*820 1. Petitioner owned certain notes maturing serially. In 1934 it entered into an agreement with its debtor wherein it granted the latter an extension in the time of payment of notes due in that year. The debtor agreed to pay an additional amount, represented by income bonds, if no default should thereafter occur in the payment of principal or interest on all the notes, and also agreed to enhance the value of certain property pledged as collateral and, in the event of default, to surrender to its creditor all of its right, title and interest in such property. Default occurred and the pledged collateral, the value of which exceeded the cost and face amount of the notes, was surrendered. Held, the transaction resulted in the receipt of taxable income by petitioner to the extent that the value of the property received exceeded the cost to it of the notes. Fair market value of the property determined.
2. The profit derived by petitioner, though includable in its gross income, was not "derived from interest", within the purview of section 351 of the Revenue Act of 1934. It is therefore held that petitioner was not a personal holding company as defined by that act, nor*821 subject to the additional tax imposed by section 291 for failure to file a separate personal holding company return.
*616 The respondent determined the following deficiency in tax against the petitioner for the year 1934:
| Deficiency | 25% penalty | |
| Income tax | $337,974.72 | |
| Excess-profits tax | 120,399.90 | |
| Surtax (section 351) | 630,157.88 | $157,539.47 |
| Total | 1,088,532.50 | 157,539.47 |
The 25 percent was added under section 291 of the Revenue Act of 1934 for failure to file a surtax return.
In computing the deficiency the respondent determined that the value of 136,000 shares of the common stock of the PhiladelphiaInquirer Co. received by petitioner in 1934 was $44 per share. In his answer he alleged that the stock had a value of $57.50 per share and asked that the deficiency be increased to the following amounts:
| Deficiency | 25% penalty | |
| Income tax | $595,237.22 | |
| Excess profits tax | 213,949.90 | |
| Surtax | 1,116,617.74 | $279,154.44 |
| Total | 1,925,804.86 | 279,154.44 |
*822 At the hearing respondent stated that the value of $57.50 used in computing the increased deficiency was erroneous and that the value which should have been used was $53.75 per share, the price at which petitioner had agreed to purchase a minority block of the stock from Public Ledger, Inc.
The questions raised by the pleadings are as follows:
1. Should any part of the value of 136,000 shares of stock received by petitioner in 1934 be included in its gross income for that year?
2. If so, then what was the fair market value, if any, of the stock received?
3. Is petitioner subject to tax as a personal holding company under the provisions of section 351 of the Revenue Act of 1934?
4. Is petitioner liable for the 25 percent addition to tax prescribed by section 291 of the Revenue Act of 1934, for failure to file a personal holding company return?
Many of the basic facts were stipulated. In addition each of the parties called witnesses to express opinions as to the value of the stock in issue. We find the facts to be as stipulated but set out in our findings only those necessary to an understanding of the issues.
FINDINGS OF FACT.
The petitioner is a corporation, *823 organized on March 1, 1930, under the laws of Delaware, with an authorized capital stock of 1,000 shares *617 of no par value per share. Its principal office is located in Chicago, Illinois.
The Philadelphia Inquirer is a daily newspaper, published mornings and Sundays in the city of Philadelphia, Pennsylvania. It was founded in 1829, and in 1889 James Elverson acquired control of it. From 1889 to April 1, 1929, the said publishing business was conducted by the Philadelphia Inquirer Co., a corporation organized and existing under the laws of Pennsylvania (hereinafter referred to as the Inquirer Co. of Pennsylvania). At the time of his death in 1911, James Elverson owned all its outstanding capital stock, namely 2,750 shares of $100 par value. At his death, control passed to his son, James Elverson, Jr., and upon the latter's death, in January 1929, Eleanor Elverson Patenotre, sister of James Elverson, Jr., became the sole owner of the stock.
Immediately prior to April 1, 1929, Eleanor Elverson Patenotre caused to be organized under the laws of Delaware another corporation, thenceforth also known as the Philadelphia Inquirer Co. (hereinafter referred to as the Inquirer*824 Co. of Delaware), the said Inquirer Co. of Delaware being authorized to issue 109,000 shares of $3 cumulative dividend convertible preference stock of no par value (hereinafter referred to as "preference stock"), callable at $57.50 per share, and 300,000 shares of common stock of no par value.
Effective as of April 1, 1929, the Inquirer Co. of Delaware issued 191,000 shares of its common stock and all of the 109,000 shares of authorized preference stock to Eleanor Elverson Patenotre, in consideration of the transfer to the Inquirer Co. of Delaware of all the assets of the Inquirer Co. of Pannsylvania other than its real estate and such of its other assets as were not related to the publishing business. The balance of 109,000 shares of authorized common stock was not then issued, but was reserved for conversion of preference stock.
On or about April 1, 1929, Eleanor Elverson Patenotre sold the 109,000 shares of preference stock and 40,000 shares of common stock of the Inquirer Co. of Delaware to a group of bankers, at a price of $46 per share for the preference stock and $39 per share for the common stock, or an aggregate price of $6,574,000. The bankers, in turn, resold the*825 stock to the public at $52 per share for the preference stock and $42 per share for the common stock.
On or about February 28, 1930, Eleanor Elverson Patenotre made a gift of 2,750 shares of capital stock of the Inquirer Co. of Pennsylvania and 151,000 shares of common stock of the Inquirer Co. of Delaware to her son, Raymond Patenotre, a citizen and resident of France.
On March 3, 1930, the petitioner issued 1,000 shares of its capital stock, the entire amount authorized, to the Inquirer Co. of Pennsylvania for the following assets:
| Cash | $152,061.51 |
| Leasehold, Twenty-third and Market Streets, Philadelphia, Pa | 293,250.00 |
| Stock of the United Corporation | 191,257.00 |
| Accounts receivable (Eleanor Elverson Patenotre) | 5,960.00 |
| 642,528.51 |
*618 The Inquirer Co. of Pennsylvania retained assets having a stated book value of approximately $5,400,000, exclusive of liabilities. The 1,000 shares of capital stock of the Elverson Corporation so issued were then immediately distributed by the Inquirer Co. of Pennsylvania to Raymond Patenotre, the then sole stockholder of the Inquirer Co. of Pennsylvania.
Curtis-Martin Newspapers, Inc. (hereinafter referred*826 to as Curtis-Martin Newspapers, Inc., or Public Ledger, Inc., as may be appropriate), is a corporation organized in 1925 under the laws of Pennsylvania and engaged in the business of publishing newspapers. On January 4, 1934, the name of the corporation was changed from Curtis-Martin Newspapers, Inc., to Public Ledger, Inc. Prior to April 16, 1934, that corporation published in Philadelphia the Philadelphia Public Ledger morning, evening, and Sunday editions. After April 16, 1934, Public Ledger, Inc., published only the evening edition of the Philadelphia Public Ledger, the morning and Sunday editions having been transferred, in accordance with a contract hereinafter mentioned, to the Inquirer Co. of Delaware. At all times material herein, the principal stockholders of Curtis-Martin Newspapers, Inc., and Public Ledger, Inc., were the late Cyrus H. K. Curtis or his estate and John C. Martin. Cyrus H. K. Curtis was the principal owner of the Curtis Publishing Co., a corporation which had published for many years weekly and monthly magazines of wide circulation, and was a man of great wealth. John C. Martin was closely associated with him in various publishing activities. Cyrus*827 H. K. Curtis died June 7, 1933.
On March 4, 1930, Raymond Patenotre sold to Curtis-Martin Newspapers, Inc., his entire holdings in the two Inquirer companies, being 151,000 shares of the common stock of the Inquirer Co. of Delaware and 2,750 shares of the stock of the Inquirer Co. of Pannsylvania, for $10,500,000. The total consideration was allocated and paid as follows:
| 151,000 shares of common stock of Inquirer Co. of Delaware: | |
| Cash | $5,250,000 |
| Series A notes | 3,050,000 |
| 8,300,000 | |
| 2,750 shares of stock of Inquirer Co. of Pennsylvania: | |
| Series B notes | 2,200,000 |
| Total | 10,500,000 |
*619 The series A and series B notes bore interest at the rate of 6 percent, were payable over a period of ten years in equal quarterly installments on the fourth day of June, September, December, and March, and were personally endorsed by John C. Martin. These notes, properly executed and endorsed, were delivered to the seller, Raymond Patenotre.
