OPINION.
SteRnhagen :The respondent determined a deficiency of $16,187 20 in petitioner’s income tax for 1926, by treating as a stock dividend the distribution in 1926 to petitioner, a preferred shareholder in the Willys-Overland Company, of some of that corporation’s common shares, with consequent reduction of cost as the basis of gain on subsequent sale in 1926 of the original shares. A stipulation and *914accompanying exhibits contain the facts npon which the case was submitted.
The petitioner, an Ohio corporation, acquired from time to time between November 1, 1922, and December 31, 1924, 6,500 shares of the 7 per cent cumulative preferred stock of the Willys-Overland Company, having a par value of $100 a share, which it owned on December 2, 1925, and January 2, 1926. The aggregate cost of these shares was $418,575. No dividends had been declared or paid on such preferred stock from July 1, 1921, to September 30, 1925, and the accumulation for such period was $29.75 a share, which amounted to $193,375 upon petitioner’s 6,500 shares.
The holders of preferred shares had the right to a cumulative dividend of 7 per cent per annum, payable quarterly, “ out of the surplus profits of the company for each year in preference to all other stockholders.”
Paragraph A I of the articles of incorporation provided:
Out of the surplus profits arising from the business of the Company, the holders of the preferred stock are entitled to receive dividends as aforesaid at the rate of seven per cent, per annum, and no more, payable quarterly on the first day of January, April, July and October in each year, before any dividends shall be declared, set aside or paid upon' the common stock, and such dividends on the preferred stock shall be cumulative as from October 1, 1912, so that if in any year or years dividends thereon at the rate of seven per cent, per annum shall not have been paid, the deficiency shall be paid before any dividends shall be paid upon or set apart for the common stock.
The preferred share certificate provided:
VII. The holders of the preferred stock shall have no right as such holders to subscribe for or to acquire from the Company any stock, either preferred or common, which the Company may from time to time issue or offer for subscription or sale.
Paragraph D of the articles of incorporation provided:
The holders of the common stock shall exclusively possess voting powers for the election of directors and for all other purposes, and the holders of the preferred stock shall have no voting power, except as above stated; provided that in case the Company shall have failed in respect of four quarterly periods to declare and pay the full regular quarterly dividend on the preferred stock, then and in every such case so long as there shall be any arrears of dividends upon the preferred stock the holders of the common stock shall have no voting power and the holders of the preferred stock shall exclusively possess voting powers for the election of directors and for all other purposes. If, however, all such accrued installments and arrears shall be paid by the Company at any time, then and thereupon all power of the preferred stockholders to vote, as in this paragraph provided, shall cease, subject, however, to being again revived upon any subsequent failure of the Company in respect of four quarterly periods to declare and pay the full dividend on the preferred stock. At all times each holder of either class of stock of the Company which shall at the time possess voting powers on any matter, shall be entitled to one vote on such matter for each share of such class of stock then standing in his name on the books of the Company, except as otherwise required by law.
*915On December 2, 1925, the directors of the Willys-Overland Company adopted the following:
Whereas surplus profits of this Company, The Willy-Overland Company, in excess of the dividend hereinafter declared have been from time to time invested in extensions and betterments to the plant and property of the Company, and in providing additional facilities for its business, and in that manner a large addition has been made to the value of the assets of the Company but which is not available for the declaration and payment therefrom of a cash dividend, though same at a fair valuation is in excess of the dividend hereinafter declared, and
Whereas this Company has on hand a large amount of cash assets and inventory which it is now deemed advisable to conserve for the legitimate business requirements of the Company; and
Whereas it is deemed advisable by the Board of Directors to declare a dividend on the outstanding preferred stock of the Company payable in unissued common stock as hereinafter set forth;
Now, Therefore, Be it Resolved, that 262,389 shares or the unissued Common Stock of this Company be and hereby are appropriated by the Board of Directors for the purpose of paying the dividend hereináfter declared on the preferred stock of the Company; and,
Now, Therefore, Be it Resolved, that from the surpius profits of this Company, a dividend of Twenty-nine Dollars and Seventy-five cents ($29.75) on each share of the present issued and outstanding preferred stock of this Company be and is hereby declared, payable on the 2nd day of January, 1926, to preferred stockholders of record, at the close of business on the 19th day of December, 1925, in the common capital stock of this Company to be taken at the price of Twenty-five ($25.00) Dollars per share, * * * ; that the dividend hereby declared shall be and is for the quarterly dividends now in arrears and unpaid, being those quarterly dividends beginning with the one payable October 1, 1921, for the quarter ending September 30, 1921, and ending with and including the one payable October 1, 1925, for the quarter ending September 30, 1925; * * *
Pursuant thereto petitioner, on January 2, 1926, received 7,735 shares of such no-par common stock, the market value of which on that date was 31% a share, aggregating $242,685.53. The “ declared value ” [sic] was $5 a share and the book value $13.51.
