GIBSON, Circuit Judge.
The question presented on this appeal is whether or not “boot”, in the form of a promissory note, received in connection with a corporate consolidation and reorganization is taxable as an ordinary dividend under 26 U.S.C. § 356(a)(2) or as a distribution entitled to capital gain treatment under 26 U.S.C. § 356(a)(1). [602]*602The District Court1 decided that the distribution was entitled to capital gain treatment. We affirm.
Initially, the plaintiffs2 contended that the consolidation and reorganization of the involved corporations resulted in an exchange of stock for stock and securities that qualified under the nonrecognition of gain provisions of § 351 of the Code. The taxpayer does not appeal the ruling of the District Court that the promissory note involved constituted “boot” and was taxable as a gain and in his brief now concedes the note to be a distribution pursuant to a corporate reorganization under § 368(a)(1) (A) of the Code.
The “boot” consisted of a promissory note in the amount of $102,002 received by taxpayer as a result of the reorganization of two closely held corporations in 1963 into a single new corporation. Prior to the reorganization in 1963, the taxpayer and Leonard Dunn, a field superintendent employed by the taxpayer, controlled and operated Danco Construction Company (Danco), an Arkansas corporation in the business of laying waterlines, sewers, and utility cables. From 1959 until 1963, Danco’s 151 shares of stock were owned by the taxpayer (108 shares or 71.5 per cent), Dunn (42 shares or 27.9 per cent), and John Thurman, Sr., one of the taxpayer’s attorneys (one share or .6 per cent).
The taxpayer also had controlling inr terest in F & G Construction Company (F & G), also an Arkansas corporation engaged in construction. From 1957 until 1963, F & G’s 240 shares were owned by the taxpayer (238 shares or 99.2 per cent), the taxpayer’s wife (one share or .4 per cent), and John Thurman, Sr. (one share or .4 per cent).
In addition to Danco and F & G, the taxpayer controlled a third corporation, World Wide, Inc. (World Wide), originally organized to engage in the automobile business but by 1963 limited to leasing equipment to Danco. In 1963, World Wide’s 1,077 shares were owned by the taxpayer (603 shares or 56 per cent), Dunn (323 shares or 30 per cent), Mrs. W. F. Wright, Sr., the taxpayer’s mother (150 shares or 13.9 per cent), and John Thurman, Jr., also an attorney for the taxpayer (one share or about .0009 per cent).
In late 1962 and early 1963, the taxpayer was considering a consolidation of F & G and World Wide in order to diversify and expand the business of the two corporations. The taxpayer and Dunn wanted the new corporation, eventually named Omni Corporation (Omni), to be owned in approximately the same proportionate basis as Danco, which was owned 71.5 per cent by the taxpayer and 27.9 per cent by Dunn. By simply consolidating F & G and World Wide with the shareholders of both corporations exchanging their shares solely for Omni shares, the taxpayer would have owned approximately 85 per cent of Omni and Dunn would have owned .approximately 10 per cent. Such a reorganization would have been tax-free,3 however it would not have accomplished the desired percentage ownership in the new corporation contemplated by the taxpayer and Dunn. On April 1, 1963, F & G’s capital stock was worth $24,000 and its earned surplus was $101,802. At the same time World Wide’s capital stock was worth $21,540 and its earned surplus was $38,365. The taxpayer and Dunn did not want a consolidation that would simply exchange shares of the two previous corporations solely for shares of Omni, for that would not result in the percentage ownership desired by the taxpayer and Dunn.
[603]*603In order to effectuate the announced purposes of ownership of Omni on the similar proportionate basis of Danco and of allocation of the equities of F & G and World Wide as previously held, a Plan of Consolidation (Plan) was adopted by the shareholders of F & G and World Wide on March 1, 1963. According to the Plan, F & G and World Wide were dissolved and their assets and liabilities transferred to Omni. In addition Dunn was required to pay $7,005.-57 to Omni,4 and Omni issued on March 15, 1963, a promissory note for $102,002 payable to the taxpayer on or before March 15, 1973, and bearing five per cent interest. Omni issued the following shares:
Class Class Total ‘B’ Shares Par Value
W. F. Wright, Jr. (taxpayer) 223 1,999 2,222 $55,500
Leonard Dunn 100 900 1,000 25,000
Mrs. W. F. Wright, Sr. 33 301 334 8,350
Mrs. W. F. Wright, Jr. 2 19 21 525
John Thurman, Sr. 2 21 23 575
360 3,240 3,600 $90,000
This Plan left the taxpayer with a 61.7 per cent ownership in Omni and Dunn with a 27.8 per cent interest.
