*3635 1. The Mercer Motor Syndicate was not a closed and completed transaction within the taxable year 1919 and, therefore, the respondent erred in taxing the alleged profits therefrom in that year.
2. The several acts of acquiring stock of the Invincible Oil Corporation constituted an inseparable transaction which was closed and completed in the year 1919.
3. Fair market value of Invincible Oil shares determined.
*1336 The cases of the five petitioners herein, which upon motion, were consolidated, pray for the redetermination of deficiencies in income taxes for the year 1919, as follows:
| Henry S. Parker | $22,414.17 |
| Craig Colgate | 14,839.61 |
| Frank Hamilton Davis, deceased | 69,273.48 |
| Louis du Pont Irving | 80,240.46 |
| P. Erskine Wood | 20,230.68 |
*1337 The income in controversy being the distributive share of profits alleged to have been earned by the copartnership, of which each of the petitioners were partners, the following issues, presented for our*3636 consideration, are identical in each case:
(1) Whether the respondent erred in taxing the profits alleged to have been earned by the firm of Colgate, Parker & Co., of which the petitioners were partners, from the Mercer Motor Stock Syndicate, and
(2) Whether the respondent committed an error in taxing certain additional profits from transactions in stock of the Invincible Oil Co. entered into by the partnership aforesaid.
Another allegation of error was set forth in the petition of Henry S. Parker but was abandoned at the hearing.
FINDINGS OF FACT.
All of the petitioners herein were members of the copartnership of Colgate, Parker & Co. (hereinafter referred to as the partnership) during the year 1919. The partnership was engaged in the investment securities business in New York, N.Y.
In the year 1919 the partnership entered into an oral agreement with two individuals named Kinne and Lyon, whereby a "purchase" group was formed to purchase the stock of the Mercer Automobile Co. and form a new company, and a "selling" group (which was the partnership) to sell the stock of the new company, dividing the profits derived therefrom, 50 per cent to Kinne and Lyon and 50 per*3637 cent to the partnership, said profits to be paid if and when the stock had been sold and distributed and the transaction completed. It was understood that the partnership was to sell the securities. The partnership borrowed $2,500,000 from the Columbia Trust Co. for the purchase of this stock and it was agreed that Kinne and Lyon should share equally with the partnership any loss that might accrue by reason of the partners' endorsements and that they should share in any obligation arising therefrom.
Pursuant to the oral agreement and understanding entered into between the partnership and Kinne and Lyon a syndicate agreement was prepared under date of October 3, 1919, in which the partnership was designated "Managers" and parties of the first part, and the parties of the second part, referred to therein as "participants" were such corporations, firms and individuals as were to become syndicate members by signing that agreement. The following "plan" setting *1338 forth the purpose and intent of the syndicate was incorporated into and made a part of the agreement:
A new corporation is about to be organized under the laws of the State of Delaware (or for such other State*3638 as may be approved by the Bankers who are the Managers named in the attached Agreement) with the corporate name of Mercer Motors Company, or some other appropriate name, (herein, and in the attached Agreement, called the New Company) to acquire all, or substantially all, of the shares of the outstanding capital stock of Mercer Automobile Company, (a New Jersey corporation, herein, and in the attached Agreement, called the Old Company).
The New Company will have an authorized capital stock of 110,000 shares, without nominal or par value, of which 100,000 shares are to be presently issued.
The Bankers (acting for themselves individually, and not as Syndicate Managers under the attached Agreement, and also for their associates) have entered into certain agreements (copies of which are on file at their respective offices and are there opened for inspection by Participants under the attached Agreement) under which the stock of the Old Company is to be acquired from the vendors thereof and under which the shares of stock of the New Company are to be issued.
The Bankers (acting for themselves individually, and not as Syndicate Managers under the attached Agreement, and also for their*3639 associates) are willing to sell to the Syndicate to be formed under the attached Agreement 89,000 shares of the stock of the New Company (referred to as "shares" in the attached Agreement), if, as and when issued and received by the Bankers, for the sum of $3,115,000 or at the price of $35 per share. Upon this transaction the Bankers and their associates will receive and be entitled to retain a profit.
The following are the pertinent article of the Agreement:
The parties hereto for and in consideration of the terms and of the mutual promises and covenants herein contained and for the purpose of joining in the carrying out of the Plan hereunto annexed, hereby severally covenant and agree as follows:
* * *
Second. The Participants hereby appoint Colgate, Parker & Co. (as that firm may be constituted from time to time) as Syndicate Managers under this Agreement.
