*953 Valspar stock had no fair market value when received by petitioners on or about February 14 and July 12, 1930. History of earnings outweighed by dark prospects and losses.
*1004 The Commissioner determined deficiencies in income tax for the calendar year 1930, as follows:
| Petitioner | Docket No. | Deficiency |
| Stonewall J. Jackson | 72002 | $1,196.38 |
| Henry U. Birdseye | 72119 | 1,658.75 |
| Estate of Nathan T. Pulsifer | 72127 | 7,211.69 |
| Dorothea V. A. Swift | 72244 | 11,740.14 |
| W. D. Waugh | 73625 | 1,271.57 |
| Hext M. Perry | 75762 | 260.95 |
| Theodore Gabert | 76448 | 403.56 |
| Philip L. Maury | 76449 | 4,441.00 |
| George M. Seibert | 76450 | $565.66 |
| E. C. Roberts | 76451 | 1,142.81 |
| Horace S. Boutell | 76452 | 8,194.88 |
| William E. Vincent | 76453 | 704.00 |
| William J. Boston | 76454 | 924.17 |
| Frank T. Hogan | 76455 | 2,179.58 |
| Thomas R. Wyles | 76980 | 2,110.51 |
*954 The only issue in the cases of the estate of Nathan T. Pulsifer and Dorothea V. A. Swift is whether or not the Valspar stock had *1005 any fair market value when it was received by those petitioners on or about February 14, 1930. The only issue in the other proceedings is whether or not the Valspar stock had any fair market value on or about June 12, 1930, when it was received by those petitioners. Each of the petitioners received Valspar stock and cash in exchange for some other stock which they had theretofore owned. They are in agreement as to the basis and period of holding applicable to the old stock. They also agree that the gain of each petitioner may be computed by deducting the basis from the total of the cash and the fair market value of the Valspar stock received and that it may be taxed to the extent of the cash received. The petitioners contend, however, that the Valspar stock had no fair market value when they received it, and, consequently, their gain is limited to the difference between the basis and the cash received. The Commissioner, in determining the deficiencies, has held that the Valspar stock had a value of $22.35 at the time it was received by*955 these petitioners in June 1930. He used $22.22 and $22.12949 as the value of the stock in February in the cases of Pulsifer and Swift. Counsel for petitioners Wyles and Waugh argue in their briefs that certain amounts which those petitioners received in 1931 from trust funds set up in 1930 by the Detroit Graphite Co. were erroneously included by the Commissioner in computing the gain for 1930. No such issue was raised by the pleadings. The stipulated facts and the deficiency notices clearly indicate that there can be no such issue, since the distributions from the trust funds made in 1931 were not included by the Commissioner as a part of the amount realized in determining the deficiencies for 1930. This point will receive no further discussion.
FINDINGS OF FACT.
Valentine & Co., hereinafter referred to as Valentine, was a corporation organized under the laws of the State of New York on January 19, 1882. It succeeded to a business which had been established in 1832. The business consisted largely of the manufacture and sale of varnish. A large part of the production of the company was purchased in bulk and used by the manufacturers of vehicles, particularly in later years*956 by the manufacturers of automobiles.
The development of Duco by a competitor had a serious, if not a fatal, effect upon the varnish business being conducted by Valentine. The effect of this competition was evident in the early part of the year 1927 and caused the officers and directors of Valentine to consider what steps they might take so that the corporation could continue to manufacture and sell merchandise profitably.
Efforts by Valentine to develop a product to compete with Duco were unsuccessful. Valentine had some initial success in an attempt to market some of its products in small containers. The officers decided *1006 that Valentine needed a larger line of products, including, in addition to clear varnishes, colored varnishes and paints.
An attempt in 1929 to combine its business with that of the Detroit Graphite Co., hereinafter referred to as Graphite, failed. A proposal was made to organize a new company, to be called the Valspar Corporation, which was to take over the business of both Valentine and Graphite.
"Valspar" was the name of the principal product manufactured by Valentine. Appraisals were made as of July 31, 1929, of the properties of*957 each of the companies for the purpose of providing comparative data upon which to base the relative interest which each company was to have in the new corporation. The land of Graphite was appraised by officers of that company. All other properties were appraised by outside appraisers regularly engaged for the purpose. Graphite withdrew on November 11, 1929, and the negotiations were abandoned. One reason for the failure of the negotiations was the crash in the stock market, which occurred in the latter part of 1929, and convinced some of the parties to the negotiations that stock of the proposed Valspar Corporation could not be successfully marketed.