The disputed issue is whether the taxpayer’s receipt of the $102,002 note from Omni constituted “boot” to the taxpayer that should be treated as an ordinary dividend under 26 U.S.C. § 356(a)(2)5 (thus taxable at ordinary income tax rates) or as a gain under § 356(a)(1) (taxable as a capital gain).
The Commissioner determined that the note should be considered a dividend under 26 U.S.C. § 356(a)(2) and assessed the taxpayer an additional income tax of $69,683.55 plus interest for the taxable year 1963. On June 16, 1967, the taxpayer paid the deficiency assessment and interest and on July 7, 1967, filed a claim for refund which was disallowed by the Commissioner on September 14, 1967. The plaintiffs commenced this action in the District Court on December 28, 1967, under 26 U.S.C. § 1346(a)(1) to recover income taxes erroneously assessed and collected by the Commissioner.
The District Court concluded that the note was “ ‘boot’ under § 356, with its fair market value to be recognized as gain to the taxpayer.” However, the District Court in interpreting § 356(a)(2) held that the distribution of the note to the taxpayer did not have the effect of a dividend, because “Wright’s interest in the corporation emerging from the consolidation was substantially reduced, from about 85 per [604]*604cent in the combining corporations to about 62 per cent of Omni.” 6 Since the note was held not to have the effect of a dividend, the gain was viewed as realized from the exchange of property and taxed as long term capital gain. Judgment was rendered for the plaintiff for an overpayment of federal income tax for 1963 in the amount of $43,748.13 plus interest. The District Court did not mention 26 U.S.C. § 302, concerning redemptions, in relation to § 356(a)(2).
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GIBSON, Circuit Judge.
The question presented on this appeal is whether or not “boot”, in the form of a promissory note, received in connection with a corporate consolidation and reorganization is taxable as an ordinary dividend under 26 U.S.C. § 356(a)(2) or as a distribution entitled to capital gain treatment under 26 U.S.C. § 356(a)(1). [602]*602The District Court1 decided that the distribution was entitled to capital gain treatment. We affirm.
Initially, the plaintiffs2 contended that the consolidation and reorganization of the involved corporations resulted in an exchange of stock for stock and securities that qualified under the nonrecognition of gain provisions of § 351 of the Code. The taxpayer does not appeal the ruling of the District Court that the promissory note involved constituted “boot” and was taxable as a gain and in his brief now concedes the note to be a distribution pursuant to a corporate reorganization under § 368(a)(1) (A) of the Code.
The “boot” consisted of a promissory note in the amount of $102,002 received by taxpayer as a result of the reorganization of two closely held corporations in 1963 into a single new corporation. Prior to the reorganization in 1963, the taxpayer and Leonard Dunn, a field superintendent employed by the taxpayer, controlled and operated Danco Construction Company (Danco), an Arkansas corporation in the business of laying waterlines, sewers, and utility cables. From 1959 until 1963, Danco’s 151 shares of stock were owned by the taxpayer (108 shares or 71.5 per cent), Dunn (42 shares or 27.9 per cent), and John Thurman, Sr., one of the taxpayer’s attorneys (one share or .6 per cent).
The taxpayer also had controlling inr terest in F & G Construction Company (F & G), also an Arkansas corporation engaged in construction. From 1957 until 1963, F & G’s 240 shares were owned by the taxpayer (238 shares or 99.2 per cent), the taxpayer’s wife (one share or .4 per cent), and John Thurman, Sr. (one share or .4 per cent).
In addition to Danco and F & G, the taxpayer controlled a third corporation, World Wide, Inc. (World Wide), originally organized to engage in the automobile business but by 1963 limited to leasing equipment to Danco. In 1963, World Wide’s 1,077 shares were owned by the taxpayer (603 shares or 56 per cent), Dunn (323 shares or 30 per cent), Mrs. W. F. Wright, Sr., the taxpayer’s mother (150 shares or 13.9 per cent), and John Thurman, Jr., also an attorney for the taxpayer (one share or about .0009 per cent).