* * *
Fifth. The Participants shall share ratably in accordance with their respective participations, in the profits and losses upon Syndicate transactions, but nothing contained herein shall constitute the parties hereto partners, or shall render any one of the Participants liable to contribute more than the*3640 amount of his participation as set opposite his name as signed at the end of this Agreement.
Sixth. The Managers are hereby specifically authorized by the Participants, as follows:
(a) To purchase from themselves in their individual capacities, if, as and when issued and received by them, 89,000 shares of the New Company, at the price of $35 per share.
(b) To receive the shares so purchased from themselves and to hold the same in their own names, or otherwise, for the benefit of the Syndicate.
(c) During the life of the Syndicate to sell such shares, or any of them, upon terms and prices which they may deem advantageous to the Syndicate.
(d) To buy, sell, purchase, repurchase and trade in, and make such contracts with respect to the purchase or sale of, the shares, as they may deem *1339 advantageous to the Syndicate, without limitation or restriction by reason of the amount of shares to be originally acquired by the Syndicate, and to utilize for the purpose of buying or trading in such shares, any funds of the Syndicate, whether derived from participations hereunder, or from the proceeds of the sales of shares acquired by the Syndicate, or otherwise, provided*3641 only that the participation or obligation of each Participant hereunder shall not be thereby increased beyond the amount of his participation as stated herein.
(e) To pledge or hypothecate all the shares or other assets in their possession or under their control and also this Agreement as collateral security for a loan or loans or to agree to pledge or hypothecate the same, as the Managers may deem wise, and each Participant hereby agrees to pay his proportionate amount of any such loan or loans when called upon to do so by the Managers or by any bank or trust company which may have made any loan on the security of the shares or other assets, or of this Agreement, provided, always that the respective liabilities of the Participants shall in no event be increased above the full amount of their respective participations.
(f) To make such changes and modifications in the Plan and any agreements existing between the Managers, in their individual capacities, and the vendors of the shares, as the Managers in their sole discretion shall deem advantageous to the Syndicate.
(g) To make during the life of this Syndicate, and up to and including the final distribution hereunder, on behalf*3642 of the Syndicate, any and all arrangements and to perform any and all acts not especially mentioned herein, that in the exercise of their unrestricted discretion the Managers shall deem to be expedient in order to consummate the purposes of this Agreement or to promote or to protect the interest of the Syndicate.
* * *
Eighth. The life of the Syndicate shall be until December 3, 1919, but the Managers may in their discretion, terminate the Syndicate at any time before the expiration of such period and the Managers may in their discretion extend the life of the Syndicate from time to time for an aggregate extended period of not more than ninety days. The Managers shall be the sole and final judges as to whether at any time it is to the interest of the Syndicate to proceed further under this Agreement or the Plan, and whenever they may deem expedient, they may abandon the objects contemplated by this Agreement or the Plan and all further proceedings hereunder.
Ninth. Upon the termination of the Syndicate the Managers shall distribute to the Participants, pro rata, the shares and/or cash remaining in the Managers' hands. Upon such distribution the Managers shall be discharged*3643 from any further liability under this Agreement.
The foregoing agreement was perfected by the signature of the syndicate managers, on the one hand, and by the signature of each participant, on the other, agreeing to bind himself for the number of shares set opposite his name at $35 per share. The agreement provided that each participant should comply with the directions of the managers and that they should make all payments to the managers as and when called, which payments were required to be made in cash within three days after call. That agreement provided further that any and all moneys received by the managers *1340 for account of the syndicate should be held by them as bankers in general account.
Not having succeeded in disposing of all of the Mercer Motor Co. shares at December 3, 1919 (the date on which the Syndicate Agreement expired by its own terms), it was found necessary to extend the life of the syndicate until March 3, 1920. At the expiration of the extended life of the syndicate an attempt was made to secure the consent of the participants to further extend its life, but failing to agree to this extension, the syndicate thereupon terminated.
There*3644 were two separate groups interested in the Mercer Motor stock transactions, the "purchase" group, whose duty it was to purchase 89,000 shares of Mercer Motor Co. stock, which it did at a total cost of $2,533,590, and having acquired those shares the purchase group thereupon turned them over to the "selling" group, whose duty it was to sell or rather secure participants therefor at $35 a share, which meant that the selling group would receive $3,115,000, provided the entire 89,000 shares were disposed of.
The partnership secured signatures of participants to the agreement and interested other houses in the stock and made a public offer of it.
