The petitioners did not report the shares received as the stock dividends in their income tax returns for 1940. The respondent determined that the dividends constituted taxable income, that at the time of distribution each share of the class A had a fair market value of $320.09 and that each share of the class B had a fair market value of $16, and on that basis he determined the deficiencies here involved. On June 20, 1940, the corporation was a going concern, and it has continued to be such.

The net profits of the corporation after adjustments and taxes and the dividends paid were as follows for the indicated years:

Summarized balance sheets of the corporation as at June 30, 1936,

There was no material change in the financial condition of the corporation between the time of the distribution of the stock dividends on June 20, 1940, and June 30, 1940. The fair market value of the net assets of the corporation on June 20, 1940, was in excess of $780,000. As at June 20, 1940, about 95 per cent of the products of the corporation were manufactured under patents developed and owned by Edwin L. Wiegand, and of which the corporation was exclusive licensee.

The corporation experienced a steady growth from the time of its organization. In June, 1940, plans were being made for the construction of new buildings and the addition of new equipment. The corporation was looking forward to increased demands upon its facilities and resources by reason of the commencement of the national defense program.

As of June 20, 1940, the outlook for the corporation indicated that it could pay dividends of $6 per share on its class A stock and $2 per share on its class B stock, including the shares of both classes distributed as stock dividends.

Because of its participating and voting rights, the class A common stock of the corporation was superior to ordinary $6 cumulative preferred stock. Because of the absence of voting rights, the class B common stock was inferior to ordinary common stock.

The stock of the corporation was not listed on any stock exchange and because of its nature had little general investment appeal.

In the first part of June, 1940, the industrial stock price index reached its lowest point in more than two years. This was followed by a rise in prices during the latter half of the month. There was considerable uncertainty at that time as to the future trend of the stock market.

As of June, 1940, general business conditions were improving, and the current level of business was substantially above that prevailing in the recession year of 1938. Activity in the electrical goods field follows fairly closely the level of general business conditions. As a result of the commencement of the war in Europe in 1939, the demand for heavy electrical equipment increased sharply.

In 1940 the corporation had between 7,000 and 8,000 customers. The products manufactured by it fell within two general groups, namely, (1) products manufactured for other manufacturers in accordance with their specifications and which reached the consumer as a part of a completed unit, and (2) products manufactured for use in industry generally. About 75 per cent of the corporation's business fell within the first group. The products were marketed under the trade name of "Chromalox." The corporation advertised its products in industrial magazines and trade journals, but not in newspapers or general magazines. It had no employee retirement plan, nor did it carry life insurance on its officers.

In February, 1943, Ernest N. Calhoun approached Edwin L. Wiegand about purchasing the latter's entire holding of the corporation's stock, consisting of 4,626 shares of class A and 16,251 shares of class B stock. Calhoun was unable to find among his associates in the corporation and among others a sufficient number of persons willing to invest in the stock so that all of Wiegand's stock could be

acquired. However, on June 26, 1943, Calhoun and the others who were interested purchased a total of 2,961 shares of the class A stock at $150 per share and 16,011 shares of the class B stock at $10 a share. Of the stock so purchased, 1,500 shares of the class A and 7,245 shares of the class B stock were purchased by the corporation and thereafter held as treasury stock.

The fair market value on June 20, 1940, of each share of class A stock was $120 and that of each share of class B stock was $14.50. The dates on which the petitioners filed their 1940 income tax returns and the gross income reported on each were as follows:

A notice of deficiency was mailed to each petitioner on March 8, 1946, excepting petitioners Fred I. Tourtelot and Mary H. Tourtelot, to whom a notice of deficiency was mailed on May 3, 1946. Fred I. Tourtelot and Mary H. Tourtelot and the respondent, on or about February 27, 1946, executed a consent extending to June 30, 1947, the time for the assessment of the 1940 income tax of those petitioners.

OPINION.

TURNER, Judge: The first question for determination is whether the distributions made by the corporation on June 20, 1940, of 2,000 shares of its class A stock to holders of that class of stock and 12,000 shares of its class B stock to holders of that class of stock constituted distributions taxable as dividends under the Internal Revenue Code.1 While section 115 (f) of the code excludes from the definition of "dividend" distributions made by corporations in their stock where

1SEC. 115. DISTRIBUTIONS BY CORPORATIONS.

(a) DEFINITION OF DIVIDEND.-The term "dividend" when used in this chapter means any distribution made by a corporation to its shareholders, whether in money or in ether property, (1) out of its earnings or profits accumulated after February 28, 1913, or out of the earnings or profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable Tear), without regard to the amount of the earnings and profits at the time the distribution vas made.