In late 1962 and early 1963, the taxpayer was considering a consolidation of F & G and World Wide in order to diversify and expand the business of the two corporations. The taxpayer and Dunn wanted the new corporation, eventually named Omni Corporation (Omni), to be owned in approximately the same proportionate basis as Danco, which was owned 71.5 per cent by the taxpayer and 27.9 per cent by Dunn. By simply consolidating F & G and World Wide with the shareholders of both corporations exchanging their shares solely for Omni shares, the taxpayer would have owned approximately 85 per cent of Omni and Dunn would have owned .approximately 10 per cent. Such a reorganization would have been tax-free,3 however it would not have accomplished the desired percentage ownership in the new corporation contemplated by the taxpayer and Dunn. On April 1, 1963, F & G’s capital stock was worth $24,000 and its earned surplus was $101,802. At the same time World Wide’s capital stock was worth $21,540 and its earned surplus was $38,365. The taxpayer and Dunn did not want a consolidation that would simply exchange shares of the two previous corporations solely for shares of Omni, for that would not result in the percentage ownership desired by the taxpayer and Dunn.
[603]*603In order to effectuate the announced purposes of ownership of Omni on the similar proportionate basis of Danco and of allocation of the equities of F & G and World Wide as previously held, a Plan of Consolidation (Plan) was adopted by the shareholders of F & G and World Wide on March 1, 1963. According to the Plan, F & G and World Wide were dissolved and their assets and liabilities transferred to Omni. In addition Dunn was required to pay $7,005.-57 to Omni,4 and Omni issued on March 15, 1963, a promissory note for $102,002 payable to the taxpayer on or before March 15, 1973, and bearing five per cent interest. Omni issued the following shares:
Class Class Total ‘B’ Shares Par Value
W. F. Wright, Jr. (taxpayer) 223 1,999 2,222 $55,500
Leonard Dunn 100 900 1,000 25,000
Mrs. W. F. Wright, Sr. 33 301 334 8,350
Mrs. W. F. Wright, Jr. 2 19 21 525
John Thurman, Sr. 2 21 23 575
360 3,240 3,600 $90,000
This Plan left the taxpayer with a 61.7 per cent ownership in Omni and Dunn with a 27.8 per cent interest.
The disputed issue is whether the taxpayer’s receipt of the $102,002 note from Omni constituted “boot” to the taxpayer that should be treated as an ordinary dividend under 26 U.S.C. § 356(a)(2)5 (thus taxable at ordinary income tax rates) or as a gain under § 356(a)(1) (taxable as a capital gain).
The Commissioner determined that the note should be considered a dividend under 26 U.S.C. § 356(a)(2) and assessed the taxpayer an additional income tax of $69,683.55 plus interest for the taxable year 1963. On June 16, 1967, the taxpayer paid the deficiency assessment and interest and on July 7, 1967, filed a claim for refund which was disallowed by the Commissioner on September 14, 1967. The plaintiffs commenced this action in the District Court on December 28, 1967, under 26 U.S.C. § 1346(a)(1) to recover income taxes erroneously assessed and collected by the Commissioner.
The District Court concluded that the note was “ ‘boot’ under § 356, with its fair market value to be recognized as gain to the taxpayer.” However, the District Court in interpreting § 356(a)(2) held that the distribution of the note to the taxpayer did not have the effect of a dividend, because “Wright’s interest in the corporation emerging from the consolidation was substantially reduced, from about 85 per [604]*604cent in the combining corporations to about 62 per cent of Omni.” 6 Since the note was held not to have the effect of a dividend, the gain was viewed as realized from the exchange of property and taxed as long term capital gain. Judgment was rendered for the plaintiff for an overpayment of federal income tax for 1963 in the amount of $43,748.13 plus interest. The District Court did not mention 26 U.S.C. § 302, concerning redemptions, in relation to § 356(a)(2).
