*178 Decision will be entered under Rule 50.
1. Taxpayer gave 4,000 shares of stock to each of four trusts. Held, 4 gifts of 4,000 shares of stock were made.
2. The value of each block of stock is determined for gift tax.
*1204 The respondent determined a deficiency in gift tax for the year 1943 in the amount of $ 6,870. The sole issue is the proper valuation of shares of common stock of Armstrong Cork Co., which, on October 26, 1943, were given to four separate trusts.
FINDINGS OF FACT.
Petitioner is an individual, residing in Edgeworth, Pennsylvania. He filed a gift tax return for 1943 with the collector for the twenty-third district of Pennsylvania at Pittsburgh.
Certain facts were stipulated, and as*179 so stipulated they are adopted as findings of fact.
The petitioner on October 26, 1943, gave 4,000 shares of common stock of Armstrong Cork Co. to each of 4 trusts created for the benefit of 4 children. There were 4 separate gifts. The 4 gifts comprised 16,000 shares of stock.
In 1943 there were 1,411,000 shares of common stock of the Armstrong Cork Co. outstanding, of which petitioner owned 39,000 shares prior to October 26, 1943. The stock was listed on the New York Stock Exchange (sometimes referred to hereinafter as the Exchange). It is principally traded on that Exchange. Armstrong Cork stock was not actively traded. It was regarded as an "erratic" stock. The stock is not a closely held stock.
*1205 The regular market on the Exchange for Armstrong Cork stock was "thin" in October and prior months in 1943.
From October 1 to October 25, 1943, the Dow-Jones Industrial average of stocks showed a decline from 140.33 to 138.22.
A "Special Offering" is a special handling of a block of stock on the New York Stock Exchange, subject to the rules of the Exchange, Nos. 490 to 497, inclusive. It is a fixed price offering by one or more members of the Exchange acting for his or*180 their own account or for the account of one or more other persons, for the sale of a block of a listed security through the facilities of the Exchange at a price not in excess of the last sale of such security or the current offer of such security in the regular market on the floor of the Exchange, whichever is the lower, but not lower than the current bid for such security in such market, whereby the offeror agrees to pay a special commission to such members or member firms as may accept all or any part of such offering for the account of his or their customers.
A "Secondary Distribution" is a special handling of a block of stock by a broker or dealer which is not subject to the rules of the Exchange. 1
Under the rules of the New York Stock Exchange, a "Special Offering" through the facilities of the Exchange must be approved by a committee of the Exchange, "provided that the Exchange * * * shall have determined that the regular market on the Floor of the Exchange cannot, within*181 a reasonable time and at a reasonable price or prices, absorb the particular block of securities which is to be the subject of such Special Offering * * *"; and a "Special Offering," except in special cicumstances, will not be permitted unless the offering involves, in the case of a stock, at least 1,000 shares and has an aggregate market value of $ 25,000.
Petitioner desired to sell a block of 4,000 shares of Armstrong Cork stock at the time he made the gifts to the trusts of the same stock. He was advised to dispose of the stock through a "Special Offering" on the New York Stock Exchange. He let brokers know that he would receive bids for the block of stock. Three brokers in Pittsburgh made a request to the New York Stock Exchange to receive permission to make a "Special Offering" of the block of stock on October 26, 1943, and permission was granted. Petitioner received independent, competitive bids on October 26 from three brokers, including A. E. Masten & Co. of Pittsburgh, which made the highest bid of $ 36.295 per share. Petitioner sold the block of 4,000 shares to A. E. Masten & Co. on the morning of October 26 at $ 36.295 per share. A. E. Masten & Co. bought the stock*182 as a principal, and its bid was a fair price.
A. E. Masten & Co. sold the block of 4,000 shares of stock on October *1206 26, 1943, through the facilities of the New York Stock Exchange at the special offering price of 37 1/8 per share.
The closing price of Armstrong Cork stock on the New York Stock Exchange on October 25, 1943, was 37 1/8.
In 1943 there were 76 "Special Offerings" and 139 "Secondary Distributions" on the New York Stock Exchange.
On October 26, 1943, there were 4,600 shares of Armstrong Cork traded on the New York Stock Exchange, which included the 4,000 shares sold under the special offering of A. E. Masten & Co. The market on the Exchange on October 26, 1943, for 4,000 shares of Armstrong Cork stock was a "solicited market" rather than a "voluntary" market.