On the same date, March 4, 1930, an indenture of trust was made between Curtis-Martin Newspapers, Inc., and Bankers Trust Co. of New York City, under which the 151,000 shares of the common stock of the Inquirer Co. of Delaware*828 were deposited with the Bankers Trust Co., as trustee, to secure payment of principal and interest on the notes. The indenture of trust provided for the release of part of the pledged collateral after specified amounts were paid. It also provided that, upon default in the payment of principal or interest on any of the notes which continued for a period of 30 days after the due date, the trustee should declare the principal and accrued interest thereon immediately due and payable, sell the collateral when directed to do so by the holder of the defaulted notes, and apply the proceeds, after deducting expenses, to the payment of principal and interest on the notes. Any surplus remaining was to be paid to Public Ledger, Inc. The indenture further provided that the exercise of the remedies provided for in the event of default should in no way impair the right of the holder of the notes to recover from the maker or endorser any deficiency on account of principal or interest over and above the amount realized from the sale of the pledged collateral.
On March 4, 1930, petitioner acquired from Raymond Patenotre 37 series B notes, with an aggregate face value of $2,035,000, and paid therefor*829 $2,000,000 in cash. Thereafter, the petitioner acquired series A notes from Raymond Patenotre and Jacqueline A. Patenotre, his wife, having an aggregate face value as follows:
| Date | From Raymond Patenotre | From Jacqueline A. Patenotre |
| April 23, 1931 | $1,143,750 | $457,500 |
| March 13, 1933 | 533,750 | 610,000 |
| Total | 1,677,500 | 1,067,500 |
In consideration for the series A notes, petitioner issued its notes payable in the aggregate amount of $2,745,000.
On October 1, 1930, the Inquirer Co. of Delaware purchased from the Curtis-Martin Newspapers, Inc., all of the 2,750 outstanding shares of capital stock of the Inquirer Co. of Pennsylvania, for the sum of $2,200,000. This purchase was made as of March 4, 1930, and the Inquirer Co. of Delaware paid to Curtis-Martin Newspapers, Inc., the *620 additional sum of $77,000, representing interest upon the aforesaid purchase price at 6 percent from March 4, 1930.
On January 20, 1933, petitioner sold note No. 32 of series A, with a face value of $76,250, to Societe Voluntas, a Swiss corporation, for $70,000. On May 15, 1934, petitioner purchased this note from Societe Voluntas at a cost of $76,250. On June 2, 1933, the*830 petitioner owned all the outstanding and unpaid series A and series B notes secured pursuant to the indenture of trust of March 4, 1930, except series A note No. 32, due March 4, 1938.
On June 2, 1933, the petitioner and Curtis-Martin Newspapers, Inc., entered into an agreement relating to the extension of the maturity dates of certain of the series A and series B notes falling due in 1933.
On April 3, 1934, the last day of the 30-day period of grace following the nonpayment of the principal due March 4, 1934, Public Ledger, Inc. (formerly Curtis-Martin Newspapers, Inc.), the maker of the notes, John C. Martin, the president of Public Ledger, Inc., and the endorser of the notes, the petitioner, the owner of the notes, and the Bankers Trust Co., the trustee and holder of the pledged collateral, entered into a supplemental agreement. The preamble of the agreement stated that Public Ledger, Inc., had requested an extension of time for the payment of the principal of eight notes aggregating $525,000 falling due in 1934 and that this extension had been agreed to by petitioner upon the terms and conditions stated in the agreement. The payment of these notes was extended to 1940 and*831 1941. Public Ledger, Inc., agreed to transfer, within 60 days from the execution of the agreement, to the Inquirer Co. of Delaware the name, good will, and Associated Press franchise of the daily and Sunday morning Public Ledger, and not to publish thereafter, prior to March 4, 1941, any morning or Sunday newspaper in the city of Philadelphia. Until payment of the extended notes had been made, Public Ledger, Inc., agreed to relinquish its right to receive dividends on the Inquirer Co. stock; to prevent the issuance of any additional stock of any class by the Inquirer Co.; and to maintain the financial condition of the Inquirer Co. at its then level, except for losses occurring in normal operations of the business. It also agreed that none of the pledged collateral should be released to it until all notes maturing up to and including notes due March 4, 1936, had been paid; and that it would execute and deliver to the trustee for the account of petitioner $1,400,000 principal amount of income bonds. The agreement provided that, in the event of default in the payment of principal or interest on any of the notes which continued for a period of 30 days after due date, Public Ledger, *832 Inc., should, by appropriate written instrument, surrender to the trustee, for the benefit of the holder of the *621 outstanding notes, all of its right, title, and interest in the pledged collateral, including any equity of redemption. Upon such default and delivery of the written instrument to the trustee, it was agreed that Public Ledger, Inc., and the endorser of the notes should be released and discharged from all liability "with the same effect as if said notes had been paid in full from the sale of the pledged collateral", and the income bonds were to be canceled and become void, saving any rights previously accruing to the holders of such bonds. In the event Public Ledger, Inc., within 30 days after request from the trustee, failed to deliver to its such written instrument, the principal of all outstanding notes was to become immediately due and payable, the pledged collateral was to be sold by the trustee, neither Public Ledger, Inc., nor the endorser of the notes was to be released from liability with respect thereto, and the income bonds were to remain in full force and effect. If Public Ledger, Inc., surrendered its interest in the pledged collateral, petitioner*833 agreed to purchase from it, at $53.75 per share, such number of shares of the common stock of the Inquirer Co. of Delaware then owned by Public Ledger, Inc. (and not included in the pledged collateral), as should be required to discharge the latter's indebtedness to the Inquirer Co. of Delaware to an amount not exceeding $600,000, which amount was to be applied by Public Ledger, Inc., to the payment of this indebtedness. The price of $53.75 per share represented the estimated average cost of the stock to Public Ledger, Inc., and was fixed without reference to the fair market value.
On April 3, 1934, there remained on deposit with the Bankers Trust Co. pursuant to the indenture of trust of March 4, 1930, as modified by the agreement of June 2, 1933, and the agreement of April 3, 1934, 136,000 shares of the common stock of the Inquirer Co. of Delaware, 15,000 of such shares having been released to Curtis-Martin Newspapers, Inc., prior to June 2, 1933, pursuant to the indenture of trust of March 4, 1930. On the same date, April 3, 1934, Curtis-Martin Newspapers, Inc., owned 17,500 shares of the common stock of the Inquirer Co. of Delaware in addition to the total of 151,000 shares*834 referred to above.
On April 16, 1934, the daily morning and Sunday editions of the Philadelphia Inquirer and the Public Ledger, were merged and thereafter published under the following title:
THE PHILADELPHIA INQUIRER
PUBLIC-LEDGER
and the agreement of April 3, 1934, was carried out according to its terms.
From May 15, 1934, until their cancellation as hereinafter described, the petitioner owned all the outstanding unpaid series A and series B *622 notes secured pursuant to the indenture of trust of March 4, 1930, the same aggregating $3,488,750 in face amount, petitioner having acquired said notes by purchase at a cost of $3,453,750.
All principal and interest due prior to September 4, 1934, on the series A and series B notes secured pursuant to the indenture of trust of March 4, 1930, were duly paid by Public Ledger, Inc., in accordance with the provisions of the said indenture of trust, as modified by the agreement of June 2, 1933, and the agreement of April 3, 1934.
Public Ledger, Inc., failed to pay, when due, the interest due September 4, 1934, upon any of the outstanding series A and series B notes secured pursuant to the indenture of trust of March 4, 1930, as*835 modified by the agreement of June 2, 1933, and the agreement of April 3, 1934.
The board of directors of Public Ledger, Inc., at a meeting held on September 18, 1934, authorized and directed the officers of the corporation to execute and deliver to the trustee an appropriate instrument releasing and surrendering to the latter, for the benefit of the holder of the outstanding notes, all of its right, title, and interest in the pledged collateral, and the trustee was on the same date advised of the action taken. Later Public Ledger, Inc., was informed that petitioner preferred to have the pledged collateral delivered to it direct rather than through the medium of the trustee, and under date of October 15, 1934, its board of directors authorized its officers to execute and deliver to the petitioner appropriate instruments of transfer of its right, title, and interest in the pledged collateral, together with its equity of redemption.
Under date of October 16, 1934, Public Ledger, Inc., and petitioner delivered a letter to the trustee advising it that they had entered into an agreement for the settlement of the indebtedness outstanding under the indenture of trust of March 4, 1930, and*836 the agreement of April 3, 1934. In this letter the trustee was authorized and instructed to deliver the 136,000 shares of stock of the Inquirer Co. of Delaware held as collateral under the trust indenture to the counsel for Public Ledger, Inc., and was authorized to cancel and cremate the outstanding notes of Public Ledger, Inc., and the income bonds, which petitioner delivered to the trustee on the same date.