The history of taxation of “boot” distributions in relation to what has become known as the “automatic dividend” rule has been mixed with confusion, shifting positions by the Commissioner, and much unfavorable commentary. The discontentment is traceable to Commissioner of Internal Revenue v. Bedford, 325 U.S. 283, 65 S.Ct. 1157, 89 L.Ed. 1611 (1945), which commentators generally agree was assumed to say that “§ 356(a)(2) automatically converted any recognized gain into dividend income, to the extent of the distributing corporation’s earnings and profits, where the taxpayer continued as a shareholder after the exchange.” B. Bittker & J. Eustice, Federal Income Taxation of Corporations and Shareholders § 14.34 (1971) (footnote omitted) (hereinafter Bittker & Eustice). The Bedford rule is generally known as the “automatic dividend” rule.
The Commissioner has vacillated in arguing for the adoption of the “automatic dividend” rule in different cases.7 Commentators have strongly criticized the “automatic dividend” rule supposedly announced by Bedford,8 In the District Court, the Commissioner argued that the “automatic dividend” rule should be applied, but on appeal agrees that the “District Court in this case was correct in rejecting the ‘automatic dividend’ reading of the Bedford opinion.” The crucial issue then becomes whether this “boot” distribution has “the effect of a distribution of a dividend” under § 356(a)(2). The answer is not without difficulty since the distribution has some but not all the characteristics of either a sale or a dividend. The Commissioner admits this, but contends that the dividend characteristics predominate in this factual situation. We do not agree.
A dividend is generally defined as a “distribution of earnings and profits which effects no change in basic relationships between the shareholder and either the corporation or the other shareholders.” Himmel v. C. I. R., 338 F.2d 815, 817 (2d Cir. 1964). Basically, a dividend is a “pro rata distribution out of corporate earnings and profits.” Hawkinson v. Commissioner of Internal Revenue, 235 F.2d at 751. A redemption of corporate shares ordinarily would result in a sale, i.e. a retiring stockholder, but a pro rata redemption of corporate shares is viewed as a dividend. United States v. Davis, 397 U.S. 301, 90 S.Ct. 1041, 25 L.Ed.2d 323 (1970). Such redemptions need not be [605]*605totally pro rata to be considered as essentially equivalent to a dividend. Sachs v. Commissioner of Internal Revenue, 277 F.2d 879, 882-883 (8th Cir.), cert. denied, 364 U.S. 833, 81 S.Ct. 63, 5 L.Ed.2d 59 (1960). The total factual situation determines whether a redemption of corporate shares, in whatever form taken, is essentially equivalent to a dividend. Thus an ultimate factual question is presented. Treas.Reg. § 1.302-2(b).
The Commissioner argues that in defining the “effect of the distribution of a dividend” under § 356(a)(2), the redemption provisions of § 302 should be applied.9 In making this contention, the Commissioner inferentially concludes that the definition of a dividend under § 31610 does not in itself provide a complete description of a dividend for the purpose of § 356(a)(2). This position is consistent with contending that an “automatic dividend” rule does not apply to all “boot” distributions, for the definition in § 316(a), if applied by itself, has the same result as the Bedford “automatic dividend” rule. Although the Code does not expressly so provide, we agree with the Commissioner that § 356(a)(2) should be read in pari materia with § 302 for the purpose of determining whether a distribution had the effect of a dividend.11
[606]*606Further the Commissioner contends that the “effect of the exchange was the same as though F & G issued its note for $102,002 to the taxpayer prior to the reorganization in redemption of a portion of his F & G stock.” This redemption would reduce the taxpayer’s percentage ownership in F & G from 99.16 per cent to 95.43 per cent, and the redemption would not fall within the so-called “safe harbors” of § 302(b)(2), supra, since, inter alia, the taxpayer-shareholder owned more than 50 per cent of the total combined voting power of F & G stock after the redemption. If this analysis of what stock was redeemed is accepted, the Commissioner correctly argues that the note should be taxed as a dividend under § 302 because the taxpayer owned almost 100 per cent of F & G stock. United States v. Davis, 397 U.S. at 313, 90 S.Ct. 1041.
