concurring in part and dissenting in part:
I concur and join in the court’s opinion except for Part V, headed Leased Line Subsidiaries. As to this. I dissent with all respect.
*81The court here adopts without change the opinion recommended by Trial Judge Schwartz. While the latter, with his usual keenness of analysis, recognizes fully the difficulties of his position, he ends up applying this court’s “source of supply” line of decisions which extend the Corn Products v. Commissioner, 350 U.S. 46 (1955) doctrine to cases in which a corporation invests in stock of another corporation to obtain a source of supply. Waterman, Largen & Co. v. United States, 189 Ct. Cl. 364, 419 F. 2d 845 (1969), cert. denied, 400 U.S. 869 (1970), and cases there cited. However, in a strangely forgotten decision, Dearborn Co. v. United States, 195 Ct. Cl. 219, 444 F. 2d 1145 (1971), a unanimous court laid down certain lines beyond which Corn Products and Waterman, Largen would not be applied, and instead the normal rule would obtain, that the purchase of corporate stock, except by a dealer in securities, is a capital transaction.
Admitting that case was close, former Trial Judge Davis distinguished it because he found the purchasing corporation was motivated by substantial investment purpose and intent, besides the business purpose of assuring a source of supply. The main factors supporting this conclusion were
(a) the purchaser did not pay a premium over the market value of the stock, or in other words, the purchase, if an investment, was not an unattractive one at the price paid,
(b) the acquisition was meant to be permanent, not to be unloaded at the end of some temporary emergency, and (c) the purchaser intended to benefit by receipt of dividends and by exacting a management fee to run the business, not just to integrate the subsidiary’s operations into its own and make it a mere feeder of materials.
I do not find that Trial Judge Schwartz applied the same tests. As I read him, the decisive factor here is that the Union Pacific and the leased lines, run as a unified operation, could have been and no doubt were more profitable than the same lines controlled and operated separately. Without them, the Union Pacific as previously known was truncated and incomplete. To be sure! But if this is all, what we are coming to is a rule that it is not a capital investment whenever one corporation purchases control of another with the purpose, alone or among others, of integrating their operations. The *82kind of inquiry Trial Judge Davis made will be foreclosed because it will be irrelevant whether the purchase is attractive, viewed as an investment, whether it was intended to be permanent, constituting a permanent addition to the purchaser’s fixed assets, and whether the purchaser will or will not derive the benefits a prudent investor in an unrelated enterprise would seek.
It is obvious here that the acquisition of the Oregon Short Line and the others were intended to be permanent, and have been so up to now. The Oregon Short Line and the others were themselves investors in railroad securities, and as to their investments it would appear the Union Pacific got an investment benefit. As to the other criteria, I do not find answers in the findings. I do not think the plaintiff has sustained its burden of proof.
In penning the above few words, I have assumed, as I must, the entire soundness of Waterman, Lar gen and our other decisions as well as, of course, Dearborn, despite previous qualms. This court’s application of Corn Products in its “source of supply” cases can roll on down the track without any challenge by me, unless derailment by the Supreme Court or by Congress occurs. This is an area of law where stare decisis must prevail in this court. It is beyond our proper power now to make it easy or simple to determine whether a transaction is a capital one for tax purposes, or to do it on the basis of objective facts and statutory language, without inquiry or speculation into the undisclosed state of mind of corporate officers, possibly ones, as here, long since deceased, and I do not so urge. My argument is directed simply against extending Waterman, Lar gen uncritically to new situations not covered by it as a precedent, and to failure to apply standards as we applied them in Dearborn.
I agree with the decision in United States v. Mississippi Chemical Corp., 405 U.S. 298 (1972) does not overrule Waterman, Largen. It holds that a borrower from a Bank for Cooperatives, obliged to purchase a stated quantity of bank stock in lieu of a higher rate of interest, nevertheless makes a capital investment in the stock. The situation is far removed from that in our “source of supply” cases. The Corn Products doctrine is not mentioned. It may perhaps afford a slight *83clue that tlie Supreme Court is not so enamored of expanding Corn Products as we are.
Findings of Fact
JURISDICTIONAL AND GENERAL
Í. Plaintiff was at all times pertinent hereto a corporation organized and existing under the laws of the State of Utah, with its office and principal place of business at 120 Broadway, New York, New York 10005.
2. Jurisdiction to hear and determine this cause is conferred upon the court by section 7422(a) of the Internal Kevenue Code of 1954. Jurisdiction of the subject matter is conferred upon the court by section 1491, Title 28, United States Code.
3. Plaintiff seeks a judgment for (1) $13,409,961.46 (consisting of $9,222,801.78 in statutory interest for 1942 and $4,187,159.68 in income and excess profits tax) and assessed interest thereon paid for 1942 or such other amount as may be legally refundable for 1942, together with statutory interest thereon.
4. For federal tax purposes, plaintiff kept its books and reported its income on the accrual and calendar year basis.
5. On or about March 15, 1943, plaintiff filed a timely tentative corporation income and declared value excess profits tax return (Form 1120) and a timely tentative corporation excess profits tax return (Form 1121). On or about June 15, 1943, pursuant to a granted extension, plaintiff timely filed its final corporation income and declared value excess profits tax return (Form 1120) and final corporation excess profits tax return for the calendar year 1942 (Form 1121). Payments of the tax shown to be due thereon and two additional payments were made on or about the following dates:
*846. On or about October 4, 1946, plaintiff timely filed a elaim for refund of income and excess profits taxes in the amount of $1,807,514.54, or such larger amount as might be legally refundable, together with statutory interest thereon for the tax year 1942. On or about April 25, 1949, plaintiff timely filed a claim for refund of income and excess profits taxes in the amount of $7,394,419.35 plus assessed interest in the amount of $361,745.90, a total of $7,756,165.25 or such larger amount as might be legally refundable, together with statutory interest thereon for the tax year 1942. On or about April 10, 1951, plaintiff timely filed a claim for refund of income and excess profits taxes in the amount of $390,828.41 or such larger amount as might be legally refundable, together with statutory interest thereon for the tax year 1942. On or about September 11,1953, plaintiff timely filed a claim for refund of income and excess profits taxes in the amount of $348,705.41, or such larger amount as might be legally refundable, together with statutory interest thereon for the tax year 1942.
7. On July 16, 1946, $12,837.99 in declared value excess profits tax for 1942 was credited against plaintiff’s income tax liability for 1942; $196.82 in declared value excess profits tax for 1942 was credited against the tax liability of the St. Joseph & Grand Island Eailway Company for 1942; $45,-685.38 in declared value excess profits tax for 1942 was refunded to plaintiff with interest of $9,178.87; and $694,-754.62 in excess profits tax for 1942 was refunded to plaintiff with interest of $68,742.63.
8. On September 16, 1960, after the audit of plaintiff’s tax returns for 1942 was finally completed, a total of $7,793,-219.55 was refunded or paid to plaintiff, consisting of $3,729,-059.29 in income tax for 1942, $2,141.13 in assessed interest thereon, $13,462.80 in declared value excess profits tax for 1942, and $4,048,556.33 in statutory interest. On September 16,1960, there was assessed against plaintiff a deficiency in excess profits tax for 1942 of $4,654,621.45 plus interest of $300,639.16, which was satisfied by a credit of $4,206,773.93 in income tax for 1942 and a post-war credit of $748,486.68.
9. Pursuant to Form 872, “Consent Fixing Period of *85Limitation Upon Assessment of Income and Profits Tax,” timely executed on behalf of the plaintiff and the Commissioner of Internal Eevenue, the period for assessment of income and excess profits taxes for the tax year 1942 did not expire prior to June 30,1961.
10. On December 28,1961, plaintiff filed a timely claim for refund for 1942 in the amount of $13,409,961.46 or such further amount as may be refundable, together with statutory interest thereon. Of the $13,409,961.46 claimed, $9,222,-801.78 was for statutory interest on amounts previously refunded or credited and the balance of $4,187,159.68 was for income and excess profits tax.
11. Statutory notices of disallowance were mailed to plaintiff on September 26,1960, with respect to the claims filed on April 26, 1949, and April 10, 1951, and on August 13, 1962, with respect to the claim filed on December 28,1961. No such notice has been issued with respect to the claim filed on October 4,1946. Since less than 2 years elapsed between the mailing of the notices of disallowance and the filing of this suit, this action is timely brought.
12. No action or suit has been commenced or is pending in any other court on account of these claims, and plaintiff is the owner of the claims herein stated.
13. After consideration Of all refunds and credits, plaintiff has paid for 1942 $30,481,263.37 in income tax and $7,484,-866.83 in excess profits tax. Plaintiff seeks to recover some portion of these payments as well as statutory interest.
i. “minimum rule” acquisitions
14. During the taxable year, plaintiff acquired miscellaneous units and items of road property and equipment which had an individual unit or item cost of $100 or more but less than $500. The aggregate cost incurred by plaintiff for these units and items during the taxable year was $113,-717.84. Each of these units and items was a capital asset, and the amounts totaling $113,717.84 constituted expenditures which would have been capitalized, except for the minimum rule which is the subject of the next following finding.
*8615. The Uniform System of Accounts prescribed by the ICC provided, for 1942, in part as follows:
(a) When the property change involves: (1) The acquisition of property (other than land, a section of track, or a unit of equipment) the cost of which is less than $500.00; (2) the betterment of property (see paragraph 10 of Section 2 of the General Instructions in the Classification of Investment of Eoad and Equipment), the excess cost of which is less than $500.00; (3) the retirement of property (other than land, a section of track, or a unit of equipment), the ledger value of which is less than $500.00, the cost of the property acquired or the value of the salvage from the property retired shall be appropriately included in operating expenses, and no adjustment shall be made in’the property investment account.
(b) The carrier shall not parcel expenditures or retirements under a general plan for the purpose of bringing the accounting therefor within this rule, neither shall it combine unrelated items of property for the purpose of excluding the accounting therefor from the rule.
(c) This exception to the general instructions of this classification shall not apply to: (1) property changes involving the retirement and replacement of property when either the ledger value of the property retired or the cost of the property acquired is $500.00 or more. (See Section 7 of these instructions.) (2) property changes involving the retii'ement of property the cost of which is included in the investment account and which is not replaced. (See Section 8 of these instructions.)
(d) The carrier is permitted to adopt for the purpose of its accounting a limit of less than the aforesaid amounts provided it first files with the Commission the maximum amount which it proposes to adopt and makes no subsequent change in this amount except by authoritv of the Commission, except that when the carrier adopts a limit of less than $500.00 in reporting property changes to the Bureau of Valuation for valuation purposes it shall adopt a like minimum for accounting purposes in order to coordinate the original cost with the physical property included in the inventory.
The foregoing rule is hereinafter referred to as the “ICC minimum rule” or “minimum rule”. The same rule was in effect for 1940 and 1941; a similar rule was in effect for 1921 through 1939 with a $100 minimum; no such rule was in effect *87for 1915 through. 1920; a similar rule was in effect for 1914 with a $200 minimum.
16. On its federal income tax returns for each of the taxable years 1921 through 1939, plaintiff included in various items of operating expense the amounts expended by it in acquiring units and items of road property which qualified as minimum rule acquisitions under the applicable Uniform System of Accounts prescribed by the Interstate Commerce Commission for each such taxable year. On the audits of these returns, the Commissioner of Internal Eevenue did not disallow as a deduction any of the minimum rule acquisitions.
17. On its federal income tax returns for 1940 and 1941, plaintiff deducted amounts up to $500 with respect to the minimum rule then in effect. On the audits of these returns, the Commissioner of Internal Eevenue did not disallow as a deduction any minimum rule acquisitions.
18. On its federal income tax return for 1942, plaintiff included in various items of operating expense the $113,717.84 referred to in finding 14.
19. On audit of plaintiff’s income tax return for 1942, the Commissioner of Internal Eevenue disallowed the deductions totaling $113,717.84 claimed for minimum rule acquisitions, and allowed plaintiff a deduction of $3,790.59 as amortization of the $113,717.84 in minimum rule acquisitions.
20. The average useful life of the units and items of minimum rule acquisitions was 15 years.
21. For the taxable year 1942, plaintiff utilized the retirement-replacement method of accounting for depreciation of its road property. Beginning with the taxable year 1943, the plaintiff changed its method of accounting for the treatment of road property by using the ratable depreciation method. The change in the method of accounting for the road property from the retirement method to the ratable method made no change in the accounting for items acquired under the $500 minimum rule. These items, which had been charged off as operating expenses before 1942, as set out in findings 16 and 17, continued to be so charged off.
22. Schedule 1 of the Appendix hereto presents:
(a) The amounts (under Column 1 of Schedule 1) actually deducted by plaintiff on its corporate income tax returns *88as operating expenses in each of the taxable years 1942 through. 1947 and 1949 through 1967 for minimum rule acquisitions which had an individual unit or item cost of at least $100 or more but less than $500.
(b) The amortization of the amounts described in subpara-graph ('a) of this finding for the taxable years 1942 through 1960 (and which are set forth under Column 1 of Schedule 1) over a 15-year period which reflects the treatment accorded these amounts by the defendant’s agents.
(c) The amortization of the amounts described in subpara-graph (a) of this finding for the taxable years 1961 through 1964 (and set forth under Column 1 of Schedule 1) over a 15-year period which is based upon the plantiff’s understanding as to the adjustments which will be included in the reports which are being prepared by defendant’s agents for the taxable years 1961 through 1964. These proposed adjustments are consistent with the treatment proposed by defendant’s agents for the taxable years 1942 through 1960.
(d) The amortization of the amounts described in subpara-graph (a) of this finding for the taxable years 1965 through 1967 (and which are set forth in Schedule 1) over a 15-year period which is based upon a projection of the adjustments which plaintiff believes will be made by defendant’s agents for said taxable years. Said projection is based upon and is consistent with the adjustments made or proposed by the defendant’s agents for the taxable years 1942 through 1964.
(e) The total amount of amortization deduction allowed by the defendant’s agents for the years 1942 through 1960.
(f) The total amount of amortization deduction to be allowed by the defendant for the taxable years 1961 through 1964 which is based upon plaintiff’s understanding as to the adjustments which will be made for such taxable years and which is consistent with the adjustments actually made by defendant’s agents for the taxable years 1942 through 1960.
(g) The total amortization deduction to be allowed for the taxable years 1965 through 1967, which has been projected by the plaintiff based upon the actual adjustments made by the defendant’s agents for the taxable years 1950 through 1960 coupled with plaintiff’s understanding as to the adjustments *89which will be made by the defendant’s agents for the taxable years 1961 through 1964.
(h) The 15-year amortization spread on Schedule 1 actually is spread over a 16-calendar-year period. The amounts amortized in the first and sixteenth year reflect, in each instance, one-half of the annual amortization. This is consistent with what is commonly known as the “half-year averaging-convention” whereby those items which are acquired during the year are considered to have been acquired on and on hand from the first day of July of such year.
23. Schedule 2 of the appendix hereto presents a reasonable reconstruction of the amounts which were included in operating expenses under the minimum rule in effect for the years 1927 through 1941. Such amounts were mathematically derived by applying a percentage test to actual operating expenses for the years involved. The percentage used was derived from an analysis of the actual experience of the company for the years 1942 through 1949. The percentage test was derived and applied specifically as follows:
('a) Each work order for the years 1942 through 1949 disclosing an expenditure of less than $500 was analyzed. Statements were prepared listing work orders, descriptions and amounts charged to operating expenses, which, except for the minimum rule, would have been charged either to the depre-ciable or nondepreciable investment accounts.
(b) The total amounts of such operating expenses when analyzed were as follows:
Depreciable property
Nondepreciable property
1942.... $115,524 $13,072
1943. 144,044 15,885
1944. 183,300 17,315
1945. 191,852 18,634
1946. 154,933 11,829
1947.-. 126,141 7,600
1948. 116,313 11,701
1949. 129,685 8,254
Total. 1,161,792 104,295
(c) The grand total of the items charged to operating expenses ($1,161,792) which, except for the minimum rale, would have been charged to the depreciable investment account was used as a numerator of a fraction which had as its *90denominator an amount of $95,715,171, which, was the total amount of the operating expenses in the following accounts:
Account No.: Description
208_ Bridges, trestles and culverts.
221_ Fences, snow sheds and signs.
227_ Station and office buildings.
229 _ Roadway buildings.
231_ Water stations.
233 _ Fuel stations.
235 _ Ships and engine.
247_ Telegraph & Telephone lines.
249_ Signals and interlockers.
253 _ Power transmission systems.
265 _ Mise, structure.
269_ Roadway machines.
273 _ Public improvements, maintenance.
281_ Right-of-way expenses.
(d) For the non-depreciable property expenses the grand total of the minimum rule items ($104,296) was used as a numerator for a fraction which had as its denominator the amount of $244,972,595, which was the total amount of the operating expenses in the following accounts:
Account No.: Description
202_ Roadway maintenance.
214_ Rails.
216_ Other track material.
218- Ballast.
220_ Track laying and servicing.
(e) The following operating expense accounts were not normally charged with expenditures under the minimum rule and were therefore omitted from the denominator:
Account No.: Description
201- Superintendence.
206- Tunnels and subways.
210- Elevated structures.
212_ Ties.
237- Grain elevators.
239- Storage warehouses.
241- Wharves and docks.
243- Coal and ore wharves.
267- Paving.
268 - Description not available.
*91Account No.: Description
270_ Description not available.
270%_ Road-Amortization of defense projects.
271_ Small tools and supplies.
272_ Removing snow, ice and sand.
274 _ Injuries to persons.
275 _ Insurance.
276_ Stationery and printing.
277 _ Other expense.
279_ Maintenance of joint tracks, yards and other facilities.
280 _ Equalization — way and structures.
( f) The fraction for depreciable property described in sub-paragraph (c), above, resulted in a percentage of 1.2138% which was then applied to the total amounts ($5,963,685) of the operating accounts enumerated in subparagraph (c), above. The application of this percentage to the total of each of the operating expense accounts resulted in an aggregate amount of $71,173 for the year 1927 for depreciable property which, except for the minimum rule, would have been charged to the investment account.
(g) The fraction for non-depreciable property described in subparagraph (d), above, resulted in a percentage of .0426% which was then applied to the total amounts ($14,-368,201) of the operating accounts enumerated in subpara-graph (d), above. The application of this percentage to the total of each of the operating expense accounts resulted in an aggregate amount of $6,121 for the year 1927 for non-depre-ciable property which, except for the minimum rule, would have been charged to the investment account.
(h) The $71,173 referred to in subparagraph (f), above, and the $6,121 referred to in subparagraph (g), above, were totaled to give $77,294 as the total $500 minimum rule items. Since in 1927 a $100 minimum rule was in effect, 20% of the $77,294 represented the minimum rule items deducted in that year.
(i) The same procedure, as described in subparagraphs (a) through (h), above, was followed in determining the amounts expended under a minimum rule for the years 1927 through 1941. Since the minimum rule for the years 1927 through 1939 was $100, 20% of the amounts determined constituted a reasonable basis for determining the amounts ex*92pended for minimum rule items, wbicli except for such rule, would have been charged to the investment account. The amounts so determined are set forth in the column captioned “Amount” on Schedule 2 for each of the years 1927 through 1945. The columns under the yearly dates 1927 through 1967 indicate the amortization of the “Amounts” over a 15-year period with the application of the half-year averaging convention (previously explained in subparagraph (h) of finding 22).
24.Plaintiff’s minimum rule items for the taxable year 1942 may be tabulated as follows:
Number of items
Percent
__ w dollars
Percent
$0.01 to $99.99.,. 473 46.28 $21,966.72 14.62
100.00 to 199.99,. 279 27.30 39,795.20 26.49
200.00 to 299.99.. 116 11.35 29,110.16 19.38
300.00 to 399.99.. 95 9.30 33,099.99 22.03
400.00 to 499.99.. 59 5.77 26,270.35 17.48
Total.. 1,022 100.00 100.00
The significance of the figures lies in the modest number of items in the higher dollar ranges and in the rough equality in number between items under and items over $100. The changes worked by the 1939 raising of the $100 to $499.99 seem not unreasonable; certainly no flood of items costing close to $500 were brought within the rule.
(The foregoing tabulation differs slightly from that in plaintiff’s proposed finding, to which defendant did not object. The proposed finding shows 1,026 items to a total of $146,565.93, with percentages and dollar subdivision figures slightly different than in this finding. Both this finding and the proposed finding are based on defendant’s exhibit 11. The differences are not material; both sets of figures equally support the significance ascribed to them in this finding.)
25. The plaintiff owned road property and equipment and miscellaneous road property having on its books an average net value (after depreciation) of $442,726,751.78 during the taxable year 1942.
26. The minimum rule acquisitions of $113,717.84 in question in this proceeding amounted to .00026 of the amount referred to in the preceding finding.
*9327. The true relationship of minimum rule acquisitions to road property and equipment (the account into which the acquisitions would go if they were not expensed) is even smaller than .00026, because the $113,717.84 is the figure for plaintiff and its leased lines, and the $442 million figure is for plaintiff alone.
28. The plaintiff and its subsidiary companies during the years 1927 through 1942 had the following railway operating expenses and expended at least the following for minimum rule acquisitions. In addition, the proportion of minimum rule acquisitions to total operating railway expenses for the years 1927 through 1942 equal the percentages shown in the last column below:
Year
Total Tnlnlmmn rule acquisitions
Railway operating expenses
Ratio
1927. $15,459 $141,938,527 . 00011
1928. 16,846 149,060,334 . 00011
1929. 18,319 149,682,240 . 00012
1930. 14,625 133,538,866 . 00011
1931. 10,700 112,157,457 . 00010
1932. 5,782 80,513,455 . 00007
1933. 6,082 76,139,778 . 00008
1934. 7,322 85,353,628 , 00009
1935. 8,899 95,208,407 . 00009
1936. 9,602 108,728,114 . 00009
1937. 10,127 116,834,578 . 00009
1938. 8,311 105,731,151 .00008
1939. 9,732 117,858,588 . 00008
1940. 60,343 120,949,111 .00042
1941. 77,485 159,997,895 . 00048
1942. 146,666 218,307,770 . 00067
29.The minimum rule method employed by plaintiff for acquisitions within the scope of the rule constituted a method of accounting, and financial statements and figures for tax purposes based upon the method clearly reflect plaintiff’s income for tax purposes in the year in question.
H. PAYROLL TAXES
30. During 1942, plaintiff paid to its employees $1,103,-413.81 in vacation pay earned in 1941. On payroll tax returns filed for the calendar year 1942, plaintiff reported the $1,103,413.31 in vacation pay paid in 1942 and a payroll tax with respect thereto of $64,108.31, which it paid in 1942.
31. During 1943, plaintiff paid to its employees $1,518,-624.02 in vacation pay earned in 1942. On payroll tax returns *94filed for the calendar year 1943,. plaintiff reported the $1,518,624.02 in vacation pay paid in 1943, and a payroll tax with respect thereto of $90,358.13, which it paid in 1943.
32. The vacation pay earned by plaintiff’s employees in 1942 was not payable or paid until 1943.
33. The vacation pay earned by an employee in 1942 could be forfeited if his employment were terminated in 1943, for reasons other than retirement, prior to the time his vacation began.
34. The record shows only the amount of vacation pay paid in 1943 which is stated in finding 31. It does not show the amount of vacation pay earned by plaintiff’s employees in 1942 or the amount thereof forfeited in 1943.
35. In the event plaintiff could not release an employee for a vacation in 1943, plaintiff was obligated to pay him an allowance in lieu of the vacation.
36. Aside from whether at the end of 1942 it was possible to determine the amount of vacation pay earned by plaintiff’s employees, it was not possible at that time to determine the payroll taxes thereon because some unpredictable portion of the vacation pay could be tax-exempt as having been paid in a month when the employee had already received
$300 in other compensation, the payroll taxes in question being imposed on only the first $300 of compensation for each calendar month, under section 1520 of the Internal Revenue Code of 1939 and Section 8(a) of the Railroad Unemployment Insurance Act.
37. Of the vacation pay disbursed in 1942 and 1943, it appears that some portion was tax exempt as having been paid in a month when the employee had already received $300 in compensation. The aggregate tax rate was 6 percent for 1942 and 6.25 percent for 1943, under section 1520 of the Internal Revenue Code of 1939 and Section 8(a) of the Railroad Unemployment Insurance Act. Plaintiff paid in 1942 vacation pay of $1,103,413. Six percent of this amount is $66,205, 'but plaintiff paid only $64,108 in payroll tax. Plaintiff paid in 1943 vacation pay of $1,518,624. Six point twenty-five percent of this amount is $94,914, but plaintiff paid only $90,358 in payroll tax. In the absence of any other explanation by plaintiff, the differences can only be attributed to *95tax-exempt payments; that is, payments made in a month when the employee had already received $300.
38. On its federal income tax return for 1942, plaintiff deducted $1,103,413.31 for vacation pay paid, in 1942 and $64,108.31 in payroll tax with respect thereto. On its federal income tax return for 1943, plaintiff deducted $1,518,624.02 for vacation pay paid in 1943 and $90,358.13 in payroll taxes with respect thereto.