On October 17, 1934, the 136,000 shares of the common stock of the Inquirer Co. of Delaware were delivered to the petitioner by the counsel for Public Ledger, Inc. On the same date, the trustee canceled and destroyed the notes of Public Ledger, Inc., in the aggregate face amount of $3,488,750 and also the $1,400,000 income bonds of Public Ledger, Inc.
On October 16, 1934, the then existing indebtedness of Public Ledger, Inc., to the Inquirer Co. of Delaware amounted to $628,230.58. On *623 that date the petitioner's nominee purchased from Public Ledger, Inc., pursuant to the agreement of April 3, 1934, 10,550 shares of the common stock of the Inquirer Co. of Delaware, at $53.75 per share, or a total of $567,062.50. Public Ledger, Inc., thereupon, pursuant to*837 the agreement of April 3, 1934, paid to the Inquirer Co. of Delaware the said amount of $567,062.50. At the same time Public Ledger, Inc., paid to the Inquirer Co. of Delaware the additional sum of $61,168.08 to discharge the balance of its said indebtedness to the Inquirer Co. of Delaware.
One of the provisions of the agreement of April 3, 1934, not heretofore mentioned, gave petitioner the right, within 30 days from the time of the surrender of the pledged collateral and the purchase mentioned in the preceding paragraph, to have the "fair value" of the 21,950 shares of the common stock of the Inquirer Co. of Delaware still owned by Public Ledger, Inc., determined by mutual agreement or by arbitration, and upon the determination of such value petitioner was given the option, to be exercised within 60 days thereafter, to purchase this stock at the value so determined. On November 13, 1934, petitioner served notice on Public Ledger, Inc., of the exercise of its right to have the fair value of the 21,950 shares determined. Thereafter, representatives of petitioner and Public Ledger, Inc., conducted negotiations in an effort to arrive at a fair price for these shares. As a result*838 of these negotiations, Public Ledger, Inc., by letter dated May 17, 1935, gave petitioner an option to purchase them at $27.50 per share. This option finally expired on July 5, 1935, without the exercise thereof by petitioner.
On August 4, 1936, the Hekor Investment Holding Co., Ltd., a corporation organized and existing under the laws of the Dominion of Canada, and on that date the owner of 10,550 shares of the common stock of the Inquirer Co. of Delaware and all of the 1,000 outstanding shares of capital stock of the petitioner, sold the same to the Cecelia Co., a corporation organized and existing under the laws of Illinois, at a price of $485,300 ( $46 per share) for the said 10,550 shares of common stock of the Inquirer Co. of Delaware, and $2,515,835.46 for the said 1,000 shares of capital stock of petitioner. On that date the petitioner owned no assets other than 136,000 shares of the common stock and $3,400,000 principal amount of notes of the Inquirer Co. of Delaware, and had liabilities aggregating $7,518,864.54.
On October 16, 1936, Public Ledger, Inc., then the owner of 21,950 shares of common stock of the Inquirer Co. of Delaware, sold the same at a price of $42*839 per share, 11,950 of such shares being so sold to the Cecelia Co., and the balance of 10,000 shares to Triangle Press, Inc., a subsidiary of the Cecelia Co.
*624 Changes in the Capital Structure of Inquirer Co. of Delaware Between April 1, 1929, and October 16, 1934.
The 109,000 shares of preferred stock issued by the Inquirer Co. of Delaware on April 1, 1929, were eliminated from its capital structure during 1929 and 1930 either by purchase for cash or by conversion into common stock, share for share. On October 1, 1930, the company completed its acquisition of the outstanding preferred stock by purchasing for retirement 58,694 shares at $57.50 per share, or at a total cost of $3,374,905.
For the purpose of raising funds to retire the 58,694 shares of preferred stock, to purchase all of the outstanding stock of the Inquirer Co. of Pennsylvania, and for other corporate purposes, the Inquirer Co. of Delaware on October 1, 1930, issued $6,000,000 of its 10-year 6 percent coupon notes pursuant to an indenture of trust. The indenture provided, among other things, that the issue was unconditionally guaranteed as to principal and interest by Curtis-Martin Newspapers, *840 Inc.; that the issuer agreed not to declare or pay any cash dividend upon its outstanding capital stock unless, after payment thereof, its current assets should exceed its current liabilities, by an amount at least equal to the amount necessary to pay the maximum sinking fund requirements and all interest charges on outstanding notes for the 12 months next succeeding the date fixed for the payment of such dividends; that the issuer agreed that its net assets would be maintained at a value of not less than 150 percent of the notes outstanding; that in the event Cyrus H. K. Curtis or John C. Martin, or their executors, administrators or trustees, ceased to retain control, either directly or indirectly, of the Inquirer Co. of Delaware, the holders of the notes would have the option of requesting payment of the principal amount of their holdings, plus accrued interest, within a period of not more than five months after the happening of such event; that the issuer agreed to pay to the trustee, on or before October 1, 1931, and on or before October 1 of each succeeding year, a sum in cash sufficient to redeem $300,000 in par value of notes at a redemption price of 102 1/2 percent, plus accrued*841 interest up to and including December 31 of such year; and that the issuer had the right to redeem at a price of 102 1/2 percent, plus accrued interest, all or any part of the outstanding notes at any time upon giving proper notice to the holders thereof.
The entire issue of notes described in the preceding paragraph was sold by the Inquirer Co. of Delaware to a banking group, the net proceeds to the company aggregating $5,760,000. The banking group offered the note issue to the public at par. On October 16, 1934, there remained outstanding under the indenture notes aggregating *625 $4,800,000 in face amount, none of which were owned by the Inquirer Co. of Delaware or the Inquirer Co. of Pennsylvania.
During the period from April 1, 1929, to December 30, 1932, the following changes took place with respect to the common stock of the Inquirer Co. of Delaware:
(a) During 1929 the company purchased three shares of this stock for $123.
(b) Upon the conversion on October 1, 1930, of 50,306 shares of preference stock into common stock, there were issued to the Inquirer Co. of Delaware 40,306 shares, and to others 10,000 shares, of the previously unissued common stock of*842 that company. The 40,306 shares were thereafter held by the company in its treasury.
(c) On December 31, 1931, the company purchased 3,000 shares of its common stock from Curtis-Martin Newspapers, Inc., at a total cost of $210,000.
(d) On December 31, 1931, the company also purchased from various holders 1,343 shares of its common stock at a total cost of $87,036.98.
(e) On April 30, 1932, the company purchased 22,535 shares of its common stock as follows:
| 10,500 shares from John C. Martin | $875,000.00 |
| 5,000 shares from Alice P. Martin (wife of John C. Martin) | 416,666.67 |
| 25 shares from Harrison P. Martin (son of John C. Martin) | 2,083.33 |
| 10 shares from Isabel Ogelsby (daughter of John C. Martin) | 833.33 |
| 7,000 shares from the Inquirer Co. of Pennsylvania | 583,333.33 |
| Total | 1,877,916.66 |
(f) On December 30, 1932, the company purchased 50 shares of its common stock for $3,750.
From December 31, 1932, to August 31, 1933, the Inquirer Co. of Delaware had outstanding 241,306 shares of common stock, being 191,000 shares originally issued, plus 50,306 shares issued in conversion of preference stock. During that period these shares were held as follows: *843
| Shares | |
| Curtis-Martin Newspapers, Inc | 168,500 |
| Charles A. Tyler, executive of Curtis-Martin Newspapers, Inc., and of Inquirer Co. of Delaware | 5,250 |
| Inquirer Co. of Delaware (treasury) | 67,237 |
| Various owners | 319 |
| Total | 241,306 |
The purchases of common stock made by the Inquirer Co. of Delaware on April 30, 1932, were paid for by the issuance of $1,877,800 face amount of the company's 15-year, 6 percent income bonds, plus $116.66 in cash.