The range of sales and the shares traded of Armstrong Cork Co. stock on the New York Stock Exchange, by months during 1943 and two months of 1944, were as follows:
| Range | |||
| Shares | |||
| 1943 | traded | ||
| Low | High | ||
| January | 7,500 | 30 | 34 3/4 |
| February | 9,000 | 32 3/4 | 34 3/4 |
| March | 14,300 | 31 1/4 | 34 1/2 |
| April | 10,400 | 34 3/8 | 36 1/2 |
| May | 13,200 | 34 3/4 | 37 1/2 |
| June | 11,900 | 36 3/8 | 40 3/4 |
| July | 6,000 | 34 1/4 | 39 5/8 |
| August | 12,700 | 33 7/8 | 38 |
| September | 12,800 | 37 1/4 | 40 3/4 |
| October | 14,000 | 35 1/2 | 38 1/4 |
| November | 6,700 | 34 7/8 | 37 1/4 |
| December | 9,900 | 35 7/8 | 38 1/2 |
| 1944 | |||
| January | 4,000 | 37 7/8 | 39 3/4 |
| February | 4,100 | 37 1/4 | 39 1/4 |
*183 During October 1943 there were 25 business days on the Exchange. On 5 days there was no trading in Armstrong Cork stock. During the other 20 days 14,000 shares were traded, which included the 4,000 shares disposed of on October 26 under the special offering. On October 27, 3,200 shares were traded, representing interest stimulated by the special offering on the previous day, a usual and normal consequence of a special offering. The shares traded during 18 days of October, excluding the days of October 26 and 27, were traded in small lots, as follows:
| Shares traded | |
| Days | each day |
| 5 | 100 |
| 3 | 200 |
| 2 | 300 |
| 3 | 400 |
| 1 | 600 |
| 3 | 700 |
| 1 | 900 |
*1207 The range of market prices during October was 38 1/4 high to 35 1/2 low. The shares traded on October 26 to 31, inclusive, were as follows:
| October | High | Low | Close | Shares |
| traded | ||||
| 26 | 37 1/2 | 37 1/8 | 37 1/2 | 4,600 |
| 27 | 38 1/8 | 37 1/2 | 38 | 3,200 |
| 28 | 38 1/4 | 38 | 38 | 700 |
| 29 | 37 3/4 | 37 1/2 | 37 3/4 | 200 |
| 30 | Not traded | |||
| 31 | Sunday |
During November 1943 there were 23 business days on the Exchange. On 3 days of business there were no sales of Armstrong Cork stock. During the other 20 business days a total*184 of 6,700 shares were traded in small lots, as follows:
| Shares traded | |
| Days | each day |
| 7 | 100 |
| 2 | 200 |
| 2 | 300 |
| 5 | 400 |
| 2 | 500 |
| 1 | 700 |
| 1 | 1,300 |
The range of the market prices during November was 37 1/4 high to 34 7/8 low.
The daily sales of Armstrong Cork on the Exchange during November 1943 were as follows:
| Dow-Jones | ||||
| November | High | Low | Shares | industrial |
| traded | average | |||
| 1 | No sales | 138.50+ .23 | ||
| 3 | 37 1/4 | 37 | 500 | 137.35-1.15 |
| 4 | 36 3/4 | 36 3/4 | 100 | 136.30-1.05 |
| 5 | 35 3/4 | 35 3/4 | 100 | 135.47- .83 |
| 6 | 36 1/2 | 36 1/2 | 100 | 135.24- .23 |
| 8 | 36 | 34 7/8 | 400 | 131.68-3.56 |
| 9 | 36 | 36 | 200 | 131.85+ .17 |
| 10 | No sales | |||
| 12 | 36 | 35 1/2 | 500 | 132.15- .53 |
| 13 | No sales | 131.76- .39 | ||
| 15 | 35 1/4 | 35 1/4 | 100 | 131.56- .20 |
| 16 | 36 | 36 | 100 | 131.18- .38 |
| 17 | 35 1/2 | 35 1/4 | 700 | 130.24- .94 |
| 18 | 35 3/4 | 35 1/4 | 400 | 130.79+ .55 |
| 19 | 36 1/2 | 35 1/4 | 200 | 132.30+1.51 |
| 20 | 37 | 37 | 400 | 132.94+ .64 |
| 22 | 36 7/8 | 36 1/2 | 400 | 132.65- .29 |
| 23 | 36 3/4 | 36 1/2 | 300 | 132.45- .20 |
| 24 | 36 1/2 | 35 1/2 | 400 | 132.10- .35 |
| 26 | 37 | 36 1/4 | 1,300 | 131.38- .77 |
| 27 | 36 3/4 | 36 3/4 | 100 | 131.25- .08 |
| 29 | 36 1/2 | 36 1/2 | 100 | 129.95-1.30 |
| 30 | 36 1/8 | 36 | 300 | 129.57- .38 |
*185 During December 1943 and January and February 1944, the total shares traded per month and the price range on the Exchange were as follows: *1208
| Shares | ||
| Month | traded | Range |
| Dec. 1943 | 9,900 | 35 7/8 to 38 1/2 |
| Jan. 1944 | 4,000 | 37 7/8 to 39 3/4 |
| Feb. 1944 | 4,100 | 37 1/4 to 39 1/4 |
The record of transactions on the Exchange in Armstrong Cork stock for 60 days prior to October 26, 1943, showed that the market was too thin to readily absorb one block of 4,000 shares and 4 blocks of 4,000 shares.
