*53 These proceedings were brought to redetermine deficiencies in the income taxes of the petitioners as follows:
| Petitioner | Docket No. | Year | Amount |
| J. G. Robertson | 49552 | 1927 | $3,398.38 |
| J. G. Robertson | 52370 | 1928 | 727.66 |
| C. F. Chapman | 52496 | 1928 | 1,935.85 |
The only issue involved is the proper fair market value of the common stock of the Firestone Tire & Rubber Co. on March 1, 1913.
FINDINGS OF FACT.
The petitioner, Robertson, was the treasurer of the Firestone tire & Rubber Co. (hereinafter called Firestone) from 1908 to 1922, and remained a director thereof until 1925. On March 1, 1913, he owned *54 348 shares of the common stock of that company of the par value of $100 per share, out of an outstanding issue of 30,000 shares. On December 5, 1916, he owned 416 shares. On the latter date he exchanged his certificates for the 416 shares for new certificates for 4,160 shares issued pursuant to a stock dividend of 10 new shares to one old. In 1927 and 1928 he sold 910 and*1186 200 shares, respectively, from the 4,160 he acquired on December 5, 1916. In 1928 the petitioner, Chapman, sold 500 shares of such stock representing 50 shares owned by him on March 1, 1913, but increased to 500 by reason of the stock dividend of December 5, 1916. Upon the issuance of that stock dividend the original stock of both petitioners lost its identity and the gain upon its sale or a portion thereof is computed on the fair market value of such stock on March 1, 1913.
The Firestone Tire & Rubber Co., whose plant was situated in Akron, Ohio, was organized August 1, 1900. It manufactured solid carriage tires and horseshoe treads. In 1905 and 1906 it began to produce pneumatic tires. A year or so later it developed and began to manufacture the "Non-Skid" tires. In about 1912 it installed tire-making machinery - revolutionary innovation in the tire industry - and also introduced the demountable rim, in both of which enterprises Firestone was a pioneer. Prior to 1913 "Non-Skid" tires were produced by Firestone as follows:
| "Non-Skid" tires | |||
| Year | Total tires | Number | Percent of total |
| 1908 | 63,000 | 15,600 | 25 |
| 1909 | 105,000 | 42,000 | 40 |
| 1910 | 168,000 | 100,800 | 60 |
| 1911 | 203,000 | 162,400 | 80 |
| 1912 | 393,000 | 353,700 | 90 |
*1187 The use of demountable rims increased noticeably the demand for tires. On March 1, 1915, Firestone was fourth in the rubber tire industry and was increasing its business very rapidly. A new plant with modern equipment had been erected. In 1912 a new unit was added. Extensions were continually being built. The plant capacity has been increased from 10,000 to 50,000 tires a day.
During a long period preceding March 1, 1913, Harvey J. Firestone, president of Firestone, enjoyed very close personal and business relationships with Henry Ford. In 1912 the Ford Motor Co. began to establish factory branches and assembly plants throughout the country and to discontinue its distribution through agents and representatives. Firestone thereupon adopted the same policy of *55 operating through factory branches and agreed to carry tire stocks for the Ford cars in Ford assembly cities. That method of sale was economical in that it saved freight rates and eliminated the financing of distributors. It also stimulated and preserved the customer's good will by direct contact with him. By that means a large expansion program was initiated. At the time it was particularly advantageous*1188 in supplying Ford sizes, but became valuable as a method of selling all sizes of tires. Firestone furnished Ford with over half of his tire requirements. Firestone's growth was in proportion to the rapid expansion of the Ford business. The total sales of Firestone and Ford from 1911 to 1916 were in round numbers as follows:
| Year | Firestone | Ford |
| 1911 | $7,462,000 | $24,658,000 |
| 1912 | 11,688,000 | 42,477,000 |
| 1913 | 15,720,000 | 89,102,000 |
| 1914 | 19,250,000 | 119,489,000 |
| 1915 | 25,319,000 | 121,130,000 |
| 1916 | $44,135,000 | $206,867,000 |
| 1917 | 61,587,000 | |
| 1918 | 75,801,000 | |
| 1919 | 91,078,000 |
Prior to 1913 the officers of Firestone continuously discussed the expected growth of the automobile industry in general and of their company's anticipated part in it. They believed that eventually the transportation system of the country was to be motorized and were preparing to keep pace with its requirements. They maintained large laboratories for the treatment and betterment of rubber and experimental departments for testing and improving manufacturing machinery. Firestone pioneered in pivotal developments to aid in the motorization which its officers felt was inevitable. *1189 It also endeavored to reduce the cost of manufacture and distribution. Harvey Firestone and his associates envisioned a world-wide organization of the company.