39. On audit of its 1942 federal income tax return, plaintiff claimed, and was allowed, a deduction for the year 1942 of the entire amount of the vacation pay which accrued during 1942 but was not payable to its employees until 1943. The Commissioner 'of Internal Revenue (relying on I.T. 3956, 1949-1 Cum. Bull. 78) allowed plaintiff an additional deduction for vacation pay of $415,210.71, representing the difference between the vacation pay paid in 1943 and the vacation pay deduction claimed on the return for 1942, but he did not allow plaintiff any additional deduction for payroll tax with respect to vacation pay.
40. In its claim for refund for 1942, plaintiff claimed a deduction in the amount of $26,249.82 for federal income tax purposes, representing the difference between the payroll tax paid in 1943 and the payroll tax paid in 1942 as described above in findings 30 and 31.
41. The Commissioner of Internal Revenue did not allow the deduction referred to in the preceding finding.
42. As of December 31, 1942, it was not possible to compute the amount of payroll taxes plaintiff would have to pay in 1943 with respect to vacation pay earned in 1942. First, the amount of vacation pay to be disbursed in 1943 was uncertain because it was forfeitable, as stated in finding 33. Second, some unpredictable amount of vacation pay could be tax exempt, as stated in finding 36.
IV., STOCK SUBSCRIPTION RIGHTS
43. During the taxable years ended December 31, 1922, 1923, and 1925, plaintiff and its wholly owned subsidiary, the Oregon Short Line, as the holders of common stock of the Illinois Central Railroad Company, received by distribution *96from the Illinois Central rights to subscribe to its convertible preferred stock as follows:
Distributee
Date of distribution
Number of rights
union Pacific Railroad Company_ May 10,1922 138,000
Do. Oct. 23,1923 138,000
Do. Oct. 22,1925 138,000
Oregon Short Line Railroad Company. May 16,1922 87,000
Do... Oct. 23,1923 87,000
Do... Oct. 22,1925 95,700
44. For each share of Illinois Central common stock held, one right was received by the aforesaid distributees. Ten rights together with the subscription price of $100 entitled the said distributees, upon exercise, to one share of Illinois Central convertible preferred stock.
45. The high and low quotations on the New York Stock Exchange of the convertible preferred stock and the stock rights, on the dates indicated, were as follows:
Illinois Central Convertible Preferred Stock
Date
High
Low-
May 16,1922. 107H 107
May 10,1922_____ —no quotations—
Oct. 23,1923.... 108 108
Oct. 22,1925... 118 116
Illinois Central Convertible Preferred Stock Bights
Date
High
Low
May 16,1922_ 67 cents 67 cents
Oct. 23,1923. He %
Oct. 19,1926. m lHe
Oct. 22, 1925. HMo IMo
46. The stock rights were exercised by plaintiff and the Oregon Short Line on June 26,1922, December 1,1923, and December 10, 1925.
47. On February 9, 1914, the Oregon Short Line owned 87,000 shares of Illinois Central common, with a cost of $10,005,000.
48. On November 22,1924, the Oregon Short Line acquired an additional 8,700 shares of Illinois Central common by payment of $87,000 and the exercise of certain rights to acquire such shares of common stock.
49. As indicated in finding 43 above, the Oregon Short Line received from the Illinois Central $269,700 rights to sub*97scribe to its convertible preferred stock. By exercising these rights and payment of $2,697,000 in cash, the Oregon Short Lino acquired 26,970 shares of the convertible preferred stock.
50. For the 26,970 shares of preferred, the Commissioner of Internal Eevenue determined that the basis to the Oregon Short Line was $2,950,102.23, consisting of the subscription price of $2,697,000 plus $253,102.23 allocated from the basis for the 95,700 shares of common in accordance with Section 214(e) of the Eevenue Act of 1939 and the Treasury Eegula-tions issued thereunder. As a result of the allocation, the Commissioner determined that the basis for the 95,700 shares of common was $10,621,897.77 or $110.99 per share.
51. On April 30,1930, the Oregon Short Line sold to plaintiff 87,000 shares of Illinois Central common in satisfaction of a debt owing to plaintiff in the amount of $10,005,000. No adjustment to earnings and profits of Oregon Short Line or plaintiff was made on account of this transaction. The Commissioner of Internal Eevenue on audit determined that the basis for this stock to the Oregon Short Line was $9,656,270.70.
52. The high and low quotations on the New York Stock Exchange for the aforesaid convertible preferred stock, on the dates indicated, were as follows:
Illinois Central Convertible Preferred Stock
Date
High
Low
June 26.1922. 108M 1075a
Nov. 30,1923. 104% 108 %
Deo. 1,1923... (Saturday, no quotation)
Deo. 10, 1926.. 118JS 117
53. On December 30, 1935, the Oregon Short Line distributed to plaintiff as a dividend in kind the entire 26,970 Illinois Central preferred stock acquired by it upon the exercise of the aforesaid rights.
On account of this dividend distribution, plaintiff increased its earnings and profits and the Oregon Short Line decreased its earnings and profits by the amount of $2,697,000.
54. On December 30,1935, the Oregon Short Line also distributed to plaintiff its remaining 8,700 shares of Illinois Central common stock. On account of this transaction, plaintiff *98increased its earnings and profits and decreased those of the Oregon Short Line by the amount of $870,000. The Commissioner of Internal Revenue on audit determined that the basis for this stock to the Oregon Short Line was $965,627.07.
55. On account of the transfer to plaintiff by the Oregon Short Line of (a) the 26,970 shares of Illinois Central convertible preferred on December 30, 1935, and (b) the 8,700 shares of Illinois Central common on December 30,1935, the plaintiff and the Commissioner of Internal Revenue increased plaintiff’s earnings and profits by $3,567,000 and decreased those of the Oregon Short Line by the same amount. This sum of $3,567,000 is equal to the Oregon Short Line’s payment of $870,000 for 8,700 shares of common on October 22, 1924 and its payments of $2,697,000 for 26,970 shares of convertible preferred.
56. For the years 1922, 1923 and 1925, plaintiff and its railroad subsidiaries, including the Oregon Short Line, filed consolidated income tax returns.
57. On the consolidated returns referred to in finding 56, no amount was included as a dividend in gross income on account of the receipt of the rights referred to in finding 43.
58. For the taxable years 1930 and 1935, plaintiff and its railroad subsidiaries, including Oregon Short Line, filed consolidated federal income tax returns. Under the federal income tax laws applicable to 1930 and 1935, the distribution of the securities described in finding 53 and findings 51 and 54 constituted intercompany transactions and were eliminated in computing plaintiff’s consolidated federal income tax liability for 1930 and 1935.
59. In computing plaintiff’s accumulated earnings and profits, the Commissioner of Internal Revenue refused to include any amount for the distribution and exercise of the stock subscription rights described in finding 43.
60. As of December 31,1922, the Illinois Central Railroad Company had accumulated earnings and profits of no less than $8,897,224.38.
61. As of December 31,1923, the Illinois 'Central Railroad Company had accumulated earnings and profits of no less than $8,761,784.00.
*9962. As of December 31, 1925, the Illinois Central Eail-road Company bad accumulated earnings and profits of no less tlian $22,173,584.00.
63. The spreads between the market value of the Illinois Central convertible preferred stock and the subscription price on the date of distribution of the rights entitling the recipient to exercise said subscriptions were as follows:
64.The spreads between the fair market value of the Illinois Central convertible preferred stock and the subscription price on the date that the rights entitling the recipient to subscribe were actually exercised were as follows:
65.The number of shares of Illinois Central convertible preferred stock acquired by exercise of stock rights which were distributed to the plaintiff and the Oregon Short Line times the respective spreads as of the date of distribution and the date of exercise of said stock rights were as follows:
66.The stock rights distributed to the plaintiff and its subsidiary on May 16,1922 were exercised on June 26,1922; those distributed on November 23, 1923 were exercised on *100December 1,1928; and those distributed on October 22,1925 were exercised on December 10,1925.
67.The lower of the aggregate value of the distribution spread and the aggregate value of the exercise spread for each of the sets of rights which were exercised were as follows:
t. LEASED LINE SUBSIDIARIES
68. Since January 1, 1986, plaintiff has operated under leasehold agreements all the properties of the Oregon Short Line Railroad Company, the Los Angeles & Salt Lake Railroad Company, and The St. Joseph & Grand Island Railway Company, hereinafter the “three roads” or the lessor corporations. Plaintiff entered into the leases in order, among other things, to reduce bookkeeping and other costs. It sought to eliminate intercompany accounting and to reduce the number of reports required to be made to state and federal authorities. Union Pacific R. Co. Unification, 189 ICC 357, 358-59, 363 (lines 21-23), 365 (lines 26-30) (1933); 207 ICC 543, 544-45 (1935).
69. During the years here in question, plaintiff accounted, for Interstate Commerce Commission and federal income and excess profits tax purposes, for all items of income and expense resulting from the operation by plaintiff of the properties of the three roads.
70. During the taxable year 1942, plaintiff included in its accounts and reported in its federal income and excess profits tax returns all items of income and expense resulting from the operation of the aforesaid properties of the three roads.
71. At all times material hereto plaintiff has owned 100% of the capital stock of Oregon Short Line Eailroad Company, 50% of the capital stock of Los Angeles & Salt Lake Eailroad Company (the remaining 50% being owned by Oregon Short Line Eailroad Company), and approximately 99% of the capital stock of The St. Joseph & Grand Island Railway Company.
*10172.On its excess profits tax return for 1942, plaintiff treated its stock in the three lessor corporations as inadmissible assets having as their basis the following amounts:
The only change made by the Commissioner of Internal Revenue in the treatment of these items for the purposes of the inadmissible asset adjustment was to reduce the basis of the Oregon Short Line stock to $85,140,589.76. Plaintiff’s basis for that stock is dependent upon the resolution of count 5.
73. In computing its admissible assets for purposes of determining its excess profits tax credit based on equity invested capital for the taxable year 1942, plaintiff in its claim for refund claimed the aforesaid aggregate amount of $108,-129,266.19 was includible therein.
74. Throughout 1942, plaintiff owned 1,000,000 shares of Oregon Short Line common stock, of which 273,507 shares were acquired prior to June 30, 1908, and the balance of 726,493 were acquired on November 10,1910. As of June 30, 1908, plaintiff owned 100 percent of the outstanding stock. The acquisition in 1910 was of additional stock issued by the Oregon Short Line. Throughout 1942, plaintiff owned 125,-000 shares of Los Angeles & Salt Lake common stock and the Oregon Short Line owned a like amount, plaintiff having acquired its stock in 1921 and the Oregon Short Line having acquired its stock in the fiscal year ended June 30,1907. Plaintiff’s stock in The St. Joseph and Grand Island was as follows on the indicated dates:
During 1942, plaintiff did not hold any of its stock in the three lessor corporations primarily for sale to customers in the ordinary course of its trade or business. During 1942, *102plaintiff was not a dealer in securities, bolding them for sale to customers.
75. All of the leases were approved by the Interstate Commerce Commission in opinions reported at 189 ICC 357 and 207 ICC 543.
78.Since January 1, 1936, plaintiff has also operated all of the properties of the Oregon-Washington Eailroad & Navigation Company under a lease similar to those made with the three lessor corporations described above. All of the stock of Oregon-Washington was, during 1942, owned by Oregon Short Line Eailroad Company.
77. During 1942, plaintiff had outstanding non-interest-bearing advances to the Oregon-Washington Eailroad & Navigation Company and the Los Angeles & Salt Lake Eail-road Company, the advances to the former ranging from about $44.6 million to about $45.7 million, and the advances to the latter ranging from about $25.7 million to about $27.3 million.
78. For 1940, 1941, 1943, 1944, and 1945, plaintiff and the lessor companies as well as other subsidiaries filed consolidated excess profits tax returns.
79. Each of the four lessor corporations incurred an income tax but no excess profits tax liability for 1942. The income tax was paid by plaintiff pursuant to the terms of the leases.
80. During 1942, the four lessor corporations owned the following shares of stock which were not leased to plaintiff:
81.Since the operation of the leasehold agreements 'began on January 1,1936, no dividends have been paid to plaintiff with respect to its stock in the lessor corporations.
*10382. Under the lease with the St. Joseph and Grand Island, plaintiff agreed to pay as part of the rent certain dividends on the stock of the lessor in the hands of the public. The lease further provided that during the term of the lease the plaintiff waived all rights to dividends out of the rentals payable thereunder.
83. The leases with the Oregon Short Line and the Los Angeles and Salt Lake contained no provision prohibiting or restricting the payment of dividends by the lessor to the plaintiff.
84. As of December 31,1941, earnings and profits accumulated after February 28, 1913, amounted to approximately $1.9 million for the Los Angeles and Salt Lake and $4 million for The St. Joseph and Grand Island. As of December 31, 1941, the Oregon Short Line had an earnings and profits deficit for the period beginning March 1,1913. For the calendar year 1942, all three lessors had earnings and profits from which dividends to plaintiff could have been paid. (This is based on the fact that each of the lessors incurred an income tax liability for 1942, as indicated above in finding 116.) The income source of such dividends could have been the stock described in finding 80.
85. The plaintiff acquired and held the stock in the three roads for a business purpose, in connection with the conduct of its railroad operations, and only incidentally as an investment or capital asset.
VI. INTEREST ON 1948 AGREEMENT
86. Pursuant to the provisions of Section 321(a) of the Transportation Act of 1940, Government-owned materials transported in 1942 for military use were eligible for the preferential land-grant freight rates prescribed by the several Granting Acts and Equalizing Agreements.
87. During the taxable year 1942, plaintiff transported substantial quantities of war-connected materials for the Government. Many of these shipments were of a secret nature, their contents being unknown to plaintiff at the time of haulage. Other shipments contained new commodities for which freight rates had not yet been established pursuant to the Land Grant and Equalization Agreements.
*10488. Where reasonable doubt existed as to the true nature of a particular shipment, plaintiff charged the Government the full commercial tariff rate. These charges were paid in full by the various Government shipment departments and agencies. Plaintiff accrued the total amount of these charges as income during the year of carriage, and reported them in its federal tax returns for the taxable year 1942.
89. Upon audit in years subsequent to the taxable year 1942, the General Accounting Office determined that a substantial amount of the charges exceeded the proper land grant freight rates provided for the materials so shipped. The excess rates so determined were disallowed by the General Accounting Office, and plaintiff was required to, and did refund the excess charges to the Government.
90. With respect to the taxable year 1942, plaintiff was required to, and did make refunds to the Government of the aforesaid excess charges in the aggregate amount of $12,801,880.24 during the taxable years ended December 31, 1943 through 1956, and the period ended August 31, 1957, inclusive.
91. During the taxable years ended December 31, 1943 through 1956, and the period ended August 31, 1957, inclusive, plaintiff deducted on its federal tax returns the entire amount of $12,801,330.24 so refunded. The amount of such refunds and deductions, the years in which made, as well as the tax applicable thereto, were as set forth below:
*10592. Under date of November 29, 1948, the Commissioner of Internal Revenue sent the following letter to plaintiff, herein sometimes called the Land Grant Cutback Agreement or the Cutback Agreement:
Union Pacific Railroad Company 120 Broadway New York 5, New York Attention: L. J. Tracy, Controller
Gentlemen: Reference is made to your letter of November 1, 1948, in which you request that certain modifications be made to Bureau letter of September 22,1948, granting your company permission, subject to your agreement to the adjustments and conditions set forth therein, to allocate for Federal income tax purposes the repayments of certain excessive transportation charges to the years in which such charges were included in taxable income.
The information submitted in your letters of July 22, and November 1,1948, is to the following effect:
Under section 321(a) of the Transportation Act of 1940, materials which were owned by the Government and were moving for military or naval use were entitled to reduced freight rates in accordance with land grants or equalization agreements. Section 322 of such act provides for the payment of transportation charges as presented but reserves the right to the Government to deduct the amount of any overpayment from any amount subsequently f ound due the carrier.
Beginning in 1941 and continuing throughout the war years and in 1946, your company transported large quantities of property for the several Government departments and agencies. In some cases the facts necessary to determine whether the property was eligible for net land grant rates were not available and were not disclosed for security reasons. In other cases the commodities were new and without precedent. Where there was reasonable doubt as to the application of net land grant rates, your company billed the Government initially on the basis of full commercial tariff rates, and the bills were paid by the disbursing officers of the several departments and agencies. Subsequently, the General Accounting Office upon audit disallowed transportation charges in excess of net land grant rates on a considerable volume of traffic and has made or is making demand for refund or effecting repayment by deduction from other amounts currently due your company.
*106Due to the arrearage in tbe work of General Accounting Office there has been a time lag of several years between the payment of the initial bills and the recoupment of the alleged excess charges. Your company has included the full amount of revenues received in its taxable income of the years in which accrued, and amounts repaid have been treated as reductions of taxable income for the years in which repaid. As a result of the delay in the audit of the transportation bills your company has reported large amounts of revenue in years when it was subject to high excess profits tax rates while the repayments have extended into post war years when tax rates are lower.
The statement submitted with your letter discloses that repayments in the amount of $38,424,471.15 have been made as of December 31,1947, which are applicable to the years 1941 to 1947, inclusive. You state that your company paid excess profits taxes for each of the years 1942 to 1945, inclusive, had an unused excess profits carry-over from 1940 and 1941 to 1942, and was within the 80 percent overall limitation in 1944.
You suggest that it would simplify the adjustment if June 30, 1948, were agreed upon as a cut-off date for the year 1941. The 1941 adjustment would be closed out with repayments up to and including June 30,1948, and any repayments arising after that date applicable to 1941 would be deductible in the year in which made.
Section 43 of the Internal Revenue Code provides, in part, as follows:
“The deductions and credits (other than the corporation dividends paid credit provided in section 27) provided for in this chapter shall be taken for the taxable year in which ‘paid or accrued’ or ‘paid or incurred,’ dependent upon the method of accounting upon the basis of which the net income is computed, unless in order to clearly reflect the income the deductions or credits should be taken as of a different period. * * *”
The facts presented by you show conclusively that by reporting the transportation charges as income on the accrual basis and deducting the repayments in the year in which repaid, the taxable income for the years involved is not clearly reflected; and thus, a large net tax is incurred due to the high tax rates during the war years.
In view of the facts and circumstances presented, permission is granted under the authority conferred in section 43 of the Internal Revenue Code to allocate, on the *107terms and conditions hereinafter stated, repayments heretofore or hereafter made of excessive transportation charges of the class described above to the years in which such charges were included in taxable income. However, the allocation of any such repayments of excessive transportation charges to any year shall be made only to the extent the refund or credit of the overpayment of income and/or excess profits tax, if any, resulting therefrom is not prevented for any reason, and the deficiency, if any, of income and/or excess profits tax resulting therefrom may be assessed.
In this connection, it is understood that you agree, as follows:
1. All amounts received by you as transportation charges from the Federal Government Departments and Agencies shall be included in taxable income on the accrual basis.
2. All refunds of transportation charges made by you to the Federal Government shall be allowed as deductions in the year or years in which such transportation charges were included in income, and any deductions claimed in the year or years such refunds were made will be disallowed. This paragraph applies only to cutbacks on account of transportation charges in excess of land grant and reclassification rates, which were not contested or in controversy.
3. The amount of interest on refunds of income and excess profits taxes resulting from these adjustments shall be allowed only to the extent of, and limited to, the amount of interest on deficiencies resulting from these adjustments.
4. You will execute any such waivers under section 276 (b) of the Internal Kevenue Code as may be requested to protect the Government’s interests with respect to deficiencies for any of the years involved.
The adjustments agreed to above will not include any items which are the subject of presently pending claims filed on behalf of the United States by the Attorney General before the Interstate Commerce Commission for refunds from the railroads, including your company, for excessive charges for the transportation of war-time freight.
In regard to a cut-off date for any one of the years in question, a date which is mutually agreeable to the internal revenue agent in charge and your company will be acceptable to this office subject to the determination upon post review that the repayments made subsequent to that date which are applicable to the particular year are comparatively negligible in amount and that the deduc*108tion of such repayments in the year or years accrued will not distort income.
In any of fcbe foregoing circumstances in which, the repayments cannot be allocated to the prior years, they will be deductible for the year in which the repayments accrue.
This letter supersedes Bureau letter of September 22, 1948.
Notification from you of your agreement with the foregoing will constitute authority for disposition of the issue for the years involved. It is requested that such notification be submitted in duplicate.
Please reply on or before December 15, 1948, for the attention of IT :P :CA :ECH.
Very truly yours,
(Signed) Geoege J. Schoeneman
Commissioner
93. By letter dated December 14, 1948, plaintiff notified the Commissioner of its assent to the foregoing letter, the Land Grant Cutback Agreement.
94. During the audit of plaintiff’s tax returns for 1942, plaintiff submitted to the Revenue Service statements showing the refunds for 1943 through 1957 listed in finding 91, as well as a refund of $72,335.30 made in 1942 of overcharges received from the Government ih 1941. Copies of these statements were included in the revenue agent’s report of December 12,1957. Representatives of the plaintiff advised Revenue Agent Stortz that additional freight charges totalling $23,-514.83 received from the Government in 1942 were refunded during the period beginning January 1, 1957, and ending August 31, 1957. Mr. Stortz verified this information, accepted it as correct, allowed as deductions for 1942 the amounts totalling $12,801,330.24, shown in finding 91, and disallowed for 1942 the deduction of $72,335.30 for refunds made in 1942 of overcharges received from the Government in 1941. These adjustments, which resulted in a net additional deduction of $12,728,994.94, were not disturbed by the Appellate Division in its final determination of plaintiff’s tax liability for 1942.
95. The deductions claimed by plaintiff in the 'amount of $12,801,330.24 on account of refunds made during each of the taxable years ended December 31,1943 through 1956 and the period ended August 31, 1957, have all been disallowed in *109Eevenue Agents’ Eeports covering said years pursuant to paragraph 2 of the aforesaid Cutback Agreement.
96. None of the deficiencies attributable to the disallow-ances referred to in finding 95 have been assessed to date, the years being still open for assessment on waivers.
97. On or about June 15, 1943, the plaintiff timely filed its Corporate Income and Declared Value Excess Profits Tax Eetum (Form 1120) for the calendar year 1942 showing the following liabilities:
These amounts were assessed and payments with respect to the assessments were received by the defendant as follows:
98. On July 16,1946, a subsequent assessment was entered and payment made for corporate income tax in the amount of $10,696.86 and interest, to that date, in the amount of $2,141.13, or a total of $12,837.99.
99. After the completion of the audit of the plaintiff’s 1942 Corporate Income Tax and Declared Value Excess Profits Tax Eeturn (Form 1120), the plaintiff received, on September 21,1960, a Notice of Adjustment (relating to such 1942 return) together with a check for $7,793,219.55. The notice of adjustment explained the computation of the refund as follows:
*110The total assessment was credited or refunded to tbe taxpayer as follows:
The adjustment for railroad cutbacks did not alter plaintiff’s income tax liability because the reduction in net income was completely offset by the reduction in the Section 26 (e) credit for income subject to excess profits tax.
The overassessment of income tax in the amount of $7,935,833.22 (col. 1 above) was due to general adjustments and not adjustments on account of railroad cutbacks. Accordingly, neither the refund of $3,744,668.22 nor the $4,048,556.33 in interest paid on account thereof was attributable to railroad cutbacks.
10,0. The overassessment previously allowed in Declared Value Excess Profits Tax for the calendar year 1942 (referred to in the preceding finding) which was in the amount of $58,720.19, a credit, was applied against outstanding liabilities as of July 16, 1945 and refunded to the taxpayer as follows:
Tn addition to the cash refund made to plaintiff in the amount of $45,685.38, the plaintiff received interest thereon in the amount of $9,178.87.
101. In addition to filing the Corporate Income and Declared Value Excess Profits Tax Eeturn (finding 97), the plaintiff timely filed a Corporation Excess Profits Tax Ee-*111turn (Form 1121) for the calendar year 1942, indicating that no liability was due thereon. Anticipating a deficiency in excess profits tax, the plaintiff on December 1, 1944, paid oyer to the District Director $3,525,000, which was immediately assessed on December 12, 1944, together with interest in the amount of $361,745.90. The assessment of interest was satisfied from an additional payment made by plaintiff on December 1,1944. On July 16,1946, in response to plaintiff’s application for a tentative amortization adjustment, the Commissioner refunded to plaintiff $694,754.62 in excess profits tax for 1942 with interest thereon in the amount of $68,742.63. As a result of this refund, the net assessment for excess profits tax left on the books and paid by plaintiff as of July 16, 1946, was substantially $2,830,245.38.
102. On audit of plaintiff’s excess profits tax return for 1942, the Commissioner of Internal Revenue made a number of adjustments, including an adjustment for railroad cutbacks. After taking into consideration all of these adjustments, he determined a deficiency in excess profits tax for 1942 in the amount of $4,654,621.45. On September 16, 1960, he assessed this deficiency together with interest thereon of $300,639.16, for a total assessment of $4,955,260.61. This assessment was satisfied by a credit of $4,206,773.93 in income tax for 1942 (referred to above in finding 99) and a postwar credit of $748,486.68.
