OPINION.
Leech :
These consolidated proceedings are under reconsideration pursuant to the Board’s order dated November 20, 1934. By order dated November 24, 1934, the proceedings were set for hearing evidence limited to the fair market value on July 1,1929, of the Hamilton Manufacturing Co. preferred stock. At such rehearing on February 13, 1935, petitioners filed a motion that the Board vacate its order directing reconsideration, that the Board deny respondent’s motion for reconsideration of the memorandum opinion heretofore entered, and that the Board enter judgment for petitioners. The principal ground for such motion was that the memorandum opinion had become final and that the Board was without authority, on November 20,1934, to direct a reconsideration. In these proceedings the Board has never entered its final order, pursuant to section 906 (d) of the Revenue Act of 1924 as amended by section 601 of the Revenue Act of 1928. Thus, the Board, not having entered its decision in these proceedings, has the power to reopen the cases and revise its prior findings of fact and opinion. Washburn Wire Co. v. Commissioner, 67 Fed. (2d) 658. Accordingly, petitioners’ motion filed on February 13,1935, is denied.
The respondent has determined income tax deficiencies for the year 1929, in the following amounts:
[821]*821Docket No. 60890_j_$5, 831.67
Docket No. 60891_ 3,570.84
Docket No. 60892_ 3,771.04
Docket No. 60893_ 1,158. 44
He determined that preferred shares issued as a dividend on the common shares of the Hamilton Manufacturing Co., on July 1, 1929, were redeemed by the company in such a manner as to make the distribution essentially equivalent to the distribution of a taxable dividend under section 115 (g) of the Bevenue Act of 1928.
The petitioners assigned error in such determination.
The Board, in its memorandum opinion heretofore entered, considered the proceedings only upon the basis of such assigned error and determined, upon the facts, that the preferred stock was not redeemed in 1929 in such a manner as to make the distribution essentially equivalent to the distribution of a taxable dividend. The parties did not specifically raise, nor did the Board consider, the question of whether the dividend was tax-free or taxable to petitioners when the shares were issued on July 1, 1929. This latter question has now been specifically raised by the granting of the respondent’s motion for reconsideration on the ground that the memorandum opinion, heretofore entered, is in conflict with the decision in Tillotson Manufacturing Co. v. Commissioner, 76 Fed. (2d) 189, affirming 27 B. T. A. 913.
In deciding now whether the present dividend was tax-free or taxable, we are not considering a new issue raised for the first time by respondent’s motion. The deficiency in controversy is asserted upon the basis of the respondent’s determination that the dividend was taxable. The correctness of that deficiency is the general issue, in the consideration of which the Board is not limited to the theory advocated by either the respondent or the taxpayer. Charles L. Coughlin, 15 B. T. A. 515, 519; James P. Gossett, 22 B. T. A. 1279; affd., 59 Fed. (2d) 365; John I. Chipley, 25 B. T. A. 1103. The question before the Board now, as originally, inherently involves the taxable character of the dividend revealed by the evidence of record. If it be determined that the dividend was not a tax-free stock dividend when made on July 1, 1929, and therefore properly includable in income, that conclusion would be decisive here without passing upon the question of whether there was a redemption within the meaning of section 115 (g) of the 1928 Act.
There follow only those facts necessary to a determination of the one question now under consideration.
The petitioners, H. C. Gowran, George S. Hamilton, and Edward P. Hamilton, are individuals residing at Two Fivers, Wisconsin. The petitioner, Edith Bose Suddard, is the duly qualified executrix [822]*822of the estate of Thomas W. Suddard, deceased, who died testate September 11, 1931. She "also resides at Two Rivers, Wisconsin.
Hamilton Manufacturing Co., hereinafter referred to as the company, was incorporated on February 23, 1926, under the laws of Wisconsin. Article III of its “Articles of Organization ” as amended on April 5, 1926, and on December 27, 1928, provides that the company’s capital stock shall be divided into 10,000 shares of preferred stock of the par value of $100 each, entitled to a preferential cumulative dividend at the rate of 7 percent per annum, payable out of net profits; and 30,000 shares of common stock without nominal or par value. Article III further provides that the holders of common stock shall have certain rights and powers, including voting rights, and, that the company shall have the right to purchase and redeem any part or all of the preferred stock on the first of January or July in any year, by paying $105 for each share together with accrued dividends, and that the preferred stock when so redeemed and canceled, may be reissued.