On December 31, 1919, the bookkeeper of the partnership, acting under instructions from the cashier in charge of the office, made the following journal entry in the books of account setting up a profit on Mercer Motors Syndicate transactions of $267,514.27.
| Mercer Motors Purchase Synd. W.O. a/c | $267,514.27 | |
| P & L (Profit and Loss) | $267,514.27 | |
| Being to take into P & L a/c for tax purposes profit accrued to us by reason of our half interest in Mercer Motors Purchase Synd. a/c on that part of business in which we were not both purchaser and seller, which part is therefore a closed transaction. |
*3645 The above book entry was not expressly authorized by the partners nor was it ratified when discovered in March, 1920, at the time of making the income-tax return for the partnership for the year 1919. In fact, this entry was reversed by a later journal entry in March, 1920. The amount of $267,514.27 was shown in the partnership's original income statement as prepared by public accountants but was omitted from the return ultimately filed for 1919.
When the Mercer Motors Stock Syndicate expired in March, 1920, the partnership had succeeded in procuring participants to the extent of about 77,000 shares, leaving about 12,000 shares undisposed of, which were divided between Kinne, Lyon, and the partnership.
In March, 1920, the partnership called upon all the signatories of the syndicate agreement to fulfill their agreements, but a number of them failed to comply. In fact one of the participants, who, although not a signer of the syndicate agreement, had agreed to take 10,000 *1341 shares, ultimately took only 50 shares, consequently Kinne, Lyon and the partnership were compelled to take the stock of the defaulting participants.
In order to sustain the market in Mercer*3646 Motor stock the partnership purchased during the year 1919 about 32,000 shares in the open market at prices ranging from $40 to $32.50 a share.
None of the parties received any cash in 1919 from the Mercer Syndicate.
The books of account of the partnership were kept on the accrual basis.
In May, 1919, the partnership together with Bache & Co. and Cochrane, Harper & Co., jointly agreed to purchase 210,000 shares of stock of the Inveincible Oil Corporation for $3,600,000 and in addition it was contemplated and understood that there would be an exchange of stock of the Louisiana Oil Corporation for stock of the Invincible Oil Corporation, that is, the parties to that agreement obligated themselves to provide a certain number of shares of Louisiana Oil stock to be exchanged, of which number the partnership's portion was about 10,000 shares.
The partnership, having only about 4,000 shares of Louisiana Oil stock, for which it paid an average of $6 a share, was compelled to acquire about 6,000 additional shares in order to effect the exchange contemplated, which it did at a cost of $45.60 a share. The partnership traded 9,955 shares of Louisiana Oil stock for 11,947 shares of*3647 Invincible Oil stock, representing a ratio of six shares of the latter for five of the former.
The partnership entered into several agreements with the parties to the Invincible Oil Stock Syndicate to withhold certain quantities of stock from the market. The following agreement, known as "Letter #2," was entered into on June 6, 1919, placing a restriction on 30,000 shares of Invincible Oil stock until December 15, 1919:
The undersigned being about to transfer to Invincible Oil Corporation, a Virginia Corporation, certain shares of Invincible Oil Company and of the Gladstone Oil & Refining Corporation, both Oklahoma corporations, together with certain cash, in payment of which they are to receive 220,000 shares of the Common Stock of Invincible Oil Corporation, the details of which purchase are more fully contained in certain contracts and agreements heretofore made, to which the undersigned are parties, it is hereby mutually agreed between the undersigned that each of them respectively will withhold or cause to be withheld from sale 30,000 shares of Invincible Oil Corporation until December 15, 1919. This agreement shall not prevent hypothecation of said shares and the time*3648 herein fixed may be shortened by mutual consent expressed in writing.
Executed in triplicate.
June 6, 1919.
(Signed) J. S. BACHE & CO.
(Signed) COCHRANE, HARPER & CO.
(Signed) COLGATE, PARKER & CO.
*1342 Another agreement known as "Letter #1" was entered into on June 6, 1919, requiring the parties to withhold from sale the shares of Invincible Oil stock received by them in exchange for Louisiana Oil stock. That agreement reads:
The undersigned being about to transfer to Invincible Oil Corporation, a Virginia Corporation, 50,000 shares of the Louisiana Oil Refining Corporation, in exchange for 60,000 shares of the Common Stock of said Invincible Oil Corporation, the details of which exchange are more fully contained in certain contracts heretofore made, to which the undersigned are parties, it is hereby mutually agreed between the undersigned that they will withhold, or cause to be withheld, from sale said 60,000 shares of the stock of the Invincible Oil Corporation until September 15, 1919. This agreement shall not prevent hypothecation of said shares, and the time herein fixed may be shortened by mutual consent expressed in writing.
Executed in triplicate.
*3649 June 6, 1919.
(Signed) J. S. BACHE & CO.