During the period prior to March 1, 1913, the automobile industry was expanding with great rapidity. The following table shows the motor vehicle registration in the United States from 1911 to 1918, inclusive:
| Passenger cars | Motor trucks | |||
| Year | Number | Increase | Number | Increase |
| Percent | Percent | |||
| 1911 | 619,500 | 35 | 20,000 | 100 |
| 1912 | 902,600 | 46 | 41,400 | 107 |
| 1913 | 1,194,262 | 32 | 63,800 | 54 |
| 1914 | 1,625,739 | 36 | 85,600 | 34 |
| 1915 | 2,309,666 | 42 | 136,000 | 59 |
| 1916 | 3,297,996 | 43 | 215,000 | 58 |
| 1917 | 4,657,340 | 42 | 326,000 | 52 |
| 1918 | 5,621,617 | 21 | 525,000 | 61 |
*56 The production of tires in the United States from 1910 to 1924, inclusive, as computed by the Rubber Association, is as follows:
| Year | Firestone | Industry | Firestone |
| Percent | |||
| 1910 | 168,000 | 2,400,000 | 7.0 |
| 1911 | 203,211 | 3,000,000 | 6.7 |
| 1912 | 393,199 | 5,000,000 | 7.8 |
| 1913 | 516,820 | 6,300,000 | 8.2 |
| 1914 | 953,649 | 8,021,371 | 11.8 |
| 1915 | 1,342,225 | 12,420,000 | 10.8 |
| 1916 | 3,435,359 | 18,564,957 | 18.5 |
| 1917 | 3,749,668 | 25,835,573 | 14.5 |
| 1918 | 3,036,199 | 24,000,000 | 12.6 |
| 1919 | 4,268,144 | $32,835,509 | 12.9 |
| 1920 | 5,037,791 | 32,400,000 | 15.5 |
| 1921 | 3,849,528 | 27,297,919 | 14.1 |
| 1922 | 5,388,384 | 41,160,000 | 13.0 |
| 1923 | 6,485,250 | 47,088,323 | 13.7 |
| 1924 | 6,627,973 | 49,114,040 | 13.4 |
*1190 The earnings per share and dividends paid per share on Firestone stock from 1911 to 1916, inclusive, were as follows:
| Year | Earnings | Dividends |
| 1911 | $18.50 | $5.50 |
| 1912 | 37.60 | 7.75 |
| 1913 | 52.50 | 10.00 |
| 1914 | $105.30 | $12.50 |
| 1915 | 148.50 | 18.00 |
| 1916 | 195.50 | 21.00 |
During the same period the amount of net invested capital at the beginning of the year, the net earnings, and sales, without correction for excessive depreciation, were as follows:
| Net invested | Net | Sales | Percent | |
| capital- | earnings | earnings | ||
| beginning | to invested | |||
| of year | capital - | |||
| beginning | ||||
| of year | ||||
| End July 31, 1910-11 | $4,047,879 | $616.912 | $7,462,581 | 15.2 |
| End July 1911-12 | 4,478,841 | 1,189,927 | 11,688,188 | 26.6 |
| End July 1912-13 | 5,831,899 | 1,628,000 | 15,720,907 | 27.9 |
| End July 1913-14 | 7,089,959 | 3,227,719 | 19,250,109 | 45.5 |
| End July 1914-15 | 8,947,678 | 4,517,272 | 25,319,475 | 50.5 |
| End Oct. 31, 1915-16 | 13,974,972 | 5,926,568 | 44,133,325 | 42.4 |
The following table sets forth the additions to fixed assets made by the company for the years shown:
| 1909 | $182,000 |
| 1910 | 347,000 |
| 1911 | 1,656,097 |
| 1912 | 380,001 |
| 1913 | 76,983 |
| 1914 | 700,000 |
| 1915 | $200,000 |
| 1916 | 8,600,000 |
| 1917 | 7,200,000 |
| 1918 | 2,000,000 |
| 1919 | 3,750,000 |
*1191 Prior to 1916 the assets of Firestone were carried on its books at much less than their true value, but in that year they were appraised and their book value increased accordingly. Firestone never carried on its books as assets goodwill, patents, advertising, *57 and other such intangibles. Excessive depreciation was taken by the company prior to 1913. In 1916 proper adjustments were made to reflect the value of assets increased thereby.