In order to evaluate the Commissioner’s casting of the consolidation of the corporations and distribution of the note as a redemption of F & G stock, it is necessary to examine § 302. Redemptions of stock are treated as distributions in part or full payment for exchange for stock under § 302(a), if the exchange meets the requirements of § 302(b). Section 302(b)(2) obviously does not apply here as the taxpayer would have greater than 50 per cent of the voting power of all classes of stock after redemption.12 However, § 302(b)(1) provides that “Subsection (a) shall apply if the redemption is not essentially equivalent to a dividend.” Therefore, even if an exchange does not qualify as a “safe harbor” under § 302(b)(2), it is still possible for the exchange to be a redemption or sale for tax purposes if it is “not essentially equivalent to a dividend” under § 302(b)(1).13
In testing dividend equivalence under § 302(b)(1), Treas.Reg. § 1.302-2(b) (1955) states that “[t]he question whether a distribution in redemption of stock of a shareholder is not essentially equivalent to a dividend under section 302(b)(1) depends upon the facts and circumstances of each ease.” Courts agree that the determination is ultimately factual. United States v. Carey, 289 F.2d 531, 537 (8th Cir. 1961) (and therein cited cases); United States v. Fewell, 255 F.2d 496, 499 (5th Cir. 1958).
In deciding whether the exchange under the facts of this case was a redemption qualifying as an exchange under § 302, it is necessary to determine what stock was redeemed for the note and what factors are relevant to defining “essentially equivalent to a dividend” under § 302.
First, a threshold question is what stock did the taxpayer exchange for the $102,002 note. As indicated previously, the Commissioner argues in his brief on appeal that the taxpayer exchanged a portion of his F & G stock for the note prior to the consolidation of the corporation. During the oral argument, counsel [607]*607for the Commissioner suggested as an alternative that a portion of the value of the note was exchanged for a portion of F & G stock and a portion of the value of the note was in exchange for a portion of World Wide stock. Therefore, the portion of the value of the note in exchange for World Wide stock would apparently qualify under the “safe harbor” of § 302(b)(2), whereas the portion of the note in exchange for F & G stock would not qualify under § 302(b)(2), or according to the Commissioner, under § 302(b)(1).
In analyzing this exchange, the Commissioner in his brief and during oral argument has mistakenly applied an artificial analysis in determining which corporation’s stock was redeemed for the note. We agree with the Commissioner that “it is not material whether the distribution is actually made by the corporation entering the reorganization or by the corporation resulting from the reorganization.” Courts and the Commissioner have said that it is irrelevant whether the earnings and profits were distributed before or after consolidation. Ross v. United States, 173 F.Supp. at 797. However, we are here confronted with the factual circumstance that there were two corporations, F & G and World Wide, before reorganization and one after reorganization, Omni. Theoretically and in addition to the Commissioner’s oral suggestion, we could look to F & G alone, World Wide alone, or F & G and World Wide together (in effect Omni at the time of consolidation, April 1, 1963) as the distributing corporation.
We think that it is artificial for the Commissioner to contend that the note was issued by F & G alone or that the note was issued partially by F & G and partially by World Wide. The issuance of the note was part of an entire corporate reorganization based on the capital accounts of both F & G and World Wide. The corporations involved did not exist separately but were owned and controlled by the same shareholders but in different proportions. We think that the note was issued by Omni in exchange for a portion of Omni stock that the taxpayer would have received if he had taken Omni stock entirely instead of receiving Omni stock and a note issued to him by Omni. In percentages and according to the Commissioner’s figures, the taxpayer reduced his ownership in Omni from 85 per cent to 61.7 per cent, or in other words the taxpayer exchanged 23.3 per cent of his Omni stock for the note that was issued to him by Omni.14
Another reason exists for holding that the note was issued by Omni. The entire concept of a redemption contemplates a change in ownership between an ongoing corporation and a newly formed corporation or within an ongoing corporation itself. For example, underlying the “safe harbor” provision, § 302(b) (2), is the rationale that a substantially disproportionate redemption of stock leads to the conclusion that the exchange is a redemption. The percentage requirements, e. g. the 50 per cent rule, refers to the necessity of having 50 per cent of the total voting stock after redemption. This rule and other redemption provisions make sense only in relation to a corporation that will continue to exist. If a substantially disproportionate redemption of stock has occurred the distribution clearly can be said to be a sale rather than a dividend because the stockholder has relinquished valuable rights in the future business. Further, the rights of stock ownership— to vote, to participate in earnings, and to share in net assets on liquidation — are all affected by a redemption. But these rights and the effect of a redemption only make sense in relation to a corporation that will be engaged in doing busi[608]*608ness after the redemption. To analyze the present case as a redemption of F & G stock alone, World Wide stock alone, or a portion of F & G and a portion of World Wide is an artificial reading of the redemption provisions, for F & G and World Wide were dissolved as part of the Plan. The change in ownership that would be significant due to a redemption would be a change in ownership in Omni, the corporation that would exist after the redemption and would have voting stock, earnings, and assets that would be affected. Therefore, due to the underlying rationale of § 302 and redemptions in general, we determine under the facts of this case that the taxpayer has in effect exchanged Omni stock for the $102,002 note.