(Signed) COCHRANE, HARPER & CO.
(Signed) COLGATE, PARKER & CO.
On June 28th the parties to the Invincible Oil Stock Syndicate entered into another agreement substituting for the agreement set forth in the so-called Letter #2 above, which agreement reads:
The undersigned having transferred to Invincible Oil Corporation, a Virginia corporation, certain shares of Invincible Oil Company and of the Gladstone Oil & Refining Corporation, both Oklahoma corporations, together with certain cash, in payment of which they have received 220,000 shares of the common stock of Invincible Oil Corporation, the details of which purchase are more fully set forth in certain contracts and agreements heretofore made, to which the undersigned are parties, it is hereby mutually agreed between the undersigned that until December 15, 1919, each of them respectively will withhold or cause to be withheld from sale 10,000 shares of Invincible Oil Corporation.
This agreement is made in place of and in substitution for an agreement executed in triplicate, dated June 6, 1919, (more particularly identified as letter #2 of said date), relating to the withholding*3650 from sale of 30,000 shares of Invincible Oil Corporation by each of the undersigned respectively.
This agreement shall not prevent hypothecation of said shares and the time herein fixed may be shortened by mutual consent expressed in writing.
Executed in triplicate.
June 28, 1919.
(Signed) J. S. BACHE & CO.
(Signed) COCHRANE, HARPER & CO.
(Signed) COLGATE, PARKER & CO.
(Signed) S. M. SCHATZKIN.
Of the 220,000 shares of Invincible stock purchased by the Syndicate they sold 120,000 shares for $3,600,000. After taking out some 10,000 shares for other purposes there remainded 90,000 shares to be distributed to the three firms of which the partnership received on July 15, 1919, 30,000 shares, part of which, however, other parties *1343 were entitled to by reason of the partnership's dividing its liability with them.
In connection with the Invincible Oil transactions, hereinabove related, the partnership joined with the other firms and formed a pool to purchase not in excess of 30,000 shares of Invincible Oil stock in the open market in order to maintain the market for that stock. The pool soon purchased the maximum number of shares provided for at an*3651 average cost of $37.033251 a share, of which the partnership's proportion was 10,000 shares.
The partnership having refused to extend its interest in the pool operations, or participate further therein, the following agreement was entered into between the parties under date of June 28, 1919:
THIS AGREMENT entered into this 28th day of June, 1919, by and between Colgate, Parker & Co., party of the first part, and Cochrane, Harper & Co., J. S. Bache & Co., and S. M. Schatzkin, parties of the second part,
WITNESSETH:
WHEREAS, the party of the first part has been interested with the parties of the second part in a certain agreement, under which the party of the first part and the parties of the second part have jointly acquired an aggregate net amount of thirty thousand (30,000) shares of the common stock of Invincible Oil Corporation, a corporation of Virginia (hereinafter called the Corporation); and
WHEREAS, the interest of the party of the first part in said stock thus acquired is ten thousand (10,000) shares and the interest of the parties of the second part is twenty thousand (20,000) shares; and
WHEREAS, the parties of the second part desire to liquidate the holdings*3652 of said stock thus acquired and to organize a New Syndicate for the purpose of trading in the shares of the Corporation, in which New Syndicate the party of the first part is unwilling to become interested;
NOW, THEREFORE, in consideration of the mutual promises hereinafter contained
IT IS AGREED AS FOLLOWS:
I. The parties of the second part hereby agree to purchase and the party of the first part hereby agrees to sell, ten thousand (10,000) shares of the common stock of the Corporation at the price of $30.00 per share net; said stock to be delivered by the party of the first part to the parties of the second part against payment therefor at any time between December 20, 1919, and January 10, 1920 - the exact date of delivery to be at the option of the party of the first part.II. The party of the first part agrees forthwith to take up and pay for said ten thousand (10,000) shares of the common stock of the Corporation, being the number of shares acquired for account of the party of the first part under said agreement first above referred to, at the average cost price, to wit $37.033251, of the 30,000 shares of stock covered by said agreement. Upon making such payment the*3653 party of the first part shall be released from all obligations under said agreement to the parties of the second part and each of them.
III. The party of the first part hereby gives to the parties of the second part the option to purchase all or any part of said ten thousand (10,000) shares referred to in paragraph II hereof at the cost thereof to the party of the first *1344 part, plus interest at six per cent per annum from the date hereof up to the date of delivery and payment; said option to expire six months from the date hereof.
