¶1dissenting: In subchapter S of chapter 1 of the 1954 Code, as amended, Congress has accorded specified benefits to certain corporate taxpayers that qualify as “small business corporation[s],” and it has defined that term so as to exclude corporations having “more than one class of stock.” Sec. 1371 (a)(4). Since there is a wide variety of corporate instruments, however labeled, reflecting the dominant characteristics of risk capital, it was certainly appropriate for the Commissioner ito promulgate regulations as to the meaning of the phrase “one class of stock.” He has done so here, sec. 1.1871-1 (g), Income Tax Regs., and has ruled that “If an instrument purporting to be a debt obligation is actually stock, it will constitute a second class of stock.”
¶2In my judgment this regulation falls within the Commissioner’s rule-making power, and should be sustained since it is clearly not inconsistent with the statute. A fair reading of the prevailing opinion leads to the conclusion that the Court has invalidated the regulation as applied here. Yet the rule has long been established that regulations must be treated as valid unless unreasonable or plainly inconsistent with the statute and that they should not be set aside except for weighty reasons. Commissioner v. South Texas Co., 333 U.S. 496, 501; Fawcus Machine Co. v. United States, 282 U.S. 375, 378; Boske v. Comingore, 177 U.S. 459, 470; Brewster v. Gage, 280 U.S. 327, 336; Textile Mills Corp. v. Commissioner, 314 U.S. 326, 336-339; Colgate Co. v. United States, 320 U.S. 422, 426; Estate of Richard R. Wilbur, 43 T.C. 322, 328; and Van Products, Inc., 40 T.C. 1018, 1024.
¶3In the present case the Court has found that the notes in question actually reflect risk capital and do not represent a genuine indebtedness. In the circumstances, since these instruments establish different rights and liabilities from those associated with the corporation’s common stock, it is entirely appropriate to conclude that they represent a second class of stock within the meaning of the regulations.
¶4It is no answer to say that these rights and liabilities may be ignored in view of the Court’s conclusion that there was no intention to enforce the notes according to their terms. The point is that by thus subordinating the notes the stockholders in effect made them equity instruments with rights and liabilities that might be enforced only at some later time when the corporation might have earnings or other funds permitting such course of action. As thus modified the notes resemble cumulative nonparticipating redeemable preferred stock. If they had been so designated, I think there would be no question that these equity instruments would constitute a second class of stock. Is a different result required by reason of a different label ? The regulations in effect say no, and I think that answer is consistent with whatever legislative purpose may have induced Congress to exclude from the category of small business corporations those having more than one class of stock. Certainly, it is not inconsistent with the words of the statute, and if there was any legislative purpose leading to the opposite interpretation, it has not been spelled out in the majority opinion.