Firestone produced the first commercial demountable rim on the market. It was used by a large proportion of automobile manufacturers. Firestone built a special rim plant for the manufacture of that product and was reputed to be the largest user of cold rolled steel in the country. The output of rims in tons was as follows:
| 1911 | 1,243 |
| 1912 | 2,259 |
| 1913 | 3,532 |
| 1914 | 9,000 |
| 1915 | 12,832 |
| 1916 | 17,012 |
| 1917 | 26,126 |
| 1918 | 38,224 |
| 1919 | 39,607 |
A strike in the Akron rubber plants, originating in the Firestone plant and known as "the I.W.W. strike," was called about February 1, 1913, and ended on March 30, 1913. During that period there were sporadic outbursts, and threats of sabotage and violence were rife. A citizens' *1192 committee of between 100 and 200 men was formed in defense of the community and sworn in as deputies. The situation was extremely tense and "panicky." During that period and subsequent thereto profits were materially reduced, although there was an increasing demand for the company's products.
Firestone was practically a close corporation. Sixty-eight percent of its common stock in 1913 and 72.3 percent thereof in 1915 was owned by its officers and directors. A considerable portion of its remaining stock was held by employees. The management of the company was excellent. Its officers were young and energetic and were keen and capable business men, with a thorough knowledge of the demands and possibilities of the industry. No statement of Firestone's financial condition was published or given to banks until October 1916. The stock of the company was not listed on any stock exchange.
During the first four months of 1913, 22 sales of Firestone stock, aggregating 235 shares, were made on the Cleveland Stock Exchange. The stock was there dealt in as an unlisted security. The sales were made usually in 5 or 10 share lots, although one sale of 50 shares was made to the petitioner, *1193 Robertson. All but one were handled by Borton and Borton, brokers of Cleveland. Fourteen of the 22 sales were made to the petitioner, Robertson, who was buying the stock for the benefit of the company and its employees. The price ranged from $360 per share on February 10, to $222.50 on February 19. The petitioner, Robertson, commissioned his brokers to purchase the stock wherever they could obtain it. The *58 owners of the stock so sold did not have knowledge of the assets, earnings, sales and other essential data relating to the company's business. After the publication of the financial statement of Firestone on December 5, 1916, its common stock sold for $1,700 per share, whereas it had sold for $1,150 prior thereto.
During February, March, April, and May approximately 800 shares of Firestone common stock were transferred. Approximately 20 percent to such transfers were made to "insiders." Minor sales were made through Akron agencies, but there was no free trading in the stock. The respondent calculated the March 1, 1913, fair market value of Firestone common stock by applying Appeals and Review Memoranda 34 and arrived at the figure of $310.24 per share. The fair*1194 market value on March 1, 1913, of the shares of the common stock in the Firestone Tire & Rubber Co. owned by the petitioners on that date and sold by them during 1927 and 1928 was $550 per share.
OPINION.
VAN FOSSAN: The sole question presented in this case is the determination of the fair market value on March 1, 1913, of the shares of common stock of the Firestone Tire & Rubber Co. sold by the petitioners in 1927 and 1928. The respondent asserts that his action in fixing that value at $310.24 per share should not be disturbed. The petitioners contend that such value was at least $609.61 per share.
Section 204(b) of the Revenue Act of 1926, identical in form and context with section 113(b) of the Revenue Act of 1928, is as follows:
The basis for determining the gain or loss from the sale or other disposition of property acquired before March 1, 1913, shall be (A) the cost of such property * * * or (B) the fair market value of such property as of March 1, 1913, whichever is greater. In determining the fair market value of stock in a corporation as of March 1, 1913, due regard shall be given to the fair market value of the assets of the corporation as of that date.
*1195 Article 1591, Regulations 69, identical with article 591, Regulations 64, provides as follows:
What the fair market value of property was on March 1, 1913, is a question of fact to be established by competent evidence. In determining the fair market value of stock in a corporation, due regard shall be given to the fair market value of the corporate assets on the basis date. In the case of property traded in on the public exchanges, actual sales on or about the basic date afford evidence of value, but in each case the nature and extent of the sales and the circumstances under which they were made must be considered. Those prices received at forced sales or prices received for small lots of property may be no real indication of the value of the property.