IV. The party of the first part hereby gives to the parties of the second part the option to purchase from the party of the first part an additional ten thousand (10,000) shares of the common capital stock of the Corporation at $30.00 per share; said option to expire upon the date upon which payment is to be made for the ten thousand (10,000) shares purchased and sold under paragraph I hereof.V. This agreement shall take the place of any and all other agreements between us relating to trading in the stock of the Corporation except our agreement of even date herewith, and except our agreement with respect to the sixty thousand (60,000) *3654 shares of stock of the Corporation issued in exchange for fifty thousand (50,000) shares of common stock of Louisiana Oil Refining Corporation.
IN WITNESS WHEREOF the parties hereto have executed this agreement in triplicate the day and year first above written.
(Signed) COLGATE, PARKER & CO.
(Signed) J. S. BACHE & CO.
(Signed) COCHRANE, HARPER & CO.
(Signed) S. M. SCHATZKIN.
The respondent increased the partnership's income for the taxable year in question by $251,182.19 as a result of the Mercer Motor stock transaction on the theory that the transaction was closed and completed within the year and for the further reason that the books of the partnership were kept on the accrual basis.
The respondent found additional profit on the Invincible Oil Stock Syndicate transactions of $131,957.60, and on the exchange of Louisiana Oil stock for Invincible stock of $57,067.50. The amount of $131,957.60 was arrived at as follows: He used 18,618 shares of Invincible Oil stock as the partnership's share of the syndicate profits which the partnership valued at $9.276 for determining its profit; the respondent used the cost of this stock to the syndicate of $16.3636 and applied*3655 the difference of $7.0876 per share to the 18,618 shares resulting in the additional income of $131,957.60.
The respondent computed the profit of $57,067.50 as follows: The partnership received 11,947 shares of Invincible Oil stock in exchange for 9,955 shares of Louisiana Oil stock, or six shares of the former for five of the latter. The partnership had on hand at December 31, 1919, 6,848.10 shares of Invincible Oil stock. In determining the profit from the exchange of Louisiana Oil stock for Invincible Oil stock the respondent took one-sixth of the total number of shares of Invincible Oil stock on hand at December 31, 1919, or 1,141.35 shares, to which he applied a value of $50 per share, arriving at a profit of $57,067.50.
*1345 OPINION.
MORRIS: While the two issues presented by the pleadings are similar in that they involve alleged profits derived from stock syndicate transactions we believe the facts and circumstances upon which the two issues are based warrant separate treatment and consideration. We will, therefore, first dispose of the question of whether the respondent committed an error in taxing as income certain alleged profits derived by the copartnership, *3656 Colgate, Parker & Co., of which the petitioners were partners, from the so-called Mercer Motor Stock Syndicate.
The petitioner contends that the Mercer transaction was not closed and complted in the year 1919 so as to render the income therefrom taxable in that year to the petitioners, regardless of whether or not the books of account of the partnership were kept on the cash receipts and disbursements basis or on the accrual basis. The respondent contends, on the other hand, that, when the purchase syndicate, consisting of the partnership and Kinne and Lyon, sold its holdings to the selling group (the partnership), this represented a closed transaction on which a definite gain or loss should be based.
Although we do not believe that the method of accounting employed by the partnership is dispositive of the issues here in controversy, we do believe that the importance attached to that question by the counsel for both parties requires a ruling as to whether the books of the partnership were kept on the cash receipts and disbursements basis as urged by the petitioner, or on the accrual basis as contended by the respondent. The books of account of the partnership were submitted*3657 in evidence in accordance with a stipulation entered into between the parties at the hearing with the understanding that the Board would determine the basis. We have carefully examined the books for the year 1919 and are of the opinion they were kept on the accrual basis. We find in the books of account large sums of accounts receivable, notes receivable, and securities on hand, notes payable and accounts payable of considerable amounts and innumerable other accounts from the very nature of which it would be practically impossible to correctly ascertain the net income for any given period without resorting to the accrual method of accounting. We also find that on December 31, 1919, the bookkeeper, anticipating the statement for the period, applied the customary rules of accounting procedure and set up a great number of accrual accounts reflecting interest accruing up to December 31, 1919, on stocks and bonds - in fact, we find all of the elements ordinarily present in a strict accrual system of accounting.