If blocks of Armstrong Cork stock such as are here involved had been offered for sale on the stock exchange open market under ordinary circumstances on October 26, 1943, or over a reasonable period of time thereafter, they could not have been sold without driving prices down.
If blocks of Armstrong Cork stock such as are here involved had been offered for sale they could have been disposed of by sale in small lots over a period of time, or through a "Secondary Distribution," or through a "Special Offering." The method of the "Special Offering" is less subject to speculative fluctuations of market prices and to the risks of piece-meal liquidation on an exchange.
When a block of *186 stock is disposed of under the method of the "Special Offering," an underwriter-broker or a group of underwriters provide the capital used to purchase the block of stock from the seller, and the seller is paid for his stock at once at a stated price per share for the entire block. The underwriting group, which thereafter offers the block of stock for sale through the facilities of a stock exchange at a stated price per share, the closing market price of the preceding day, pays a commission to the members of the exchange who place subscriptions for the stock for their customers, which commission is higher than the customary stock exchange commission of 21 7/8 cents per share. In the instance of the offering by A. E. Masten & Co. on October 26, 1943, a commission of 55 cents per share was paid to Exchange members who placed orders for the stock offered. The brokers who place orders for stock offered through a special offering can not purchase stock for their own account, but must place orders for customers. The customer who purchases stock presented under a special offering does not pay a commission to the broker, but is saved that charge. The higher-than-usual commission which *187 brokers receive who place orders for special offering stock stimulates them to solicit buying by the public. The brokers exert themselves to do intensive selling. The special offering is announced on the stock exchange tape. The attention of the buying public is attracted by a large number of salesmen, who let it be known how much stock is offered for sale at a stated market price.
*1209 The special offering is a method of stimulating demand for a stock and greater volume of sales, with a safeguard against price "rigging" and fluctuations of the market price, so that although demand is stimulated and sales are increased, market price is stabilized and the market is unmolested. The difference between the selling of stock on an exchange under ordinary circumstances and the selling of stock on an exchange through a special offering is that in the former instance the buyers come into the market voluntarily (they put orders with the broker), whereas in the latter instance they come into the market as the result of solicitation by salesmen (the salesman goes out to get the order). Under ordinary circumstances, the average public does not know what or how much stock is being offered*188 unless he is solicited by salesmen. When there is not a ready market for stock, buyers have to be solicited. Many who are willing to buy small lots of stock are brought into the market by paying salesmen a higher sales commission. The original seller of the stock makes a concession from the market price, so that the dealer purchasing the stock from him will be able to pay salesmen to solicit orders from customers. The net price realized by the original seller is usually about $ 1 per share under the market price for a stock selling in the middle thirties. Under the "Special Offering" method of selling stock, protective measures covering the buying public, the brokers, and the sellers are imposed by the stock exchange and meticulously observed.
The fair market value of 4,000 shares of Armstrong Cork stock on October 26, 1943, was $ 36.295 per share, or $ 145,180. The fair market value of 16,000 shares of Armstrong Cork was $ 580,720.
The sale of 4,000 shares of Armstrong Cork stock by petitioner to A. E. Masten & Co. on October 26, 1943, was not a forced sale.
OPINION.
Petitioner contends that a block of 16,000 shares of stock is to be valued for gift tax. The contention appears*189 to be made because on the same day the total shares given away aggregated 16,000 shares. It is held that 4 separate gifts were made of 4 blocks of stock of 4,000 shares, each. ; ; affd., ; certiorari denied, ; .
The only remaining question is the fair market value of each of the gifts. Respondent determined that the Armstrong Cork stock had a value of $ 37.25 per share on the date of gift, which value is 95 1/2 cents higher than the value which petitioner claims. Petitioner contends that the value of the gifts should be determined on the basis of $ 36.295 per share, after making allowance for the size of the block of stock involved in each gift and the ability of the market on the *1210 date of gift to absorb the quantity of stock involved under the ordinary circumstances, where market prices are determined by "voluntary" buying by a public uninformed about the quantity of stock available for*190 purchase on a given day or over a period of time.
The respondent has followed a formula for valuing stock which is set forth in his regulations. He has taken the mean between the highest and lowest quoted selling prices on the date of the gift and held that it represents the fair market value per share of the stock. Regulations 108, sec. 86.19 (c).