103. Certain additional computations were prepared by an auditor in the Audit Division of the Internal Revenue Service bearing on whether the interest restriction in the Cutback Agreement should be given effect in computing interest allowable to plaintiff. These additional computations showed first that the general adjustments made on audit, if taken alone, resulted in an income tax liability of $30,481,263.37, an income tax deficiency of $7,935,833.22, an excess profits tax liability of $18,807,391.15, and an excess profits tax deficiency of $15,977,145.77. The computations showed that the general adjustments and the adjustment attributable to railroad cutbacks resulted in an income tax liability of $30,481,263.37 (which was the same liability as determined in the first of the four computations above) and an excess profits tax liability of $7,484,866.83. Because the *112latter was $11,322,524.32 less than the excess profits tax liability initially determined in the amount of $18,807,391.15, the computation showed $11,322,524.32 in the line for over-assessments. Finally, the computations showed that all adjustments resulted in an income tax liability of $30,481,263.37, an overassessment of income tax of $7,935,833.22, an excess profits tax liability of $7,484,866.83, and an excess profits tax deficiency of $4,654,621.45. Because the income tax liability was not changed by the adjustment for railroad cutbacks, these computations showed that none of the income tax overassessment or overpayment was attributable to the cutbacks and thus that the interest allowable on this overpayment should not be restricted by reason of the interest restriction in the Cutback Agreement. Because the computed excess profits tax deficiency of $15,977,145.77 resulting from general adjustments was never assessed or paid, the amount of $11,322,524.32 was not a true overassessment or overpayment. As indicated in the preceding finding, the Commissioner assessed and collected the excess profits tax deficiency of $4,654,621.45 resulting from all audit adjustments.
104. The Eevenue Service has not made any refund of income or excess profits tax for 1942 resulting from adjustments for railroad cutbacks. (The only refund made was for $3,744,663.22 in income tax which was attributable to general adjustments, as indicated in finding 99.)
105. In computing the interest on the overpayment of income tax of $7,935,833.22, the Commissioner of Internal Ee-venue did not reduce the interest allowable on account of the interest restriction contained in the Cutback Agreement. The interest restriction in the Cutback Agreement did not enter into that computation. Had the interest restriction been deleted from the Cutback Agreement, interest would have been computed in the same manner.
vn. 1898-1918 LAND SAUSS
106. Upon the acquisition of the properties of Union Pacific Eailway Company pursuant to a plan of reorganization in 1898, plaintiff acquired, among other properties, various lands.
*113107. On April 5, 1898, plaintiff caused tbe Union Pacific Land Company to be incorporated in Utah. Plaintiff caused the lands and rights derived from the land grant to the Kansas Pacific Eailway Company to be transferred to the Union Pacific Land Company. The Union Pacific Land Company issued to plaintiff $100,000 par value of its common stock and $10 million par value of its bonds. The bonds were secured by a mortgage upon all of the Union Pacific Land Company’s assets. Plaintiff pledged the Union Pacific Land Company stock and bonds as collateral under its first mortgage.
108. The lands and properties referred to in the preceding findings consisted of 6,577,000 acres of land in Colorado, Kansas, Nebraska, Wyoming and Utah.
109. As of June 30,1919, the plaintiff owned lands for non-carrier purposes in Nebraska, Kansas, Colorado, Wyoming and Utah amounting to 971,348.64 acres.
110. Plaintiff’s first mortgage provided that the net proceeds from the sales of lands covered by the mortgage, with the exception of lands used for railroad purposes, be set apart and held by the trustee as a cash improvement and equipment fund and such net proceeds from time to time be paid to plaintiff to reimburse it for expenditures for betterments, improvements, and equipment, exclusive of such expenditures that may have been charged to operating expenses as cost of maintenance. Pursuant to this provision, during the period February 1,1898, through December 31,1918, the trustee had the following receipts:
*114From these receipts, during the aforesaid period, the trustee paid over to plaintiff $28,286,091.13.
111. On its books plaintiff credited the aforesaid net proceeds of $23,286,091.13 to its investment in road equipment account.
112. Of the $2,381,588.36 in items 1, proceeds of sales, in finding 110, $160,922.65 is attributable to the period March 1, 1913, to December 31, 1917. None of the $160,922.65 was reported as income or gain on plaintiff’s federal income tax returns for 1913-1917. (The amount of $160,922.65 is the sum of $160,212.65, $450, and $260 shown on plaintiff’s exhibit Y, in column 6, for fiscal 1915 and 1916 and calendar 1917.)
113. Of the entire amount of $10,203,367.53 in item 2, in finding 110, the sum of $1,231,264.60 has already been included in plaintiff’s accumulated earnings and profits. This was for interest on deferred payments, other receipts from land, a small amount of taxable gain for 1918, less expenses. The balance of $8,972,102.93 represents deferred payments from sales of land.
114. Of the entire amount of $10,203,367.53 in item 2, in finding 110, $1,893,601.30 is attributable to the period March 1, 1913, to December 31, 1917. None of the $1,893,601.30 was reported as income or gain on plaintiff’s federal income tax returns for 1913-1917. Of the $1,893,601.30 attributable to March 1,1913, to December 31,1917, $375,974.45 has already been included in plaintiff’s accumulated earnings and profits as part of the $1,231,264.60 referred to in the preceding finding.
115. The entire amount of $5,713,967.20 in item 3 in finding 110 has 'already been included in plaintiff’s accumulated earnings and profits. Of the $5,713,967.20, $566,431.20 is attributable to the period March 1,1913, through June 30,1916. None of the $566,431.20 was reported as income or gain on plaintiff’s federal income tax returns for 1913-1916.
116. Of the entire amount of $5,067,000 in item 4, in finding 110, $151,947 is attributable to the period March 1, 1913, to December 31,1917. None of the $151,947 was reported as income or gain on plaintiff’s federal income tax returns for 1913-1917.
*115117. Item 5, in finding 110, has been included in plaintiff’s accumulated earnings and profits. The sum of $18,223.89 was attributable to the period March 1,1913, to December 31, 1917. None of the $13,223.89 was reported as income or gain on plaintiff’s federal income tax returns for 1913-1917.
118. Of the claimed addition of $23,286,091.13 to accumulated earnings and profits, $6,972,025.93 has already been allowed, consisting of $1,231,264.60 of item 2 and all of items 3 and 5 in finding 110.
VIH. UNAMORTIZED BOND DISCOUNT & EXPENSE
119. When a corporation issues its bonds for cash, the difference between the maturity value of the bonds and the cash received, plus the expenses of the bond issue, is known as “bond discount and expense.”
120. The dollar amount of bond discount and expense is customarily charged off over the life of the bonds. The dollar amount which has not yet been charged off is known as “unamortized bond discount and expense.”
121. When the issuer receives less for its bonds than face value, e.g., $900,000 for $1,000,000 in face value of bonds, and the balance sheet would not balance as would be the case were the left side to show cash of $900,000 and the right side to show $1,000,000 in liabilities, the unamortized bond discount, in the example $100,000, is customarily placed on the left side of the ledger in order to make the balance sheet balance.
122. In computing its excess profits tax credit for 1942 and its unused excess profits tax credit carryovers from 1940 and 1941, plaintiff included in total 'assets the following amounts for unamortized bond discount and expense:
The amounts for 1940 and 1941 are aggregate amounts for the plaintiff, Oregon Short Line Eailroad Company, Oregon-Washington Eailroad & Navigation Company, Los Angeles & Salt Lake Eailroad Company and The St. Joseph and Grand Island Eailway Company.
123.On audit of plaintiff’s excess profits tax return for 1942, the Commissioner of Internal Eevenue included un-*116amortized bond discount and unamortized bond issuance expense in total assets in the following amounts:
124. On its books, plaintiff bad deducted from surplus, in the year of issuance of debt securities, the amount of bond discount and expenses incurred. On its books and on its balance sheet, therefore, plaintiff did not carry as an asset amounts for unamortized bond discount and expense. For income tax purposes however, 'bond discount and expense was amortized and deducted over the life of the bonds. Helvering v. Union Pacific R.R., 293 U.S. 282 (1934). In computing plaintiff’s consolidated accumulated earnings and profits for 1940 and 1941, and plaintiff’s accumulated earnings and profits for 1942, the Commissioner of Internal Eevenue followed the treatment of bond discount and expense claimed for income tax purposes; that is, he did not deduct the discount and issuance expense in the year the bonds were issued, but he amortized it in accordance with deductions allowed for income tax purposes. In these same computations, the Commissioner deducted from earnings and profits none of the amounts referred to in finding 123. These amounts were stipulated to be unamortized, that is, unamortized for tax purposes, being the balances of bond discount and expense remaining to be written off in future years over the life of the bonds.
125. To a potential buyer of the stock of a corporation which had for income tax purposes unamortized bond discount and expense, the amount of the discount and expense could have some value as a source of tax deductions for future years. To a potential buyer of the assets of a corporation, or on liquidation, its unamortized bond discount and expense would not have any value. Unamortized bond discount produces no income.
126. In the determination of the book value of corporate stock, a securities analyst would not treat unamortized bond discount and expense as an asset; he would treat it as an offset to surplus.
*117IX. DISCOUNT AND PREMIUMS
127. For 1940 and 1941, plaintiff and its railroad subsidiaries, including the Oregon Short Line Railroad Company and the Oregon-Washington Railroad & Navigation Company, filed consolidated income tax returns and consolidated excess profits tax returns. For 1942, plaintiff filed a separate income tax return and a separate excess profits tax return.
128. In computing net income, plaintiff deducted, on its consolidated income tax returns for 1940 and 1941 and its separate income tax return for 1942, the following amounts for amortization of bond discount and expense, unamortized bond discount and expense for bonds reacquired, United States documentary stamp taxes, and call premiums to retire bonds:
129.On September 1,1940, plaintiff called for redemption two series of bonds, both with a maturity date of June 1,2008. The first consisted of 4 percent bonds issued in the years 1908, 1909, and 1910, at a discount and with issuance expense. To redeem these 4 percent bonds, plaintiff paid the face amount of these bonds plus a premium of $4,942,881.12. The second series consisted of 5 percent bonds issued in 1923 at a discount. To redeem these 5 percent bonds, plaintiff paid the face amount plus a premium of $1,500,000. The total of the call premiums, $4,942,381.12 and $1,500,000, $6,442,381.12 is shown in the preceding finding. At the time these bonds were redeemed, there was unamortized bond discount and expense of $2,741,201.39 on the 4 percent bonds and unamortized bond discount of $517,997.28 on the 5 percent bonds. The total of these two amounts of unamortized bond discount is $3,259,-198.67.
*118130. In May 1936, plaintiff issued 35-year Sy2 percent debenture bonds at a discount. In October 1936, plaintiff issued 34-year Sy2 percent debenture bonds at a discount. In 1940, plaintiff purchased certain of these debenture bonds at par with moneys derived from a sinking fund and retired them. With respect to these bonds purchased and retired, there was unamortized debt discount of $3,489.59 as to the 35-year bonds and $2,349.20 as to the 34-year bonds. The total of these two amounts of unamortized bond discount, $5,838.79, when added to the total unamortized bond discount in the preceding finding, $3,259,198.67, comes to $3,265,037.46, the figure shown in finding 129.
131. On its excess profits tax return for 1942, in computing its excess profits net income for 1942 and its unused excess profits tax credit carryovers from 1940 and 1941, plaintiff did not treat as interest the amounts shown in finding 128, but it treated the indebtedness with respect to these amounts incurred as borrowed capital.
132. On audit of the returns for the years 1940 and 1941, the Commissioner of Internal Eevenue did not disturb the action taken by plaintiff as described in these findings.
133. The $110,004 in finding 128 was deducted in full in the years the bonds were issued and was not amortized over the life of the bonds as bond issuance expense. Defendant does not contend that these deductions were for interest for purposes of section 711 (a) (2) (B).
X. DONATIONS AND CREDITS
134. (a) For the taxable years ended December 31, 1940 and 1941, plaintiff and its railroad subsidiary companies, set forth below, filed consolidated federal income and excess profits tax returns:
Oregon Short Line Eailroad Company (OSL) ;
Oregon-Washington Eailroad & Navigation Company (O-WE&N);
Los Angeles & Salt Lake Eailroad Company (LA & SL);
The St. Joseph and Grand Island Eailroad Company (St. J &GI);
*119Saratoga & Encampment Valley Eailroad Company (S &EV);
Laramie, North Park & Western Eailroad Company (L &NPW);
Des Chutes Eailroad Company (D C);
Yakima Valley Transportation Company (Y V T).
(b) For the taxable year ended December 31,1942, plaintiff and the named subsidiaries filed separate federal income and excess profits tax returns.
(c) Henceforth the plaintiff and its aforesaid subsidiaries will ordinarily together be called the plaintiff.
135. The issue is whether the transfers by nonstockholders to plaintiff, whose amounts appear in finding 138(a), may be included in equity invested capital in plaintiff’s consolidated return for 1940 and 1941, to determine its unused consolidated excess profits tax credit carryovers from 1940 and 1941 to 1942, and in plaintiff’s return for 1942, to determine its credit for 1942.
In terms of statutory language, the question is whether the transfers in question are “contributions to capital” within the meaning of § 718(a) (8) of the 1939 Code. The test is that laid down in United States v. Chicago, Burlington & Quincy R.R., supra.
136. In the years 1914 through 1942, there were literally thousands of instances in which plaintiff received from numerous transferors cash and other property which it treated as donations and grants in aid of construction. These amounts were recorded on the plaintiff’s books, since July 1, 1914, in accordance with the Uniform System of Accounts as prescribed by the Interstate Commerce Commission, by debiting the investment account, with a concurrent credit being made to “Other Adjustment Credits,” “Donations” or “Grants in Aid of Construction.”
Note: Such words as “donations and grants” and “donor” in the stipulation of the parties and in these findings are words of convenience only, without any substantive significance, except where they appear in the historical facts as, e.g., in finding 136.
137. (a) On the balance sheets of plaintiff as of December 31,1940,1941 and 1942, the credit balances in the afore*120said accounts were included on the liability side. Beginning with the year 1948, these amounts were included on the asset side of the balance sheet as credit balances in the investment portion.
(b) The following is a summary of the transfers treated as donations and grants on the respective books and records:
138. (a) The amounts of the transfers which (except as otherwise explicitly mentioned) are in issue and the classes of facilities constructed with the cash and property transferred appear in Schedule 3 of the appendix hereto and are incorporated by reference.
(b) The significance of the Schedule 3 tables lies in the amounts stated and not in the captions of the columns. In the stipulation of the parties, the caption of the first column of the tabulation reads “donor.” The term, as is noted in finding 136, was not intended to be one of legal consequence and is properly an alternative to “transferor.”
(c) The transfers in issue, whose amounts appear in foregoing subparagraph (a), fall into seven classes, the first five by governmental transferors and the last two by private transferors.
The classes (and in parenthesis their amounts for the period ending December 31, 1939) are as follows:
(1) governmental transfers to relocate line on account of dams ($5,992,110 of the total of $9,798,364).
(2) governmental transfers to relocate line on account of highways and waterways ($251,669). This class is a consolidation of lines 2 and 3, “relocation line account, highways,” and “relocation line account waterways,” in the column “class of facility” in finding 138(a). The single item whose amount appears on line 3 is on examination found to relate more to highways than to waterways.
(3) governmental transfers for highway underpasses and other highway crossings ($1,673,375). This class is a merger, *121as substantially identical, of tlie transfers in line 4, “underpasses account highways” and line 5, “highway crossings,” in the column “class of facility” in finding 138 (a).
(4) governmental transfers for spur or other tracks ($273,831).
(5) governmental miscellaneous transfers ($320,601).
(6) nongovernmental transfers for industry spurs and other tracks ($891,354) and
(7) nongovernmental miscellaneous transfers ($395,422).
139.The aggregate account balances with respect to the transfers set forth in finding 138 (a), as of December 31,1939, 1940,1941 and 1942 were as follows:
140. The foregoing aggregate account balances as of the close of each of the years 1939,1940,1941 and 1942 represent facilities on hand as of the close of each of the respective years.
141. The aforesaid facilities in finding 138(a), representing the cash and other property transferred to plaintiff and its railroad subsidiaries, were held by plaintiff and its subsidiaries during the taxable years 1940, 1941 and 1942 for use in their trade or business for such years.
142. None of the transfers whose amounts appear in finding 138(a) were reported or taxed as income for federal income tax purposes, with the exception of the transfers specified in finding 145(a) as having been subjected to income tax.
143. In computing its excess profits tax credit for the taxable year 1942, and its consolidated excess profits tax credit for the taxable years 1940 and 1941, so as to determine its unused excess profits tax carryovers from 1940 and 1941 to 1942, plaintiff included in equity invested capital:
(a) In Accumulated Earnings and Profits
The entire credit balances for the transfers set forth *122in finding 138(a), as of December 31,1939 through. 1941, inclusive; and
(b) In Total Assets
The entire credit balances for the transfers set forth in finding 138(a) as of December 31 plus one-half the aggregate net additions occurring during the next succeeding year. The aggregate net additions so included were determined by netting retirements occurring during the stated periods against additions occurring during such periods.
144 In the audit of plaintiff’s consolidated excess profits tax returns for 1940 and 1941, and its separate excess profits tax return for 1942, the Commissioner of Internal Eevenue excluded from equity invested capital the amounts referred to in finding 143, with the exception of the amounts set forth in finding 145 (a).
145. (a) In the audit of plaintiff’s returns for the taxable year 1942, the Commissioner of Internal Eevenue treated the following transfers as includible in equity invested capital (either as a contribution to capital or as accumulated earnings and profits) and total assets of plaintiff’s aforesaid railroad subsidiaries in the amounts as set forth below:
(b) The parties have agreed that plaintiff is not entitled to prevail with respect to item 1 in the foregoing subpara-graph and with respect to a transfer by the United States Eailroad Administration in 1932 involving $243,475.60. These transfers are not included in the amounts stated in finding 138(a).
(c) The parties have agreed that for the purposes of this proceeding items 7, 8,9,10 and 11 in subparagraph (a) above are not in issue and they were properly included in equity *123invested capital. These items are included in the amounts stated in finding 138(a).
(d) Items 2, 3, 4, 5 and 6 in subparagraph (a), above, are included in the amounts stated in finding 138(a), and are in issue in this proceeding as offsets to count 17. See the findings following finding 173.
146. (a) The thousands of transfers in issue (appendix, Schedule 3, finding 138(a)) have by agreement been reduced to 56 representative transfers, which appear in Schedule 4 of the appendix hereto.
(b) The parties have further agreed, in the interchange of proposed and counterproposed findings and objections thereto, upon individual transfers to represent the several classes of transfers in issue described in finding 138(a).
147. Glass 1 — Governmental transfers to relocate line on account -of dams, (a) The two transfers representative of this class were made by the Federal Government to the Oregon-Washington Railroad Company in connection with the construction of the Bonneville Dam on the Columbia River in Oregon.
The first took place in the years 1935-1943 and involves $2,359,747. This was the cost (paid by the Government) of relocating a portion of the line which was going to be submerged as the result of the construction of the dam.
The second took place in the years 1938-1941 and involves $1,200,729. This was part of the $1,531,000 paid by the Government to the railroad for flowage rights. The railroad agreed to grant the rights for this price in order to obviate the exercise of the right of eminent domain threatened by the Government. The railroad used the funds to relocate and protect parts of its line due to the raising of the level of the river.
(b) It is concluded that these transfers, exchanges of values and simple replacements of existing facilities which left the transferee railroad no better off than before, did not materially contribute to the production of further or additional income by the transferee railroad. The transfers were, also, a direct payment for a specific, quantifiable benefit provided for the transferor by the transferee. See United States v. Chicago, Burlington & Quincy R.R., supra. Also, *124the transferors sought and obtained a direct benefit to themselves, and did not intend to confer a benefit on the transferee.
The transfers did not effect a contribution to the capital of the transferee railroad, the plaintiff.
148. (a) Glass % — Governmental transfers to relocate line on account of highways. The transfer representative of this class was made by the City of Long Beach to the Los Angeles and Salt Lake, involving $240,000 for 1933-1935.
The contract for the transfer recites that the City was desirous of acquiring (a) the railroad’s rights to operate its line on certain city streets, with a view to improving the streets, and (b) the right to use the railroad’s drawbridge across the entrance to a harbor for pedestrian and vehicular traffic (and certain land on the approaches to the drawbridge), requiring the construction of a new highway for this purpose. For these rights, the City agreed to pay the railroad $460,000, later reduced to $240,000. The railroad agreed to relocate its line on a right-of-way it would acquire. The purpose of the transaction on the part of the transferor was to pay for the property rights acquired.
(b) It is concluded that the transfers in class 2 are essentially the same as those in Class 1, supra, and, did not effect a contribution to the capital of the transferee railroad, the plaintiff.
149. Glass S — Governmental transfers for highway underpasses and other highway crossings, (a) The two transfers representative of this class are:
1. A transfer involving $152,316, made in the years 1934-1938 by the State of Idaho to the Oregon Short Line Railroad Company. The state and the City of Pocatello, under a contract with the railroad, replaced a viaduct with a subway to carry the highway traffic under the tracks of the railroad. Under the contract between the state, city, and railroad, the railroad granted the state the right to remove the viaduct and to construct the subway; granted the city the right to maintain and use the subway; and agreed to undertake, at •the expense of the state, portions of the work involved. The state agreed to pay for the removal of the viaduct and the construction of the subway. All of the construction was per*125formed by the railroad at a total cost of $155,079.45, of which $152,816 was paid for by the State of Idaho.
Article I of the contract between the parties grants to the City the right to maintain and use the subway and street under the tracks, subject to the “continuing right and obligation of the Eailroad Company to use and maintain its said right of way in the performance of its public duty as a common carrier.” Article 8 provides that the City shall maintain the subway structure, except the track-supporting structure, and that “The Eailroad Company shall, at its own expense, maintain the track-supporting structure portion of the subway.”
There is no explicit reference to federal financing in the papers in the record concerning this transfer. In the papers on other transfers in this class for similar facilities, however, it appears that such transfers were federally financed. One of them, a transfer of $147,962 for a subway under the line at Lawrence, Kansas in 1938, is described as a grade crossing project financed under the Federal Aid Appropriation Act of June 16,1936 (Public Eesolution 686, 74th Congress) in accordance with the Federal Highway Act, which provided for the elimination of hazards to life at railroad grade crossings. By the contract between the parties, the railroad was obligated to maintain a specified part of the improvement. The contract for a transfer of $120,088 (federally financed) for a subway under the line in Denver, Colorado in 1941 imposes upon the carrier the obligation to “forever maintain” specified portions of the improvement.
2. The second transfer representative of this class involves $400 paid by Jefferson County, Kansas in 1921 to the plaintiff for the construction of a new highway crossing at Walnut Street in Williamstown, Kansas. The County Commissioners ordered the work and issued a warrant for it. The work consisted of grading and the supply of oak planks and one highway crossing sign, and other materials and labor. No formal agreement appears to have been made, and nothing appears as to any obligation of the railroad to maintain the improvement.
(b) It is concluded that the transfers in class 3 are substantially identical with those considered in United States v. *126Chicago, Burlington & Quincy R.R., supra, and did not effect a contribution to the capital of the transferee railroad, the plaintiff.
150. Glass Jp — Governmental transfers for spur or other tracks, (a) The transfer representative of this class involves $9,564 paid by the State of Colorado and the City of Denver to plaintiff in 1939 as the cost of plaintiff’s share of work jointly performed by several railroads to eliminate grade crossings at the Union Stockyard in Denver by the construction of a vehicular subway below the railroad line. The transferor governments were seeking to replace the grade crossings with a subway to carry vehicular traffic under the tracks of several railroads in the stockyard. Plaintiff and The Colorado and Southern Railway Company jointly owned a portion of the trackage involved. The work was divided among the roads involved and plaintiff’s share of the work was some connecting track and extensions to the industry spur. (Hence, apparently, the title of category 4 as involving transfers for spurs.)
The project was to be financed from funds appropriated by the Federal Government, as appears from the agreement governing the project, which recites that funds described as “Works Program Grade Crossing Funds” provided under the Emergency Relief Act of 1935 (Public Resolution No. 11, 74th Cong.) are available for the purpose of eliminating the existing hazard to life of railroad crossings and that the project in question was being undertaken in the interest of public safety and convenience.
The contract provides that the City shall have the duty to maintain, repair and renew the new work on the roadway of the new subway and that the Burlington and the Colorado and Southern Railroads and the stockyard company shall have the duty for the subway structure. It does not appear what are the contractual relations between the Colorado and Southern on the one hand and plaintiff on the other, the joint owners of the trackage by reason of which the two were involved in the project.
(b) It is concluded that the transfers in class 4 are substantially identical to those considered in United States v. Chicago, Burlington & Quincy R.R., supra, and did not ef-*127feet a contribution to the captial of the transferee railroad the plaintiff.
151. Glass 5 — Governmental miscella/neous transfers — (a) Transfers 1-6 of the 10 transfers representative of this class, totalling $13,679 or 87.2 percent of the total for the 10 transfers of $15,693, are as follows:
1. $145. In 1938 plaintiff leased a portion of its right-of-way to the Kansas City Prison for use as a pasture, under a lease providing that the lessee was to move the present right-of-way fence at its expense. The actual work for the facility involved, a “hog-tight” fence for the prison farm, was done by the plaintiff 'at the cost of the lessee. The labor was furnished by the prison and $145 worth of materials were used.