*1346 If the Mercer Motor Syndicate transaction was not substantially closed and completed in 1919, then the profits alleged by the respondent to have been derived therefrom*3658 are not taxable in that year. What constitutes a closed and complted transaction depends upon the facts and circumstances in each individual case. The Board has held in , where the petitioner was attempting to deduct an alleged loss in the year 1919 upon the ground that certain property was abandoned as worthless in that year, that the taxpayer could not deduct as a loss the cost of real estate and improvements where he still retains title thereto. In , one Burroughs was indebted to the taxpayer, which indebtedness was extinguished by deed to an orange grove owned by Burroughs. It appears that Burroughs had no other property through which the indebtedness could have been satisfied and that he took over the grove as a last resort for such value as it might have. The Board held that the exchange of the deed for the indebtedness was a closed and completed transaction in 1921 upon which the taxpayer was entitled to deduct the loss sustained by him in that transaction. In *3659 , the taxpayers had contracted to sell certain presses within the taxable year subject to inspection and acceptance upon completion. We held in that case that the transaction was not a closed and completed one until inspection and acceptance, which took place in the succeeding year.
The Mercer Motor Syndicate transaction began with the oral agreement entered into between the partnership and Kinne and Lyon in 1919, and continued up to March, 1920, when the syndicate ageement was terminated because of the failure of the participants to agree to a further extension of time. During all of that period the partnership as managers of the syndicate were attempting to procure participants to the syndicate agreement. On December 3, 1919, the partnership, finding that all of the Mercer stock had not been disposed of, extended the agreement to March 3, 1920.
If the partnership had succeeded in disposing of all the Mercer stock in 1919 and had all the participants carried out their obligation under the syndicate agreement and complied with the calls of the managers of the syndicate there would have been no necessity for an extension*3660 beyond December 3, 1919, and any gain derived would have been definitely determinable at that time, but the situation was quite different.
The purchase group, composed of Kinne, Lyon and the partnership, acquired the 89,000 shares of stock of the Mercer Automobile Co. under an agreement entered into between themselves that the *1347 stock should be turned over to a selling group of which the partnership was manager, and that the stock be sold by said selling group and the profits divided, 50 per cent to Kinne and Lyon and 50 per cent to the partnership, to be paid as and when the stock had been sold and distributed and the transaction completed. A syndicate agreement was prepared, dated October 3, 1919, under which the partnership, as syndicate manager, was authorized by the participants whose names had been procured to purchase the shares in question from themselves at $35 a share. It is obvious that had the purpose of the syndicate been accomplished, that is, if participants had been procured for all the stock and none had defaulted, a handsome profit would have been realized. On the other hand, if participants could not be found for all of the stock, and if some of*3661 those procured defaulted, which was the case here, the partnership may have ultimately lost a considerable sum; at any rate, whatever profits that were made from the sales in 1919 may have been more than offset by losses sustained in 1920 when the remaining shares were to be sold. How much profit, if any, was to be derived from this transaction could only be determined as final calls were made upon the participants in March, 1920, to comply with their agreements at which time a number of them failed to respond.
The circumstances in which the partnership was placed were made even more precarious when we consider the fact that the market for Mercer stock during the period of time under consideration was being artificially stimulated by pool operations and that the stock went from $39 a share in January, 1920, to $2 a share in December, 1920, and that shortly thereafter it became absolutely worthless. Had the market not been supported by these pools while the stock of the syndicate was being sold the value of the shares in the hands of the syndicate would no doubt have been considerably less and consequently a very considerable loss would have been evident in 1919 even before the*3662 expiration of the syndicate agreement.
The respondent attached considerable importance to the book entry made by the partnership's bookkeeper at December 31, 1919, reflecting a profit in that year of $267,514.27 from the Mercer Motor Syndicate. The testimony shows clearly that this entry was unauthorized, and furthermore, that it was corrected in March, 1920, when discovered by the partners. Books are merely prima-facie evidence of the facts contained therein and the fact that the bookeepper improperly made this entry in the books of account in 1919 does not foreclose the partners' right to show that the entry was improper and unauthorized. .
*1348 Under the circumstances of this case we are of the opinion that the respondent improperly taxed the alleged profits derived from the Mercer Motor Syndicate transaction in 1919 and that this transaction was not a closed and completed on until March, 1920, when the syndicate agreement expired.
The second allegation of error urged by the petitioners is with respect to the taxability of alleged profits derived from syndicate transactions in stock of*3663 the Invincible Oil Co. The petitioner contends that the Invincible Oil stock transactions constituted a single inseparable whole which was not completed for income-tax purposes in 1919, and that even assuming that the transaction is divisible, the fair market value of the Invincible stock received in exchange for stock of the Louisiana Oil Corporation stock subject to restrictions placed thereon, was much less than the cost of the Louisiana Oil stock turned in in exchange and that, therefore, no profit was realized on the exchange.
