Not every

of what was done in the name of a stock dividend. dividend in stock is a stock dividend, Peabody v. Eisner, 247 U. S. 347; United States v. Phellis, 257 U. S. 156, nor is every stock dividend a dividend in stock, Harry A. Brown, 26 B. T. A. 901; cf. W. Q. Wright, 10 B. T. A. 806. Indeed a dividend declared in cash has been held to be in substance a tax-free stock dividend. United States v. Mellon, 279 Fed. 910; 281 Fed. 645; United States v. Davison, 1 Fed. (2d) 465; 9 Fed. (2d) 1022; Irving Trust Co. v. United States, 44 Fed. (2d) 246; cf. W. J. Hunt, 5 B. T. A. 356; George T. Smith, 21 B. T. A. 782. The tax exemption is also applicable to stock rights, Miles v. Safe Deposit & Trust Co., 259 U. S. 247. While this does not apply to a dividend in debenture bonds from surplus, Doerschuck v. United States, 274 Fed. 739, a distribution of rights to convertible bonds has recently been held to produce no income, T. I. Hare Powel, 27 B. T. A. 55.

Analyzing the facts in this proceeding in the manner prescribed in Eisner v. Macomber, supra, the want of essential similarity is immediately apparent. This was not a proportional redistribution of existing or inchoate rights. There was a substantial change in the shareholder interests not only of this petitioner but of all other shareholders as well. Whether the adventitious effect of this at any given time to any one shareholder be for better or worse may serve to measure the gain or loss, but it leaves the change no less substantial. This petitioner as a preferred shareholder not only enjoyed the benefits of its preference and the assurance which the provision for cumulative dividends might give, but it also was subject to the limitations of a fixed dividend and a contingent right to vote. By this dividend, it acquired new and separate rights of a common shareholder to participate in unlimited dividends and liquidations and unqualifiedly in the shareholders' meetings.

While this did not take anything from the corporation nor anything directly from the other common shareholders except a proportionate part of the value of their shares, it is the petitioner's situation which is now being considered and the effect of the dividend upon its income alone. United States v. Phellis, 257 U. S. 156. There need be no mutuality in the effect of such a dividend upon the several taxpayers who may be in one way or another affected by it. Some attempt is made by the petitioner to show a significant change in the corporation's accounts. But this arises from the discrepancies between the book value, the adopted dividend value and the par value of the shares, and they do not control the character of the transaction, whatever the corporation may have voluntarily entered upon its books and records.

Although much is said in the opinion in Eisner v. Macomber, supra, about a stock dividend taking nothing from the corporation

and being the opposite of a distribution of earnings, it seems to us a perversion of the esssential reasoning of that opinion to regard this as the more important of the considerations. The case presented the question whether the plaintiff could constitutionally be subjected to the income tax in respect of a pure proportional common stock dividend. The primary concern was to ascertain what such dividend brought to her and whether it could be said to be income. This question was thoroughly explored, and finding that the shareholder received nothing of substance and that the corporation parted with nothing but only modified its accounts, the conclusion was drawn that she had derived no income. With a simple stock dividend, both propositions support the conclusion; but it is a plain fallacy to give them equal weight, or to infer that the effect upon the corporation would alone have induced the result reached if the effect upon the shareholder had been to give her additional rights so separate and substantial as to afford different prospects, yield different fruit, and be salable with different market considerations from those formerly existing as to her. Cf. Marr v. United States, 268 U. S. 536. As between the claims of life tenant and remainderman, the latter could hardly deny that such a dividend as that now before us was an accession which could be given to the life tenant without impairing the remainderman's interest. For to him would still be preserved the same rights and possibilities which the preferred shares represented, notwithstanding the corporation's manner of liquidating the cumulative dividend by the distribution of common shares which represented subordinate rights.

When it is realized that the occasion for the original prototype of section 201 (f), namely, section 201 (d) of the Revenue Act of 1921, exempting stock dividends from tax, was the decision of the Supreme Court in Eisner v. Macomber, supra, annulling so much of section 2 (a) of the Revenue Act of 1916 as included stock dividends among those taxable, it becomes clear that the subsequent statutory exemption was only as broad as the decision, and hence that the intention was not to exempt stock dividends by any general or loose concept but only such as could not constitutionally be taxed because they were not income. The term "stock dividend " is not of itself so free from ambiguity as to preclude construction, and hence the statutory exemption must be construed to promote the intendment disclosed by the history and circumstances of its enactment. This requires that it be confined to such as have the attributes which distinguished them from the receipt of income by the shareholder. Only those which place the shareholder in no essentially different position are exempt.

The respondent erred in treating the petitioner's receipt of the common shares as if it were a nontaxable stock dividend which

operated to reduce the cost basis of the 6,500 shares of preferred. The petitioner correctly measured its profit from the sale of the 6,500 shares upon the basis of the entire original cost of such shares, $418,575.

Reviewed by the Board.

Judgment will be entered under Rule 50.

BLACK, dissenting: I dissent from the conclusions reached in the majority opinion. It is my view that the Commissioner has treated the transactions involved in this proceeding in accordance with the applicable statute and his regulations promulgated thereunder, and moreover that these regulations are correctly interpretative of the law. The statute which must be construed is section 201 (a), (f) of the Revenue Act of 1926, which reads:

SEC. 201. (a) The term "dividend" when used in this title

means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913, *

(f) A stock dividend shall not be subject to tax.