2. $62. The plaintiff was assessed $630, presumably by municipal authorities, for the installation of a street light system on Grand Street at the railroad station in Pullman, Washington. The plaintiff then billed the State of Washington $62 as the latter’s proportion of the assessment under the easement contract covering encroachment of the state’s highway on the railroad’s grounds at Pullman. The contract is not in the record.
3. $6,999, for the installation in 1938 of an underground cable and aerial cable for telephone and telegraph lines, replacing open wire lines, paid for by the Los Angeles Bureau of Power and Light. There is no contract in the record covering this transfer.
4. $456. In 1939 the town of Cornish, Utah, desired to furnish water to the stockyard at the railroad station and by contract obtained from plaintiff the right to construct and maintain a water pipeline under the plaintiff’s line to the stockyard. Apparently by further agreement, the plaintiff agreed to furnish the material and the town agreed to bear the labor costs, which it did by furnishing “W.P.A. labor” valued at $456.
5. $3,080 for the installation in 1924 under plaintiff’s roadbed and tracks of an irrigation waterway, compiising a cast iron pipe syphon, concrete end walls and a 4' x 8' ditch, paid for and to be maintained by the Indian Service of the *128Federal Government in connection with the operation of an irrigation system for Indians.
6. $2,937 for the construction in 1938 of a culvert under the right-of-way for the drainage of waste irrigation water, paid for by the United States Beclamation Service.
(b) It is concluded that 87.2 percent of the transfers in this class, essentially expenditures by a tenant or easement owner for his own benefit, left plaintiff no better off than before. The transfers were under United States v. Chicago, Burlington & Quincy R.R., supra, peripheral to plaintiff’s business and did not materially contribute to the production of further income by the railroad. Also, the transferors sought and obtained a direct benefit to themselves, and did not intend to confer a benefit on the transferee. The transfers did not effect a contribution to the capital of the transferee railroad, the plaintiff.
(c) Transfers 7-9 of the 10 transfers representative of this class, totalling $1,885 or 12 percent of the $15,693 of the 10 transfers, are:
7. $437, paid by the State of Colorado in 1934 for rearrangement of telegraph and signal lines required in connection with the construction of a highway viaduct by the state.
8. $1,443 for two searchlight signals at a grade crossing in the City of Los Angeles, paid by the State of California in 1940 with funds allocated to the state by the Federal Government for the purpose of installing additional grade crossing protection.
9. $5, the cost of four metal plates reading “Stop,” provided by the State of Colorado in 1928 for use in “Stop” signs to be installed at two highway crossings.
(d) It is concluded that 12 percent of the transfers in this class are substantially identical with those considered in United States v. Chicago, Burlington & Quincy R.R., supra, and did not effect a contribution to the capital of the transferee railroad, the plaintiff.
(e) The last of the 10 transfers representative of this class is $129, or 0.8 percent of the total of $15,693 of the 10, and was the value of the W.P.A. labor caused to be furnished by the town of Oakley, Kansas, in 1938 to construct four new sanitary privies, notice having been given the railroad by the *129town to abate a nuisance in the form of unsanitary privies. While the data is scanty, it is concluded as a matter of fact that the dispositive transferor was the town and that it was utilizing, in a manner it deemed appropriate, W.P.A. labor available to it for a purpose generally advantageous to the community and beyond its own regular functions, and that the town intended to confer a benefit upon the plaintiff.
(f) It is concluded that 0.8 percent of the transfers in this class replaced existing facilities with new and better ones which the plaintiff would have been required to construct from capital funds had the transfers not taken place, and thus the transfers resulted in a benefit to the transferee in an amount commensurate with value in that they enabled plaintiff to avoid a capital expenditure to the value of the assets transferred, the sum whose expenditure was avoided was employed in the production of further or additional income. Also, the transferors did not seek or obtain a direct benefit to themselves, but rather an indirect benefit to the community at large, thereby manifesting a purpose to enlarge the capital of the transferee. The transfers effected a contribution to capital of the transferee railroad, the plaintiff.
152. Class 6 — Nongovernmental transfers for industry spurs and other tracks, (a) The three transfers representative of the majority of the transfers in this class, by shippers, are as follows:
1. $1,154 paid by the Republic Chemical Works to the plaintiff in 1919 for a spur track of 975 feet. The track was requested by Republic to obtain rail service to its potash plant.
2. $6,976 transferred by the Utah Idaho Sugar Company to the Oregon Short Line in 1919 for a spur track to serve the former’s factory. In order to obtain rail service, the sugar company transferred to the railroad land for the spur track right-of-way, performed the necessary grading, and paid for the installation of nine culverts.
3. $577 transferred by the Amalgamated Sugar Company to the Oregon Short Line in 1936 for a 920-foot beet loading track. The sugar company sought the loading track to serve a new beet-raising territory it was developing. The *130sugar company performed the necessary grading and paid for the labor required for the construction of the track.
Such transfers to railroads by shippers are compensation— “a direct payment for a specific quantifiable service provided for the transferor by the transferee” (United States v. Chicago, Burlington & Quincy R.R., supra). Also, the transfer-ors sought and obtained a direct benefit to themselves, and did not intend to confer a benefit on the transferee. The transfers did not effect a contribution to the capital of the transferee railroad, the plaintiff.
(b) The two transfers by nonshippers among the transfers representative of this class are:
1. $7,770 paid by the Utah Power and Light Company. In 1927 the company, by agreement with plaintiff, planned to construct a reservoir which would encroach on the plaintiff’s right-of-way, necessitating the underpinning and strengthening of an embankment and connected improvements. By contract the parties agreed that the work would be done at the expense of the power company and would become the property of the plaintiff.
It is concluded that such transfers are substantially identical with the transfers in class 1 and the 87.2 percent of the transfers in class 5. They did not effect contributions to the capital of the transferee railroad.
2. $1,997, the cost of work borne by the Southern Pacific Eailroad Company. The lines of plaintiff and the Southern Pacific crossed at a point in San Bemadino County, California. Under agreements dating from 1902 the two roads maintained a joint crossing and manually operated interlocking plant and gates. In 1930 the California Eailroad Commission ordered the replacement of the equipment with an automatic interlocker. The two roads negotiated and agreed, presumably in the light of the provisions of their existing agreements, upon the proportion of the cost each would bear. The $1,997 transferred to plaintiff by the Southern Pacific Eailroad is the product.
It is concluded that such transfers, made pursuant to an earlier agreement between transferor and transferee, for a consideration flowing from transferee to transferor, are *131closely similar to a “direct payment for a specific quantifiable service provided for the transferor by the transferee” (United States v. Chicago, Burlington & Quincy R.R., supra). Also, the transferors sought and obtained a direct benefit to themselves, and did not intend to confer a benefit on the transferee. The transfers did not effect a contribution to the capital of the transferee railroad, the plaintiff.
153. Glass 7 — Nongovemmentdl miscellaneous transfers. (a) The transfers representative of this class are $536 paid by two lessees for street lights installed on the leased property ; $92 paid by the owner of land on both side of the right-of-way for the construction of a private road crossing over the right-of-way and the installation of two right-of-way gates; $2,100 paid by the Laramie Stock Yards Company for the construction of feed racks in the sheep pens located on the plaintiff’s land; $631 paid by the Beaverhead Water Company for the construction of a culvert to carry its irrigation ditch under the tracks; $126 paid by the Pacific Fruit Express Company for the repair and installation of an old car-body for storing charcoal heaters used by the Express Company; $354 as the value of a scale installed on Oregon Short Line property by the Big Hole Stockmen’s Association for the latter’s use in connection with the operation of its stock yards; $415 for a 22' x 60' covered vegetable platform located on plaintiff’s property for the use of a lessee produce company; $444 paid by the Pacific Fruit Express Company for an electric power line constructed across the right-of-way to the express company’s icing facilities; and $1,364 spent by Magnus Metal Company for the construction of a retaining wall on plaintiff’s right-of-way, preliminary to raising the grade on an industry spur track which was to serve a new addition to the Magnus plant.
(b) It is concluded that such transfers are substantially identical with the 85.2 percent of the transfers in class 5. Such transfers do not effect contributions to the capital of the transferee railroad.
154. Pursuant to a contract of March 25,1901, the Oregon Short Line Eailroad Company agreed to build a railroad from its line in Idaho to the properties of the White Knob *132Copper Co., and to transport over the railroad coal and coke to be used in the smelter to be erected by the Copper Co., at as favorable terms and rates as made to other parties under similar conditions, in consideration of which E. C. Bradley agreed to bring about the construction of the smelter and to pay the Oregon Short Line $200,000 in cash. Subsequently, these agreements were carried out, and the $200,000 was paid to the Oregon Short Line.
155. Bradley paid the $200,000 in order to obtain rail service for his smelter.
156. In computing plaintiff’s excess profits tax liability for 1942, the Commissioner of Internal Eevenue included the $200,000 received from E. C. Bradley in the Oregon Short Line’s accumulated earnings and profits as of January 1,1940 and January 1, 1941. The Commissioner also included the $200,000 in total assets for the Oregon Short Line for 1940 and 1941. (See finding 145 (a), item 2.)
157. It is concluded that the transfer was a payment for a specific, quantifiable thing; also the transferor sought a direct benefit as a quid pro quo, and manifested no purpose to enlarge the working capital of the plaintiff. The transfer therefore did not effect a contribution to capital.
158. (a) During the year 1925, the Oregon Short Line acquired certain lands in Idaho in two transfers.
The first transfer consisted of land between Orchard and Boise, Idaho, acquired from a citizens right-of-way committee and/or individuals of Boise, Idaho. It was made pursuant to a contract of August 14, 1922, between the Boise Chamber of Commerce and the Oregon Short Line. The contract recites that the Chamber of Commerce has petitioned the railroad to build a railroad line from Orchard to Boise to connect with the existing line between Boise and Nampa, “the purpose of which is to provide through train service” for Boise. The railroad agreed to construct the line and to run through Boise four particular trains. The Chamber of Commerce agreed to (a) raise a fluid to pay a portion of the taxes on the new line, (b) provide the right-of-way, (c) secure for the railroad the balance of the so-called Citizens *133Eight-of-Way Committee, and (d) obtain the necessary franchises.
(b) The transferors conveyed ¡the land for the right-of-way to obtain better rail service for the City of Boise.
(c) The second transfer consisted of land for a new line from Eogerson, Idaho, to Wells, Nevada, acquired from the Citizens Eight-of-Way Committee of Twin Falls, Idaho. It was made in connection with the construction of an extension of the rail line from Eogerson to Wells, a distance of some 94 miles; side tracks of about 13 miles; terminal facilities at Twin Falls and Wells; and an elevated crossing over the Southern Pacific line at Wells.
(d) The Citizens Eight-of-Way Committee of Twin Falls conveyed the land to the railroad to provide more direct outlet for agricultural .products of Southern Idaho to California markets, and to open up for tonnage shipments numerous copper mining properties adjacent to the new line.
159. In computing plaintiff’s excess profits tax liability for 1942, the Commissioner of Internal Eevenue included in the Oregon Short Line’s accumulated earnings and profits as of January 1, 1940, and January 1, 1941, and its total assets for 1940 and 1941, the amounts of $1,076 and $28,338.80 relating respectively to the two transfers described in the foregoing finding. (See finding 145(a), items 3 and 4.)
160. It is concluded that the two transfers described in finding 158 were not payments for a specific thing or a service, were bargained for, resulted in a benefit to the transferee in an amount commensurate with their value, and the assets transferred were employed in the production of further or additional income. Also, the transferors did not seek or obtain a direct benefit to themselves, but rather an indirect benefit to the community at large, thereby manifesting a purpose to enlarge the capital of the transferee. The transfers effected contributions to capital.
161. In 1928, a citizens committee paid $100,000 to acquire the Saratoga and Encampment Eailroad and transferred it to the Saratoga and Encampment Valley Eailroad Company, a subsidiary of the plaintiff incorporated on May 5, 1928, in Wyoming, in consideration of plaintiff’s promise to operate the railroad permanently.
*134162. Operation of the railroad referred to in the foregoing finding had been terminated earlier that year. The committee paid the $100,000 in order to obtain a resumption of rail service.
163. In computing plaintiff’s excess profits tax liability for 1942, the Commissioner of Internal Revenue included this $100,000 in the Saratoga and Encampment Valley Railroad Company’s accumulated earnings and profits as of January 1, 1940, and January 1, 1941, as well as its total assets for 1940 and 1941. (See finding 145(a), item 6.)
164. It is concluded that the transfer described in the two foregoing findings was essentially similar to the two transiera described in finding 160 and equally with those transfers effected a contribution to capital.
165. Pursuant to a contract of October 24, 1917, the Los Angeles & Salt Lake Railroad Co. relocated a portion of its main line, which adjoined the tailings dumps of the Utah Copper Co., near Garfield, Utah, and conveyed its abandoned right-of-way to the Copper Co., in consideration of which the Copper Co. conveyed land to the Los Angeles and Salt Lake for the new right-of-way, paid the expenses of the relocation, and paid to the Los Angeles and Salt Lake $19,760 for future maintenance of the relocated line plus $46,125 for the increased cost of operating the line.
166. The Utah Copper Company needed the additional land conveyed to it for expansion of its tailings dumps and the location of the Los Angeles and Salt Lake line of .railroad prevented the acquisition in a useful way. To accommodate the former, the railroad company agreed to relocate its line on land furnished by the Copper Company, which was to pay all the expenses of the relocation.
167. In 1919, the Los Angeles and Salt Lake credited its property investment accounts with the sum of $196,564.27 as the cost of that part of its line of railroad which 'had been abandoned, charged to its property investment accounts the sum of $323,882.11 as the cost incurred by the Copper Company in the construction of the new and relocated section of railroad, and credited to its profit and loss account “606-*135Donations,” the sum of $127,317.84, being the difference between the above-mentioned amounts credited and debited, respectively.
168. In 1921, the Los Angeles and Salt Lake credited the sum of the cash payments of $19,760 and $46,125 to its account “Miscellaneous Credits,” and in a later year transferred this sum to its account “606-Donations.” On audit of the income tax return of the Los Angeles and Salt Lake for 1919, the Commissioner of Internal Eevenue included in income the aforesaid amounts of $127,317.84, $19,760 and $46,125. The Los Angeles and Salt Lake conceded that the item of $19,760 was taxable income and sued for refund in the Court of Claims on the ground that the amounts of $127,317.84 and $46,125 were not taxable income.
169. In Los Angeles & S.L.R.R. v. United States, 86 Ct. Cl. 87, 21 F. Supp. 347 (1937), this court held that the amounts of $127,317.84 and $46,125 were not taxable income on the ground that the contract was designed “to make the plaintiff whole in the transaction and to insure it against loss.”
170. In computing plaintiff’s excess profits tax liability for 1942, the Commissioner of Internal Eevenue included the aforesaid cash payments of $19,760 and $46,125 (but not the amount of $127,317.84) in the Los Angeles and Salt Lake’s accumulated earnings and profits as of January 1, 1940, and January 1, 1941, and its total assets for 1940 and 1941. (See finding 145 (a), item:5.)
171. The amounts of $127,317.84, $19,760, and $46,125 are included in the amounts received from private transferors set forth in finding 138(a) for the Los Angeles and Salt Lake Eailroad as of December 31,1939.
172. The defendant does not contest the treatment by the Commissioner of Internal Eevenue of the amount of $19,760 described in finding 170 for the stated reason that the Los Angeles and Salt Lake has paid an income tax with respect thereto.
173. It is concluded that the transfer of $46,125 was substantially identical with the transfers in class 1 and equally with those transfers did not effect a contribution to capital.
*136XI. EQUITY INVESTED CAPITAL
Index
Finding No.
1. Definition of the Issue...-... 174
2. Issuance of the Stock. 190
(a) Issuance of the Reorganization Stock. 190
(b) Issuance of the Post-Reorganization Stock. 207
3. Cash Assessments on Old Stockholders. 208
4. The Expert Witnesses... 211
(a) Qualifications of the Plaintiff's Expert. 212
(b) Qualifications of the Government’s Expert. 218
6.Valuation Dates. ... 223
(a) Plaintiff's Valuation a Valuation as of 1907.-. 223
(b) Plaintiff’s Underlying Theory of a Reconstitutive-Reorganization.. 227
(c) The Valuation Dates Utilized by the Government’s Expert. 235
(d) Conclusions as to Valuation Dates.... 236
6. The Dollar Valuation of the Reorganization Stock by the Government’s Expert.-. 241
7. Pre-Receivership History...... 242
(a) 1869 — Construction and Capitalization. 242
(b) Expansion: Mergers. 247
(c) Expansion: Construction. 255
(d) Growth of Competition. 260
(o) The United States Pacific Railway Commission-.. 265
(f) Economic Conditions — 1869 to the Panic of 1893. 270
8. The Receivership of the U.P. — 1893-1898_-. 277
(a) Causes. 277
(b) Settlements. 282
(c) The Reorganization Plan. 288
(d) The End of Reorganization, January 31,1898. 292
(e) Receivership and the U.P.’s Branch and Subsidiary Lines. .. 297
9. Post-Reorganization Prosperity... 300
(a) National Prosperity. 300
(b) The U.P.'s Increasing Prosperity. 305
10. Approaches by the Government to Valuation of the Reorganization Stock. 326
(a) Prospects for Reacquisition of the Oregon Lines_____ 326
(i) History of the Oregon Lines. 326
(ii) The Oregon Lines in 1898. 332
(b) Stock Market Values. 337
(i) The common... 337
(ii) The Preferred. 344
(iii) Value Based on Stock Market Prices.... 348
(c) Net Asset Values. 361
(d) Values Based on Capitalization of Earnings.-. 366
(e) Values Based on Price-Earnings Ratios.. 370
(f) Comparison of Union Pacific Preferred with Othor Stocks.. 383
11. Conclusions on the Reorganization Stock. 384
12. Valuation of the Post-Reorganization Stock... 386
(a) The Exchange of U.P. Stock for Oregon Stock. 386
(b) The Dollar Valuations by Defendant's Expert of the U.P. Post-Reorganization Stock. 390
(c) Value of the Oregon Short Line at the Time of the Exchange Offer.. 391
(i) Value of the Oregon Itself. 391
(ii) Value of the Oregon’s Holdings in Oregon Navigation. 398
(iii) Defendant's Conclusion on the Value of the Oregon Short Line and its Holdings.....-. 407
(d) Value of the U.P. at the Time of the Exchange. 408
(e) The Value of the Several Blocks of Shares Issued in the Exchange_ 409
(i) The Stock Issued in 1899. 409
(ii) The 3,688 Shares Issued December 2,1899-June 30,1900. 418
(iii) The 2,636 Shares Issued July 1, 1900-June 30,1901_ 420
(f) Price-Earnings Ratios and Other Comparisons for 1899-1901. 425
13. Court's Findings on Value. 430
1. Definition of the Issue
174. The plaintiff’s predecessor, The Union Pacific Railroad Company, sometimes herein called the predecessor, was incorporated on July 1,1862, by tbe Act of July 1,1862, c. 120, 12 Stat. 489. In 1880, when it was consolidated with the Kansas Pacific and Denver Pacific, its name was changed *137to The Union Pacific Kailway Company. The Company was in receivership between 1893 and January 31, 1898, and was succeeded by the plaintiff, as will appear. Both plaintiff and its predecessor are for convenience herein often called the “U.P.”
175. Plaintiff, the Union Pacific Railroad Company, was incorporated July 1, 1897, under the general laws of the State of Utah, for the principal purpose of acquiring the property, rights and franchises of The Union Pacific Railway Company. In addition, plaintiff had the power to acquire the lands and land grants, and all rights with respect thereto, of The Union Pacific Railway Company or of its constituent companies, and to construct, purchase or otherwise acquire and operate branches, extensions and connecting or auxiliary lines.
176. As more fully set forth hereinafter, plaintiff acquired the property, rights and franchises of The Union Pacific Railway Company and certain of its constituent companies, including certain branch, extending, connecting and auxiliary lines.
177. Upon the conclusion of the receivership of its predecessor and pursuant to the reorganization plan, the plaintiff issued to the predecessor’s reorganization committee, for money and property of the predecessor acquired by the committee, $90 million in 4 percent first mortgage bonds, 610,000 shares of common stock, par value $100, with an aggregate par value of $61 million, and 750,000 shares of preferred stock, par value $100, with an aggregate par value of $75 million, for distribution to the predecessor’s stockholders and other claimants. The stock so issued — both the common and the preferred shares — is herein called the reorganization stock, and is the first of two blocks of stock whose valuation is the subject of the instant case.
178. During the fiscal year ended June 30, 1915, plaintiff cancelled 136 shares of its common stock, with a par value of $13,600, and 258 shares of its preferred stock, with a par value of $25,800, reducing the reorganization stock outstanding as of June 30, 1915, to 609,864 shares of common with a par value of $60,986,400 (609,864 shares at $100 par) and *138749,742 shares of preferred with a par value of $74,974,200 (749,742 shares at $100 par).
179.Pursuant to an offer made by plaintiff, following the reorganization, to issue one share of its common stock, par value $100 per share, for one share of the common stock of the Oregon Short Line Railroad Company plus $3, plaintiff issued its common stock as follows:
The foregoing 273,493 shares will, either intact or minus 150 shares whose value has been agreed, herein be called the post-reorganization stock, and is the second of the two blocks involved in this case.
180. By other means, plaintiff acquired prior to June 80, 1908, an additional 14 shares of Oregon Short Line common. As of June 30, 1908, no shares of Oregon Short Line common were in the hands of the public; plaintiff owned the entire amount outstanding, having a par value of $27,350,700, and the Oregon Short Line owned $109,400 par value of its common stock.
181. On its excess profits tax return for 1942, plaintiff stated the money paid in for stock, or as paid-in surplus, or as a contribution to capital to be $321,834,100, or the par value of $100 per share for the 3,218,341 shares of common and preferred stock outstanding during 1942, of which 1,633,099 shares of common and preferred were originally issued in connection with the reorganization of the Union Pacific and the acquisition of the Oregon Short Line Railroad Company.
These 1,633,099 shares were comprised of the remaining outstanding reorganization stock, that is, (1) 609,864 of the 610,000 shares of common and 749,742 of the 750,000 shares of *139preferred which had been issued as above-mentioned, pursuant to the reorganization plan, and (2) the 273,493 shares of common issued as above-mentioned between 1899 and 1908 to acquire the common shares of the Oregon Short Line Railroad Company.
In other words, plaintiff took the position in its tax return that the fair market value, when issued, of the then remaining outstanding shares of reorganization and acquisition stock, and thus that the fair market value, when issued, of each of the shares comprising the reorganization stock and the acquisition stock was its par value, $100 per share, with a total value of $163,349,300 for the originally issued 1,633,493 shares of reorganization and acquisition stock or a total value of $163,309,900 for the 1,633,099 remaining outstanding shares of reorganization stock and the acquisition stock.
182. Upon audit the Commissioner of Internal Revenue, determining the fair market value for the shares to be less than the plaintiff’s valuation, reduced the item of money and property paid in for stock by $83,790,860 or from $321,834,100 as claimed by plaintiff on its excess profits tax return to $238,043,240. Said decrease was determined by the Commissioner to be attributable to the fair market value of plaintiff’s preferred and common stock issued incident to the reorganization and to the acquisition of the Oregon Short Line Railroad Company common stock, that is, the reorganization and post-reorganization stock. The decrease was thus a decrease to $79,'519,040 from the $163,309,900 at which plaintiff had valued 1,633,099 shares still outstanding reorganization and the post-reorganization stock.
The Commissioner determined that the aggregate fair market value of the reorganization stock was $67,029,150 and that the aggregate fair market value of the post-reorganization stock was $12,489,890.
It does not appear, and it is not material for purposes of comparisons, whether the Commissioner deemed the proper number of shares to be valued 1,633,493 or 1,633,099 and thus whether he valued the number of the reorganization and post-reorganization shares originally issued or as reduced by the cancellation of 394 shares (136 common and 258 prefered). *140It will henceforth, be assumed for purposes of comparisons that the Commissioner valued 1,633,493 shares. In any event the Commissioner determined the fair market value of stock valued by plaintiff at $163.3 million, to be $79.5 million, or less than 50 percent of plaintiff’s valuation.
183. The issue is the valuation of the reorganization and acquisition stock for purposes of computation of plaintiff’s excess profits tax credit for 1940 through 1942 based upon invested capital. The standard for determination of value is, as determined in the conclusions of law, the fair market value at the time of the issuance of the stock.
“Fair market value” is henceforth sometimes abbreviated to “value”; “value” when hereinafter used refers to “fair market value,” unless á different meaning appears from the context.
184. Solely for purposes of the issue of valuation, it is agreed that the 150 shares of acquisition common issued after June 30, 1901, for Oregon Short Line common stock had a fair market value when issued of $175 per share.
185. The 610,000 shares of reorganization common, the 750,000 shares of reorganization preferred and the 273,493 shares of acquisition common, a total of 1,633,493 shares, are the shares issued for the money and property paid in, and those shares are thus the shares whose valuation determines money and property paid in, without regard to any cancellation of such stock thereafter.
Accordingly, while these findings will address themselves to per share values, the blocks of stock to be considered and aggregated will be the blocks originally issued, without regard to the cancellation of 394 shares after the original issuance.