There was no evidence on some of the details of this transaction which would have facilitated a consideration of the question involved. Even the testimony of the two witnesses called was indefinite and at times conflicting on features of the transaction which counsel endeavored to place in evidence, and other facts which enter into the computation of the amount of the income, if any, were apparently not in controversy but were not placed in the record for our consideration. The decision is therefore limited to the general question presented.
In May, 1919, the partnership entered into an agreement with Bache & Co. and Cochrane, Harper & Co. to jointly*3664 purchase some 210,000 shares of stock of the Invincible Oil Corporation, it being understood that a certain number of shares of stock of the Louisiana Oil Corporation (of which number the partnership's portion was 10,000 shares), were to be exchanged for Invincible Oil stock in the ratio of five for six. Viewing the circumstances surrounding these transactions, in the light of the understanding of the parties and their acts in carrying out these transactions, we are of the opinion that the exchange of Louisiana Oil stock for and the purchase of 210,000 shares of Invincible Oil stock constituted a single inseparable transaction and we shall so consider them.
The partnership received 11,947 shares of Invincible Oil stock in exchange for 9,955 shares of Louisiana Oil stock and the syndicate having disposed of the 120,000 shares of the 220,000 shares of Invincible Oil stock which it acquired, the partnership received as its pro rata portion 30,000 shares, a part of which other parties were entitled to, due to the partnership's allowing them to participate in *1349 the transaction. The partnership also acquired 10,000 shares of Invincible stock in the pool operations.
On*3665 June 6, 1919, the partnership entered into agreements restricting the sale of 30,000 shares of Invincible Oil stock until December 15, 1919, which agreement was superseded by another writing of June 28, 1919, reducing the restriction to 10,000 shares. There was also an agreement entered into by the partnership restricting the sale of the 11,947 shares of Invincible Oil stock which had been received for Louisiana Oil stock to September 15, 1919.
The partnership having refused to join further in the pool operations theretofore carried on, the parties on June 28, 1919, entered into a further agreement under which the partnership sold to the other parties to the syndicate 10,000 shares of Invincible Oil stock for $30 per share, said stock to be delivered by the partnership "at any time between December 20, 1919, and January 10, 1920 - the exact date of delivery to be at the option of the party of the first part (the partnership)." That agreement also gave to the other parties of the syndicate a six-month option to purchase 10,000 shares of Invincible Oil stock from the partnership at $37.033251 per share and also a further option to purchase 10,000 additional shares at $30 per share*3666 to expire "upon the date upon which payment is to be made for the (10,000 shares) purchased and sold under paragraph 'I' hereof." Paragraph "I" referred to, provided for delivery and payment at any time between December 20, 1919, and January 10, 1920.
It is not absolutely essential that every detail of a transaction must have been closed in order to render a transaction closed and completed for income-tax purposes. In 1919 the partnership had received its proportion of the profit from the purchase and sale of the Invincible stock in the form of stock of that corporation, it had received the stock from the exchange of Louisiana stock, and under the agreement of June 28, 1919, it withdrew from the pool, thereby relieving itself from any further obligation thereunder. It therefore seems clear to us that the Invincible Oil Syndicate was a closed and completed transaction within the year 1919. The best that could be said, taking the most favorable attitude, is that the syndicate remained alive and active due to restriction and option until on or about December 28, 1919, or six months from June 28, 1919, at which time the partnership was obligated to produce 10,000 shares of Invincible*3667 Oil stock in compliance with the option granted in article 3 of the agreement of June 28, 1919, set forth in the findings of fact herein.
Having concluded that the several component parts of the Invincible Oil Syndicate constitute an inseparable whole, and also that *1350 the syndicate transaction was closed and completed in the year 1919, it becomes necessary for us to consider whether the stock of the Invincible Oil Corporation had any fair market value in 1919 when received. If it did not, then the profit from the transaction should not be reported until the stock was sold.
The testimony of witnesses convinces us that stock subject to restrictive agreements has a lower value than stock which is free and unrestricted. The amount of depreciation which takes place as a result of these restrictive agreements it seems depends upon the nature of the restriction and the length thereof. In , where the fair market value of shares of stock received by the taxpayer under an agreement to retain certain of them for an indefinite period and the others for a period of at least two years, the Board held that the quotation*3668 for that stock on the Chicago Stock Exchange was no basis for the determination of fair market value for those shares at the time they were received by the taxpayer.
While the restrictions in the instant case are not as burdensome as those in the , we are of the opinion that stock exchange quotations under the circumstances here related are not determinative of the fair market value of the stock of the Invincible Oil Corporation at the time it was received by the partnership. Let us, therefore, determine if possible just what the fair market value of this stock was.