*626 On August 31, 1933, the 67,237 shares of common stock of the Inquirer Co. of Delaware which that company then held in its treasury were, by appropriate corporate action, reclassified into preferred stock (hereinafter referred to as new preferred stock). Under an amendment to the company's certificate of incorporation dated August 31, 1933, the holders of this new preferred stock were entitled to receive out of the surplus or net profits of the company cumulative dividends at the rate of $6 per share per annum, payable quarterly, before any dividends were paid on the common stock. The new preferred stock was redeemable at $100 per share plus accrued dividends and the holders of this stock were entitled to*844 receive the same amount upon liquidation. So long as any new preferred stock was outstanding the company was required to have and maintain current assets in an amount not less than one and one-half times the amount of current liabilities. The amended certificate of incorporation further provided that no dividends should be paid upon the common stock until all accrued payments to the sinking fund for the redemption of the new preferred stock had been paid, and that in the event of default in the payment of two quarterly dividends or default in any payment into the sinking fund, or failure to maintain the required ratio between current assets and current liabilities, the holders of the new preferred stock would have the right to vote to the exclusion of common stockholders as long as such default continued.
On August 31, 1933, the Inquirer Co. of Delaware transferred 18,778 shares of its new preferred stock to the holders of the income bonds previously issued in exchange for such bonds. The remaining 48,459 shares were at all times thereafter retained in the treasury of the Inquirer Co. of Delaware.
On April 3, 1934, and on October 16, 1934, the issued and outstanding new preferred*845 stock and the common stock of the Inquirer Co. of Delaware were held as follows:
| April 3, 1934 | October 16, 1934 | |
| New preferred stock: | Shares | Shares |
| John C. Martin and members of his immediate family | 12,945 | 12,809 |
| Inquirer Co. of Pennsylvania | 5,833 | 5,833 |
| Total | 18,778 | 18,642 |
| Common Stock: | ||
| Public Ledger, Inc. (pledged under indenture of trust of March 4, 1930) | 136,000 | 136,000 |
| Public Ledger, Inc. (not pledged) | 32,500 | 32,500 |
| Charles A. Tyler | 5,250 | 5,250 |
| Various owners | 319 | 319 |
| Treasury | None | None |
| Total | 174,069 | 174,069 |
*627 Assets, Liabilities, Circulation, Advertising Income and Net Earnings.
The following is the consolidated balance sheet of the Inquirer Co. of Delaware (parent) and the Inquirer Co. of Pennsylvania (subsidiary), as of September 30, 1934:
| Assets | |
| Cash | $191,846.52 |
| Accounts receivable: | |
| Trade and miscellaneous (net) | 791,999.37 |
| Due from Public Ledger, Inc. (net) | 628,272.80 |
| Accrued interest | 810.00 |
| Notes receivable | 12,658.82 |
| Accrued interest on investments | 7,950.00 |
| Inventories | 249,011.76 |
| Fixed assets: | |
| Land | 1,103,063.00 |
| Buildings (less depreciation) | 3,511,159.69 |
| Machinery (less depreciation) | 2,078,560.42 |
| Art | 134,250.00 |
| Prepaid interest | 131.90 |
| Deferred charges | 230,783.77 |
| Miscellaneous | 17,504.35 |
| Deposits in closed banks | 49,853.37 |
| Franchise, leasehold, and good will | 2,800,000.00 |
| Total | 11,807,855.77 |
| Liabilities | |
| Accounts payable | $338,990.99 |
| Notes payable to bank | 278,427.50 |
| Accrued interest on notes | 155,474.67 |
| Accrued interest on mortgage | 2,237.57 |
| Accrued pay roll | 47,686.22 |
| Prepaid subscriptions | 14,771.89 |
| Deferred credits | 3,315.48 |
| Miscellaneous reserves | 48,600.29 |
| Notes payable - 10 yr., 6% | 4,800,000.00 |
| Accrued redemption premium on 10 yr. notes | 50,553.56 |
| Mortgage payable | 3,000,000.00 |
| Capital stock: | |
| Preferred stock at $10 per share | 128,090.00 |
| Common stock | 1,740,690.00 |
| Surplus | 1,199,017.60 |
| Total | 11,807,855.77 |
*846 The average net paid circulation, circulation income, advertising lineage, and advertising income of the Philadelphia Inquirer from 1929 to 1935, inclusive, were as follows:
| 1929 | 1930 | 1931 | 1932 | 1933 | 1 1934 | 1935 | |
| Net paid circulation (morning) | 281,442 | 264,424 | 239,999 | 225,810 | 208,338 | 258,560 | 277,099 |
| Net paid circulation (Sunday) | 506,527 | 491,906 | 462,169 | 427,549 | 384,923 | 547,373 | 670,251 |
| Circulation income (morning) | 1,133,119 | 1,142,029 | 961,276 | 900,736 | 823,655 | 1,056,269 | 1,099,319 |
| Circulation income (Sunday) | 1,829,929 | 1,713,043 | 1,677,970 | 1,561,802 | 1,443,614 | 2,190,159 | 2,534,331 |
| Advertising lineage (morning) | 11,610,645 | 9,725,443 | 8,241,197 | 7,122,666 | 6,326,529 | 7,360,640 | 7,028,359 |
| Advertising lineage (Sunday) | 6,880,973 | 5,802,191 | 5,077,485 | 4,901,737 | 4,179,129 | 4,694,304 | 5,233,735 |
| Advertising income (morning) | 3,780,101 | 3,052,392 | 2,537,662 | 2,062,538 | 1,680,659 | 1,984,972 | 2,155,474 |
| Advertising income (Sunday) | 3,220,086 | 2,600,185 | 2,256,375 | 1,764,560 | 1,525,325 | 1,851,457 | 2,340,251 |
*847 The earnings of the Inquirer Co. of Delaware for the years 1930 to 1934, inclusive, including those of its wholly owned subsidiary (the Inquirer Co. of Pennsylvania) before deducting interest paid, and the amount of interest paid by each of these companies, were as follows:
| Interest paid | |||
| Annual earnings | Delaware Co. | Pennsylvania Co. | |
| 1930 | $1,284,599 | $177,331 | $172,800 |
| 1931 | 1,385,687 | 409,663 | 168,663 |
| 1932 | 1,151,737 | 465,790 | 163,946 |
| 1933 | 910,985 | 450,676 | 162,000 |
| 1934 | 952,562 | 344,404 | 162,000 |
| Average | $1,137,114 |
*628 The combined earnings of the Inquirer companies for 1935, the year following the acquisition of the morning and Sunday editions of the Public Ledger, amounted to $1,154,477, before deducting interest paid of $211,988.
The dividends paid by the Inquirer Co. of Delaware and the inquirer Co. of Pennsylvania for the years ended December 31, 1929, to 1934, inclusive, were as follows:
| Delaware Co. | |||
| Preferred | Common | Pennsylvania Co. | |
| 1929 | $226,384.50 | ||
| 1 1930 | 165,796.50 | $150,000 | |
| 1931 | 1,000,738 | ||
| 1932 | 539,284 | ||
| 2 1933 | 28,167.00 | 261,103 | $185,625 |
| 1934 | 112,056.00 |
*848 The profit and loss account of Public Ledger, Inc., and its predecessor, Curtis-Martin Newspapers, Inc., shows the following profit from the morning and Sunday editions of the PhiladelphiaPublic Ledger for the years 1929 to 1933, inclusive:
| 1929 | $1,485,589.36 |
| 1930 | 1,082,346.67 |
| 1931 | 756,084.06 |
| 1932 | 423,602.28 |
| 1933 | 208,431.53 |
The fair market value as of October 16, 1934, of 136,000 shares of the common stock of the Inquirer Co. of Delaware was $37.50 per share, or $5,100,000.
Petitioner kept its books and filed its returns on the accrual basis. On June 14, 1935, it duly filed its Federal income and excess profits tax return on form 1120 for the calendar year 1934 with the collector of internal revenue for the second district of New York, reporting gross income of $87,677.86 from interest and dividends after deducting a capital loss of $2,000, deductions of $112,955.88, and a net loss for the year of $25,278.02. Petitioner did not accrue on its books or include in its gross income for 1934 any amount representing interest due after June 4, 1934, on the $3,488,750 notes of Public Ledger, Inc.Public Ledger, Inc., had entered on its books as interest*849 accrued on these notes from June 4, 1934, to October 16, 1934, the sum of $67,864.79, and on the latter date made appropriate entries on its books canceling this accrued interest in connection with the cancellation of the notes. The petitioner did not file a personal holding company return on form 1120-H for the year 1934.
*629 In his deficiency notice, respondent computed petitioner's net income as follows:
| Net loss as disclosed by return | $25,278.02 | |
| Add: | ||
| (a) Gain realized on exchange of notes for common stock | $2,495,250.00 | |
| Less: | ||
| (b) Loss allowable on sale of capital assets | 11,974.00 | |
| 2,483,276.00 | ||
| Net income as adjusted | $2,457,997.98 |
OPINION.
