Our court regards "determinations as to whether a certain transaction is essentially equivalent to a dividend as a mixed question of law and fact, if not purely a conclusion of law." Kerr v. Commissioner of Internal Revenue, 326 F.2d 225, 229 (9th Cir.), cert. denied, 377 U.S. 963, 84 S.Ct. 1644, 12 L.Ed.2d 735 (1964). Thus, as to the ultimate question of dividend equivalence, our scope of review is broader than that limited by the clearly erroneous test.

Section 302 provides in relevant part that if a corporation redeems its own stock, the redemption shall be treated as an exchange (and taxed at capital gains rates) if the redemption is not essentially equivalent to a dividend. If, however, the redemption is essentially equivalent to a dividend, then it is taxable at ordinary income rates under Sections 301, 316 and 317 of the Code, 26 U.S.C. §§ 301, 316 and 317. See generally, United States v. Collins, 300 F.2d 821, 822-823 (1st Cir. 1962); Kerr v. Commissioner, 326 F.2d 225, 228-229 (9th Cir.1964). SEC. 304.

The mechanical application of the comparative-dividend test, as suggested by petitioner, would force us to close our eyes to these facts and would reduce the rules of section 302(b)(1) to a single decisive test exists. Kerr v. Commissioner, 326 F.2d 226, 230 (C.A. 9, 1964), affirming 38 T.C. 723 (1962), certiorari denied 377 U.S. 963 (1964); Bradbury v. Commissioner, 298 F.2d 111 (C.A. 1, 1962), affirming a Memorandum Opinion of this Court; United States v. Carey, 389 F.2d 531, 537 (C.A. 8, 1961); United States v. Fewell, 255 F.2d 496, 500 (C.A. 5, 1958); Flanagan v. Helvering, 116 F.2d 937, 939 (C.A.D.C. 1940), affirming a Memorandum Opinion of this Court. Furthermore, if we relied solely upon the comparative-dividend test, we would not make the factual inquiry which was contemplated by Congress when it enacted section 302(b)(1).

We recognize that the lack of a dividend history and the presence of accumulated earnings and profits is sometimes pointed to as an element in determining dividend equivalency. See, e.g., Thomas Kerr, 38 T.C. 723, 730 (1962), affd. 326 F.2d 225 (C.A. 9, 1964), certiorari denied 377 U.S. 963 (9164); John A. Decker, 32 T.C. 326, 331 (1959), affirmed per curiam 286 F.2d 427 (C.A. 6, 1960). But, in fact, this element is little more than a guidepost in determining the bona fides of the asserted business purpose and the absence of a tax-avoidance motive.

And in any event, the existence of a business purpose will not, of itself, require that the transaction be classified as ‘not essentially equivalent to a dividend.’ Cf. United States v. Fewell, 255 F.2d 496, 500 (C.A. 5); Bradbury v. Commissioner, 298 F.2d 111, 118 (C.A. 1), affirming a Memorandum Opinion of this Court; Thomas Kerr, 38 T.C. 723, 732, affirmed 326 F.2d 225 (C.A. 9). See SEC. 318. CONSTRUCTIVE OWNERSHIP OF STOCK.(a) GENERAL RULE.— For purposes of those provisions of this subchapter to which the rules contained in this section are expressly made applicable—(2) PARTNERSHIPS, ESTATES, TRUSTS, AND CORPORATIONS.

The other courts of appeals that have passed on the question are apparently willing to give at least some weight under § 302(b)(1) to the business motivation of a distribution and redemption. See, e.g., Commissioner v. Berenbaum, 369 F.2d 337 (C.A. 10th Cir. 1966); Kerr v. Commissioner, 326 F.2d 225 (C.A. 9th Cir. 1964); Ballenger v. United States, 301 F.2d 192 (C.A. 4th Cir. 1962); Heman v. Commissioner, 283 F.2d 227 (C.A. 8th Cir. 1960); United States v. Fewell, 255 F.2d 496 (C.A. 5th Cir. 1958). See also Neff v. United States, 157 Ct. Cl. 322, 305 F.2d 455 (1962).

Whether a distribution is essentially equivalent to a dividend is "a mixed question of law and fact, if not purely a conclusion of law." Kerr v. Commissioner, 326 F.2d 225, 229 (9th Cir.), cert. denied, 377 U.S. 963, 84 S.Ct. 1644, 12 L.Ed.2d 735 (1964), followed, Tabery v. Commissioner, 354 F.2d 422, 427 (9th Cir. 1965). This case primarily concerns the legal significance of undisputed facts. Therefore, de novo review is appropriate.

II Whether I.R.C. § 471 permits property other than merchandise to be inventoried for tax purposes is a question of law reviewed de novo. Cf. Dumdeang v. Commissioner, 739 F.2d 452, 453 (9th Cir. 1984) (interpretation of term "dependent" in I.R.C. § 152(b)(3) is reviewed de novo); Kerr v. Commissioner, 326 F.2d 225, 229 (9th Cir.) (interpretation of phrase "essentially equivalent to a dividend" in I.R.C. § 302 is reviewed de novo), cert. denied, 377 U.S. 963, 84 S.Ct. 1644, 12 L.Ed.2d 735 (1964). However, the Commissioner's determination as to whether inventory accounting clearly reflects income for a particular class of taxpayers should not be set aside unless "clearly unlawful" or "plainly arbitrary."

The Government contends that a pro rata distribution by a corporation effecting no basic change in shareholder relationships is the hallmark of a dividend, therefore the payment to Taxpayer was "essentially equivalent to a dividend" and taxable as such. Himmel v. Commissioner of Internal Revenue, 338 F.2d 815 (2d Cir. 1964); Kerr v. Commissioner of Internal Revenue, 326 F.2d 225 (9th Cir. 1964) cert. denied 377 U.S. 963, 84 S.Ct. 1644, 12 L.Ed.2d 735. Section 318(a)(1) makes Taxpayer the constructive "owner" of the common stock owned by his spouse and children.

Friedman v. Fordyce Concrete, Inc., 8 Cir., 362 F.2d 386, 387; Kerr v. C.I.R., 9 Cir., 326 F.2d 225, 229, cert. den. 377 U.S. 963, 84 S.Ct. 1644, 12 L.Ed.2d 735; Los Angeles Extension Co. v. United States, 9 Cir., 315 F.2d 1, 3;