*59 In , we had before us the problem of determining the fair market price or value of the stock of the Ford Motor Co. on March 1, 1913. In that case we said:
While we have not arrived at this value by the application of any mathematical formula, because we believe that there is no authoritative formula available, we have given careful consideration to the several methods*1196 suggested in the course of the trial, and have not been unmindful of the aid to be derived from the use of such tests. The comparative studies which have been submitted of the Ford Company and numerous other industrial corporations, from which the market value of the Ford stock has been deduced were in some instances found to be of little help because they involved assumptions or collateral matters which were not cognizable here, or were based on unsubstantiated hypotheses, or for other reasons were found of little weight. We think it would unjustifiably deflect this opinion from its proper course to set forth a critical analysis of all of the evidence and methods by which the numerous witnesses arrived at their various opinions as to value.
And in the concurring opinion in that case it was said:
Passing to the question of a proper valuation on March 1, 1913, of the Ford stock, we engage ourselves in an undertaking which is at once complex and simple. Complex in the factors and formulae that are presented for consideration and simple in the realization that, in its essence, the determination of value is merely a matter of judgment. Many factors must be weighed, and in this*1197 process various theories and formulae may be employed, but in the end the value determined on must comport with sound and well reasoned judgment. It follows that the accuracy of the valuation is directly proportionate to the soundness of the judgment.
Under the conditions set forth in the findings of fact we do not deem the few scattered sales of Firestone stock in small lots to be conclusive of fair market value. Firestone was distinctly a close corporation, the Firestone family owning a large part of its stock. No statement of the company's assets, volume of business, earnings, actual or potential market or other facts vital to its financial condition had been given or was available to the public, banks, stockholders, or anyone not within the inner circle of its officers and directors. During the first four months of 1913 only 22 sales, aggregating 235 shares, were recorded in the Cleveland Stock Exchange. The strike in the rubber plants in Akron in February and March 1913, had a depressing effect on the prices of stock in tire companies and particularly on the few transactions in the Firestone stock. Neither the volume of the sales nor the attendant circumstances were sufficient*1198 to establish a fair market. In view of this situation we must examine other factors to arrive at the proper fair market value.
We find several unique facts in the record which convince us that the fair market value was much greater than the price at which a few shares of stock were sold at par or near March 1, 1913. Harvey *60 Firestone and Henry Ford were warm friends. Their business association likewise was unusually close. Firestone consistently furnished Ford with over half of his tire needs. He was in constant and intimate touch with Ford's business policies and his projected plans for expansion. On March 1, 1913, the Firestone Co. knew what would, in all probability, be required from Ford and accordingly provided for its own anticipated increase in business and earnings. Its subsequent deliveries to Ford show clearly that its expectations were amply justified.
At the same time Firestone was engaged in perfecting and placing on the market in substantial quantities its nonskid tires and demountable rims, in the production of both of which it was the pioneer among tire and rim manufacturers. The marked increase in the sales of these two articles also reflects*1199 the reasonableness of Firestone's belief that the public demand for them would be strong.
In arriving at our conclusion we must give due regard to certain other unusual practices of Firestone which served to enhance the fair market value of its stock. The company's assets were carried on its books at an unwarranted low figure, so low in fact, that in 1916, after an appraisal a sharp upward revision was required and made. Contributing to this situation was the fact that Firestone had taken excessive depreciation on its physical assets. Such depreciation was later reduced by the respondent and was reflected in Firestone's increased income during the period in which such depreciation had been taken. Furthermore, Firestone had never carried as assets such valuable intangibles as patents, good will, etc. No appraisal or valuation of such intangibles was presented to us, but their possession by Firestone may properly be taken as a factor in arriving at fair market value.
The character and ability of Firestone's management also has an important bearing on our problem. It was described as "outstanding." The organization was young and virile, headed by Harvey Firestone, a young*1200 man of large experience in the tire industry. The officers of the company were constantly on the alert to invent, discover and develop improvements in their products and methods of manufacture as well as to reduce the cost of production and distribution. On March 1, 1913, they had forseen the probable great growth of their business and were making their plans accordingly.
Under the foregoing circumstances we are convinced that the fair market value of common stock of the Firestone Tire & Rubber Co. on March 1, 1913, was at least $550 per share and we so determine.
Decision will be entered under Rule 50.