MELLOTT: The principal question is, What was the amount of taxable income realized by petitioner during the year 1934 from the acquisition of 136,000 shares of the common stock of the Inquirer Co. of Delaware, hereinafter sometimes referred to as the pledged collateral? Petitioner contends that it is limited, as a matter of law, to the amount by which the face amount of the canceled notes ($3,488,750) exceeded the cost of such notes ($3,453,750) or $35,000; that the pledged collateral was acquired*850 by it in payment of the outstanding purchase money notes; and that in accepting this collateral in payment of said notes in merely became a purchaser thereof for their face amount. Respondent insists that the agreement of April 3, 1934, as carried out, resulted in taxable gain to petitioner, measured by the difference between the fair market value of the pledged collateral on the date it was acquired by the petitioner and the cost to it of the notes. Both parties concede that the agreement of April 3, 1934, resulted in the ultimate acquisition by petitioner of the stock in October of the same year. A brief resume of the facts may lead to a better understanding of the contentions of the respective parties.
Prior to March 4, 1930, Raymond Patenotre owned 151,000 of the 191,000 outstanding shares of the common stock of the Inquirer Co. of Delaware, and all of the outstanding stock of the Inquirer Co. of Pennsylvania. On that date he sold his entire holdings in these two companies to the Curtis-Martin Newspapers, Inc. (which later became and will hereinafter be referred to as Public Ledger, Inc.), for a total consideration of $10,500,000, one-half of which was paid in cash and the*851 remainder in notes of the purchasing company bearing 6 percent interest and payable in equal quarterly installments over a period of years.
On the same date, March 3, 1930, an indenture of trust was made between Public Ledger, Inc., and the Bankers Trust Co. of New York under which the 151,000 shares of common stock of the Inquirer *630 Co. of Delaware were deposited with the Bankers Trust Co., as trustee, to secure the payment of principal and interest on the notes. The indenture provided for the release of part of the pledged collateral after specified amounts had been paid, and directed the trustee, upon default in the payment of principal or interest on any of the notes which continued for a period of 30 days after the due date, to sell the collateral when requested to do so by the holders of the defaulted notes, to apply the proceeds thereof to the payment of the notes and costs, and to pay over the surplus, if any, to Public Ledger, Inc. It also provided that the principal of all notes and accrued interest thereon should become due and payable in the event of default and sale of the collateral, and stated that the exercise of any of the remedies provided therein in*852 the event of default should in no way impair the right of the holder or holders of the notes to recover from the maker or endorser any deficiency on account of principal or interest over and above the amount realized from the sale of the securities deposited with the trustee.
Prior to April 3, 1934, petitioner had acquired, by purchase, all of the outstanding purchase money notes. On that date these notes totaled $3,488,750, and 136,000 shares of the common stock of the Inquirer Co. of Delaware remained on deposit with the trustee as collateral security. The notes falling due on March 4, 1934, were not paid. Public Ledger, Inc., requested an extension of time for the payment of all the notes falling due in 1934. This request was granted upon terms and conditions contained in an agreement dated April 3, 1934, signed by the four interested parties - the petitioner, Public Ledger, Inc., the trustee under the indenture, and the endorser of the notes.
The principal commitments of Public Ledger, Inc., under the agreement were to transfer to the Inquirer Co. of Delaware the morning and Sunday editions of the Public Ledger; to execute and deliver to the trustee for the account of*853 petitioner $1,400,000 principal amount of income bonds; and, upon default in the payment of principal or interest on the notes, to surrender to petitioner all of its right, title, and interest in the pledged collateral, including any equity of redemption. The principal commitments of petitioner were to extend the time of payment of all notes falling due in 1934; to release and discharge Public Ledger, Inc., and the endorser of the notes from all liability thereon; and to cancel the income bonds, if, upon default in the payment of principal or interest, the pledged collateral should be surrendered for its benefit. Petitioner also agreed, in the event of the surrender of such collateral, to purchase from Public Ledger, Inc., at $53.75 per share, but in an amount not in excess of $600,000, such number of shares of the common stock of the Inquirer Co. of Delaware then owned by Public Ledger, Inc., *631 as would enable the latter corporation to discharge its indebtedness to the Inquirer Co. of Delaware. It was also given the option to purchase from Public Ledger, Inc., within 90 days from the surrender of the collateral, any other shares of the common stock of the Inquirer Co. *854 of Delaware owned by Public Ledger, Inc., at a "fair value", to be determined by mutual agreement or arbitration.
Public Ledger, Inc., failed to pay the interest due on September 4, 1934, and on October 16, 1934, all of its right, title, and interest in the pledged collateral was surrendered to the petitioner. On the same date the petitioner delivered the notes and the income bonds to the trustee, with instructions that they be canceled and destroyed, and its nominee purchased 10,550 shares of the common stock of the Inquirer Co. of Delaware from Public Ledger, Inc., at $53.75 per share.
The parties agree that the transaction is controlled by the agreement of April 3, 1934, but differ in their interpretation of its provisions. According to petitioner's interpretation, it acquired the pledged collateral in payment of the outstanding purchase money notes, thereby becoming a purchaser of such stock for the face amount of the notes. It urges that by the agreement of April 3, 1934, the parties, dealing at arm's length, fixed the value of the pledged collateral at an amount not exceeding the face amount of the outstanding notes, and that Public Ledger, Inc., was, in effect, given*855 an option to sell this collateral to the petitioner at any time for the amount of the notes. Petitioner thus arrives at the conclusion that it realized no gain in excess of the difference between the face amount of the notes and their cost to it.
Respondent asserts that the position taken by petitioner is based upon a misconception of the purport of the agreement of April 3, 1934. He urges that the intention of the parties must be determined from a consideration of the contract as a whole () rather than from a consideration of the forfeiture clause only, and that what actually happened was that the parties entered into an enforceable contract for an extension of the time of payment of certain notes, the consideration for such extension being an absolute obligation on the part of the debtor either to make payments not previously required of it (to pay the $1,400,000 income bonds), or, to give up property having a value greatly in excess of the face amount of the notes. Inasmuch as petitioner received the property (i.e., the pledged collateral, enhanced in value by the morning and Sunday editions of the Ledger), respondent*856 contends that it realized taxable income measured by the difference between the fair market value of such property and the cost of the notes.
*632 In support of its contention that in accepting the pledged collateral it became a purchaser thereof for the face amount of the notes, petitioner cites and relies on ; affd., ; ; affd., (C.C.A., 2d Cir.); certiorari denied, ; ; and . The cited cases hold that the transfer of property by a debtor to a creditor in satisfaction of a debt is to be treated as a sale of the property for the face amount of the obligation. Petitioner's contention is that if the debtors in the cited cases made sales, the creditors made purchases of the property for the face amount of the debts. It therefore argues that, by a parity of reasoning, it was a purchaser of the stock of the Inquirer Co. of Delaware.
Ordinarily the purchase of property does not result in a deductible*857 loss or a taxable gain, even though the price paid is more, or less, than the value of the property acquired. ; ; ; ; ; . If petitioner's interpretation of the transaction is correct, the taxable income realized by it is limited to the amount by which the face amount of the notes exceeded their cost.
Petitioner concedes that if Public Ledger, Inc., had paid the notes and the income bonds and had retained the pledged collateral, it would have realized taxable gain. It urges, however, that when, upon default, it received the pledged collateral, the transaction was precisely the same as if the collateral had been surrendered to it on April 3, 1934, before the execution of the agreement. Such a construction ignores some of the important changes in the rights of the parties under the agreement. Under the note indenture, *858 the trustee upon default was to sell the pledged collateral, apply the proceeds to the payment of the outstanding notes, and surrender any excess to the maker of the notes. If such a sale resulted in a deficiency, the creditor (petitioner) was given the right to collect it either from the maker or endorser. Under the agreement of April 3, 1934, there was to be no sale of the pledged collateral upon default; so there was no possibility that the debtor would ever receive any sum, regardless of how valuable the collateral should become. In addition, the debtor was required to enhance the value of the pledged collateral very substantially by transferring to the Inquirer Co. an asset which witnesses for both parties valued at more than a million dollars, viz., the morning and Sunday editions of the Public Ledger, and to surrender its equity of redemption.