On July 1, 1929, the company’s common capital stock, issued and outstanding, amounted to 18,680.8 shares held by 30 individuals in amounts ranging from 1 share to 6,189 shares.
Prior to July 1, 1929, the company’s preferred stock, issued and outstanding, amounted to 7,155 shares held by approximately 300 individual stockholders. The petitioners held no shares of the company’s preferred capital stock prior to July 1, 1929.
On July 1, 1929, the company’s earned surplus available for distribution was not less than $444,147.05.
The company’s board of directors, at a special meeting on Juné 29, 1929, adopted a resolution which, after setting forth that the company’s surplus was in excess of $261,531.20, the total of a $14 per share dividend on 18,680.8 common shares outstanding, and that there remained unissued $261,600 par value preferred stock available for issue by way of stock dividend,- provided in part as follows:
Resolved, by the Board of Directors of Hamilton Mfg. Company, that there he and there hereby is declared a dividend on all of the outstanding common capital stock of the company, to the holders thereof of record on July 1, 1929, amounting to $14.00' per share, and that the officers of the company be and they hereby are directed to pay and distribute said dividend forthwith to said stockholders of record, pro rata to each in proportion to his present holdings of common stock, in the form of certificates of the company’s preferred stock, each share of said preferred stock so distributed to be taken at its par value, viz: $100.
The petitioners’ holdings of common shares on July 1,1929, and the number of preferred shares each was entitled to and did receive pursuant to the above mentioned resolution, were as follows:
[823]*823[[Image here]]
The preferred stock so received by petitioners on July 1, 1929, had a fair market value of $100 per share on that date. Subsequent to September 1929 petitioners agreed to sell to the company at par, all the preferred stock issued to them as a dividend, and on or about October 1, 1929, the company purchased at par all such preferred stock, for resale to its employees.
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OPINION.
Leech :
These consolidated proceedings are under reconsideration pursuant to the Board’s order dated November 20, 1934. By order dated November 24, 1934, the proceedings were set for hearing evidence limited to the fair market value on July 1,1929, of the Hamilton Manufacturing Co. preferred stock. At such rehearing on February 13, 1935, petitioners filed a motion that the Board vacate its order directing reconsideration, that the Board deny respondent’s motion for reconsideration of the memorandum opinion heretofore entered, and that the Board enter judgment for petitioners. The principal ground for such motion was that the memorandum opinion had become final and that the Board was without authority, on November 20,1934, to direct a reconsideration. In these proceedings the Board has never entered its final order, pursuant to section 906 (d) of the Revenue Act of 1924 as amended by section 601 of the Revenue Act of 1928. Thus, the Board, not having entered its decision in these proceedings, has the power to reopen the cases and revise its prior findings of fact and opinion. Washburn Wire Co. v. Commissioner, 67 Fed. (2d) 658. Accordingly, petitioners’ motion filed on February 13,1935, is denied.
The respondent has determined income tax deficiencies for the year 1929, in the following amounts:
[821]*821Docket No. 60890_j_$5, 831.67
Docket No. 60891_ 3,570.84
Docket No. 60892_ 3,771.04
Docket No. 60893_ 1,158. 44
He determined that preferred shares issued as a dividend on the common shares of the Hamilton Manufacturing Co., on July 1, 1929, were redeemed by the company in such a manner as to make the distribution essentially equivalent to the distribution of a taxable dividend under section 115 (g) of the Bevenue Act of 1928.
The petitioners assigned error in such determination.
The Board, in its memorandum opinion heretofore entered, considered the proceedings only upon the basis of such assigned error and determined, upon the facts, that the preferred stock was not redeemed in 1929 in such a manner as to make the distribution essentially equivalent to the distribution of a taxable dividend. The parties did not specifically raise, nor did the Board consider, the question of whether the dividend was tax-free or taxable to petitioners when the shares were issued on July 1, 1929. This latter question has now been specifically raised by the granting of the respondent’s motion for reconsideration on the ground that the memorandum opinion, heretofore entered, is in conflict with the decision in Tillotson Manufacturing Co. v. Commissioner, 76 Fed. (2d) 189, affirming 27 B. T. A. 913.