Valentine then began negotiations for the acquisition of the business of the Con-Ferro Paint & Varnish Co., hereinafter called Con-Ferro. Con-Ferro was a relatively small corporation, organized in 1919 under the laws of the State of Missouri. Its principal business was the sale of cheap colored surfacing liquids in small packages to chain stores. Valentine intended to use Con-Ferro as an outlet for some of the off-color products which Valentine anticipated would result from its attempt to increase its line of high quality products. *958 The properties of Con-Ferro were appraised by outside appraisers regularly engaged for the purpose. Valentine entered into an agreement with Con-Ferro on January 10, 1930, pursuant to which the Valspar Corporation was organized on February 13, 1930. Valspar had an authorized capital stock of 750,000 shares of no par value. Provision was also made for an authorized issue of $6,000,000 par value of 10-year 6 percent convertible debenture bonds.
Valspar acquired the capital stock of Valentine in exchange for $1,640,000 in cash and 198,000 shares of Valspar stock, and Valspar acquired all of the assets of Con-Ferro in exchange for $419,577.56 in cash and 4,480 shares of Valspar stock. Valentine distributed $650,000 of the cash received to its preferred stockholders and $990,000 to its common stockholders. It distributed the 198,000 shares of Valspar stock to its common stockholders on the basis of six shares of Valspar for each share of Valentine. Con-Ferro distributed all of the cash and Valspar stock which it received to its stockholders in exchange for their Con-Ferro stock on or about February 14, 1930.
*1007 Valspar obtained the cash necessary for the acquisition*959 of the Valentine and Con-Ferro properties by selling $2,500,000 par value of its 10-year 6 percent convertible debenture bonds dated February 1, 1930, at 93, or at a total discount of $175,000. It retained for organization expenses and working capital only $265,422.44 of the total amount received for the bonds. Valspar then had 202,480 shares of its no par stock outstanding.
In April 1930 Valspar resumed negotiations with Graphite. Valspar, on June 11, 1930, obtained all of the net assets of Graphite as shown by a balance sheet dated June 11, 1930, exclusive of certain contingent and pending liabilities not reflected on the balance sheet, in exchange for $2,166,387.50 in cash and 77,000 shares of the common stock of Valspar.
Valspar raised the cash necessary for this transaction by borrowing $2,310,000 from banks on its promissory note payable within six months with interest at 6 percent. This loan was secured by a mortgage of all of the assets being taken over from Graphite and by an hypothecation of the accounts receivable thereafter owned by Valspar.
Graphite then changed its name to Fort-Twelfth Corporation, and on June 12, 1930, authorized the retirement of its preferred*960 stock and the exchange of the cash, the Valspar stock, and the interest of the corporation in two trust funds, for its outstanding common stock. This liquidation was made on July 12, 1930, and was pursuant to the plan of reorganization.
Valspar then had outstanding 279,480 shares of its capital stock, of which 198,000 shares had been issued to the former stockholders of Valentine, 4,480 to the former stockholders of Con-Ferro, and 77,000 to the former stockholders of Graphite.
The Valspar stock was not listed on any exchange and there is no evidence in this record of any sales of that stock. One of the petitioners tried unsuccessfully to sell some of his stock shortly after he received it. He could not obtain an offer. Another recipient of the stock tried unsuccessfully to pledge it with a bank as collateral for a loan.
The stock of Valentine, Con-Ferro, and Graphite had been closely held, and there is no evidence of sales of stock of any of those companies, except that an employee of Valentine in October 1929 entered into an agreement to buy 2,000 shares of Valentine at $140.26 per share.
Valspar did not have earnings sufficient to pay the interest on its indebtedness*961 after May 1930. Valspar never had a profitable year. It sustained a substantial loss in 1930 and a substantial loss in 1931. The operation of its business was taken over by the bankers in the latter part of 1931 and the company was placed in bankruptcy in 1932.
*1008 Valentine, Con-Ferro, and Graphite had been operating profitably. The net earnings on the three companies for the five years preceding 1930 were as follows:
| Year | Valentine 1 | Con-Ferro 2 | Graphite | Total |
| 1925 | $608,280.92 | $39,063.26 | $227,951.31 | $875,295.49 |
| 1926 | 459,875.88 | 25,709.02 | 324,030.24 | 809,615.14 |
| 1927 | 314,419.58 | 45,095.88 | 205,830.20 | 565,345.66 |
| 1928 | 228,379.53 | 93,790.59 | 273,459.68 | 595,629.80 |
| 1929 | 607,902.86 | 142,941.71 | 207,447.26 | 958,291.83 |
The following statement shows as of January 31, 1930, a balance sheet of Valentine and a balance sheet of Con-Ferro taken from the books of those companies, together with certain other figures used in consolidating those two balance sheets:
(Table omitted)
*1009 The following*962 is a similar balance sheet as of November 30, 1930:
(Table omitted)
*1011 The following is a statement of the assets and liabilities of Graphite taken from its books as of June 11, 1930, together with table showing changes made thereafter in connection with those items, and the figures at which the various items were placed upon the books of the new Valspar Corporation after the reorganization:
(Table omitted)
The book value of a share of stock, as computed from the consolidated balance sheet of January 31, 1930, was $21.84. The book value of a share of Valspar stock, as shown by the balance sheet of November 30, 1930, was $18.42. The Con-Ferro stockholders had the option of receiving 4,480 shares of Valspar stock or $112,000 in cash in lieu of the stock. They chose to accept the stock. The Graphite stockholders had the option of receiving $200,000 in cash in lieu of 9,000 shares of stock. They took the cash in lieu of the stock.