*633 The fundamental rule in the construction of contracts is to ascertain the intention of the parties. . This intention is to be collected from the entire instrument, viewed in the light of the subject with which it deals, and not from single words, phrases, or sentences. *859 . As we view the agreement of April 3, 1934, petitioner granted its debtor an extension in the time of payment of the notes due in that year under such terms and conditions that it would be assured of receiving, upon the completion of the contract, either (1) $3,488,750, plus interest, and $1,400,000 principal amount of income bonds; or (2) 136,000 shares of the common stock of the Inquirer Co. of Delaware, enhanced in value by the morning and Sunday editions of the Public Ledger. It is not necessary to characterize the agreement as a contract of purchase, sale, or exchange. It was, as the parties intended it to be, a substitute for their earlier agreement. The condition which was to give rise to the receipt of the first consideration was the payment of the notes and interest as they became due. In the event of default in the payment of principal or interest, petitioner became entitled to receive the second, or alternative consideration. The alternative consideration was received and, in our opinion, resulted in taxable income to petitioner.
*860 The conclusion which has been reached accords with the underlying principle of such cases as ; affd., ; ; and . In Salvage v. Commissioner, an officer and employee of a corporation was permitted to purchase 1,500 shares of its stock for $100 per share, which had a value at the time of the purchase of $1,064.70 per share. The shares were sold to the officer at less than their real value in consideration of his agreement not to engage in any competing business and to permit the corporation to repurchase part of it at $100 per share. The court held that the officer made a "bargain purchase" of the shares and that the portion thereof which represented the consideration for his covenant not to compete, was taxable income in the year the shares were received. In Cox v. Helvering, it was held that an amount paid by a purchaser of the business of a corporation in consideration of an agreement of its stockholders to refrain from engaging in a competing business for*861 a limited period was taxable income, and a similar conclusion was reached in Beals' Estate v. Commissioner. Cf. ; .
In the cited cases the courts included in the taxpayers' gross income the consideration received for the covenant to do, or to refrain from doing, some act. They pointed out that such consideration *634 came squarely within the exceedingly broad statutory definition of gross income, being gains, profits, or income derived from dealings in property or growing out of its ownership. The same definition of gross income is contained in the Revenue Act of 1934. (Sec. 22(a).) If, therefore, it can be said that petitioner received a consideration for granting an extension of time and forbearing from demanding payment of the notes due, the consideration so received should be included in its gross income. This is the essence of respondent's contention and the theory under which the deficiency was determined.
Petitioner contends that the granting of the extension of time was relatively unimportant; that the important consideration for the contract*862 of April 3, 1934, from the standpoint of the debtor, was that it and the endorser of the notes were released from liability under their respective contracts; that its right to receive the pledged collateral was the consideration for releasing the maker and endorser; and that it agreed to accept the pledged collateral in full payment of the notes only because of the transfer of the morning and Sunday editions to the corporation whose stock was pledged.
While petitioner's argument is not without substance, we are of the opinion that the basic consideration for the commitments made by the debtor in the agreement of April 3, 1934, was, as stated therein, "an extension of time for the payment of the principal of certain notes, * * * agreed to by Elverson Corporation upon the terms and considerations stated in this agreement." The essence of the terms and considerations, as we have pointed out above, was that the debtor would do one of two things - pay an additional $1,400,000 or surrender the collateral, enhanced in value by the morning and Sunday editions of the Ledger. The latter was done and we think it resulted in taxable income to petitioner to the extent that the value of the*863 property surrendered exceeded the cost of the notes. We therefore affirm the respondent in his determination of a deficiency. He erred, however, in ascribing too large a value to the stock.
There is no definite formula by which fair market value can be determined. . It is a question of fact to be determined from all of the evidence. . The generally accepted definition of "fair market value" is the price at which a seller, willing to sell at a fair price, and a buyer, willing to buy at a fair price, both having reasonable knowledge of the facts, will trade. As a general rule, the best evidence of fair market value of stock is the price at which it is bought and sold on the open market; ; certiorari denied, ; ; ; *635 *864 ; ; ; but market value may exist independent of sales. ; ; . "The value of shares in a commercial or manufacturing company depends chiefly on what they will earn, on which balance sheets throw little light." . However, in estimating the value of common stock of a corporation where there are no sales, the value of the net assets of the corporation have an important bearing. .
Although petitioner has cited several cases in support of its contention that the stock of the Inquirer Co. had no fair market value on October 16, 1934, only one, *865 ; certiorari denied, , deals with the valuation of stock of a corporation established in business for years and showing a record of consistent earnings. In that case the Circuit Court of Appeals for the Second Circuit affirmed the decision of this Board, holding that the common and preferred stock of a corporation held by members of one family had a fair market value. The court pointed out that a "fair market value" does not always exist, citing , wherein it was held that an interest in a newly created partnership did not have any market value. It emphasized, as the factor which distinguished the case from other cases (some of which are relied upon by petitioner), the fact that it was not then considering an untried venture, but an old, profitable, thoroughly seasoned business, which had paid large dividends and was as stable as such ventures could be, and that the interests of the owners were shares of stock, the commonest form of industrial property.
The Inquirer Co. of Delaware (or its predecessor, the Inquirer Co. of Pennsylvania) *866 had been engaged in the business of publishing a morning and Sunday newspaper in the city of Philadelphia for more than 50 years. The newspaper had been published continuously for more than a century. Its franchise, that is, its publishing opportunity, was, and is, one of the best in the United States. For 30 years immediately preceding 1935 it operated at a profit. During the last 10 years of that period its average annual net income was $731,557, its largest being $1,451,262 in 1929, and its smallest being $289,559 in 1933. In 1935 its net income was $962,314, and for the first five months of 1936 it was $549,820. The average net paid circulation of its morning edition increased from 161,898 in 1906 to 208,338 in 1933, 258,560 in 1934, and 277,099 in 1935. Its Sunday edition increased from 179,221 in 1906 to 384,923 in 1933, 547,373 in *636 1934, and 670,251 in 1935. Its advertising lineage, which was 8,808,900 agate lines in 1906, increased to more than 12,000,000 in 1916; and since that time has never dropped below that amount with the exception of 1933, when it was 10,505,658.
In our opinion these facts, together with the financial condition of the company and*867 the testimony of witnesses for both parties, indicate that the stock had some fair market value.
Six witnesses expressed opinions as to the fair market value of the stock on October 16, 1934. The four called by the petitioner placed the value at $20, $24.30, $21.50, and $18.59, and the two called by the respondent placed it at $40 and $37.50.
While petitioner's witnesses differed in their methods of arriving at the values fixed by them, their respective computations indicate that they all considered the value of the common stock to be the equivalent of the net worth of the business, after deducting the preferred stock liability. Its first witness, a publisher and publisher's counsel, took the amount of the nonpublishing assets as shown on the balance sheet of September 30, 1934, added thereto an amount which he determined to be the value of the working capital plus good will, and $1,000,000 to represent additional value resulting from the merger with the Ledger, deducted from the total the liabilities of the Delaware Co., and thus determined the value of the total outstanding common stock (174,069 shares) of the company to be $3,550,191.05, or $20 per share.
The second witness, *868 a consulting economist, who had had considerable experience in connection with the valuation of stock for tax purposes, found from the September 30, 1934, consolidated balance sheet that the tangible assets of the company aggregated $9,007,855 and that the consolidated liabilities plus the retirement price of the preferred stock aggregated $10,020,958. He concluded that any value attaching to the common stock would have to depend entirely upon the value of the good will. His first step in the valuation of good will was the ascertainment of prospective earnings. He found the average annual earnings of the enterprise for the five-year period 1930 to 1934, inclusive, before deducting interest paid, to be $1,137,114, and that these earnings were reasonably in prospect for the future. He then divided the earnings, separating those due to the tangible property from those due to good will. He decided that, in view of the continuity of earnings since 1920 and the reasonably safe and certain character of the property, the earnings due to the use of the gross tangibles would be 8 percent of the book value of the consolidated tangible property, or $720,628 (8 percent of $9,007,855). He*869 then subtracted the latter amount from his total estimated annual earnings of $1,137,114, which left $416,487 that he designated as excess earnings attributable to the intangibles of the consolidated companies. *637 This excess he capitalized at 10 percent, or $4,164,870, and thus found the valuation of the good will or intangibles. He then added the good will value so determined to the gross consolidated tangible assets of $9,007,855, subtracted the consolidated liabilities, including the preferred stock at its retirement price, or $10,020,958, and thus arrived at the amount of $3,151,767, which he determined to be the value of the common stock of the Delaware Co. before acquisition of the Ledger circulation, or $18.11 per share. In determining the value of the increment resulting from the merger with the morning and Sunday Public Ledger, he resorted to some extent to subsequent events and found that for the 29-month period from January 1934 through May 1936, which included 25 1/2 months after the merger, the company's earnings before deducting interest were at the rate of $1,246,783 per year, or $109,669 in excess of the average for the 1930-1934 period. He concluded that*870 this amount represented a reasonable prognostication of additional future earnings due to the merger, capitalized it at 10 percent, and obtained an additional value of $1,076,690 (apparently erred in his computation as amount should be $1,096,690), or $6.19 per share. Adding this $6.19 to the $18.11 value previously found, gave him the figure of $24.30 which he considered to be "the maximum value that can be ascribed to the stock."