186. 'Plaintiff contends that the value of the reorganization and acquisition common was $175-200 per share and the value of the reorganization preferred was par or $100 per share.
These values ($200 for the common and $100 for the preferred), when applied to the total of 1,633,493 originally issued reorganization and acquisition shares give an aggregate total valuation of $251,698,600.
*141Plaintiff thus now puts a value of $251.7 million on the stock it valued in its return at $163.3 million.
187. The Government has in an additional defense alleged that the Commissioner had only partly eliminated the overstatement in money and property paid in for stock; and that the fair market value of the reorganization stock was $47,450,000 and the value of the acquisition stock was $10,000,000 or less, a total of $57,450,000.
More specifically, on the trial, the Government has contended that the value of the 610,000 shares of reorganization common was $22.50 per share or an aggregate of $13,725,000; that the value of the 750,000 shares of reorganization preferred was $45 per share or an aggregate of $33,750,000; and that the value of the 273,343 shares (all but the last-issued 150) of the 273,493 acquisition shares issued at various times between 1899 and 1901 ranged from $35 to $112 or an aggregate of $10,046,021.50, bringing the aggregate value contended for by the Government to $57,521,021.50.
The Government thus now puts a value of $57,521,021.50 on the stock which the Commissioner of Internal Revenue valued at $79,519,040. The former figure is 72.3 percent of the latter; the latter is 138.2 (more precisely 138.24344) percent of the former.
188. The various valuations are
$251.7 million — plaintiff’s valuation contended for on trial
$163.3 million — plaintiff’s valuation in its return
$79.5 million — The Commissioner’s valuation
$57.5 million — the Government’s valuation contended for on trial
189. A comparison of the per share valuations contended for by the Government with the per share valuations derived from the Commissioner’s valuation is as follows. The pro forma per share valuations by the Commissioner are obtained by multiplying the Government’s per share valuations of the reorganization stock by 141.19 percent, and the Government’s per share valuations of the post-reorganization stock by 124.33 percent, these being the percentages by which the Commissioner’s aggregate valuations, respectively, exceed the Government’s aggregate valuations.
*142
2. Issuance of the Stock
(a) Issuance of the Reorganization Stock
190. On October '5,1898, 31 years after the original Union Pacific was incorporated, three of its stockholders filed a complaint in the Circuit Court of the United States for the District of Nebraska, alleging that the company would fail to meet its expenses and charges in 1893 by at least $3 million and that the company was insolvent, and asking that receivers be appointed for the entire system. On October 13,1893, the court issued an order appointing receivers as requested in the complaint.
191. On January 21,1895, the trustees of the Union Pacific first mortgage filed in the same court a bill to foreclose the mortgage. A decree of foreclosure was issued on July 29,1897.
192. Under date of October 15, 1895, a committee headed by Louis Fitzgerald published a plan for the reorganization of the railroad. It proposed that a new company (or a reorganized Union Pacific Railway Co.) should succeed to main lines and lands covered by the mortgages included in the plan and that the new company should issue to the reorganization committee $100 million in first mortgage 4 percent bonds, 750,000 shares of $100 par value noncumulative preferred stock, and 610,000 shares of $100 per value common stock. A major portion of the new securities were to be distributed by *143the reorganization committee to holders of the securities of the plaintiff’s predecessor.
193. On January 29, 1897, the United States filed in the court referred to in finding 190, a bill to foreclose a lien existing under certain statutes against the Union Pacific line from Council Bluffs to Ogden. A decree of foreclosure was issued on July 29,1897.
194. Pursuant to the two decrees of foreclosure, the railroad (except for the lines and lands of the Kansas Pacific and Denver Pacific) was sold on November 1,1897, to Louis Fitzgerald and Alvin Krech, as purchasing trustees for the reorganization committee.
195. Pursuant to the decree of foreclosure under the suit filed by the United States, the reorganization committee paid, for the assets involved, $40,253,605.49 in cash, as follows:
196. Pursuant to the decree of foreclosure of the Union Pacific first mortgage, the reorganization committee paid $50,637,435 for the assets involved. Of this amount, $5,373,249 was paid in cash and the balance was apparently paid by use of the first mortgage bonds deposited with the committee.
197. On January 17,1898, the purchasing trustees assigned their two bids at the sale to the plaintiff. On January 22, 1898, two deeds were executed, conveying to the plaintiff the property sold on November 1, 1897. One of the deeds was executed by the special master, the purchasing trustees and the predecessor and the other (on the foreclosure under the first mortgage) ) by the special master, receivers, trustees, the purchasing trustees and the predecessor.
198. Pursuant to the plan of reorganization, plaintiff issued $90 million in first mortgage bonds and the reorganization stock (750,000 shares of preferred stock and 610,000 *144shares of common stock) to the reorganization committee for money and property acquired by the reorganization committee.
199. On January 31, 1898, in the foreclosure proceeding brought by the United States, the court issued a decree approving and confirming the payment of the purchase price, the assignment of the bid to the plaintiff and the execution and delivery of the deed conveying to the plaintiff the property sold on November 1, 1897.
209. On January 31, 1898, the two deeds of January 22, 1898 and plaintiff’s first mortgage were recorded at Omaha in Douglas County, Nebraska.
201. On January 31,1898, the Mercantile Trust Company, the depositary under the plan of reorganization, advertised that on and after January 31, 1898 it was prepared to issue plaintiff’s new securitites (its bonds and preferred stock) in exchange for certain old bonds and the purchase money certificates, and on that day the Mercantile Trust Company in fact issued some of the new securities.
202. At midnight at the end of January 31,1898, plaintiff took possession of the property sold on November 1,1897, including the main line from Omaha to Ogden.
203. On February 9, 1898, the Mercantile Trust Company advertised that it was prepared as of that date to issue plaintiff’s preferred and common stock in exchange for certificates of deposit of the common stock of The Union Pacific Railway Company.
204. The plan of reorganization provided that it could be abandoned by the committee at any time and included a procedure for making substantial changes in the plan.
205. By reason of the events of January 31,1898, described in findings 199-202, on that day the plan was no longer contingent and could no longer be abandoned or changed substantially.
206. January 31, 1898 is the date of the issuance of the reorganization stock.
(b) Issuance of the Post-Reorganization Stock
207. The dates of the issuance of the acquisition stock are as stated in finding 179.
*1453. Gash Assessments on Old Stockholders
208. Under the plan of reorganization of the Union Pacific Railway Company dated October 15, 1895, the common stock was assessed at the rate of $15 per share. A holder of one share of the old common who paid the $15 assessment was entitled to receive one share of the new common plus 15/100ths of one share of the new preferred. In other words each recipient of 1 new share of common was assessed $15; a total of $9,130,275 was received on account of these assessments.
209. As appears in finding 179, the post-reorganization stock — all common — was issued on the basis of 1 new share (acquisition common) for 1 share of Oregon Short Line common plus $3. In other words, each recipient of one share of post-reorganization common was assessed $3. The sum of $815,820.62 was received on account of these assessments.
210. The foregoing cash assessments of $15 and $3 were part payment for the shares being issued or, put otherwise, the shares being issued were issued in part for property and in part for money, the respective cash assessment. The shares were thus being issued for a combination of money and property and as determined in the conclusions of law the money — the cash assessments — is not to be included in equity invested capital in addition to the fair market value of the stock which was issued.
4. The Expert Witnesses
211. The value of the stock was the subject of testimony by an expert witness for each party. The direct testimony of these experts was exchanged before trial and the witnesses began their testimony at the trial with cross-examination. Both witnesses qualified as entitled to testify to their opinions.
(a) Qualifications of the Plamtiff's Expert
212. Plaintiff offered the testimony of Mr. Alexander Sachs as its expert witness on the stock valuation issues. Mr. Sachs is an independent economist, investment adviser and busi*146ness consultant. He has not held himself out to the public as an investment adviser and is not registered as such with the SEC.
213» He has testified before this court as a witness for the United States, in a proceeding to determine the value of common stock for purposes of the World War II Excess Profits Tax Act, specifically the value at which such stock should be included in a taxpayer’s equity invested capital for purposes of determining its excess profits tax credit. He also has testified before the Federal Communications Commission, the New York Public Service Commission, and the Pennsylvania Public Utilities Commission regarding a fair rate of return.
214. Mr. Sachs was graduated from Columbia University in 1912, and shortly thereafter became an employee of Lee Higginson & Company, an investment firm, working on the effect of the money market on the purchase and issuance of various securities.
In 1916 he undertook studies in jurisprudence and administrative law at Harvard; and in the following year he assisted Mr. Justice Brandéis and Professor Felix Frankfurter in work related to foreign aff airs.
215. During the early 1920’s Mr. Sachs was employed in studying individual investment situations.
In 1929 he became the chief economist and director of investment research for a diversified investment fund, founded by Lehman Brothers, which ultimately became the Lehman Corporation. As director of investment research for the Lehman Corporation he directed staff members engaged in investment research, and reviewed problems in economics, banking and the economic outlook for particular industries and general economic conditions. He was also a member of the portfolio committee of the Lehman Corporation. He was a director of the Lehman Corporation from 1931 to 1959 and a vice president of that company from 1936 to 1942.
In 1933 he headed the Economic and Planning Division of the National Eecovery Administration. In 1956 and 1957 he was a special consultant to the Federal Eeserve Board on problems of credit and credit institutions. He has par*147ticipated in various governmental and industrial committees and conferences.
218. Mr. Sachs has also rendered advisory and consultant services on economic and investment problems as well as on industrial management problems to a major oil company, a mid-western insurance company, a New York bank, a prominent French bank and to various investment management firms.
217. He has at various times been a member of various learned societies, including the American Economic and Statistical Association, the Econometric Society, the Society of Security Analysts, the American Political Science Association, the Boyal Economic Society, and the Conference of Business Economists. He has lectured at the University of Virginia, Swarthmore, St. John’s College and the Academy of Political Science. Mr. Sachs has not published any books or articles on the valuation of securities. He has published numerous articles in professional journals; the titles and subjects of some are: fcnancial dynamics of u.s. Recovery, 1937-38; logistics petroleum pipeline system for war prosecution, 1942; restoring economic-cultural bases foreign INVESTMENT, 1950; CRITIQUE OF THE CYCLE THEORY, 1953 J inflation as source and challenge, 1958; also chapter contributions to America’s recovery program, oxford university press, 1934; and to moral principles of action, Harper’s 1952.
(b) Qualifications of the Government's Expert
218. The Government offered as its expert witness on the stock valuation issues, Mr. Arthur Jansen, a general partner of W. E. Burnet & Company, a New York City brokerage firm. Mr. Jansen is a specialist in the analysis and valuation of railroad securities.
219. He has testified as an expert witness in four cases before the Interstate Commerce Commission and one case in this court. His appearances before the ICC were on behalf of railroads or railroad stockholders. One of the ICC cases concerned the division of freight rates on transcontinental shipments. He was retained by a group of eastern railroads to present various financial aspects of ten eastern *148roads and to make comparisons with seven Mountain Pacific roads. His other testimony before the IOC concerned the fairness of plans of railroad recapitalization or railroad reorganization. His previous appearance in this court was on behalf of the Government with regard to the fair market value at the time of issuance of the preferred stock of a natural gas transmission company, issued in 1929 through 1931 in the construction of a pipeline.
220. Mr. Jansen attended Columbia College and the Columbia School of Business, graduating with a degree of Bachelor of Science in 1927. He has worked for Wall Street firms in investment research since 1930. In 1930 he began research work for a member firm of the New York Stock Exchange. In 1938, he went with his present firm as head of the research department. He became a partner in 1943 and since then has been the partner in charge of research activities.
221. His primary interest has been the railroad industry, an interest dating back to railroad courses he took in college. Since 1937 he has published at least 400' articles in Barron's, a widely read financial weekly; in recent years he has contributed four articles a year. About 90 percent of these articles have been on railroads, the remainder having dealt with public utilities and industrials. In the 1940’s many of his articles dealt with reorganized railroads, setting values for proposed new securities under varying conditions, and the recovery he foresaw for the bonds of railroads which had been in bankruptcy in the 1930’s and the depressed medium-grade bonds of other railroads. For some years he also wrote for his own firm a monthly letter on railroads, devoted mainly to trends in the industry and current developments. For several years in the 19'50’s he served as editor of the Annual Railroad Survey of “The Investment Dealers Digest.”
In connection with his interest in the railroad industry, Jansen has made numerous inspection trips. He has interviewed many railroad executives and carries on extensive correspondence with them. He also attends meetings of the New York Society of Security Analysts on railroad matters and *149does extensive reading on current developments in the railroad industry.
222. He taught financial analysis of railroads 'and railroad securities at the New York University Graduate School of Business from 1943 until 1955 or 1956, corporation finance at Columbia in the 1950’s, analysis of industrial securities at the American Institute of Banking, and analysis of industrial and public utility securities at a summer course of the Graduate School of Banking of the American Bankers Association.
He is a long-time member of the New York Society of Security Analysts and was chairman of its Railroad Committee from 1948 through 1950. In 1968 he passed the examination of the Financial Analysts Federation to qualify as a Chartered Financial Analyst.
5. Valuation Dates
(a) Plaintiff’s Valuation a Valuation as of 1907
223. Mr. Alexander Sachs, the plaintiff’s expert, testified that
(a) “The 749,742 shares of Union Pacific preferred when issued incident to its reconstitutive-reorganization, had a fair market value, as evaluated by contemporaneously governing money rates, related to a 4 percent yield, of $100 per share.”
(b) “The 883,357 shares of Union Pacific common stock [a reference to the reorganization common and to the post-reorganization stock, which was all common] when issued incident to its reconstitutive-reorganization, had a fair market value or investment worth, figured conservatively, in the range of $175 to $200 per share.”
224. The witness derived his dollar figures for the preferred from a contemporaneous 4 percent money rate and for the common from price-earnings ratios for eight selected railroads during 1901-1907, multiplied by the total earnings per U.P. share as determined by him. The valuations of both preferred and common, however, were a product of the witness’ concept of a “reconstitutive-reorganization” which began in 1893 and ended in 1907.
*150225. (a) The witness’ theory, which he said was held or espoused by no one else, was that only the financial or technical reorganization of Union Pacific took place on January 31,1898, and that the true reorganization was a “recon-stitutive-reorganization,” a term apparently coined by him, which ended in 1907, a date vainly sought in plaintiff’s post-trial brief to be amended to 1905.
(b) In his prepared direct examination the witness testified, on the subject of the duration and. terminal date of the reconstitutive-reorganization, that “the reconstitution was, for all intents and purposes, accomplished at the close of the 1907 fiscal year.”
(c) At the trial he testified that “[i]t is a terminal time span, the earliest part of which is the post-Northern securities case and the retirement of the directors of the Union Pacific from the board and the ensuing collaboration between the Northern Pacific and the Union Pacific in the Clearwater district. . . . That date was in 1905, around May, I think, but it extended through the ensuing year . . . through 1906 . . . into the end of the fiscal year 1907.”
(d) The testimony of the plaintiff’s expert must be taken to be that the “reconstitutive-reorganization” ended in 1907. In part this conclusion is rested on the actual words of the testimony and in part on the substantial reliance by the witness, for his valuation, on earnings of other railroads for the period 1901-1907 as a source of ratios to be applied to earnings per share of the U.P. over the period 1901 through 1907, and on other data with respect to groups of years ending in 1907.
226. The valuations by plaintiff’s expert were thus valuations as of 1907, not as of 1898 and not as of 1898 taking into account then foreseeable events. Only if one could in 1898 foresee all events to 1907 could his valuations be described as valuations as of the earlier date tailing into account future events so far as then foreseeable.
(b) Plaintiff's Underlying Theory of a Reoonstitutive-Reorganization
227. The concept of a reconstitutive-reorganization underlies the valuation of plaintiff’s witness and his utilization of *1511907 as the date as of which he valued the stock. This concept is the subject of the following findings.
228. A valuation of the U.P.’s common and preferred shares, the plaintiff’s expert testified, requires that full attention be given the following fundamental and readily apparent facts concerning the construction, receivership, and reconstitutive-reorganization of the U.P., which he felt have for the most part largely been ignored in the great body of literature with respect to the road:
(1) The so-called “effective” date for the “financial reorganization” of the U.P. as of January 31, 1898 cannot be utilized as a proper date of valuation of the reorganized company inasmuch as:
(a) The reorganizers of the U.P. were dealing with a company which had become dismembered during the course of its receivership, and did not consider their task of reorganization to have been completed until that point in time when Union Pacific was fully reconstituted into a functioning railroad system. Thus the reorganizers of the U.P. would never have undertaken its reorganization, which involved the expenditures of great sums of money, unless they had been and were assured, among other things, that during the course of, and as a part of, that reorganization the Oregon Short Line and Oregon Railroad & Navigation Company, the U.P.’s gateway to the Northwest, would be reintegrated into the U.P. system;
(b) The pre-receivership competitive challenges thrown up to the Union Pacific Railway by the Chicago, Burlington & Quincy Railroad, which continued to persist throughout the U.P.’s receivership, and culminated in the Hill-Morgan combination of the Northern Pacific and the Great Northern Railroads, constituted a threat to the U.P.’s very survival, a fact which was well known to the reorganizers of that company who in the course of such reorganization were required to, and did, deal with such threat as an integral part thereof;
(c) The threat of the transfer of majority control of the Southern Pacific to a competitor of the U.P. had to be effectively overcome by the reorganizers of the U.P. and until *152such threat had been met no true and concise determination of the value of the reorganized company could be made;
(2) The receivership of the U.P. and its various branch and auxiliary lines was not inevitable, but rather was undertaken as a means of solving problems inherent in the original charter of the U.P., which were occasioned 'by the high cost of the road’s construction during the inflationary Civil War years, and which arose from the oppressive burden of the U.P.’s indebtedness to the Federal Government; and
(3) The fact that there was, just prior to U.P.’s receivership, and continuing throughout its ensuing reconstitution, a shift in the ownership of its equity from domestic to foreign holders, who were predominantly British.
229. Plaintiff’s expert further testified that the U.P.’s re-constitutive-reorganization was to be distinguished from its financial reorganization, as follows:
(a) The U.P.’s reorganization was singular and distinct from those of other railroad reorganizations which were effectuated during the last decade of the 19th century and the first decade of the 20th century. The preponderance of other railroads reorganized during the aforementioned period remained intact as physical transportation systems during their respective receiverships. Their receiverships were brought about due to an inability to meet creditor obligations. In turn such receiverships were in each case replaced by “financial reorganizations” which were directed towards, and in fact accomplished, a rearrangement of such companies’ financial structure in order to meet their creditors’ demands.
(b) On the other hand, the reorganization of the Union Pacific was to be contrasted with the said “financial reorganizations,” undergone by various railroads. The U.P. did not during its receivership undergo a mere readjustment of its capital structure to meet creditor demands. Rather it was subjected to an extensive dismemberment and disintegration, and therefore the effective date of its “financial reorganization,” as of early 1898, applied to only a very small portion of the transportation system which in fact was reorganized. From the standpoint of economic functioning, that small fraction of road, which underwent a “financial reorganiza*153tion” in early 1898, was in no way related to, nor could it be equated with, the great system which existed during the U.P.’s pre-receivership years. That integrated system, the true economic entity, was reestablished later through its re-constitutive-reorganization. It was to this great system and not to its component parts that an investor would look. The small fraction of road which resulted from the early 1898 “financial reorganization” was in a state of vulnerability to accentuated competition from neighboring transportation systems, and thus could not have been, nor was it, the economic entity which was the goal of the reorganizers of the U.P. Accordingly, it is to 'be concluded that as of the date of its “financial reorganization,” the U.P. had in fact only begun to embark on its true reorganization, its “financial reorganization” being merely the overture and prelude to the economic reconstitution and real reorganization of its requisite prior parts, and the rehabilitation of its competetive functioning in the post-receivership period. That competition was not only for local and trunk line traffic, but also for transcontinental traffic with competing systems, which systems for the most part had gone through their own individual receivership structurally intact, without the fractionation peculiar to the U.P. Thus while its competitors were reorganized as a unit, the foreclosure of the liens of the Union Pacific branch and auxiliary lines required a multi-step reorganization before the economic unit could in fact be reorganized.
(c) Accordingly, it is to be concluded that the reorganization of Union Pacific was not completed until that point in time when the system had been reconstituted, and the competitive threats which had existed prior to, and during receivership, had been effectively dealt with. The earliest possible point in time at which the reorganization of the U.P. could be considered completed was the latter part of 1905, when friendly relations were restored between the U.P. and the Northern Pacific, continuing to the end of the fiscal year 1907. See also finding 225.
230. It is found that the witness testified that the reorganization was completed at the end of the fiscal year 1907.
231. Plaintiff’s expert further testified that
*154(1) The reorganization of the U.P. necessarily encompassed tbe reintegration of the Oregon’s lines into the U.P.’s system, as follows:
(a) It is to be repeatedly emphasized that the reorganizers of the U.P. from the outset worked to bring about a reconstitution of the system as it existed in the pre-receivership time, i.e., to bring back into the system on a satisfactory basis all of its important branch and auxiliary lines which had been cut off during the receivership, and thereby restore to the U.P. its connection with the Pacific Ocean.
The U.P.’s receivership brought about the complete dismemberment of the system, and its reorganizers had, from the outset, no less a goal than the reintegration into the system of the Oregon Short Line Railroad, the Oregon Railroad and Navigation Company, the Omaha and Republican Valley Railroad, the Union Pacific Lincoln & Colorado Railroad, the Kearney & Black Hills Railroad, the Junction City & Fort Kearney Railroad, the Julesburg Branch of the Union Pacific, Denver & Gulf Railroad, the Carbon Cut-off Railway, the Echo & Park City Railway, the Solomon Railroad, and the Salina & Southwestern Railway.
An important factor leading to the conclusion that the reorganization contemplated reacquisition of the various aforesaid lines of road, was that the prereceivership U.P. controlled or owned some 7,681.72 miles of railroad, of which it had lost during receivership some 5,832.43 miles, which included its connection with the Pacific Ocean, and therefore, as of the date of its “financial reorganization,” consisted of only 1,849.29 miles of railroad.
Another important f actor of great weight was the manner in which the reorganizers of the road reintegrated the various branch and auxiliary lines, as well as the speed with which such reintegration was accomplished. The 1891 Collateral Note Trust Indenture, to which had been pledged, as security, all of the stocks and bonds of Union Pacific Railway’s auxiliary and branch lines, played a large part in the plans of the reorganizers. More specifically, as early as 1895 the reorganizers of the Union Pacific commenced purchasing from the trustee of the 1891 Trust much of the aforesaid collateral, acquiring such securities in the name of the reorgani*155zation committee for the account of the new company. All of the various acquisitions made by the reorganization committee from the trustee under the 1891 Indenture were made for the account of the Union Pacific Railroad, the purpose behind such acquisitions being to reintegrate into the U.P. those profitable branch and auxiliary lines which had been lost during receivership.
(b) The U.P.’s reorganization from the outset looked to the reacquisition of the Oregon lines. In the final settlement worked out 'between the reorganization committee and the Federal Government with respect to the Government debt, the reorganizers planned to secure for the benefit of the U.P. the various securities of the Oregon lines which were held as collateral in the Morgan-Drexel Trust of 1891.
The reorganization committee from the outset looked to reacquisition of the Oregon lines as part of their reorganization scheme. A failure to carry forward the reorganization plans would have adversely affected many other large affairs and interests in which the reorganizers were involved; particularly the comprehensive plans which had been made by them to recover the lines lost to the old Union Pacific system, plans which included an agreement to purchase the Oregon Short Line stocks, held by the firm of J. P. Morgan under an old trust indenture of 1891. In the fall of 1897 the reorganization committee “had gone too far to be able to retrace its steps.” Accordingly, the reorganizers of the road acceded to the demands of the Federal Government, paying in full Union Pacific’s indebtedness both for principal and interest.
(c) In about December of 1898 the U.P. announced that it was to absorb the Oregon Short Line through an exchange of its common stock. The act of acquisition of the Oregon lines was not to be regarded as a new development nor as introducing into the reorganization a new factor. It was only the method of carrying out the acquisition which constituted a new feature. The fact that a large block of Short Line stock had been purchased in 1897 by the reorganization committee from the Morgan Trust and was held in the interests of the Union Pacific has been well established for a long time. The investment public had long been aware of the fact that *156the reorganization of Union Pacific necessarily carried with it a reacquisition and reintegration of the Oregon lines.
232. The plaintiff’s expert further testified that the reorganization of the U.P. necessarily encompassed the reor-ganizers’ plans for dealing with pre-receivership challenges to its transcontinental role as follows:
(a) Another major factor, as noted above, in.determining the point in time at which the U.P.’s reorganization was completed, was the manner in which its reorganizers dealt with threats to the U.P.’s transcontinental position by competing roads. The first of these threats was the possibility that major control of the Southern Pacific would fall into the hands of a competitor. The second of these threats took the form of the pre-receivership challenges of the Chicago, Burlington & Quincy Eailroad, which continued to persist throughout Union Pacific’s receivership, and culminated in a settlement between the U.P. and the Hill-Morgan combination. Had not both of these problems been overcome during the course of reorganization, the U.P. would have been reduced to the position of a trunk line without feeders of its own, dependent for freight upon traffic arrangements Which it might make with rival systems.