In pursuance of the foregoing statute, the Commissioner has promulgated articles 1547 and 1548 of Regulations 69, which read as follows:

ART. 1547. Dividends paid in property.-Dividends paid in securities or other property (other than its own stock) in which the earnings of a corporation have been invested, are income to the recipients to the amount of the market value of such property when receivable by the shareholders. (See, however, section 203 (g) and article 1576.) Where a corporation declares a dividend payable in stock of another corporation, setting aside the stock to be so distributed and notifying the shareholders of its action, the income arising to the recipient of such stock is its market value at the time the dividend becomes payable. (See article 52.) Scrip dividends are subject to tax in the year in which the warrants are issued. [Italics supplied.]

ART. 1548. Stock dividends.-The issuance of its own stock by a corporation as a dividend to its shareholders does not result in taxable income to such shareholders, but gain may be derived or loss sustained by the shareholders from the sale of such stock. The amount of gain derived or loss sustained from the sale of such stock, or from the sale of the stock with respect to which it is issued, shall be determined as provided in articles 1561 and 1599. [Italics supplied.]

Similar regulations are found in articles 1547 and 1548 of Regulations 62 under the 1921 Act, and articles 1547 and 1548 of Regulations 65 under the 1924 Act, and articles 627 and 628 of Regulations 74 under the 1928 Act. The substantial reenactment in later acts of the provisions theretofore construed by the Bureau is persuasive evidence of legislative approval of the regulation. Brewster v. Gage, 280 U. S. 327; National Lead Co. v. United States, 252 U. S. 140.

It seems clear to me from a reading of the foregoing regulations that the dividend distribution involved in this proceeding was a nontaxable one under the terms of these regulations. The Commissioner has consistently given such interpretation to his regulations. For example, in I. T. 2538, C. B. IX-1, p. 465, the M Company had outstanding preferred stock, the dividends on which were payable in cash or at the election of the stockholders in common stock. In December, 1929, a dividend was declared payable in cash on February 15, 1930, in respect of each share, the record holder of which on January 15, 1930, had not on or before such date filed a certificate of election to receive dividends in common stock. If a certificate of election was filed, the dividend was payable in common stock. It was held under such circumstances that the stockholders who filed certificates of election and received their dividends in common stock, received a stock dividend and therefore received no taxable income.

The error, as I see it, of the majority opinion in holding that such dividend was not a stock dividend is that it assumes that the only kind of a stock dividend exempted from taxation by section 201 (f) is such a stock dividend as was present in Eisner v. Macomber, supra. In that case the Standard Oil Company of California, having only one class of stock, to wit, common stock, had declared and paid out of surplus and profits an ordinary stock dividend by distributing to its several stockholders common stock of the corporation in proportion to the common stock holdings of each. The Government determined that such distribution was taxable, but the Supreme Court held to the contrary.

The fundamental question which the Supreme Court decided in that case was stated by the court in the beginning of its opinion, as follows:

This case presents the question whether by virtue of the sixteenth amendment Congress has the power to tax as income of the stockholder and without apportionment, a stock dividend made lawfully and in good faith against profits accumulated by the corporation since March 1, 1913.

It is my view that in the instant case we have before us a "stock dividend" made lawfully and in good faith against profits accumulated by the corporation since March 1, 1913, just as much as was present in Eisner v. Macomber. The only difference is that in the instant case we have no constitutional question involved because, in my view, Congress has made no attempt to tax such a dividend as we have here. True it is that the stock dividend involved in Eisner v. Macomber was the ordinary stock dividend where all stockholders were treated alike by receiving a dividend in common stock in proportion to their common stock holdings and when the dividend dis

tribution was completed each stockholder still owned the same proportional interest in the corporation as he did before.

But that kind of a stock dividend is not the only kind that is free from tax. The Government made that kind of a contention in the following cases, but its contention was denied by the courts. United States v. Mellon, 279 Fed. 910; affd., 281 Fed. 645, and United States v. Davison, 1 Fed. (2d) 645; affd., 9 Fed. (2d) 1022; certiorari denied by the Supreme Court. More will be said about these cases later on in this dissent.

Ballentine's Law Dictionary defines a stock dividend as a "dividend payable to the stockholders of a corporation in shares of stock of the corporation, which dividend a corporation having power to increase its capital may in the absence of statute declare, and which represents earnings of the corporation invested by the board of directors in the enlargement and extension of its work or its plant or both."

The dividend in the instant case, it seems to me, fits almost exactly into the foregoing definition.

The Willys-Overland Company had certain authorized but unissued common stock. It was in arrears in dividends on its preferred stock. It had sufficient accumulated profits and surplus to pay these dividends, but such surplus and profits were not in cash. The situation was fully described in the dividend resolution of December 2, 1925, which has been quoted in the majority opinion and to which reference is hereby made. The distribution which it made to its preferred stockholders in pursuance of said resolution was not in cash or other property belonging to the corporation, but only in common stock of the corporation, up until that time, unissued. There was in no sense a severance from the corporation assets of the subject of the dividend.

In Hayes v. St. Louis Union Trust Co., 298 S. W. 91, the court said:

A stock dividend, which is really nothing more than a process in corporation bookkeeping, is not in any sense a real dividend", which implies a severance from the corporate assets of the subject of the dividend and a distribution thereof among the stockholders. [Italics supplied.]

The distinction between the title of a corporation and the interest of its members or stockholders in the property of the corporation is familiar and well settled. The ownership of that property is in the corporation and not in the holders of shares of its stock. The interest of each stockholder consists in the right to a proportionate part of the profits whenever dividends are declared by the corporation, during its existence under its charter, and to a like proportion of the property remaining upon the termination or dissolution of