The Circuit Court of Appeals in , said:
Now, what is the market price? What is the fair market price of the statute? We say "fair," since every word used by Congress must be given due effect in the construction of this widely applicable statute, for obviously, while a stock might be bought and sold - and so marketed - and might thus be said to evidence some market price, yet it is obvious that Congress by the addition of the words "fair market price," certainly meant that not only must the market price be ascertained*3669 by sales, but that sales so made, the circumstances under which they were made, the subject-matter of the sales, all the attendant circumstances, were to be considered to determine whether such sales served to evidence not alone a market sale, but the fair price which Congress said should be the statutory start or base from which subsequent "gain derived" should be determined.
We start, then with the fact that we are here dealing with the existence of a market, and a market price evidenced by sales in such market; so that our first and basic inquiry is whether there actually was a market for the sale of this insurance stock. Now, market implies the existence of supply and demand, for without the existence of either factor no market value is shown. Standing alone, offers to sell, with no takers, or offers to buy, with no sellers, show no such concurring willing action of buyer and seller as is involved where a market is made by buyers and sellers who by their respective sales and purchases make a market price which the law takes as evidence of value.
*1351 The District Court for the Western District of Pennsylvania in *3670 , the court said in considering the question of fair market value:
It is well settled that the fair market price or value of the property as of March 1, 1913, is a question of fact under all the circumstances of the case. No method of determining this value can be stated which will adequately meet all circumstances. The stock sales made from time to time are to be considered together with the nature and extent of the sales, and the circumstances under which they were made; hence forced sales, or sales of small lots may often be no real indication of the value. The test is the fair market value. This may be defined to be the value of the property in money as between one who wishes to purchase and one who wishes to sell; 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. Prior to 1924, it appearing that the Treasury Department, in valuing the stock of close corporations, had given insufficient weight to the value of the assets and too great weight to forced or isolated sales of comparatively small blocks, there was inserted*3671 in the Revenue Act of 1924, 43 Stat. 259 (Comp. St. Supp. 1925, Art. 6336-1/6 bbb), these words:
"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."
When one of the petitioner's witnesses was asked what the fair market value of the Invincible stock received for Louisiana Oil stock was, subject to these restrictive agreements, the witness replied, "I do not know. I do not know what they could have been sold for, subject to such a restrictive agreement." When questioned further on this subject and asked if he would say that the stock subject to such agreements had no fair market value, he replied, "I would say I do not know what the market value would be." Therefore, it will be seen that this witness's testimony is of very little aid in solving the question of fair market value. The only other witnesses offered, when asked whether the Invincible Oil stock received in exchange for Louisiana Oil stock subject to such restrictive agreements had a fair market value, said "The thing had no fair market value," yet in the same breath he states "you might*3672 get somebody to take it off your hands at a preposterous value, of 50?? a share, or $1.00 a share, or $5.00 or something like that." The same witness testified that Invicible Oil stock had some market value, just what, it was impossible to tell. We are of the opinion, considering the testimony of the witnesses, that the Invincible Oil stock did have some fair market value notwithstanding the restrictive agreements at the time these shares were received by the partnership.
We know little or nothing about the assets of the Invincible Oil Corporation and consequently can not resort to the assumption that the shares received had the same value as the assets of that corporation as was done in
*1352 The partnership and others interested in the Invincible Oil Stock Syndicate purchased those shares of stock in May, 1919, for $16.3636 a share. It appears that an investigation was made of the Invincible Oil properties prior to purchasing these shares. Although the restrictions in question were not placed upon these shares until the following month, the necessity therefor was no doubt within the minds of all of the parties interested*3673 in the syndicate. Realizing, as they must have, that restrictions would be placed upon the stock when acquired, and knowing the effect of such restrictions upon the value of shares, they must have considered that the fair market value of the stock of the Invincible Oil Corporation was no less than the amount paid therefor. We are, therefore, of the opinion that the best evidence of the fair market value is the value placed upon these shares at the date of acquisition, or $16.3636 a share. In determining the profit or loss for 1919 from the Invincible Oil stock transaction the fair market value of $16.3636 per share, as hereinabove determined, should be used.
The petition of Frank Hamilton Davis contained an allegation of fact with respect to additional profit of $4,108.66 found by the respondent on account of 153 shares of Mercer Motors stock received by the members of the partnership outside the syndicate account. From the evidence offered, we are unable to determine whether these shares constituted a part of the Mercer Motors Syndicate hereinabove disposed of, and we will therefore sustain the findings of the respondent as to that allegation.
Reviewed by the Board.
*3674 Judgment will be entered on 15 days' notice, under Rule 50.