The various groups of security holders within the U.P. system struggled to put themselves in position to form alliances with other systems should the U.P. be broken up. It would be utterly false and erroneous to attempt to evaluate the U.P. as of the date when it emerged from its so-called “financial” reorganization, inasmuch as at that point in time it merely constituted a truncated fragment, nowhere resembling its pre-receivership identity or the entity which its re-organizers, officers and faithful investors envisioned from the outset as the system which would emerge from the true reorganization.
(b) The Southern Pacific and the Central Pacific were important to the U.P. The U.P. in early 1901, put the keystone to its arch through the purchase of control of Southern Pacific, thus permanently assuring to it possession of the Central Pacific connection. By 1901 the U.P. had determined on the purchase of Central Pacific or, in the alternative, the construction of a new line from Ogden to San Fran*157cisco. The acquisition by Union Pacific of Southern Pacific was to protect the System from further threats of truncation.
The opportunity afforded the U.P. to acquire a controlling interest in Southern Pacific must be considered to have 'been a defensive move on its part to protect the System which was then in the final stages of its reconstitutive-reorganization.
The acquisition of Southern Pacific was to protect and maintain the position of the System, safeguard its future against combinations of other lines, which, should they become hostile, might divert its business by changes in the existing channels of transportation.
(c) With respect to the Chicago, Burlington & Quincy threats, problems arose in the late 1880’s between the U.P.’s management and the management of the Burlington. During the period of time wherein the U.P. was attempting to extricate itself from the problems of the Government debt, great obstacles were thrown in its way by the Burlington. The campaign which was waged by the Burlington was calculated to bring about the insolvency of Union Pacific and destroy its transcontinental character.
The challenges thus presented to the U.P. by the Burlington carried over into 1901. This is evident in the fact that the tenure in office of President Perkins of the Burlington did not terminate until 1901. Coupling this fact with the fact that it was during the closing years of Perkins’ presidency of the Burlington that the negotiations which culminated in the Hill-Morgan combination took place, leads to the conclusion that there was a connection between the two incidents which was evident to the reorganizers of the U.P.
The acquisition by the U.P. of the preferred stock of Northern Pacific was a protective measure, undertaken to preclude the reduction of the U.P. to a trunk line without feeders. The purchase of a majority interest in the Burlington by the Great Northern and Northern Pacific was an invasion of U.P.’s territory.
The ultimate resolution of the problems created in the Hill-Morgan combination were not effectively dealt with until that point in time at which a settlement between the parties was effected. This did not occur until the Supreme Court ruled on the proper distribution to be made by the *158Northern Securities Company of the stock and securities of Northern Pacific which it had acquired during the early 1900’s.
In the light of the foregoing, it is to be concluded that reconstitution of the U.P. could not be considered complete until the dangers and threats to its transcontinental position had been surmounted. The earliest point in time at which the Burlington threat, as personified in the Hill-Morgan combination, could possibly have been settled was in 1905, when the U.P. and Northern Pacific joined in the construction of some 500 miles of road in the Clearwater District of Idaho, and the time extended to the end of fiscal 1907.
233. The plaintiff’s expert further testified that
The Union Pacific’s receivership was not inevitable but was undertaken to solve problems inherent in the original charter, as follows:
(a) An understanding of the true reorganization of the U.P. requires a thorough knowledge of the causes which underlay its receivership and its dismemberment during receivership ; that not until these factors are firmly understood can a true appreciation of the actual goals of the organizers of the road be possible and not until these goals are appreciated can the reconstitutive-reorganization be understood.
(b) One principal cause of the receivership and subsequent dismemberment of the U.P. was inherent in the original charter of the Pacific Railroads, which denied to the road the iegal power to effectuate any meaningful unification of its branch and auxiliary lines. Thus the road lacked the economic flexibility necessary to utilize such unification as a basis for refunding the existing debt obligations at interest rates lower than those with which the road was burdened at the time of original construction. Because of this restriction, the road was denied substantial financial advantages which other competing systems had available.
(c) The earnings power limitations which arose from the U.P.’s charter restrictions were not only known, but were of vital concern to both management and the long term equity investor over the pre-receivership period.
(d) The restrictions and their interrelationship with the problems of the Government debt ultimately led to the U.P.’s *159receivership. The receivership of the U.P. in 1893 was effectuated more to force a settlement with the Government than from actual necessity.
(e) Other transcontinental systems entered into the field of U.P. competitors. The financial impasse faced by the U.P. prevented unification with its subsidiary companies, and also prevented a refunding of its fixed charges and indebtedness due to the interdictions placed upon changes in its capital construction. The Thurman Act of 1878 required the U.P. to pay over to the Federal Government all of the transportation revenues derived on account of services rendered to the Government, for investment in the sinking fund and for annual payments to be applied on the Government debt.
(f) The charter restrictions are to be related to the extremely high costs incurred in financing the original construction of the U.P., as compared to the lower costs of construction which its competitors were able to take advantage of during the 1880’s.
An additional factor underlying the U.P.’s receivership was the advantage available to other railroads, direct competitors of Union Pacific in many instances, to obtain financing at the much lower interest rates which prevailed during the 1880’s. The Northern Pacific and Manitoba was built in 1887, and thus enjoyed the advantage of low construction costs, while the U.P. was financed during the post-Civil War inflation at a time when labor and capital were scarce and costs high.
(g) Had the U.P. been free of the constraints inherent in its original charter, it would have been able to refund the excessively high fixed charges which it bore as the result of wartime finance and, therefore, could have guaranteed, without the necessity of refunding through the collateral trust medium, the prior burdens which had been incurred by its branch or auxiliary lines. Furthermore, after other transcontinental systems entered into the field of U.P. competitors, U.P.’s defensive construction, undertaken to counter the competing transcontinentals, could have been accomplished at lower costs, and would not have resulted in excessive rate reductions. Each of the foregoing factors (inability to refund *160excessively high, fixed charges; necessity of utilization of collateral trust financing; high cost of defensive construction; and excessive rate reduction) were causes of U.P.’s receivership and dismemberment, and the reorganizers of the road during the course of their reorganization had effectively to deal with these factors so that they would never again work to the detriment of the System.
234. The plaintiff’s expert further testified that
(a) A second cause of the road’s receivership and subsequent dismemberment was the problems arising from the Government debt and the means which had to be utilized in order to meet that indebtedness.
Tracing the U.P.’s obligation to the Federal Government from inception up to and including its ultimate payment in full of that obligation and, for the aforesaid conclusion, using in great part the UP. annual reports to stockholders for the period which immediately preceded its receivership, it was noted that President Charles Francis Adams, as early as 1887, had adopted a program designed to accelerate a solution to Union Pacific’s political and economic problems. Further noted was Adam’s reference to the so-called Outh-waite Bill, which was then pending before the Congress, and which would have provided for a refunding of the Government indebtedness for some 50 years at a lower rate of interest. Highly significant was the Adams statement to the effect that the passage of this legislation was prevented only by a small body of opponents, and though it had not yet been enacted into law, represented the views of the United States Government in all of its departments, and the further Adams statement that the company hoped soon to resume payment of dividends.
(b) The defeat of the aforesaid legislative proposal resulted from political, rather than economic reasoning. In support of this conclusion is the fact that during the late 1880’s and early 1890’s the country experienced a strong Populist Movement whose principal champion was William Jennings Bryan. The convergence of this movement on the political scene, at a time when the U.P. was attempting to extricate itself from problems which arose in the early years of its construction, prevented a final solution from being effec-*161lively reached, and necessitated receivership, dismemberment and the reconstitutive-reorganization of the System.
(c) The foregoing conclusions were borne out by the final settlement effectuated with the Government, as well as the immediate prosperity realized by the U.P. System within a short period of time thereafter. The settlement with the Government was not less than brilliant. Referring to the sequence of events which transpired in 1897, and which led up to the final payment in full to the Federal Government of U.P.’s indebtedness in the fall of that year, and particularly events as they concerned the last minute postponement of the Government’s foreclosure sale, it was evident that, should further delay have been encountered, serious consequences would have ensued and Union Pacific would not have been able to effectuate its reconstitution. Only through the alliance of the foreign-based bankers, who underwrote the reorganization, and men such as E. H. Harriman was the settlement with the Federal Government accomplished.
(d) In final corroboration of the theory that the Union Pacific’s indebtedness to the Federal Government was a major cause which gave rise to its receivership, subsequent dismemberment, and reconstitutive-reorganization, reference was made to the editorial comment which appeared in the Chronicle of December 30, 1899, and which dealt in great detail with the U.P.’s annual report for the year ending June 30, 1899, with particular emphasis to the following:
It is therefore gratifying to find that the offsetting-advantages of the new arrangement, whereby the road is no longer hampered by Government interference and the managers are free to carry out whatever policy seems for the best interests of the company, are such as to remove occasion for misgivings in the particular mentioned period.
*****
That the property had a future under a capable and efficient administration, at liberty to pursue its own plans, has never been questioned by anyone competent to express an opinion on the point. Indeed it was obvious that the road had certain distinct advantages over other transcontinental lines.
*****
*162One real danger threatened the property when it became involved in the financial difficulties from which it seemed so hard to extricate it. The danger was that the system would be completely disintegrated, impairing the earning capacity of the main line.
*****
But under the energetic and far-sighted management of those who formulated and conducted the reorganization, and who are guiding the new company’s affairs, this difficulty has been avoided. All the most desirable lines, branches and feeders have been secured, and are now being more firmly cemented to the system than before.
(c) The Valuation Dates Utilized by the Government's Expert
235. The Government’s expert utilized the following valuation dates in his valuations (see findings 206-207) :
(d) Qonclusions as to Valuation Dates
236. The date of February 2, 1898, the date of the first trading of the reorganization preferred is, as determined in the opinion, the correct date for determining the fair market value of the reorganization stock.
237. The dates of the issuance of the post-reorganization stock between 1899 and 1901, set out in finding 235, are the correct dates for the determination of the fair market value of the respective blocks of post-reorganization stock.
238. The concept of a reconstitutive-reorganization, the basis for the valuations by plaintiff’s expert, has no merit whatsoever as affecting the dates of issuance of the stock involved, the correct dates for the valuation of the stock, the *163entity with respect to which the stock is to be valued, or otherwise, in any way material to this case.
239. The use by plaintiff’s expert of a valuation date of 1907 was the use of an incorrect valuation date, with the consequence that his valuation has no material bearing on the determination of the fair market value of the reorganization stock and the post-reorganization stock at the correct dates for valuation.
His valuation has therefore not been considered on its merits at all, either for its correctness as a valuation for 1907, for 1898 or otherwise.
240. The Government’s expert did not use correct valuation dates. See finding 236.
6. The Dollar Valuation of the Reorganization Stoch J>y the Government's Expert
241. As already indicated, defendant’s expert valued the 610,000 shares of reorganization common at $22.50 per share and the 750,000 shares of reorganization preferred at $45.00 per share.
7. Pre-Receivership History
(a) 1869 — Construction and Capitalization
242. The Act of July 1,1862, the first Pacific Eailway Act (c.120,12 Stat. 489), provided for the construction of a transcontinental railroad from the Missouri Eiver to the Pacific Ocean. Plaintiff’s original predecessor, The Union Pacific Eailroad Company, incorporated by the Act, was to construct the road westward from the Missouri Eiver to the western boundary of the Nevada Territory, where it was to meet and connect with the railroad to be constructed by the Centx-al Pacific Eailroad Company of California. The Government would finance part of the cost of construction by issuing to the Union Pacific 6 percent bonds of the United States payable in 30 years, at specified amounts per mile of road constructed. In addition, the Government agreed to transfer to the U.P. land for the right of way plus five additional sections per mile on each side of the track. In turn, the U.P. agreed to pay the bonds at maturity and to reimburse the Government for the interest. To secure the repayment to *164the Government of the amount of the bonds and the interest thereon paid by the Government, the Government was given a first mortgage on all the property of the U.P. In addition, all compensation for services rendered to the Government and at least 5 percent of the net earnings of the road were to be applied to payment of the bonds and interest thereon.
243. These provisions failed to induce sufficient interest in the proposed construction and the road was unable to raise private, capital. Not until Congress amended the law in 1'864 (Act of July 2, 1864, c.216,13 Stat. 356), subordinating the Government to a second lien position and granting substantially increased benefits to the road, did it become feasible to go ahead with the project. Specifically, under the amenda-tory act the land grant was doubled, the number of alternate sections on each side of the line granted per mile was increased from five to ten and the limits within which these sections were to be granted were increased from a distance of ten miles from the line to twenty miles. In addition, the road was authorized to issue its own first mortgage bonds in an amount not to exceed the Government bonds. Also, only half, instead of as formerly the whole, of the compensation for services to the Government was now required to be devoted to payment of the Government bonds and interest.
A still further amendment, on July 3,1866 (c. 159,14 Stat. 79) transformed the construction of the Pacific Railroad into a race between the U.P. and the Central Pacific, each to build in a continuous line until they should meet and connect. Land grants were the prize.
244. In 1866 the Union Pacific began construction westward from Omaha, Nebraska, while the Central Pacific built eastward from Sacramento, California. The historic meeting of the two took place in 1869 at Promontory, Utah Territory, 54 miles west of Ogden. The two roads subsequently agreed upon a point five miles west of Ogden as the connecting point from the standpoint of traffic interchange, the Union Pacific selling to the Central Pacific its line west of the agreed point. On this, the Union Pacific had about 1,038 miles of road.
245. The cost of construction to the Union Pacific was very high due to high prices prevailing during the construction period, the speed of construction, and the method of financing *165employed. As was common practice, the U.P. used a construction company. The owners of the company, Credit Mobi-lier of America, were the directors and stockholders of the road itself, as was again common practice. In consequence there was a built-in incentive on the part of the road to maximize the payments for construction and thus the profit accruing to the Credit Mobilier at the expense of the U.P.
The Credit Mobilier received, for the road, the maximum amount of bonds provided by the Government and an equal amount of the U.P.’s first mortgage bonds, along with substantially all of the road’s common stock. The sale of these bonds essentially provided the funds for the actual cost of construction, while virtually the entire common stock of the railroad was distributed to the stockholders of the Credit Mobilier. The construction cost stated in the U.P.’s 1870 balance sheet, immediately after the completion of the road, was $97.8 million, while the actual cost of construction to the Credit Mobilier was only about $54.2 million. The profit to the Credit Mobilier was $23.4 million in terms of the market value of securities and cash.
For the $36.8 million in par value of stock issued by the road, it received in cash only $400,650, the balance of the stock constituting a bonus of profit to the Credit Mobilier. As a result, there was no true equity for the common stock, in today’s sense of that term.
246. The road had net earnings of $58,357,133 during the period 1870-1879, some of it resulting from charging to construction items chargeable to operating expenses. Interest charges for the same period were $49,438,109, including the interest on the Government debt. Since the latter was not payable until maturity, there was income available for dividends, and dividends in the amount of $11,942,125 were paid from 1875 to 1880.
As time went on, the practice of not providing from earnings for the interest to be due to the Government in the future contributed to the inability to provide for the maturing debt, which by the time of the reorganization amounted to $58,448,223.25 for principal and interest, and was paid in full, on September 30, 1898, as part of the reorganization plan.
*166(b) Expansion: Mergers
247. In 1880 the U.P. was consolidated with, the Kansas Pacific, from Kansas City to Denver, Colorado, and the much smaller Denver Pacific, from Denver to Cheyenne, Wyoming, at the U.P.’s main line. The two new railroads added 750 miles to the U.P.’s 1,038 miles.
248. Stock was added to stock and bonds to bonds, the consolidation increasing U.P.’s stock by $14 million, from $36.7 to $50.7 million, its bonds $38.4 million, from $88.4 to $126.8 million, and its miscellaneous debt $5.7 million from $4 to $9.7 million.
249. A large part of the new securities issued went to Jay Gould, in exchange for stock he had acquired. The U.P. was forced to pay hold-up values to Gould, who had managed the consolidation while he was a director of the U.P. According to the report of the United States Pacific Railway Commission (in evidence; see finding 266), pp. 54-65, Gould brought the consolidation about by threats and other methods which, apart from their propriety at the time, would today be regarded as extremely improper. Some of Gould’s stock he had acquired at low prices. In other transactions, in the course of his threatened plan to build a competitor of the U.P., he had acquired branch lines at extraordinarily high prices, much greater than value. These lines he was now able to transfer to the consolidated U.P. at the inflated prices he had paid.
250. The Kansas Pacific was a bond-aided railroad, but the aid had been given only to the 100th parallel, a distance of 394 miles. Some $6.3 million in Government bonds were issued, and sold for almost full face value. Upon completion of the road, the Kansas Pacific had issued $32,088,950 of securities, of which $9,437,950 was represented by stock and $22,651,000 by bonds bearing interest at 6, 7 and 8 percent.
251. Records are not available to show the true cost of the Kansas Pacific, but, on the basis of the Union Pacific’s experience of construction costs somewhat smaller than the actual issuance of bonds, a reasonable estimate of the actual cost of construction is approximately $22.6 million, the par value of the bonds issued, or about $32,000 per mile. Subsequently the Kansas Pacific issued funding mortgage bonds *167to take care of unpaid coupons on defaulted issues, thereby increasing its bonded debt by $1,500,000. At the time of consolidation, the Kansas Pacific had an accumulated deficit of $6,525,069 after fixed charges. Interest on the Government debt, as in the case of the U.P., not payable until maturity, amounted to $4,805,703.
252. The Kansas Pacific had just then emerged from its chronic insolvency (in substantial part due to the reduction in its rates in the course of its fierce competition with the U.P.), and an intelligent and skillful reorganization of its affairs and a recent large improvement in its business had enhanced largely the value of its securities. Nevertheless, there was little to justify the conclusion that its earning power was such as to expect that it could pay a dividend, except, perhaps, that its new relationship with the U.P. might mean a cut in its losses.
Its outstanding bonds were worth considerably below par value and its common stock was of little intrinsic value.
253. The capital of the Denver Pacific consisted of $2.5 million in bonds and $4 million in stock. Eecords from which construction costs might be learned, the United States Pacific Eailway Commission reported in 1887, were missing or unintelligibly kept, and the Commission could not determine the cost of construction other than to note that the construction account was the $6.5 million capitalization. 'The minority commissioner of the United States Pacific Eailway Commission estimated construction cost at $2.5 million. In the light of the practice of the period of using construction companies owned by the stockholders of the railroad company and the practice of issuing stock as a bonus, a reasonable estimate of construction cost is $5 million. The road had had poor earnings and at the time of the consolidation it had a deficit of half a million dollars.
The stock of the Denver Pacific had therefore little or no intrinsic value, other than the road’s value as a connecting link between the Kansas Pacific at Denver and the Union Pacific at Cheyenne.
254. By such standards as asset value and earning power, therefore, the consolidation was unfavorable to the U.P. The three roads had much water in their statements and in terms *168of capital structure the consolidation led to still further inflation of the capital of the predecessor of the present plaintiff.
There is, however, another point of view. The Kansas Pacific and the Denver Pacific had been the main source of the U.P.’s competition prior to the merger. The fierce competition had almost ruined the Kansas Pacific and severely damaged the U.P. The consolidation had the significant benefit to the U.P. of an end to the competitive wars and an enlargement of its system, both all but indispensable in that era for the U.P.’s survival.
(c) Expansion: Construction
255. Between the consolidations of 1880 and the receivership in 1893, the U.P. embarked upon a period of extensive construction. The construction was undertaken through subsidiary companies because the road itself was unable to build additional mileage under the Pacific Eailway Acts, specifically the prohibition contained in section 4 of the Act of March 3, 1873 (c. 226, 17 Stat. 509) to the effect that (with minor exceptions here inapplicable) no new stock could be issued nor debt incurred with respect to the property or future earnings of any of the Pacific railroads, without leave of Congress.
256. To initiate the program of construction of branch lines, the U.P. sold an additional issue of $10 million of stock in 1880 and 1881 at par value.
257. Jay Gould, then a director of the U.P., was much involved in the construction of these branch lines. According to the minority report of the Pacific Eailway Commission, Gould is estimated to have acquired a fortune of around $40 million, much of it through his dealings in and with the U.P. Some $10 million of this sum were said to have been realized from construction activities in the period immediately following the consolidation of 1880.
Mr. Gould’s connection with the road ceased in 1883. The new management was honest, intelligent and energetic. Thereafter construction was economical.
258. Under new management, an even more ambitious acquisition and construction program took place, from 1883 *169to receivership in 1893. New lines were built with economy and without personal impropriety of the directors, albeit with watered stock. For instance, in the most ambitious project of all, the construction of the Oregon Short Line, book capitalization was $29 million but the cost of construction by third parties, under contract, was “less than $15 million.” Bonds were issued to finance the construction, and sold at face value. For every $1,000 bond sold at par, the subscriber received without cost $500 in stock. Half the stock issued was so disposed of and the other half was issued to the U.P. without consideration, which retained it 'to secure control. There was thus a great deal of water in the capitalization, though more was doubtless realized on the bonds than might otherwise have been obtained.
259. The greatest difficulty caused by the 1880-1893 construction and acquisition program, which was no bonanza for earnings at the time, was the burdensome capitalization and a large floating debt to service the capitalization, which was a contributing factor to the insolvency in 1893. The program was, however, more or less forced on the road from the growing competition east of Ogden, and but for the extension of the System from Ogden, the parent road might have encountered financial difficulties because of competition. The program thus staved off trouble earlier than 1893. And by building a wider system, the program no doubt contributed to the long-range (post-receivership) profitability of the U.P.
(d) Growth of Competition
260. Prior to the consolidation of 1880, the U.P. had competition mainly from the Kansas Pacific and its affiliate, Denver Pacific. The sharp rivalry resulted in depressed rates and was to a considerable extent responsible for the chronic financial difficulties of the Kansas Pacific. As a result of the consolidation, the competitive situation was corrected and rates were restored to satisfactory levels.
261. In the years immediately after 1880, however, nine railroad companies entered the territory east of Ogden and four additional lines were built across the continent. In the 1870’s and 1880’s, the controlling interests in the Central Pacific, which connected with the Union Pacific at Ogden, *170constructed a competitive route from San Francisco to New Orleans, reached in 1883, with, connections by water to New York. As a result some traffic was diverted from the northerly, Central Pacific-Union Pacific route to the southern route, thereby in effect breaking the monopoly the U.P. had on transcontinental traffic up to that time.
262. Completion of the construction of the Denver and Rio Grande in the 1880’s ushered in further competition between Denver and Ogden. Extension of the Chicago, Burlington and Quincy from Kansas City, St. Joseph and Omaha westward to Denver during the same period also brought this line into the U.P.’s territory. Additional construction by the Burlington northward to connections with the Northern Pacific further sharpened competition. In the same era, the Rock Island Railroad added very greatly to its mileage by building lines from Omaha and Kansas City to Denver. In addition, the Atchison, Topeka and Santa Fe Railroad Company constructed or otherwise acquired about 6,500 miles of road, including some mileage in U.P.’s territory, and more particularly it became a transcontinental competitor when it reached the Pacific Coast in 1885. The Northern Pacific and Great Northern also joined the group of transcontinental carriers, the former being completed in 1883 and the latter in 1893.
263. The tremendous increase in competition led to rate-cutting which impaired the earning power of the U.P. Rebates were given to favored shippers and discrimination in favor of certain shippers and communities was commonplace. In order to improve their lot, the railroads, including the U.P., entered into pool agreements with other roads to shore up rates and share revenues. These practices were engaged in by all the roads as necessary for their economic life, and were not necessarily corrupt or improper.
264. The U.P. was not merely subjected to a great deal of competition; it created a great deal itself. Its construction of the Oregon Short Line and the latter’s leasing of the Oregon Railroad and Navigation Company were planned to give it a route to the West Coast so as to minimize the use of the Central Pacific. With the empire being built by the Central Pacific and the Southern Pacific from Portland, *171Oregon, to New Orleans, Louisiana, the U.P. undoubtedly was put in the position that, in order to survive, it had little alternative but to continue building branch mileage.
(e) The United States Pacific Railway Commission
265. Recognizing the imminence of the maturity of the debt owed the United States, Congress in 1887 established the United States Pacific Railway Commission, and authorized it to investigate the books, accounts and methods of railroads which had received aid from the United States and to determine, among other things, whether it would be to the best interest of the Government to extend the maturity of the debts owing to the United States, c. 845, 24 Stat. 488.
266. On December 1, 1887, the Commission, whose members were appointed by the President, delivered its report. A majority report was made by Commissioners E. Ellery Anderson and David T. Littler and a minority report by Commissioner Robert E. Pattison. The report is in evidence as plaintiff’s exhibit 413 and is cited herein by name.
267. In addition to its original excessive funded debt and burdensome fixed charges, the road had by 1884 incurred an additional $10 million in floating debt in the mileage expansion beginning in 1880. Moreover, in the period leading up to 1884, earnings were in a declining trend; dividends were omitted in 1884, and were not resumed in the remainder of the time of the receivership in 1893.
