come back to, because it turns out to matter.

In nineteen forty-four she retired, opened an account at Merrill Lynch, and started buying.

She bought what she had spent two decades reading about. Brand-name American companies whose products she could name and whose returns she had audited. Coca-Cola. Schering-Plough. Paramount. Eventually more than a hundred positions.

Then she did the two things that actually built the twenty-two million dollars, and both of them are boring.

The first: she reinvested every dividend. A dividend is a cash payment a company sends its shareholders out of profits. Most people spend it. Every dividend she received went back into buying more shares of the company that paid it, which meant the next dividend was larger, which bought more shares again. That is dividend reinvestment. It is the difference between a portfolio that pays you and a portfolio that grows itself, and it requires no skill whatsoever — only the decision not to touch the money.

The second: she almost never sold.

Understand what that does. When a stock you own goes up and you have not sold it, the profit is called an unrealized gain, and the tax code does not tax it. Not that year, not the next year, not ever, until you sell. The moment you sell, the gain is realized and the government takes its share, and whatever it takes is money that stops compounding for you.

A stock split does not change this. When a company splits its stock two-for-one, you own twice as many shares at half the price — the same position, cut into smaller pieces. No sale, no tax, and every share still collects a dividend. Her position in Schering-Plough, bought around nineteen fifty, split so many times over forty-five years that a purchase of roughly ten thousand dollars became millions without her signing a single sell order.

Everything else in her life was arranged to protect that arithmetic.

She lived alone in a rent-controlled studio apartment on the West Side of Manhattan for decades and never changed the furniture. She wore clothes that were decades old. She read annual reports. She monitored her holdings. Her attorney and her broker at Merrill, William Fay, appear to have been more or less the only people who knew her.

Clark's description of her is worth quoting exactly, because it is not a flattering one and it belongs in the record. "She was the loneliest person. I never saw her smile."

She left fifty thousand dollars to a niece and a hundred thousand dollars to the American Society for the Technion, in Israel.

Everything else — the whole twenty-two million — went to Yeshiva University, to fund scholarships for Jewish women. Needy students at Stern College for Women, and women at the Albert Einstein College of Medicine.

She had no connection to the school. She had never attended it. Nobody in the administration had heard of her. The university's president, Norman Lamm, on being told: "Elation would be an understatement. At first I didn't believe it."

Clark's account of why she chose it is direct. She wanted the money to help other women get past the discrimination she ran into.

She was never promoted, and she paid for the medical educations of women who will never meet her.

Now the assessment, which requires taking the legend apart.

The popular version of this story is that Anne Scheiber turned five thousand dollars into twenty-two million by picking stocks better than almost anyone alive. That version has appeared in print for thirty years and it does not survive contact with her own paperwork.

Her executor is reported to have put the starting figure closer to twenty thousand dollars than five. And by published accounts her tax return for nineteen thirty-six — eight years before the retirement she supposedly started from nothing — showed nine hundred dollars of dividend income, which implies she already held something on the order of twenty thousand dollars of stock while she was still working. The five-thousand-dollar figure, and the story of losing everything through her brother, are both softer than the retelling.

Run the compounding with the higher starting number and her annual return lands somewhere in the low teens rather than the high teens. Which is to say: she compounded at approximately the rate of the broad American stock market with dividends reinvested, possibly a bit above it, for fifty-one years.

That is a smaller claim about her stock picking and a much larger claim about everything else.

Because the market was available to everybody. What was not available to everybody was fifty-one years of never selling, never spending the dividend, and never needing the money. She did not beat the market. She simply stayed in it longer, and with less friction, than almost any investor of her century — and the friction she removed was mostly tax.

Which brings us to the last transaction of her life, and the reason a former auditor structured it the way she did.

Fifty years of gains sat in that portfolio, unrealized. Had she sold during her lifetime to give the money away, the sale would have triggered capital gains tax on nearly all of it, and the check to Yeshiva would have been meaningfully smaller.

She did not sell. And when a person dies holding stock, the tax code resets the value of that stock to whatever it is worth on the day of death, which wipes out the unrealized gain for income tax purposes completely. Half a century of appreciation, never taxed by anyone. That much would have been true regardless of who she left it to.

The charity did something different, and it is the part an auditor would have known cold. In nineteen ninety-five the federal estate tax exempted the first six hundred thousand dollars of an estate and took up to fifty-five percent of what was above it. On twenty-two million dollars, that is an enormous number. But a bequest to a qualified charity comes out of the estate in full, with no ceiling, before the tax is calculated.

So the estate tax was zero, the tax on fifty years of appreciation was zero, and the entire twenty-two million dollars arrived at Yeshiva intact.

She paid income tax on her dividends every year for fifty-one years, the same as anyone holding stock in a taxable account. On everything the holdings themselves gained, she paid nothing.

A woman the Bureau of Internal Revenue would not promote in twenty-three years spent the next fifty-one applying, to her own account, the one thing the job had taught her.

The last audit was hers. It came out zero.