Viewing the distribution of the note as an exchange for Omni stock, the taxpayer’s redemption does not fall within the “safe harbor” of § 302 (b)(2), since he owned approximately 61.7 per cent of the stock of Omni after the redemption.15 However, the exchange may still qualify as a redemption under § 302(b)(1) if it is “not essentially equivalent to a dividend.” 16 United States v. Carey, supra, typically represents the method of analysis that courts used in determining the factual question of dividend equivalence under § 302 before United States v. Davis, 397 U.S. 301, 90 S.Ct. 1041, 25 L.Ed.2d 323 (1970). The Eighth Circuit said in that case:
“Among these criteria are: The presence or absence of a bona fide corporate business purpose; whether the action was initiated by the corporation or by the shareholders; did the corporation adopt any plan or policy of contraction, or did the transaction result in a contraction of the corporation’s business; did the corporation continue to operate at a profit; whether the transaction resulted in any substantial change in the proportionate ownership of stock held by the shareholders; what were the amounts, frequency, and significance of dividends paid in the past; was there a sufficient accumulation of earned surplus to cover the distribution, or was it partly from capital.” United States v. Carey, supra, 289 F.2d at 537, quoting Heman v. Commissioner of Internal Revenue, 32 T.C. 479 (1959), aff’d, 283 F.2d 227 (8th Cir. 1960) (citations omitted).
See also Annot., 170 A.L.R. 1392 (1947) for a discussion of relevant factors for analyzing redemptions as of 1947.
This Court has since recognized, however, that Davis has changed the law in this area and that a business purpose is no longer a relevant inquiry. Johnson v. United States, 434 F.2d 340, 343 (8th Cir. 1970); accord, Title Insurance and Trust Co. v. United States, 326 F.Supp. 617, 620 (C.D.Calif.1971). In fact, the language in Davis broadly states that the “explanation [contained in the legislative history of § 302(b)(1)] gives no indication that the purpose behind the redemption should affect the result.” United States v. Davis, supra, 397 U.S. at 310-311, 90 S.Ct. at 1047 (footnote omitted). Rather the Court specifically said that to qualify under § 302(b)(1) “a redemption must result in a meaningful reduction of the shareholder’s proportionate interest in the corporation.” [609]*609United States v. Davis, supra at 313, 90 S.Ct. at 1048 (emphasis added). We read that language and Davis as holding that the proper inquiry is the percentage change of ownership in the corporation and the attendant overall results due to that change. Stated otherwise, the basic inquiry is whether the distribution had the “net effect” of a dividend. Brown v. United States, 345 F.Supp. 241, 244 (S.D.Ohio 1972) (and cases cited therein).
We think that if a distribution is not to have the “net effect” of a dividend, there must have occurred a meaningful reduction of the redeeming shareholder’s proportionate interest or in other words a meaningful change in the relative economic interests or rights of the shareholder after the redemption. United States v. Davis, supra, 397 U.S. at 313, 90 S.Ct. 1041; Brown v. United States, supra, 345 F.Supp. at 244. We further think that it is improper to refer to the “net effect” standard as the “net economic test,” as in Brown v. United States,17 since a meaningful change in shareholders’ voting power18 is a relevant inquiry. Also “net effect” can no longer be said to include the business purpose or motive of a corporation in making the distribution as was the ease in United States v. Fewell, supra, 255 F.2d at 499-500.