The third witness for petitioner, a newspaper engineer who specialized in the rehabilitation or reorganization of newspaper operations, arrived at a valuation of $21.50 per share in somewhat the same manner as the preceding witness, except that he determined the value for good will by taking the five-year average of daily circulation at $10 per subscriber and adding thereto the five-year average of Sunday circulation at $5 per subscriber. He, however, made very little, if any, allowance for the increase in value resulting from the addition of the Ledger's morning and Sunday circulation.
The fourth witness for the petitioner, the assistant general manager, secretary, and treasurer of a corporation which publishes 2 newspapers and controls a chain of*871 16 others through stock ownership, was of the opinion that the value should be fixed "some place between" $11.90 and $18.59 per share. He concluded that if he were a willing buyer he would offer $11.90 per share, and that if he were a willing seller he would demand $18.59 per share. In arriving at these figures, he added together the earnings of the Delaware Co., before deducting interest (except mortgage interest) and taxes, for the 10-year period 1925-1934. To this he added the earnings of the Pennsylvania Co., after eliminating intercompany items, which gave him a total of $10,021,368.10. He then estimated that earnings would increase $175,000 per year because of the merger. In order to reflect this in his 10-year earnings figure, he multiplied it by nine, and added $50,000 more to represent the first 3 1/2 months of 1934, prior *638 to the merger. He thus arrived at the figure of $1,625,000 to be added to the 10-year earnings, which resulted in a grand total of $11,646,368.10, or an average of $1,164,636.81 per year. Seven times this, less the notes and preferred stock, represented what in his opinion would be the buyer's offer, and eight times this, less the notes*872 and preferred stock, the seller's "asking price."
In the opinion of respondent's first witness, a newspaper consultant, the major factor affecting the value of the Delaware Co.'s stock was the earnings which the enterprise would produce for the owner of the stock. He compiled the operating earnings of the business for the nine and three-fourths years from January 1, 1925, to September 30, 1934, i.e., from the net income of the Delaware and Pennsylvania companies for this period he subtracted the investment income received as dividends and interest, and added back the interest, amortization and premium charges on the variable funded debt, an item of stock transfer taxes, and the Federal taxes paid. He thus obtained a consolidated operating income for the period of $11,027,800. In judging the earning power of the Delaware Co., he believed that the nine months of 1934 should be eliminated as an unusual period of transition and as including five and one-half months of merged operation. Eliminating this period gave him $10,472,837 for nine years, or an annual average of $1,163,626. To this he added what he determined to be a reasonable amount to expect as future earnings as a result*873 of the merger. This amount is unstated but apparently was approximately $400,000. From the aggregate thus determined he deducted interest of $450,000 on the consolidated funded debt and Federal income taxes at the 1934 corporation rate, which gave him a net figure of slightly in excess of $1,000,000. He cut this figure down to $950,000 to take care of possible future contingencies and deducted the preferred stock dividend requirements of $76,854, thus arriving at the figure of $873,146 representing the annual earnings available for dividends on common stock, or $5 per share on the 174,069 shares outstanding. Applying the capitalization rate of eight times earnings, he concluded that the value of the stock was $40 per share.
Respondent's other witness, who had been connected with an appraisal company engaged in the business of making valuations of industrial, public utility, and commercial properties for 25 years, determined that the average earnings over the nine-year period 1925 to 1933, inclusive, was $1,099,772 before interest charges. He then deducted mortgage interest of $162,000 and note interest on $4,800,000 at 6 percent or $288,000, or a total of $450,000, which left*874 a balance available for preferred and common stock of $649,772. From this amount he deducted the annual preferred dividends on 12,809 shares *639 of preferred stock of $76,854. He divided the remainder, $572,918, by the 174,069 shares outstanding, which gave him a per share average earning for the common stock of $3.29, without giving effect to the merger with the Ledger. He added $1.41 as the Ledger's earnings which would accrue to the combined companies and arrived at a total per share earning of $4.70. In his opinion a fair rate of capitalization was eight times earnings and he thus arrived at his opinion that the value of the stock was $37.50 per share.
Respondent urges that the lower values arrived at by petitioner's witnesses result from the use of methods which are basically wrong, and that they failed to differentiate between the problem presented when good will is to be valued and that presented in a case involving the valuation of common stock. He insists that a determination of the net worth of the company in excess of its preferred stock does not necessarily demonstrate the value of the common stock, and states that this Board has not accepted the asset value*875 of a long established business corporation, having a consistent record of earnings, as the sole criterion for the valuation of its common stock. In this connection he cites ; ; ; ; ; ; . He also urges that a value derived from capitalizing earnings, by the methods used by the petitioner's witnesses, does not reflect the true value of the common stock because a large part of the earnings resulted from the use of borrowed money and of money advanced by the holders of preferred stock having a fixed dividend rate. He points out that such money cost the corporation 6 percent or less, whereas, under the assumptions made by petitioner's witnesses, it earned 8 percent or more, whether invested in tangibles or intangibles. This, he says, demonstrates*876 the unsoundness of their valuations inasmuch as it ignores the fact that the fund thereby produced belonged to the common stockholders.
Other points stressed by the respondent are that the petitioner's witnesses failed to differentiate between the value of a block of stock representing control, and the value of a lesser interest, and also failed to include a reasonable amount for increase in earnings due to the merger.
Petitioner agrees with the respondent that the value of the stock of a corporation is seldom to be measured solely by its asset value, but contends that its witnesses did not limit themselves to a determination of asset value as the sole, or even as an important, guide to the value of the stock. It agrees with the respondent that common *640 stock may be valued by capitalizing, at an appropriate rate, the earnings available for such stock, but does not concede that every other method is improper. It urges that the rate employed by respondent's witnesses is too low to suit their method because it does not reflect the necessity for support of the investment in tangible assets, does not properly reflect the risks of the business, and disregards the amount*877 and nature of the prior obligations. According to petitioner, the obligations ahead of the common stock, i.e., the $4,800,000 of 6 percent notes, and $1,280,900 of preferred stock, constituted one of the most important single factors affecting the question of value. It takes exception to the respondent's statement that its witnesses failed to differentiate between the per share value of a block of stock representing control, and the per share value of a lesser block, and points out that they were asked to express their opinion as to the value of 136,000 shares of stock, "a controlling interest." Petitioner also takes exception to respondent's assertion that its witnesses did not include a reasonable amount of increase due to the merger.
Some of the criticisms are probably justified. Each of the witnesses, however, had sufficient qualifications to express an opinion, and it would serve no useful purpose to attempt to point out possible weaknesses in their testimony. We have found as a fact that the fair market value of the stock of the Inquirer Co. of Delaware was $37.50 per share as of October 16, 1934. While this happens to be the same value expressed by one of the respondent's*878 witnesses, our finding is not based solely on his opinion. Neither have we followed any set rule or formula in arriving at our determination. ; . We have given special consideratioin to the earnings of the Inquirer Co. of Delaware and its assets and liabilities, and to the fact that the 136,000 shares of its stock represented a controlling interest; that during the year 1930 it acquired all of the outstanding capital stock of the Inquirer Co. of Pennsylvania for $2,200,000 and in April 1934 acquired the morning and Sunday editions of the Public Ledger, without cost; that during the period between 1930 and 1934, when Public Ledger, Inc., owned the controlling interest in the Delaware Co., it attempted to recover a part of the purchase price of this company's stock by having it declare and pay large dividends and redeem some of its stock at an excessive price; and that, in spite of this selfish and unwise financial management, the Delaware Co. reduced its outstanding preferred stock from $6,267,500 to $1,280,000; reduced the*879 mortgage from $3,200,000 to $3,000,000; reduced outstanding notes from $6,000,000 to $4,800,000; purchased machinery *641 and equipment at a cost of $471,627; retired 16,931 shares of its common stock; and paid cash dividends of over $2,000,000 - all of which was accomplished at a reduction in the company's surplus of only approximately $2,000,000.