Some of the preferred shareholders insisted upon and received the $29.75 dividend in cash.
The market value of the preferred stock on January 2, 1926, was $93 a share, or $604,500 for petitioner’s 6,500 shares.
On February 8, 1926, petitioner sold its 6,500 shares of preferred stock for $599,906.67.
Petitioner treated the receipt of 7,735 common shares as an ordinary property dividend, and in its 1926 return it included the value of $242,685.63 with other dividends in its gross income and in its deductions [see Revenue Act of 1926, section 234 (a) (6)]. It also reported on said return a profit of $181,331.67 from the sale of the preferred shares, based on their original cost of $418,575.
*916The respondent treated the receipt of 7,735 common shares as a stock dividend, and apportioned the original cost of $418,575 among the old preferred and the new common in the ratio that the total market ..value on January 2,1926, of each bore to the combined total market value of both, resulting in an assigned cost of $298,669.81 to the preferred shares. This figure he used as the basis for determining a gain of $301,286.86 upon the sale. By thus increasing the profit, he determined the deficiency.
There is no doubt that if the dividend of common shares to preferred shareholders was such a stock dividend as was not subject to tax (Revenue Act of 1926, section 201 (f)), the Commissioner’s method of using it to reduce the basis for determining gain or loss upon sale of the original preferred shares is correct. George T. Smith, 21 B. T. A. 782. For the characteristic which gives it immunity from tax, not alone under the statute, Towne v. Eisner, 245 U. S. 418, but also under the Constitution so long as the income tax is un-apportioned, Eisner v. Macomber, 252 U. S. 189, is that it represents nothing new or different from the original investment but only a further subdivision of its tokens. So much the taxpayer would admit, if it agreed that this was such a stock dividend. But it insists that the dividend was not inherently free from tax as a stock dividend, since it lacked the very characteristics and effects which give substance to the exemption. While to this corporate petitioner the dividend is tax free, whether it be a stock dividend or not, it is nevertheless of primary importance to determine whether the immunity is found in the exemption of section 201 (f) or the deduction of section 234 (a) (6), because the effect in tax when the stock thus received is disposed of is different, a stock dividend dividing the basis and an ordinary dividend, whether in cash or property, leaving the basis unaffected.
Any idea that the distribution of the common shares to the preferred shareholders was in discharge of a debt must be dismissed. Cumulative preferred dividends do not become a debt of the corporation until they have been properly declared. Before that there is a right to preference, but this is not a chose in action. When the dividend is declared it is still a dividend. So the taxpayer’s former concession that the difference between the $29.75 cumulative dividends regarded as a debt and the $31,375 value of the share when received was taxable profit would not stand against it. But the concession was withdrawn by an amended pleading, and the respondent not only seeks nothing from it but opposes the view that there was a liquidation of debt. We pass to the essential question.
Whether there has been a tax-free stock dividend is to be determined not by the terms used but by an analysis of the legal effect *917of what was done in the name of a stock dividend. Not every 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 Stages, 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 *918and 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 *919operated 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.