In deciding now whether the present dividend was tax-free or taxable, we are not considering a new issue raised for the first time by respondent’s motion. The deficiency in controversy is asserted upon the basis of the respondent’s determination that the dividend was taxable. The correctness of that deficiency is the general issue, in the consideration of which the Board is not limited to the theory advocated by either the respondent or the taxpayer. Charles L. Coughlin, 15 B. T. A. 515, 519; James P. Gossett, 22 B. T. A. 1279; affd., 59 Fed. (2d) 365; John I. Chipley, 25 B. T. A. 1103. The question before the Board now, as originally, inherently involves the taxable character of the dividend revealed by the evidence of record. If it be determined that the dividend was not a tax-free stock dividend when made on July 1, 1929, and therefore properly includable in income, that conclusion would be decisive here without passing upon the question of whether there was a redemption within the meaning of section 115 (g) of the 1928 Act.
There follow only those facts necessary to a determination of the one question now under consideration.
The petitioners, H. C. Gowran, George S. Hamilton, and Edward P. Hamilton, are individuals residing at Two Fivers, Wisconsin. The petitioner, Edith Bose Suddard, is the duly qualified executrix [822]*822of the estate of Thomas W. Suddard, deceased, who died testate September 11, 1931. She "also resides at Two Rivers, Wisconsin.
Hamilton Manufacturing Co., hereinafter referred to as the company, was incorporated on February 23, 1926, under the laws of Wisconsin. Article III of its “Articles of Organization ” as amended on April 5, 1926, and on December 27, 1928, provides that the company’s capital stock shall be divided into 10,000 shares of preferred stock of the par value of $100 each, entitled to a preferential cumulative dividend at the rate of 7 percent per annum, payable out of net profits; and 30,000 shares of common stock without nominal or par value. Article III further provides that the holders of common stock shall have certain rights and powers, including voting rights, and, that the company shall have the right to purchase and redeem any part or all of the preferred stock on the first of January or July in any year, by paying $105 for each share together with accrued dividends, and that the preferred stock when so redeemed and canceled, may be reissued.
On July 1, 1929, the company’s common capital stock, issued and outstanding, amounted to 18,680.8 shares held by 30 individuals in amounts ranging from 1 share to 6,189 shares.
Prior to July 1, 1929, the company’s preferred stock, issued and outstanding, amounted to 7,155 shares held by approximately 300 individual stockholders. The petitioners held no shares of the company’s preferred capital stock prior to July 1, 1929.
On July 1, 1929, the company’s earned surplus available for distribution was not less than $444,147.05.
The company’s board of directors, at a special meeting on Juné 29, 1929, adopted a resolution which, after setting forth that the company’s surplus was in excess of $261,531.20, the total of a $14 per share dividend on 18,680.8 common shares outstanding, and that there remained unissued $261,600 par value preferred stock available for issue by way of stock dividend,- provided in part as follows:
Resolved, by the Board of Directors of Hamilton Mfg. Company, that there he and there hereby is declared a dividend on all of the outstanding common capital stock of the company, to the holders thereof of record on July 1, 1929, amounting to $14.00' per share, and that the officers of the company be and they hereby are directed to pay and distribute said dividend forthwith to said stockholders of record, pro rata to each in proportion to his present holdings of common stock, in the form of certificates of the company’s preferred stock, each share of said preferred stock so distributed to be taken at its par value, viz: $100.
The petitioners’ holdings of common shares on July 1,1929, and the number of preferred shares each was entitled to and did receive pursuant to the above mentioned resolution, were as follows:
[823]*823[[Image here]]
The preferred stock so received by petitioners on July 1, 1929, had a fair market value of $100 per share on that date. Subsequent to September 1929 petitioners agreed to sell to the company at par, all the preferred stock issued to them as a dividend, and on or about October 1, 1929, the company purchased at par all such preferred stock, for resale to its employees.