288. Beginning in the spring of 1884, the new management of the road devoted itself, by economy and application of earnings to the reduction of the debt and the betterment of the System, in an endeavor to put the road on a sound financial foundation. The new management was successful in eliminating the floating debt, but the basic problems of the road’s original capitalization remained.
269. The Pacific Railway Commission approved highly of the U.P.’s new management. The U.P., the Commission reported, “has been entirely extricated from the difficulties which surrounded it at the close of 1883, and stands today as a solvent corporation, in excellent physical condition as to all of its construction, well equipped, and promising ex*172cellent results in the future.” There is no reason to doubt this judgment.
(f) Economic Conditions — 1869 to the Panic of 1893
270. During the first four years following completion of the U.P. in 1869, the nation experienced reasonably good business 'and the territory served by the road probably enjoyed above-average conditions. The very existence of the U.P. brought growth with it as population flowed in from the East and immigrants began coming to the United States in increasingly larger numbers. At the same time, prices of such farm products as wheat and com, important crops in the territory served, were maintained at good levels, even though they were far below the abnormally 'high points attained during the Civil War. Beginning with the Panic of 1878 and extending through 1879, the country went through the long depression of the 1870’s. Wheat and com prices declined moderately from 1875 to 1880, according to United States Department of Agriculture statistics, but the extensive opening of the West left the U.P.’s territory relatively untouched by the depression and the road’s revenues continued to grow.
271. In the 1880’s wheat and corn prices averaged somewhat lower again, but bountiful crops created generally good conditions. As the decade was coming to a close, however, drought and insect plagues in the United States, recovery in European agriculture, and the development of new growing areas, especially for wheat, in such countries as Canada, Australia, and the Argentine, brought about agricultural depression in the United States. Wheat fell from 95 to 53 cents (prices given here are yearly averages) per bushel from 1880 to 1893; com fluctuated in the 1880’s and finally dropped from 50 to 36 cents per bushel from 1890 to 1893.
272. The steady erosion of farm prices 'between 1890 and 1893 and the concomitant reduction in demand for the products of industry precipitated the Panic of 1893. Purchasing power of workers declined along with the fall in farm prices, and in the short period 1890-1893, wages received were decreased over one-third. Thus was ushered in a nation-wide depression that was to last for several years. Although com *173prices enjoyed a sliarp recovery in 1894, generally speaking farm prices remained low- — -wheat until 1896 and com into the late 1890’s or even later.
273. The Panic of 1893 was followed by a long period of business depression in the territory served by the U.P. In the years prior to 1893, this area -had enjoyed -a boom based on easy credit. Thousands of newcomers, many of them with very little agricultural knowledge or experience, had bought land at inflated prices, borrowing on it all the money they could get. Speculative syndicates bought immense tracts of land, mortgaged them for more than they were worth, cut them up into farms and sold them, or tried to sell them, to immigrants from the East. Even the established farmers borrowed millions of dollars on their holdings for the purpose of building -houses and barns, acquiring additional land or purchasing live stock and machinery. Cities and towns in the agricultural area outgrew their former boundaries and expanded widely in suburban development.
274. When the Panic of 1893 came, with a sudden contraction in credit and a general loss of confidence in everything and everybody, the financial structure collapsed. Interest payments on speculative loans ceased; mortgages were everywhere foreclosed; farmers were unable to meet their engagements and a period of general embarrassment and distress followed the period of prosperity. The great tracts of land bought by speculative syndicates were no longer saleable and remained uncultivated; town sites were abandoned, and municipalities which had floated loans in the East ceased to exist, leaving the holders of their bonds to foreclose on deserted town lots and empty buildings. Settlers could no longer obtain bank accommodations; solvent businessmen suffered great losses from the sudden shrinkage in values; and even the population decreased as ruined farmers and unemployed farm laborers drifted back into the eastern states.
275. During the erosion of agricultural prices that started soon after Appomattox, discontent arose in the farm areas. Though there were periods of considerable prosperity because of bountiful crops, agricultural machinery, equipment and tools commanded high prices due to high tariffs and monopoly controls. In addition, property taxes were burden*174some and interest rates were high, ranging from 7 percent to 10 percent and even higher as a result of special charges. To add to the difficulties of the farmers, especially those in the western states, Congress in 1873 prohibited any further coinage of silver. Passage of the Bland-Allison Act in 1878, providing for limited coinage of silver, proved to be comparatively ineffective in strengthening farm prices.
276. The agrarian discontent found reflection in the Populist movement, called “the emphatic political expression of agrarian revolt,” which had its origin in “Farmers’ Alliances,” though it also enlisted the support of industrial workers adversely affected by the depression which began in 1893. The Populist movement reached its peak in 1896; but when the Democratic Party nominated William Jennings Bryan as its candidate for President after his stirring “Cross of Gold” speech, the Populists embraced and supported his free silver program and other reforms.
8. The Receivership of the XJ.P. — 1893-1898
(a) Games
277. The predecessor Union Pacific went into receivership on October 13, 1893, a victim, with many other roads, of the Panic of 1893. Its financial troubles dated back to its capitalization, both original and as worsened by the consolidation in 1880.
278. With each passing year, the road was coming closer to the period when it would have to face up to heavy debt maturities, including publicly held bonds, as well as obligations due to the United States Government and interest thereon.
The principal early maturities of the predecessor held by the public at the close of 1892 were as follows:
*175Debt owed to the United States Government and due in the years 1895-1899, thirty years after it originally was incurred, amounted to $27,236,512 for the U.P. and $6,303,000 for the Kansas Pacific, a total of $33,539,512, exclusive of net interest accrued after deduction of the sinking fund established by law to meet the payments due the Government.
279.In summary form, the obligations of the U.P. at the 1880 and 1892 year ends were as follows:
280. Interest charges of the U.P. System in 1892 amounted to $5,371,587, exclusive of interest on the United States Government debt, compared with $5,288,788 in 1880 and $4,-914,671 in 1881. In addition, interest requirements on the Government debt amounted at 6 percent per annum to $2,011,920 annually.
281. The direct causes of the U.P.’s receivership were the collapse in business conditions in the second half of 1893, sometimes called the Panic of 1893, and the expectation of a $3 million deficit for the year, after fixed charges.
Longer-range causes were the high cost of construction, the size of the debt owed to the Government, the restrictions on the road’s financial freedom imposed in its charter to protect the Government, the burdens assumed in building branches, the debt assumed in the construction following the mergers in 1880, and the rate reductions and other measures undertaken to meet the competition of transcontinental roads.
(b) Settlements
282. The receivership continued from 1893 to 1898. The receivers were three in number at first, then five. Of the five, two specifically represented the United States Government, with a third also in something of a quasi-public role.
283. Shortly after the receivership began, a reorganization committee came into being at the instance of various classes of the road’s security holders. Mr. J. Pierpont Morgan subsequently was added to the committee and proved to be a *176dominant force in its decisions. This committee tried for two years to obtain approval of its successive reoganization plans, but the recalcitrance of Congress to the working out of a solution for handling the Government debt (eventually paid in full) caused it to abandon its efforts in March 1895. Mr. Morgan retired, disgusted with what he regarded as political intriguing which had blocked reorganization.
284. In the period of the first reorganization committee, the U.P. System shrank from 8,167 miles of road to 4,469 miles, with further shrinkage in prospect, in largest part due to the loss of branch lines of the U.P.’s system.
285. At this juncture, Mr. Winslow S. Pierce, chairman of the board of directors of the U.P., induced Mr. Jacob H. Schiff and his firm, Kuhn, Loeb & Company, to undertake reorganization. Mr. Schiff created a strong reorganization committee, including such influential people of the era as Mr. Chauncy M. Depew, president of the New York Central, and Mr. Marvin Hughitt, president of the Chicago and North Western Railroad, both regarded as associates of Commodore Cornelius Vanderbilt, prominent railroad magnate. The association in the public mind of the reorganization committee and such outstanding figures in the railroad world proved to be a constructive influence.
286. Undoubtedly, the biggest problem of the reorganization committee was to find a solution to the question of meeting the debt plus accrued interest owed to the United States Government. The Government proved to be a hard bargainer, for even after agreeing to accept $50 million for its claim, in late October, 1897, it refused to abide by its agreement. The reorganization committee then agreed to pay the Government in full, principal and interest, on the debt due on the original Union Pacific Railroad mileage — a total of $58,-448,224, including the sinking fund of $18,194,618. On February 12, 1898, the committee also agreed to pay the principal amount of $6,808,000 due on the Kansas Pacific debt owed to the Government, but refused to pay the $6,588,900 of accrued interest. The latter sum, plus interest on this amount, remained as a claim against the receivership estate and ultimately was settled at $821,898.
*177The Government received a total of $65,573,122, far more than the reorganization committee or the Government directors on the Union Pacific board had had in mind as a probable settlement. For its second mortgage position, the Government appears to have come off quite well in being paid in cash for its entire claim against the main line and a substantial part of its claim against the Kansas Pacific.
287. In contrast with the liberal treatment obtained by the Government in the reorganization, holders of U.P.’s first mortgage bonds all agreed to make the sacrifices of a long-term extension — to 50 years — of their maturities, and a reduction to 4 percent in the rate of fixed interest to which they were entitled. On the old bonds the interest rates had been for the most part 6, 7 and 8 percent. In compensation for the extension of the maturity date and the reduction in interest on these new bonds, all bondholders other than the Government were given a substantial increase in principal, receiving new $100 par 4 percent preferred stock. They (the bondholders included in the reorganization) received (without other payment therefor) new preferred stock to the extent of at least 50 percent of the principal amount of bonds held; no class of old bonds received in new bonds and preferred stock together less than 150 percent of the par value of the old bonds, with a few minor exceptions. Holders of $36,440,950 publicly held bonds received in the aggregate $29,719,960 par value of new bonds, along with $26,841,775 in new preferred stock, a total of $56,561,735 in new securities, or 155.2 percent of the par value of the old bonds.
(c) The Reorganisation Plan
288. In sum, the reorganization plan of the U.P., as finally adopted, provided for the issuance of $90 million in first mortgage and land grant 4s 1947 bonds, $75 million or 750,000 shares of 4 percent noncumulative preferred stock of $100 par value and $61 million or 610,000 shares of common stock of $100 par value. New common stock having a par value of $60,868,500 was delivered to holders of the common stock of the predecessor who paid an assessment of $15 per share. See finding 208.
*178As stated above, $29,719,960 par value of tbe bonds and $26,841,775 par value of the preferred stock were issued to bondholders of the Union Pacific Eailway Company, other than the Government and collateral trust issues. Of the remaining securities of the reorganized company, $52 million of the bonds and $24,666,667 par value of the preferred stock were issued to the Purchase Money or Eeorganization Syndicate in settlement of net cash advances of $46,940,000. Another $6,250,000 par value of the preferred was issued to the Purchase Money Syndicate and bankers as compensation for their claim of $2,500,000 for services, a sum which on division by the 62,500 shares issued gives a product of $40 per share. Another $2,122,000 par value of the preferred was paid to holders of Union Pacific 6 percent Collateral Trust Notes for the right acquired by the reorganization committee to purchase the collateral. Still another $9,103,658 par value of the preferred was issued at par to holders of the common stock of the predecessor for their payment of the cash assessment. The balance of the new securities were sold by the reorganization committee for cash or retained by the committee.
289. (a) The defendant’s expert testified that
The issuance of 62,500 shares of preferred to the Purchase Money Syndicate and bankers as compensation for their claim for $2,500,000 for services was a valuation of the preferred at $40 per share.
(b) It is found that
The services of such a committee as was here involved are not ordinary personal services and are not purchasable in a competitive market. It would be more correct to think of the committee and the Syndicate as selling an asset going into the reorganization, for a block of stock. While the division of the shares into the dollar amount gives a seeming dollar figure per share, it is wholly artificial and the figure is not a market valuation or a valuation material in determining fair market valuation.
290. After commissions, the reorganization committee actually received $8,582,458.50 in cash as assessments on the old common. It should not be assumed that no other consideration was received for the $75 million in preferred *179stock issued in tbe reorganization. A great deal of legitimate work unquestionably was performed by tbe reorganization committee and tbe Purchase Money Syndicate obligating itself to take large blocks of tbe new securities.
291. (a) Tbe defendant’s expert testified that
By no stretch of the imagination, however, could their services have been worth more than several million dollars, allowing for the risks assumed by the Purchase Money Syndicate and compensation in lieu of interest for the money furnished to the reorganization committee. In any event, the capitalization of the reorganized company, as stated on the books, was increased out of all proportion to the value of the services rendered. It should also be pointed out that had the U.P., through sound operation and financial management, been a prosperous and solvent railroad, it would have been able to refund its bond maturities of the 1890’s, including the Government lien, at the low interest rates prevailing during the period and thereby have avoided completely the issuance of any new fictitious capital.
(b) The testimony that the services of the reorganization committee and the Purchase Money Syndicate were “by no stretch of the imagination . . . worth more than several million dollars” is not accepted. It is vague, subjective, unspecific and undocumented. The services of such committees are unique and costly. They were moreover presumably approved by the reorganization committee. No basis, intrinsic or extrinsic, appears for the derogations by the witness of the value of the services.
The testimony that the U.P. could have avoided the issuance of any “new fictitious capital” had it been a prosperous and solvent railroad through sound operation and financial management is also not accepted. Many railroads went into reorganization at the time. The Panic of 1893 was not the fault of the U.P.’s management. The U.P.’s insolvency had roots as far back as the original conditions upon the Government’s assistance. Insolvency and reorganization were the facts. The reorganization plan was a good one and successful, and made it possible for the U.P. to proceed to profitable operation, free of the burdens of its past. It was to be expected that there would be substantial payments for the additions to *180value brought about by the reorganizers and their committees and syndicates in the form of capital stock paid to the reorganizers, stock which proved not to be a burden on the company.
Finally, in view of the foregoing, the witness’ further conclusion — that the capital of the reorganized company was increased disproportionately — is also not accepted.
(d) The End of Reorganization, January SI, 1898
292. The Union Pacific emerged from receivership at midnight at the end of January 31,1898, with the acquisition by the present plaintiff, the taxpayer, from the reorganization committee of the property sold on foreclosure, including the main line of 1,043 miles from Omaha to Ogden, Utah. On April 1 of the same year, the road reacquired the 806 miles of the lines of the Kansas Pacific.
293. No balance sheet was included in the annual report of the predecessor U.P. for the year ended December 31, 1897, and it is thus impossible to determine the amount of any property write-up between December 31,1897 (a date close to the January 31, 1898 effective date of the reorganization) and June 30,1898, the date of the first balance sheet of the reorganized company, the taxpayer.
Comparison of the balance sheets for December 31,1896 and for June 30, 1898 shows that in the elapsed year and a half road and equipment had been written up, as of the latter date, $65.9 million, from $155.4 million to $221.3 million.
The 1896 report also contained separate or additional items labeled “Receivers Union Pacific Railway Co., Property Account, $3,787,203.71” and “Land Contracts, Land Cash, etc., $6,171,303.43.” The first of these two items, to the extent acquired by the taxpayer, may have been included in the property account of the taxpayer. Whether the land assets of the predecessor were included in the road and equipment account of the taxpayer on June 30,1898 is not clear, but presumably they were not. The item does not otherwise appear in the 1898 balance sheet. The land assets did not show up until June 30, 1899, when they were reported as follows: “Land Assets, $3,002,232.29.”
*181294. The reorganized road disclosed in its first balance sheet, dated June 30,1898, that the following securities were outstanding: funded debt of $90 million, $75 million 4 percent noncumulative preferred stock of $100 par value, and $61 million common stock of $100 par value.
295. The reorganization meant a great improvement in the condition of Union Pacific at the time of the reorganization in 1898. All debt was consolidated into one long-term issue, and by the same token there was no problem of short-term or floating debt, which in that era often was a threat to solvency.
296. The emergence of the U.P. from reorganization, moreover, came at the beginning of a wave of prosperity for the nation and particularly for transcontinental railroads.
(e) Receivership and the U.PJ’s Branch and Subsidiary Lines
297. The branch line system had disintegrated rapidly during receivership. As the U.P’s trustees defaulted on interest payments on the road’s collateral trust issues, which were secured by pledges of securities of the branch line subsidiaries, the trustees under the indentures sold the collateral. In 1893 the trustees under these indentures sold collateral consisting of securities of 13 branch lines with a par value of $5.2 million and a book cost of $4.9 million. In turn the subsidiaries went into receivership.
Without these branch and subsidiary lines, a reorganized U.P. would be a truncated main line railroad. The reacquisition of these lines, following their and the U.P.’s reorganization, was of the utmost importance to the reconstitution of the pre-receivership U.P.
It is not entirely clear, and not material, whether the defaults on the securities which put the branches and subsidiaries into receivership were in the ultimate sense voluntary or involuntary. One view is that the defaults were involuntary — that the money was simply not available. Another view is that defaults would in any case have been allowed to happen, to force a reorganization of the branches and subsidiaries, all separate corporations, which would purge them of their heavy debts and shrink their watered capital.
*182298. Whichever view is correct, it was the underlying intention and plan of those prominent in the affairs of the U.P. — receivers, reorganizers, investors, bankers and prospective leading figures in the new company — to keep close and friendly contacts with the former branches and subsidiaries of the U.P. in order to protect the U.P.’s traffic and then to reacquire those branches and subsidiaries for the U.P. to reconstitute the U.P. network. In pursuance of this plan, the U.P.’s reorganization committee took an early part in the reorganization of the former branches and subsidiaries and purchased interests in them.
299. In this ivay or another, most of the branch and subsidiary line mileage (except for a good part of the mileage of the Union Pacific Denver and Gulf) was reacquired by the U.P., most of it shortly after consummation of the receivership in January 1898, the rest in 1899. Most of these lines were reacquired from the U.P.’s own reorganization committee, which had acted on behalf of the new corporation (the present taxpayer), which would take over the U.P. property.
9. Post-Reorganization Prosperity
(a) National Prosperity
300. With the defeat of Bryan in 1898 and the election of William McKinley on his (or Mark Hanna’s) strong endorsement of the gold standard, high tariffs, and support of business, the nation emerged from a period of political uncertainty and moved into an era of generally sustained and rising prosperity until the Panic of 1907.
301. In marked contrast to earlier times, the years after the reorganization of the Union Pacific were very prosperous. Between 1900 and 1910, the population of the trans-Missouri states increased about 40 percent, while the increase in the value of farm lands along the lines of the Union Pacific ranged from 100 to 853 percent. This enhanced value of farm lands was partly due to better and more extensive cultivation, and partly to a greatly improved railroad service which enabled the farmers to send their crops cheaply and promptly to markets where there was an active demand for them. The annual value of these crops, in the states directly tributary *183to the Union Pacific, increased in the decade 1899-1909 by percentages that ranged from 89 to 235.
302. Agricultural crops, however, were not the only western products that needed transportation. In the revival of business that followed the reorganization of the U.P., industrial activity increased rapidly in all the far western states, and between 1900 and 1910 the annual value of manufactured products in Union Pacific territory rose from $257,000,000 to $530,000,000 in California; in Colorado from $89,000,000 to $130,000,000; in Idaho from $3,000,000 to $22,000,000; in Kansas from $154,000,000 to $325,000,000; in Nebraska from $13,000,000 to $199,000,000; in Utah from $18,000,000 to $62,000,00; and in Washington from $71,000,-000 to $221,000,000. This group of states alone, in 1909, produced manufactured goods valued at $1,500,000,000, as well as farm crops to the value of $672,000,000 more.
303. Business conditions were given further sharp stimulus with the involvement of the United States in war with Spain in 1898. Then upon its conclusion, annexation of the Philippines by the United States — and the unrelated annexation of Hawaii — resulted in a tremendous expansion of trade with these new territories. In addition, trade with the Orient generally rose to a substantial degree. This was of especial benefit to the transcontinental railroads. In the 1900’s, prior to the Panic of 1907, there was an all-pervading aura of prosperity occasioned by favorable business, good farm crops and prices, corporate mergers, and high earnings. Even the Panic of 1903 — essentially a rich man’s panic that hardly touched the nation as a whole — failed to stop the upward course of the boom at the turn of the century.
304. The statistics in the foregoing from the decade 1899-1909 or from 1900-1910 are not intended to negative the finding that the returning wave of prosperity began in 1896, and was thus underway at the time of the reorganization of the U.P. in 1898. It has been said that fortune smiled on the Republican party after McKinley’s election.
(b) The TJ.P.h Increasing Prosperity
305. Edward H. Harriman became chairman of the Union Pacific’s executive committee in May, 1898, when he was just *184short of 50 years old, and later chairman of its board, president and chief executive officer. He first came to the U.P. in 1896 from successes with other railroads, and since that time he had been a director and member of the advisory and executive committee and closely involved with Jacob H. SchiiF of Kuhn, Loeb & Co. in the reorganization committee and a large participant in the Purchase Money Syndicate.
Harriman had during the reorganization made clear his intention to take control of the road, and he soon came to dominate the Union Pacific, from about 1897 (and possibly earlier) until his death in September of 1909.
His remarkable personal qualities — prodigious memory, capacity to marshal facts, good judgment, courage in large business decisions — were exercised on behalf of the U.P. to its great profit, until the Panic of 1907.
306. He had a large personal stake in the Union Pacific— stock acquired mainly at low prices beginning in 1898; and by the dynamic character of his operations he brought into the company many millions of new capital. His purchases of interests in other railroads for the U.P. and his improvements of the U.P. were undertaken in a period of almost uninterrupted business improvement and prosperity. Business, as defendant’s expert testified, was consistently good from 1897 to 1907.
Harriman brought great profit to the Union Pacific in the time of his administration, until the Panic of 1907, followed by his death not long thereafter.
Some measures of the U.P.’s improvement during Harri-man’s leadership are that in the period 1900-1906 its gross earnings increased nearly 42 percent and its net earnings increased 69 percent; its income from investments increased from $2.7 million to $10.3 million; and its net income available for dividends increased by $19.2 million or 152 percent.
Dividends on the 4 percent preferred began in 1899, in the first full fiscal year following reorganization, with a 3 y2 percent dividend (on the par of $100).
Dividends on the common began in 1900 with a payment of 3y2 percent (on the par of $100), went to 4 percent in 1901, to 414 percent in 1905, to 6 percent in 1906 and, a major feat for Harriman, to 10 percent in 1907.
*185Improvement in the very first years and the foreseeability in January 1898 of improvement brought about by Harriman are the subject of following findings.
307. Correctly judging that the depression had run its course in 1896 or 1897 and would soon be followed by a new wave of prosperity, Harriman’s first venture on behalf of the U.P. was a renewal in 1898 of U.P.’s plant. The decision to spend the very large sum involved was the product of a characteristic combination of his prosaic belief in good maintenance, efficiency and fine equipment, his excellent judgment in matters of economic forecasting and his courage in risking large sums on grand plans.
While the road was in good condition in 1887, it had deteriorated during the receivership, and Harriman found it in need of much rehabilitation when he made a daylight inspection trip of the Union Pacific, Oregon Short Line and Oregon Railroad and Navigation and proposed by wire and by letter a $25 million rehabilitation program. So great was his confidence in the outlook for a new wave of prosperity and in his own judgment that he ordered millions of dollars worth of materials and supplies before obtaining approval of the board of directors on his return. The board acquiesced, though some misgivings were expressed, and Harriman’s program was ratified. (No finding is made on the dates and details of the events in this paragraph because the sources are contradictory and unreliable.)
Harriman proved to be right in his views that the Union Pacific should prepare for coming prosperity before its rivals by improving its roadway and buying more powerful locomotives and bigger cars. Through expenditures of $45 million in the years 1898-1902, the Union Pacific System placed itself in an impregnable position to handle the rising volume of traffic that followed the acceptance of the gold standard in 1896 and strong foreign demand for the nation’s rising wheat crops.
Harriman continued to plow back the rising earnings of the Union Pacific until the road was regarded as one of the finest in the world. There can hardly be any question but that under the excellent management of Harriman the Union *186Pacific enjoyed a rapid metamorphosis from a rundown railroad to one of superior standards.
308. At the same time that Harriman was demonstrating bis soundness in the rehabilitation and operation of the U.P. he was planning great enlargements of the road’s sphere of influence such as the acquisition of majority or controlling interests in the Southern Pacific, the Northern Pacific and the Chicago, Burlington and Quincy.
The Southern Pacific owned the Central Pacific, which connected with the Union Pacific at Ogden to make a continuous road to San Francisco, and it also controlled the Pacific Mail Steamship Co. The Northern Pacific controlled the Burlington, a competitor in the Union Pacific’s own territory.
309. Harriman’s acquisition of the Southern Pacific was disclosed in January, 1901, when it appeared that on behalf of the U.P. Kuhn, Loeb & Company had purchased $75 million par value of Southern Pacific’s stock, at under 50 percent of par, of the total of $197.8 million outstanding. Another $15 million par value was purchased by the Union Pacific approximately a year later.
310. To finance the initial purchase and for other corporate purposes, the Union Pacific offered $100 million par value of First Lien Convertible 4s, due May 1, 1911. The approximate market value of the assets conveyed under the indenture was $107,565,800, or only about 7y2 percent in excess of the par value of the bonds issued. The $75 million of Southern Pacific stock just acquired and pledged was at that time carried at $50 per share, or a little more than its market value at the time.