Respondent did not object to the introduction by the petitioner of evidence relating to matters other than the stock exchange prices of the Armstrong Cork stock. Cf. ; .
The question of fair market value of property is a question of fact. Under the regulations of the , the mean between the highest and lowest quoted selling prices on the date of the gift shall be considered as the fair market value per share of stock in the case of stocks listed on a stock exchange; but in cases where it is established that the above stated formula does not reflect the fair market value of stock, then other relevant facts and elements of value shall be considered in determining*191 fair market value.
After consideration of all of the evidence in this case, it has been concluded that the respondent's method of valuation does not reflect the fair market value of the stock in question. Therefore, consideration has been given to other factors.
Petitioner relies upon the testimony and opinions of 3 expert witnesses in addition to the evidence relating to the sale on the same date the gifts were made, October 26, 1943, of a block of 4,000 shares of Armstrong Cork Co. stock under a "Special Offering" on the New York Stock Exchange. Respondent did not introduce any evidence, and he called no witnesses.
The evidence shows that the regular market on the stock exchange for Armstrong Cork stock on October 26 would not have absorbed a block of 4,000 shares or 4 blocks of 4,000 shares at the prices at which small lots of stock changed hands, i. e., at $ 37.25 per share; but that the market price would have been driven downward, because of the quantity of stock involved in each gift and in the 4 gifts, 95 1/2 cents below the mean between the high and low prices on October 26, at least. The market for the stock on the valuation date was thin. On October 26, aside from the*192 "Special Offering" of a block of 4,000 shares, only 600 shares were traded; and on October 25 only 300 shares were traded, at 37 3/8 high and 37 1/8 low. The market prices on October 25, in our opinion, are a better indication of how a voluntary market would react than the stock exchange quotations on October 26, because of the fact *1211 that on the latter day most of the transactions on the market were made under the "Special Offering," which resulted in sales of 4,000 shares at a fixed price. 2
Under the modern marketing method of a "Special Offering" through the facilities of the Exchange, an entire block of stock is offered at a fixed price per share, and the market price for all shares in the block is thereby stabilized at the approved offering price. 3 One of petitioner's expert witnesses, a man of long experience in marketing stocks, pointed out the distinction between a "voluntary" market*193 and a "solicited" market. Where the stock exchange officials approve a "Special Offering" under the rules of the exchange, the market is a "solicited" market in the transactions involving the "Special Offering" stock. The purchases are solicited by salesmen. When the market is "voluntary," the buyers are not solicited and are not aware of how much stock is available for purchase. Respondent's reliance upon the market prices on the exchange on October 26 does not take into consideration the fact that there was a "Special Offering" on that date. There is nothing in the record to show that the respondent was aware of the fact that there was a "Special Offering" on October 26 in making his determination that the value of the gifts was $ 37.25 per share.
The evidence shows, further, that officials of the New York Stock Exchange were consulted just prior to October 26 on the matter*194 of the effect of marketing a block of 4,000 shares of Armstrong stock in the ordinary way, in a voluntary market, on current market prices reflected by transactions involving small lots of stock. They concluded that the regular market could not absorb 4,000 shares "within a reasonable time and at a reasonable price or prices," and, accordingly, consented to the "Special Offering" of 4,000 shares on October 26. This evidence is entitled to receive weight, and consideration has been given to it. As was stated in , it is proper to give consideration to whether the circumstances under which sales are made at a certain price were unusual, and to the kind of market in which the sales were made.
Also, there is the unrefuted testimony of one of petitioner's expert witnesses that each block of gift stock of 4,000 shares, if offered over a reasonable period of time after October 26, would not have fetched an aggregate of more than $ 145,180 for an entire block, which would represent an average price per share of $ 36.295, if that much. See ; and .*195 The evidence shows that during November 1943 quoted market prices *1212 for Armstrong stock showed a downward trend, and that the Dow-Jones Industrial Average showed declines in market prices.
The fair market value of each gift of Armstrong stock on October 26, 1943, has been found to be $ 145,180, which represents $ 36.295 per share. This is 95 1/2 cents below the mean between the highest and lowest quoted selling prices on the exchange on that date. In arriving at the above value of each gift, consideration has been given to all of the evidence, and no single factor has been controlling of the finding made. Consideration has been given to the price at which the blocks of stock could be sold over a reasonable period of time; to the size of the block of stock involved in each gift; to the fact that 4 gifts were made of blocks of stock of 4,000 shares each; to the fact that the market for the stock was thin; and to the fact that on the same date the gifts were made there was a "Special Offering" of 4,000 shares of the same stock on the New York Stock Exchange. Cf. ; and ;*196 affd. per curiam, .
Respondent's determination is reversed.
Decision will be entered under Rule 50.