Petitioners argue that the present dividend on common stock declared and paid in preferred stock of the declarant company, is a stock dividend within the meaning of section 115 (f) of the Revenue Act of 1928,1 and is, therefore, not taxable.
The authorities upon which they rely are: Alfred A. Laun, 26 B. T. A. 764; Pearl B. Brown, Executrix, 26 B. T. A. 901; affd., 69 Fed. (2d) 602; certiorari denied, 293 U. S. 570; and Frances Elliott Clark, 28 B. T. A. 1225; affd., 77 Fed. (2d) 89.
In all those cases, no preferred stock was outstanding when the preferred in question was distributed as a dividend on or in partial exchange for common stock. Thus, since (1) there was no severance of assets from the declarant corporations, and (2) there was no alteration of the preexisting proportionate interest of the stockholders, but “ only a proliferation of preexisting interests ”, (Pearl B. Brown, Executrix, supra) the disputed dividend was held nontaxable. (Tillotson Manufacturing Co. v. Commissioner, supra.)
In that case, which petitioners attempt to distinguish from the pending situation, there was a substantial amount of common stock outstanding when the dividend on the preferred stock, payable in common, was declared and paid. That fact sustains the Board’s conclusion that the second prerequisite, above, to the exemption of that dividend from tax, was not there established. The position of the stockholder in receiving such common stock in that distribution was materially changed. He acquired substantially different and, as the court there held, “ additional property rights which might well afford him a different and greater market with an increased money return.”
So, here, as in the Tillotson case, though the first of the two recognized tests {supra) for distinguishing a taxable from a non[824]*824taxable dividend, may have been met, the second has not. The preexisting proportionate interest of the stockholder was substantially changed. It is true that the present record discloses the converse situation as to the class of stock in which the dividend was declared and paid, but in the. recent case of James H. Torrens, 81 B. T. A. 787, in applying the rule announced in the Tillotson case to similar facts, this Board said:
If there be any difference in the degree of change effected in the stockholders’ existing rights by the converse factual situation here, we do not think it sufficient to except this case from the application of that rule.
Our immediately pertinent inquiry is the taxable status of this new preferred stock, not from the standpoint of the corporation, but from that of the common stockholders. What did the petitioners, as common stockholders, receive ? Here, not only was there a substantial amount of preferred stock of the declarant company outstanding when the present dividend on common was declared and paid in preferred stock, but none of that preferred was then owned by petitioners. The rights and attributes of these preferred and common stocks were, materially different. Despite the mechanics of the corporate bookkeeping, which certainly do not control the taxable character of the disputed dividend in the hands of the petitioners (Doyle v. Mitchell Bros. Co., 247 U. S. 179), they, as common stockholders, by the receipt of the present preferred stock, as a dividend, received rights in the assets of the corporation, as to future dividends, and upon liquidation, which were, before receipt of that preferred stock, limited to the then outstanding preferred stock. By the distribution of the preferred stock here, the then existing rights of petitioners, common stockholders, were increased, and those of the then preferred stockholders were decreased, to that extent. Nor is the effect of that fact in evaluating the difference between petitioner’s rights before and after the receipt of the questioned preferred stock, avoided here by the financial condition of the corporation at the time of that receipt. Petitioner’s rights, though constant in extent during each of those respective periods, were subject to fluctuation in value with that financial condition during each of such periods. It is that continuing potentiality of the common stockholders’ new and proportionately altered interests, inherent in the preferred stock in dispute, not the mere liquidating value of that stock at any particular time, which gave petitioners “ additional property rights which might well afford them a different and greater market with an increased money return.” Tillotson Manufacturing Co. v. Commissioner, supra.
The disputed dividend, on common stock, declared and paid in preferred stock of the declarant company, of a fair market value [825]*825of $100 per share, when issued on July 1, 1929, was not a tax-free stock dividend.
The memorandum opinion heretofore entered in these proceedings is modified accordingly.
Reviewed by the Board.
Decision will be entered pursuant to Rule 50.
Black dissents.