The Commissioner argues that Hawk-inson v. Commissioner of Internal Revenue, supra, provides a close parallel to this case and supports his analysis that the distribution of the note had the effect of a dividend. In Hawkinson, the taxpayer and other members of the Whitney family owned shares in Whitney Chain Manufacturing Company (Whitney Chain) that was consolidated with Hanson-Whitney Machine Company to form Whitney-Hanson Industries. After the redemption, the Whitneys received 5.7 per cent less stock in Whitney Chain because Whitney Chain canceled an indebtedness owed to it by some of the Whitneys. The court held that this cancellation of indebtedness as part of a plan of consolidation had the effect of a dividend since the whole transaction was “in reality a preservation of the economic status quo by a realistic alignment of ownership in the new corporation to reflect its productive assets.” Hawkin-son v. Commissioner of Internal Revenue, 235 F.2d at 751.
Arthur H. Squier, 35 T.C. 950 (1961), is more closely analogous to this case and distinguishable from Hawkinson. In Arthur H. Squier, the taxpayer owned, directly and constructively, 63.3 per cent of stock before the redemption and 56.82 per cent after the redemption. Also after the redemption, the taxpayer, an estate, had less than 50 per cent direct ownership, and a dissident minority interest increased from 36.7 per cent to 43.18 per cent. The Tax Court focused on a significant change in control and held that this 6.48 per cent reduction in shareholder interest due to the redemption caused the exchange to not have the effect of a dividend.
Apparently no change in voting power was present in Hawkinson after the redemption. However, in this case, the taxpayer reduced his interest in Omni from 85 per cent to 61.7 per cent after the redemption. Under Arkansas law, two-thirds vote is required for amending the articles of incorporation (Ark.Stat. Ann. § 64-507), for merger or consolidation (Ark.Stat.Ann. § 64-703), and for liquidation (Ark.Stat.Ann. § 64-901).
The redemption here has created a meaningful change in the voting power of the taxpayer under Arkansas law. Also, viewing the transaction as a realistic whole, the taxpayer has reduced his holding in one corporation, F & G, from almost complete ownership in F & G to 61.7 per cent ownership in Omni. In contrast, his ownership in World Wide was 56 per cent in relation to his 61.7 [610]*610per cent ownership in Omni, which either before or after the redemption would make no difference under the above two-thirds requirements of Arkansas law. The change in voting power here is similar to the voting control focused upon in Arthur H. Squier.
Further, although there is no per se rule on what percentage reduction of ownership is required to assure that a redemption does not have the effect of a dividend,19 the taxpayer in this case has a 23.3 per cent less of a right to dividends and to assets upon liquidation, which in itself is of considerable significance.
We think it appropriate to note at this point that Judge Bright in his dissent focuses on the applicability of the constructive ownership provisions to this case. We feel in connection therewith that an issue not raised at trial or on appeal does not provide a proper predicate for a decision.
The dissent basically reasons that the constructive ownership provisions do apply, which would make the taxpayer’s ownership interest 72 per cent after the redemption, instead of 61.7 per cent. The dissent, further, is inclined to agree that Arthur H. Squier might be applicable to this case “[i]f the record in the present case revealed the exceptional situation where the interest of family-member shareholders . . . were in fact adverse to the taxpayer. . . . ”
However, the Commissioner at trial, in his brief, and during oral argument employed the 62 per cent figure as the proper percentage ownership of the taxpayer after redemption. He has never mentioned the possible applicability of § 318, and therefore the record and briefs have not discussed this issue.
This Court has recently held that the Commissioner’s failure to raise, before or at trial, the theories, Code sections, and regulations upon which he relies, deprives the taxpayer of fair notice and opportunity to defend against presumptively correct deficiency assessments. Commissioner of Internal Revenue v. Transport Manufacturing and Equipment Co., 478 F.2d 731, 736 (8th Cir. 1973). Although the facts as to ownership by family members were stipulated, the failure of the Commissioner to raise the issue at all makes an opportunity by the taxpayer to respond impossible. If the issue had been raised at the appropriate time, it could have been articulated and explicitly briefed. We offer no view on whether § 318 would, apply under the facts of this case and only conclude that the failure of the Commissioner to raise this issue at all precludes its consideration by this Court.
The factual circumstances in this case lead us to the conclusion that the “boot” distribution of the promissory note of $102,002 was “not essentially equivalent to a dividend” under § 302(b)(1) nor had “the effect of a distribution of a dividend” under § 356(a)(2).
The judgment of the District Court is affirmed.