Before concluding our discussion of the fair market value of the Delaware Co.'s stock, brief reference will be made to petitioner's alternative contention that it could not have been sold on October 16, 1934, for $37.50 per share, and that, if this amount is the minimum fair price for the pledged collateral on that date, it had no "fair market value." In support of this contention petitioner refers to the fact that the $4,800,000 10-year 6 percent coupon notes which were outstanding on that date had been issued pursuant to an indenture of trust which provided that, in the event the Curtis-Martin interests relinquished control of the company, the holders of the notes would have the option of requesting full payment within 5 months. Petitioner argues that any prospective purchaser of the 136,000 shares of the common stock of the*880 Inquirer Co. of Delaware, which represented control of the company, must have been prepared to face the necessity of raising an additional $4,800,000 to refinance the notes in order to retain the control purchased, and that no purchaser could have been found for the pledged collateral at a price of $5,100,000 (136,000$37X.50) under such circumstances.
We do not believe that the existence of the note liability and the possibility that it would have to be refinanced would have prevented the sale of the stock for $37.50 a share. Obviously any prospective purchaser would take into consideration the possibility that the notes might have to be refinanced. However, that would not have been an insurmountable obstacle to a sale. In 1930 a purchaser was found who paid $8,300,000 for 151,000 shares of the common stock of the Inquirer Co. of Delaware and $2,200,000 for all of the capital stock of the Inquirer Co. of Pennsylvania. It is true, as petitioner points out, that at that time the Delaware Co. did not have an outstanding note liability of $4,800,000. It should not be overlooked, however, that these notes were originally issued in the amount of $6,000,000 for the purpose of raising*881 funds to retire 56,694 shares of preferred stock at $57.50 a share, or $3,374,905, all of which were outstanding at the time of the purchase in March 1930, and to purchase for $2,200,000 all of the capital stock of the Pennsylvania Co. which the Delaware Co. did not own in March 1930. We doubt that a purchaser on that date would have hesitated to pay approximately $8,300,000 for 151,000 shares of the common stock of the Inquirer Co. of Delaware if the corporation at that time had increased its assets by $2,200,000 and decreased its preferred stock liability by $3,374,905, even though in doing so it incurred a note *642 liability of $6,000,000. While we believe that this is sufficient answer to petitioner's argument, it may not be amiss to mention that in 1936 a corporation purchased all of the outstanding stock of petitioner for $2,515,835.46 when it had liabilities of $7,158,864.44 and when its only assets consisted of 136,000 shares of the common stock and $3,400,000 principal amount of notes of the Inquirer Co. of Delaware. In other words, the effect of this transaction was that the purchaser paid nearly 10,000,000 for 136,000 shares of the Delaware Co. stock and $3,400,000*882 principal amount of notes, which was equivalent to a payment of $46 per share for the stock which we have valued at $37.50.
In attempting to prove that no purchaser could have been found who would pay $37.50 per share for the stock, petitioner introduced evidence showing that certain unsuccessful efforts were made by Public Ledger, Inc., between September 4 and September 18, 1934, to sell its Inquirer Co. stock or to refinance its indebtedness to petitioner. The record does not disclose the price Public Ledger, Inc., asked for the stock nor the price a prospective purchaser would have been willing to pay. It is reasonable to assume that Public Ledger, Inc., was seeking a purchaser willing to pay an amount sufficient to retire its note liability of $3,488,750, plus accrued interest, to pay the $628,230.50 indebtedness due the Inquirer Co. of Delaware, and to undertake the payment of the $1,400,000 income bonds. None of these liabilities could have been escaped. Their total exceeded $5,100,000. Nor is it surprising that the bankers, who evidently were familiar with the debtor's record, should refuse to refinance it, knowing that it was burdened with the onerous extension agreement*883 of April 3, 1934, and that it was then in default for the interest due on September 4, 1934.
The remaining questions are whether petitioner is subject to tax as a personal holding company under the provisions of section 351 of the Revenue Act of 1934, and, if so, whether it is subject to the 25 per centum addition to tax prescribed by section 291 of the same act for failure to file a personal holding company return.
Section 351 provides that a surtax of 30 per centum shall be levied upon the undistributed, adjusted net income of every personal holding company not in excess of $100,000 and 40 per centum on the amount in excess of $100,000. In so far as here material a "personal holding company" is defined as meaning:
* * * any corporation, * * * if - (A) at least 80 per centum of its gross income for the taxable year is derived from royalties, dividends, interest, annuities, and (except in the case of regular dealers in stock or securities) gains from the sale of stock or securities, and (B) at any time during the last half of the taxable year more than 50 per centum in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals.
*884 *643 Assuming for present purposes, though not deciding, that during the last half of the taxable year more than 50 per centum in value of petitioner's outstanding stock was owned, directly or indirectly, by or for not more than five individuals, was 80 per centum of petitioner's gross income derived from the sources specified in subparagraph (A)?
Respondent contends that three kinds of taxable income were derived by petitioner: (1) $35,000 gain from the receipt of more than the cost of the notes (this amount is the difference between the face of the notes, $3,488,750 and their cost $3,453,750); (2) $67,864.79, the gain derived from interest which accrued on the notes from June 4, 1934, to October 16, 1934; and (3) the gain derived from the receipt of the consideration paid for the extension of time. The last two, he says, were clearly personal holding company income, the second being interest eo nomine, and the third being interest, though not so designated by the parties.
We have determined that petitioner's dealings with its debtor during the year 1934 resulted in a profit to it of $1,646,250, this amount being the difference between the cost of the notes ($3,453,750) *885 and the fair market value of the stock received ($5,100,000). It is apparent that this amount includes the $35,000 referred to in subdivision (1) of the preceding paragraph. The $67,864.79, referred to in subdivision (2), even though denominated interest by the debtor and the creditor, was properly excluded from petitioner's gross income; for before the end of the taxable year it became perfectly obvious that the amount would never be collectible. ; ; ; ; ; certiorari denied, . Indeed petitioner's right to collect it terminated when it took over the stock and surrendered the notes for cancellation.
In its income tax return filed for the year 1934 petitioner reported gross income of $87,677.86 from interest and dividends after deducting a capital loss of $2,000. If the profit of $1,646,250 constituted "personal holding company" income within*886 the purview of section 351, supra, petitioner was required to file a personal holding company return on form 1020 H (art. 351-8, Regulations 86), as this profit constituted more than 80 per centum of its gross income for the taxable year 1934. No contention is made that it was derived from royalties, dividends, annuities or the sale of securities and it obviously was derived from none of these sources. Respondent, however, contends that it was derived from interest.
*644 In support of his contention, respondent cites several cases holding that the consideration paid for an extension of time constitutes interest within the purview of state statutes against usury. He also cited several cases, such as , and , holding that a taxpayer may deduct, as interest, amounts paid under a contract which was devised as a cloak to hide usury and does not correctly describe the relationship of the parties.
The principle of the cited cases does not seem to be applicable to the present facts. Petitioner and its debtor entered into a contract under which petitioner made*887 a substantial profit. We have held that such profit constituted income within the broad statutory definition of that term. But we do not delieve that it can, or should be, designated interest.Interest, as generally understood, means simply the "compensation allowed by law, or fixed by the parties, for the use or forbearance of money, or as damages for its detention"; "the compensation which is paid by the borrower of money to the lender for its use"; "the price or rate of premium per unit of time, paid by the borrower of money to the lender for its use." 33 Corpus Juris 178; ; Bouvier's Law Dictionary; Webster's New International Dictionary; . "The usual import of the term is the amount which one has contracted to pay for the use of borrowed money." . Congress apparently used the word in its usual and commonly accepted sense, , and there is nothing in the legislative history to indicate that it was to be construed otherwise. *888 . (See Report No. 704, Ways and Means Committee, 73d Cong., 2d sess., p. 11, and Report No. 558, Senate Finance Committee, pp. 13, 16.) "If there were doubt as to the connotation of the term, and another meaning might be adopted, the fact of its use in a tax statute would incline the scale to the construction most favorable to the taxpayer. ; ; ; ; ."
It is our conclusion from the foregoing that petitioner did not derive at least 80 per centum of its gross income for the year 1934 from royalties, dividends, interest, annuities, and gain from the sale of stock or securities, and that it was not a personal holding company and as such required to file a personal holding company return. It follows therefore that it was not subject to the surtax prescribed by section 351, *889 supra, and is not liable for the 25 per centum addition to *645 tax imposed by section 291 of the Revenue Act of 1934 for failure to file a return on form 1020 H.
Reviewed by the Board.
Judgment will be entered under Rule 50.