The Valspar stock had no fair market value on or about February 14, 1930, and it had no fair market value on or about June 12, 1930.
All of the facts stipulated in these proceedings are hereby incorporated in these findings by this*963 reference.
*1012 OPINION.
MURDOCK: The only question for decision in this case is the fair market value of the Valspar stock on February 14 and on June 12, 1930. The first date is determinative in the Pulsifer and Swift cases, while the latter date is determinative in all of the remaining cases. The parties agree that each distribution was pursuant to a plan of reorganization, and the profit received by the stockholders is recognized only to the extent of the cash. They have also agreed upon the basis for gain or loss on all of the old shares surrendered. The Commissioner has not recognized a profit in any case in excess of the amount of the cash. But in every case he has computed a profit by attributing a certain fair market value to the stock. The petitioners contend that the stock had no fair market value. The stock of all of the companies was closely held and there were no sales at or near the dates in question. There were no sales of the Valspar stock.
The Commissioner used $22.35 as the fair market value of the stock on July 12, 1930. He obtained that figure from a balance sheet for the new Valspar Corporation as of June 12, 1930, which he apparently*964 constructed by taking the last available balance sheet and making certain adjustments thereto. He used two different figures to represent the fair market value of the stock on February 14, 1930, one in the case of Pulsifer and a different one in the case of Swift. Each was slightly less than the figure used as the value on July 12. He claims that his figures are justified, not only by the book values of the stock, but by earnings and the past history of the corporations. He also claims that the parties to the reorganization themselves recognized that the value of the Valspar stock was in the neighborhood of $25. His arguments are supported, for the most part, by evidence in the record which ordinarily would be entitled to great weight. Yet other evidence in this record indicates that that evidence upon which the Commissioner relies is not a reliable indication of the fair market value of the stock.
A very serious situation in the affairs of Valentine developed when Duco came on the market. The officers of Valentine recognized the seriousness of that competition and they tried in every way they knew to save their corporation. They tried to save as much of its business as*965 could be saved and they tried to develop profitable new lines. But immediately following the advent of Duco came the stock market crash and the depression, which began in the fall of 1929. Despite the earning history of its predecessors, Valspar never earned money. On the contrary, it sustained large operating losses. The effect of the two reorganizations was that the stockholders of Valentine, Con-Ferro, and Graphite received a very large amount of cash which they took out of the business. The stock which they received was never sold. *1013 Although it had a substantial book value, the evidence indicates that that book value was the result of certain writeups of the book value of a number of the assets which were not justified under the circumstances. The petitioners did not believe that the Valspar stock which they received had any fair market value at the time they received it, and, with one exception, they did not report it on their returns as having any fair market value. Subsequent events confirmed their opinions. Any reasonable person interested in buying this Valspar stock on the critical dates would have learned of the prospects of this company, and we can*966 not assume that any reasonable person knowing those prospects would have given anything for the stock. This is not a case of the disposition of stock where the gain or loss must be determined in some definite amount, but is a case where the question of further gain or loss is postponed under the statute to await the final disposition of the stock. See Paul & Mertens, sec. 52.01. It is, of course, possible that the stock may not have been entirely worthless, but, after considering all of the evidence, we have come to the conclusion that for the purposes of this case our finding that it had no fair market value on the critical dates is in accordance with the weight of the evidence.
Reviewed by the Board.
Decisions will be entered under Rule 50.
VAN FOSSAN, dissenting: I am unable to agree that on the record before us the stock in question has no fair market value. The fact that it amy be difficult, on the evidence, to find some intermediate figure between that found by respondent and that contended for by the petitioners (here, no value) does not absolve the Board of its duty to find such correct value.
ARNOLD agrees with the above dissent.
Footnotes
1. Proceedings of the following petitioners are consolidated herewith: Henry U. Birdseye; Estate of Nathan T. Pulsifer, Bankers Trust Co., Executor; Dorothea V. A. Swift; W. D. Waugh; Hext M. Perry; Theodore Gabert; Philip L. Maury; George M. Seibert; E. C. Roberts; Horace S. Boutell; William E. Vincent; William J. Boston; Frank T. Hogan; Thomas R. Wyles. ↩
1. Fiscal year ended November 30. ↩
2. 1927 was a period of 11 months. 1928 and 1929 were fiscal years ended November 30. ↩