Under the conditions of palladium-catalyzed formate reduction, the isomers isoindoline and indoline undergo distinct hydrogenation and dehydrogenation processes to form 4,5,6,7-tetrahydroisoindole and indole, respectively. In terms of resonance energy, the reduction of isoindoline is accompanied by a loss of aromaticity, whereas the dehydrogenation of indoline occurs with a gain in aromaticity. To rationalize why isoindoline and indoline, under the same conditions of palladium catalysis, form different products, we used density functional theory calculations to investigate the mechanisms of the two reaction pathways. Both processes are initiated through direct oxidative insertion (OxIn) of Pd(0) into the aliphatic C-H bond at the methylene group, followed by beta-hydride elimination to form the isoindole and indole. Because isoindole is much less stable relative to indole, it undergoes further hydrogenation on its benzene moiety to form the final product, 4,5,6,7-tetrahydroisoindole. Our theoretical findings rationalize the experimental observations.