(f) STOCK DIVIDENDS.—

(1) GENERAL RULE.-A distribution made by a corporation to its shareholders in its stock or in rights to acquire its stock shall not be treated as a dividend to the extent that It does not constitute income to the shareholdes within the meaning of the Sixteenth Amendment to the Constitution.

such distributions do not constitute income to the stockholders within the meaning of the Sixteenth Amendment, it does not provide any rule or test for determining whether a given distribution does or does not constitute income within the meaning of the amendment. Relying on certain decisions of the Supreme Court and of this Court, the petitioners contend that the well established and controlling test for making such a determination is whether the distribution did or did not materially change or alter the preexisting proportionate interest of the stockholders in the net assets of the corporation as such assets existed on the distribution date; that where no such change in proportionate interest in net assets occurred, no income resulted; and that where such a change did occur, income resulted. The respondent contends that the real and proper test is not solely as to whether the stock distribution effected a change in the proportionate interest of the stockholders in the net assets of the corporation at the time of distribution, but also whether it effected a change in their other interests in the corporation as a going concern, such as their interests in control, in dividends, and in ultimate liquidation. His position is that a stock distribution which effects a change in the proportional interests of the stockholders with respect to any of the foregoing, results in income to the recipients and accordingly is taxable to them as a dividend.

It is well settled, we think, that where a corporation has only one class of stock outstanding and it distributes a dividend on that stock of stock of the same class, the distribution does not constitute income within the meaning of the Sixteenth Amendment. Eisner v. Macomber, 252 U. S. 189; Helvering v. Griffiths, 318 U. S. 371. On the other hand, where a corporation. has two or more classes of stock outstanding and a dividend is paid on one class of stock in the form of shares of the other class, it is equally well settled that such a dividend is income within the meaning of the Sixteenth Amendment. Koshland v. Helvering, 298 U. S. 441; Helvering v. Gowran, 302 U. S. 238; and Helvering v. Pfeiffer, 302 U. S. 247. When the decisions were at that stage, Helvering v. Sprouse and Strassburger v. Commissioner were decided by the Supreme Court at 318 U. S. 604. Both of these cases originated in this Court, which was then known as the Board of Tax Appeals. In the Sprouse case, the authorized capital stock was of three classes: Nonvoting 7 per cent cumulative preferred, redeemable at par, plus accrued dividends; voting common stock; and nonvoting common stock. All shares had a par value of $100 per share. The divimon stock of both classes was to share equally in dividends, after

all three classes of stock was to share equally in the assets of the cordividend payments on the preferred. On liquidation or dissolution, At a time when the corporation had no preferred stock

poration.

outstanding, but only common stock, consisting of voting common stock of $397,471.25 par value and nonvoting common stock of $819,333.06, a 10 per cent stock dividend was paid in nonvoting common on voting and nonvoting common stock alike. This Court was of the opinion that the Koshland case was controlling as to the dividend of nonvoting common paid on the voting common stock and that the taxpayer realized income to that extent, since the nonvoting stock received on the voting stock was not of "precisely the same character" as the stock previously held, and accordingly represented an interest different from that which the stock previously held represented. In the Circuit Court of Appeals for the Ninth Circuit we were reversed, the court being of the view that we had misconstrued the decisions of the Supreme Court. The court said that:

to determine whether the stockholders had received "income" actually and really is to determine whether the corporate earnings have been divided, segregated or set apart for the stockholders. Thus if the corporation has only one class of stock, the stock dividend is not a representation of a division or segregation of earnings, because the distributed stock gives the stockholders nothing which they did not already have. The proportionate interests are the same, the value of the original stock decreases to the extent of the value of the distributed stock, and the net result is that the stockholder's shares have been split into two interests. *

*

Where the corporation has more than one class of stock outstanding, and distributes a stock dividend to one class only, then the proportionate interests in the corporation are changed, because the class of stockholders who receive the dividend then have a greater interest in the assets of the corporation than those who did not receive the stock dividend. There being a change in the proportionate interests, the recipients of the stock dividend have derived income. * * * The court then remanded the case, with instructions to find whether the proportionate interests of the stockholders were changed by reason of payment of the nonvoting common stock dividend on the voting common stock. In the Supreme Court, the argument of the taxpayer was that the distribution of the dividend "in nowise disturbed the relationship previously existing amongst all the stockholders or that previously existing between the respondent [taxpayer] and the corporation." On that argument, the Supreme Court affirmed the action of the Circuit Court of Appeals below.

In the Strassburger case, the taxpayer owned all of the stock of a corporation, which consisted of common stock only. The corporate charter was amended to authorize 500 shares of 7 per cent nonvoting cumulative preferred stock, with a par value of $100 per share. A dividend of 50 shares of the preferred stock was distributed on the common stock. This Court held that the dividend constituted income. In that view, we were affirmed by the Circuit Court of Appeals for the Second Circuit, the Circuit Court holding that, even though the situation presented was different from that presented in the