The new Union Pacific bonds were convertible at the option of the holder into Union Pacific common stock, at the rate of $100 face amount of bonds for one share of $100 par value stock. On the issue of the bonds, Union Pacific received $100 million in cash, less a commission of $2 million.
311. The investment in the Southern Pacific soon, as will appear, enabled the Union Pacific to make a huge amount of profit which it turned to advantageous reinvestment from the standpoint of current income, which in turn permitted the payment of liberal dividends.
*187312. In the next year after the Southern Pacific acquisition in 1901, Harriman began a battle with J. P. Morgan and his ally James J. Hill to obtain for the U.P. an entrance into Chicago by gaining control of the Chicago, Burlington & Quincy.
313. Briefly, Great Northern and Northern Pacific had in 1901 obtained control of the Chicago, Burlington & Quincy. When the two Northerns refused to include the Union Pacific as a participant in the acquisition, Harriman attempted to buy into Northern Pacific to obtain control of it and thereby achieve his objective as to the Burlington. Had he succeeded, he would have had an equal interest with Great Northern in the Burlington.
A buying contest ensued; J. P. Morgan and Great Northern also bought heavily into Northern Pacific. Although Union Pacific acquired a larger interest in the Northern Pacific than the Morgan-Hill group did, the Morgan-Hill group controlled the common and had the right to call the preferred, and the U.P.’s interest was reduced to a minority position through redemption of the preferred stock.
314. The Harriman interests still owned a large block of Northern Pacific common stock and a compromise was effected with the Morgan-Hill group, creating the Northern Securities Company to hold control of both Great Northern and Northern Pacific and thereby hold control of the Burlington. When Northern Securities Company was held by the United States Supreme Court in March 1904 to be a combination in restraint of trade, its holdings of Northern Pacific and Great Northern were distributed pro rata, rather than returned as originally contributed by the parent roads. See Northern Securities Co. v. United States, 193 U.S. 197 (1904); Harriman v. Northern Securities Co., 197 U.S. 244 (1905). The net effect was that the Union Pacific received interests in the two roads which while substantial were inadequate for purposes of control.
Thereafter very large profits were realized from the sale of the securities distributed by the Northern Securities Company.
315. A series of complex financial transactions was the source of the funds to finance the original purchase of North*188ern Pacific stock, the $15 million additional Southern Pacific stock referred to in finding 347, advances of $20,462,927 to that company, advances of $5,055,311 to Pacific Mail Steamship Company, and acquisition and construction of the San Pedro, Los Angeles and Salt Lake Railway Company at a cost of nearly $20.5 million. The bulk of the money came from the $100 million convertible bond issue sold immediately after the initial commitment to buy $75 million par value of Southern Pacific stock at something under 50 percent of par. Substantial funds apparently also were obtained from banks, and the road’s net floating debt on June 30, 1901, was $30,-249,459 larger than a year earlier.
Title to the Northern Pacific shares actually was vested in the Oregon Short Line, which obtained funds from Union Pacific by issuing to it purchase money certificates of indebtedness for $61 million. In addition, Oregon Short Line in 1903 issued $36 million 4 percent and participating collateral trust bonds.
316. The net effect of the foregoing and other transactions was that as of June 30,1904, the Union Pacific had outstanding consolidated net indebtedness of around $289 million, compared with about $149 million on June 30, 1900, before Harriman’s plans got underway. The net debt of the U.P. thus rose in this 3-year period, mainly to finance these ventures, by roughly $140 million, or approximately 93 percent.
317. The Southern Pacific did not pay dividends, and it required substantial physical rehabilitation. The impressive improvement in earnings was the chief support for the $4 million of interest called for annually by the bond issue issued to finance the S.P.’s acquisition. In U.P.’s ownership, the S.P. stock produced by June 30,1901, equity earnings of $4,447,500 — $5.93 per share on the 750,000 shares of S.P. purchased in that year, or $4.36 per share on U.P.’s outstanding common. Moreover, the interest requirement diminished as, increasingly, the bonds were converted into common stock pursuant to the option attached to the bonds.
318. Indeed, the rate at which the privilege of conversion was exercised by the holders of the 4 percent bonds issued to finance the Southern Pacific acquisition (finding 310) was an index to the steady improvement in the Union Pacific’s *189position in this period. Only $12.7 million face amount of these bonds had been converted as of June 30,1904. Another $56.1 million was converted in the fiscal year ended June 30, 1905, and another $32.7 million was converted after the increase of the dividend on the common from a 4 to a 5 percent basis in October 1905 and to a 6 percent basis in April, 1906. As of August, 1906, all except $500,000 face amount of these bonds had been converted.
319. (a) The defendant’s expert testified that the impressive improvement in U.P.’s earnings which supported the interest requirements on the bonds issued to finance the Southern Pacific acquisition was not generally foreseen.
(b) It is found that the impressive improvement in earnings, while in its full extent not generally foreseen, was as a trend foreseeable by a reasonably informed investor. The significance of the acquisition of the Southern Pacific as a source of business and profit for the U.P. was foreseeable; and the reasonably aware investor could appreciate the context — the management’s continuing and successful efforts to reconstitute the Union Pacific System, in a setting of increasing national prosperity.
320. (a) The defendant’s expert testified that
Harriman’s ventures entailed tremendous financial risks and that had he not engaged in them the Union Pacific no doubt would have been a highly prosperous property in its own right, for nothing of a permanent nature was realized from an operating standpoint from Harriman’s financial escapades.
(b) It is found that the ventures were risky only in that they were of very large scope; that the ventures cannot be described as “financial escapades”; that they were sound, foreseeably profitable to U.P. and that the profits were soon realized; in short, that the ventures were exceedingly good investments — “eminently successful” and the source of a “fabulous” amount of profit for the U.P., as defendant’s expert testified — which enlarged the Union Pacific’s system and in a remarkably short time brought it profit from an operating and investment standpoint.
321. (a) Defendant’s expert testified that
Harriman had “speculative leanings”; that he was “auda-*190cions”; that his ventures were “risky,” “daring,” “escapades” and “forays.”
(b) It is found that these and other depreciations of Harriman are without basis and unwarrantedly seek to minimize the value to the U.P. of his management talents and the reflection in the value of U.P.’s stock of the profits he brought to the U.P.
322. (a) The defendant’s expert testified that
Plarriman correctly judged the upturn in business conditions in 1897, and yet testified that if business conditions had not been consistently good from 1897 to 1907 some of Harri-man’s escapades could well have plunged the U.P. into trouble again.
(b) It is found that the conclusion in the foregoing sub-paragraph (a) is rejected as an improper characterization of Harriman’s sound and successful business steps and as an effort without basis to deprive the valuation of the U.P. stock of the value of Harriman’s talents and successes.
323. (a) The defendant’s expert testified that
Harriman’s successes hardly alter the conviction that he risked the future of the Union Pacific from the standpoint of finances, operations and the public interest; that his ventures heavily involved the Union Pacific’s credit and financial integrity, and could have been as disastrous as they were in fact ultimately profitable.
(b) It is found that there is in the record no data, other than the mere size of the ventures and the sums involved, to support the conclusions in the foregoing subparagraph (a). Superbly planned and executed ventures by all but inspired corporate leadership, so soon and so successful as these were, cannot be denigrated with the cliche that any venture can fail.
This is not to say that the value of the corporate stock at the beginning of such ventures is to be measured by the full actual success later realized. The reasonably good prospects for the success of the ventures must, however, go into the scales in the valuation.
324. Harriman’s period of management was one of improvement in U.P.’s value generally, and not only in consequence of his acquisitions of interests in Southern Pacific, Northern Pacific and Burlington. The improvement could *191be seen in tbe brief year between the effective creation of the new company on January 31,1898 and the exchange offer of the Oregon Short Line stock on January 26, 1899 (finding 424 et seq.). In that period alone, the U.P. became a considerably stronger road.
The prospects of this improvement were to a degree foreseeable by reasonably informed investors in January 1898, by reason of the knowledge available to and in the financial community, which knew of Harriman’s talents and had witnessed since 1896 his increasing degree of leadership of the U.P.
325. (a) The defendant’s expert testified that
While the financial condition of the U.P. was good at the time the reorganization became effective in January, 1898 (see finding 295), the current financial position of the reorganized road as of June 30, 1898, was not robust, for current assets of $7,598,045 exceeded current liabilities of $4,468,416 by only $3,129,629. A year later, the balance sheet showed an excess of current assets over current liabilities of only $1,109,098. Moreover, the liability side did not include a dividend of $1,500,000 declared on the preferred, which was payable in cash on October 2,1899. A significant change for the better took place in the current financial condition of Union Pacific during November 1899, when the receivers of the old Union Pacific Eailway Company made a cash distribution on claims against that company. The plaintiff’s proportion amounted to $5,249,090, which, together with the balances in the treasuries of Oregon Short Line and Oregon Eailroad and Navigation Company, gave the combined system a cash balance of $11,385,793 on December 1, 1899. By June 30, 1900, the situation was not so favorable again. Cash and cash items had dwindled to $7,957,896 and in addition station agents and conductors held cash of $579,363. Including these items and accounts collectible of $3,027,350, total current assets amounted to $11,564,-610. Current liabilities totalled $7,486,611, leaving what the road called “Balance, Cash Assets” in the amount of $4,077,-999. Additionally, the liability side of the balance sheet listed interest and sinking funds accrued but not due in the amount of $449,538 and dividends payable of $3,904,146 on October 1, 1900. On June 30, 1901, Union Pacific was run-*192rung extremely serious financial risks inasmuch as on a consolidated basis it bad a net deficit of $25,779,808 in working capital and also had declared dividends of $4,071,006 payable October 1,1901. This abrupt decline in its working capital position was due to plaintiff’s acquisitions of stock in the Southern Pacific and Northern Pacific, as described above.
(b) The foregoing testimony and conclusion in the foregoing subparagraph (a) are rejected as misleading.
(1) Any implication that the condition or value of the Union Pacific worsened following the reorganization would be incorrect. The reorganization was a good one, the cash position of U.P. was reasonably good and its credit was good, and its general condition kept constantly improving from the moment the reorganization was effected.
(2) The quality of the risks in the acquisitions of the Southern Pacific and Northern Pacific have been discussed above; the risks were not, as the witness implies, serious. The obligations assumed and the effect on cash in consequence of these investments did not create “serious financial risks” but were good business.
(3) The approximate size of the distribution of such a sum as the $5,249,090 distributed to the Union Pacific by the receivers was doubtless foreseeable and known well in advance, on the basis of management’s and investors’ knowledge of the relationship of the total claims to the amount of assets to become available for satisfaction of the claims. The exact sum may not have been foreseeable and forecast, but that a claim would be paid, and its magnitude, would have been known long in. advance.
10. Approaches by the Government to Valuation of the Reorganization Stock
(a) Propects for Reacquisition of the Oregon Lines
(i) History of the Oregon Lines
326. The Oregon Short Line Railroad was organized in February 1897 as the successor to the Oregon Short Line and Utah Northern Railway Company, which had been sold under foreclosure in January that year. The prop*193erties — primarily a road from Ogden to tire Idabo-Qregon border — were turned over to tlie new company on March 16 of the same year.
The predecessor, the Oregon Short Line and Utah Northern, had its beginnings in 1881 as the Oregon Short Line Railway Company. The last-named had been created by the Union Pacific to provide it with a connection with the Oregon Railway and Navigation Company, organized in 1879 and still in the blueprint stage but planned to run from the Idaho-Oregon border to the coast.
In 1889, the plaintiff’s predecessor, which owned a large majority of the outstanding Utah and Northern Railway bonds and stock, merged the Utah and Northern with the Oregon Short Line, thereby creating the Oregon Short Line and Utah Northern. The latter, on December 31,1896, owned $13,006,678 of the outstanding $24,000,000 stock of the Oregon Railroad and Navigation Company, of which $13,000,000 was pledged under its collateral trust 5s 1919 and the remaining $6,678 with 'the Union Pacific.
Other lines merged into the Oregon Short Line and Utah Northern were the Idaho Central and the Utah Central, the latter itself a consolidation of the Utah Central, the Utah Southern, and the Utah Southern Extension Railroads.
327. As earlier indicated (finding 258) the Oregon Short Line was financed by the issue of $29 million in securities, half in bonds and half in stock, 50 percent of the stock being-issued as a bonus to the purchasers of the bonds and the other 50 percent of the stock being issued to the plaintiff’s predecessor for no consideration.
328. The cost of construction was $14.5 million, half the $29 million capitalization. Bonds in the amount of $14,-931,000 were issued to finance the cost, and were sold at face. (See finding 258.)
Expenditures for new construction to December 31, 1886, amounted to $3,379,405.56 for the Utah and Northern Railway and $890,978.92 for the Utah Southern. Information on other expenditures is not available.
329. At the time of the reorganization of the Oregon Short Line and Utah Northern in 1897, the road had outstanding $36,794,000 mortgage bonds, which, in view of the practice *194of using the bonds to finance construction and issuing the stock as a bonus, probably represented the true cost of construction of the various lines comprising the property. In addition, the Oregon Short Line and Utah Northern had outstanding $13,000,000 collateral trust 5s 1919 secured by an equal amount of Oregon Railroad and Navigation Company stock. In the reorganization, the Oregon Short Line issued or assumed $34,054,000 fixed interest bonds and $22,-026,000 income Series A and Series B bonds, the Series B issue of $14,841,000 being secured by the Oregon Railroad and Navigation Company stock. Pursuant to the plan of reorganization, bonds with a face value of $21,755,000 remained undisturbed and other mortgage bonds with a face value of $14,370,000 received 50 percent in new Oregon Short Line consolidated mortgage 5s 1946, 50 percent in new income Series A bonds, and 100 percent in new common stock. Holders of the $26,180,200 old common stock received one-half share of new common stock upon payment of an assessment of $12, for which holders received an equivalent par value in the new consolidated 5s. Scaling down of the old common stock by 50 percent had the effect of squeezing $13,090,100 of water out of the old capitalization, but this was in substance offset to the extent of $14,370,000, representing the amount by which new securities given to the aforementioned “other mortgage bonds” exceeded their face value, although there was some consideration in the form of lowered interest and acquiescence in new extended maturity dates.
330. Accordingly, the total ¡cost of road and equipment of $67,508,189 appearing in the Oregon Short Line balance sheet of June 30, 1898, was probably still overstated despite the reorganization, in the light of the water in the capitalization of the original Oregon Short Line and the probable water in properties added to it.
331. The Oregon Railway and Navigation Company was in receivership from October 13, 1893, to August 17, 1896, and was then reorganized under the name of the Oregon Railroad and Navigation Company. The new company issued bonds having a face value of $20.1 million, $11 million par *195value of preferred stock, and $24 million par value of common stock.
(ii) The Oregon Lmes in 1898
332. There can hardly be any question that the Oregon Short Line occupied a most strategic position from the standpoint of the Union Pacific. With the Oregon Short Line and the Oregon Railroad and Navigation Company as part of its system, the U.P. had a line to the Pacific Coast; without these two Oregon lines, the U.P. terminated at Ogden and was in a very weak position in interchange traffic, particularly the transcontinental movement. The reacquisition of the Oregon Short Line, lost or deliberately let go in the reorganization (finding 297), as well as other parts of the old Union Pacific system, was therefore essential to protect the position of the U.P.
333. As far back as early 1896, Mr. Mink, then one of the receivers of the Union Pacific, stated that while the U.P. reorganization plan did not specifically provide for inclusion of the Oregon Short Line, “There is a strong probability that we shall retain it.” At another point, Mr. Mink said, “I think that the loss of the OSL would be almost irretrievable.” On October 30,1897 it was reported that the reorganization committee had “comprehensive plans” for recovering the “old Union Pacific system.”
334. (a) The defendant’s expert testified that
(1) Of the $27,460,100 par value of common stock issued in 1897 by the reorganized Oregon Short Line, $8,460,000, or 84,600 shares, was acquired by the Union Pacific reorganization committee in December, 1897. This stock was purchased by Kuhn, Loeb & Company, representing the reorganization committee, from the trustees of the collateral trust 6 percent Notes due 1894. From 'all indications, the assessment on the old Oregon Short Line and Utah Northern stock had been paid, apparently by the trustees of the 6 percent Gold Notes.
(2) In March, 1898 the committee increased its holdings of Oregon Short Line common, and as of March 28, 1898, held a total of 120,093 shares at an average cost of $21.10 per share, including interest and commissions. These shares were transferred to the Mercantile Trust Company under a *196syndicate agreement which apparently gave the Union Pacific the right to purchase this stock. Within the next several months, additional Oregon Short Line stock was purchased, and, at the end of August, 1898, the Union Pacific and Kuhn, Loeb agreed that the latter would buy for $8 million (or approximately $23.73 per share) the 125,679 shares of Oregon Short Line common then held by the Trust Company plus 750 shares to be acquired by the Union Pacific. A condition of the sale was that Kuhn, Loeb had the right to resell this stock to the Union Pacific prior to December 31,1899, for its cost of $3 million plus interest of 5 percent.
(b) The foregoing testimony is rejected as materially incorrect and misleading. It is found as follows:
(1) Pursuant to the plan to reacquire the U.P.’s subsidiaries (findings 298, 299) the U.P.’s reorganization committee had bought up foreclosed Oregon Short Line stock and by December 1897 it had acquired 84,600 shares of the 274,601 shares of the reorganized Oregon Short Line from Kuhn, Loeb & Co., who were acting as bankers and financial agent for the committee. The shares remained with Kuhn, Loeb & Co. as security for the purchase price.
(2) The committee was acting on behalf of the new company which would acquire the road, that is, the new U.P., the present plaintiff. An agreement of February 23, 1898, which recites the purchase and makes further purchases, of which more below, disclaims personal liability of the members of the committee. The members promised only that they charged funds at their disposition with the agreement and that they would cause the new U.P. to agree to pay the monies due under the agreement and to assume performance of the agreement.
(3) It appears from the recitals in the agreement that Kuhn, Loeb had as of that date, February 23, 1898, bought additional Oregon Short Line common shares (whose number is not given throughout the agreement) which the committee desired to purchase, and that the committee desired Kuhn, Loeb to purchase for its account still further shares, which together with the 84,600 and the “additional” shares would aggregate 137,301 shares.
*197(4) The agreement then goes on to provide that Kuhn, Loeb hereby sell to the committee, and the committee purchases, all the said shares of Oregon which have been purchased by Kuhn, Loeb in addition to the 84,600 already belonging to the committee, for a consideration of cost plus $1 per share for each share beyond the 84,600; the same rate was to be paid for the still further shares mentioned above.
(5) As of March 28,1898, a settlement of accounts under the February 23 agreement among Kuhn, Loeb & Co., the committee and the U.P., showed the total number of shares “purchased under the agreement of February 23, 1898” to be 120,093, for which the committee owed Kuhn, Loeb $2,533,608.25. It does not appear how many of these, beyond the original 84,600, were the “additional shares” sold to the committee by the agreement of February 23, 1898, and how many were bought between February 23 and March 28.
(6) It is therefore apparent that a part of the shares additional to the first block of 84,600 had already been purchased by Kuhn, Loeb prior to February 23,1898, and thus perhaps even prior to the effective date of the reorganization, January 31, 1898. In view of Kuhn, Loeb’s position in the reorganization, any such shares would have been bought with a view to resale to the new U.P. or at least control by the U.P. as part of the plan for reacquisition of the Oregon lines.
(7) The said 120,093 shares of Oregon Short Line, with others to a total of 125,679, were transferred to the Mercantile Trust Company to be held by it as trustee under an indenture called the Auxiliary Lines Syndicate Agreement of March 28, 1898. The function of the Mercantile Trust Company was apparently to act as trustee for the interested parties — those whose money had paid for the stock and the U.P., which had a right to delivery on payment of the stipulated price.
(8) The agreements mentioned in the foregoing were ratified by the U.P. on April 7,1898.
(9) On August 29, 1898, the U.P. transferred its right to delivery of the said 125,679 shares and sold 750 additional Oregon Short Line shares just acquired — a total of 126,429 *198shares — to Kuhn, Loeb & Co., who paid $3 million for them, Kuhn, Loeb & Co. to have the right of reselling them to the U.P. at any time between August 30 and December 31, 1899 at cost plus 5 percent interest.
(10) The U.P.’s reason for the transaction does not seem to have been any shortness of funds. There is affirmative indication in the relevant correspondence that the U.P. was not in need of money. The motive for the transaction does not appear from the scanty papers which have been available for the record in this case; it may have been designed with a view to the soon to be announced offer to exchange U.P. stock for Oregon stock (finding 386), and to facilitate the public response to the offer.
(11) Whatever the precise reason for the transaction, however, it is clear that the shares — both those bought before and after January 31,1898 — were safe for U.P.’s interest with Kuhn, Loeb. In view of the long standing plan of the reorganization committee, led by Kuhn, Loeb, to reacquire the U.P.’s subsidiaries for the U.P., the relations between the parties, the U.P.’s overriding need for the Oregon stock and its apparently adequate financial means at the time, the apparent sale of August 29,1898 was not a sale of the Oregon shares out of the U.P.’s control, away from the U.P. system or in any way a setback in U.P.’s program to reacquire the Oregon lines, but merely a formal and temporary deferment of open ownership of the stock by the U.P. Control of Oregon had been assured to the U.P. by the earlier buying campaign.
335. (a) The defendant’s expert testified that
As of January 31,1898, the reacquisition by plaintiff of the Oregon lines was probable, but by no means certain. Something might have occurred to prevent reacquisition by the plaintiff. The reorganization committee’s 84,600 shares of Oregon Short Line common were only about 30 percent of the 274,601 shares outstanding and not a majority, and there were others seeking control of the Oregon Short Line. As for the Oregon Eailroad and Navigation Company, it was controlled not by the Oregon Short Line, but by the Great Northern and the Northern Pacific through ownership of *199two-tbirds of the Navigation Company preferred which was subject to a voting trust agreement. Moreover, little value can be assigned to the prospect of reacquisition. As of January 31,1898, the Oregon Short Line did not have much earning power. Secondly, the terms of reacquisition were not predictable. It was the reorganization committee, not the plaintiff, which owned the 84,600 shares of Oregon Short Line common. Any benefit to be derived from reacquisition depended to a major extent upon the price the plaintiff would pay for the stocks of the two Oregon lines and the terms of the payment. Finally, reacquisition of the Oregon Short Line without the Oregon Eailroad and Navigation Company would have been of little value 'because the Oregon Short Line ended at the Idaho-Oregon border and did not extend to the west coast.
(b) The foregoing testimony and conclusion are rejected. It is found as follows:
(1) As of January 31,1898, reacquisition by the new U.P. of the Oregon lines on reasonable terms was substantially certain; further, the Oregon lines had good earning power and were essential to the prosperity of the U.P.
(2) Throughout the receivership it was planned and anticipated by the receivers and the committees and leading figures in the reorganization that the U.P. would be able to and would acquire the Oregon lines. In carrying out this plan the reorganization committee was acting on behalf of the new U.P.; the committee’s ownership was the U.P.’s ownership. Kuhn, Loeb, too, bankers to the reorganization, was involved in the reorganization in the interest of the U.P. Both the committee and Kuhn, Loeb were engaged in a program of acquisition of Short Line stock on behalf of and for the account of U.P. for purposes of eventual control by the U.P. There is nothing of substance in the record to show that the U.P. 'had rivals in this program or that there were any substantial obstacles to its success. While the committee may not have had an absolute majority of the Short Line stock by January 31, 1898, it definitely had 84,600 shares, ordinarily a number large enough for control. Moreover the *200“additional” shares which the committee bought from Kuhn, Loeb on February 23, 1898 may already, on January 31, 1898, have been in the hands of Kuhn, Loeb, and in those hands safe for use in the U.P.’s reacquisition of the Oregon. Further, by March 28, 1898 the shares accumulated for the committee — shares of which U.P. was the beneficial owner, albeit subject to payment of their cost — totaled 120,093. These various transactions, even including the accumulation of 120,093 by March 28,1898, were substantially contemporaneous with the effective date of the reorganization and thus any valuation of U.P.’s stock as of January 31, 1898 should be based on U.P.’s ability to control shares to this number.
(3) The reacquisition was of great value to the U.P. It is incorrect to say that as of January 31,1898 either of the Oregon lines did not have much earning power. They had been out of reorganization for some time, favorably recapitalized, and launched on successful money-making courses. See findings 391-407. And aside from the Oregon lines’ ability to make money on their own mileage, they were, as defendant’s expert admitted, most strategic and essential for the U.P., and so aside from their own earning power, they were undoubtedly of great value to U.P.
(4) It is incorrect to say that the terms of reacquisition were not predictable and that benefits would depend on the price fixed by the reorganization committee, the owner of the stock. The reorganization committee was acting as agent for the U.P. It bought for cost plus $1 per share commission to Kuhn, Loeb, and this would be the price to U.P. The U.P., moreover, as appears from its correspondence with Kuhn, Loeb, was not short of money for the reacquisition program.
Kuhn, Loeb, too, was in the buying program acting for U.P. and could be depended upon to turn over any Oregon shares it bought or held either at a nominal profit or on terms otherwise not onerous to the U.P.
(b) Lastly, it is sheer speculation to suggest that the U.P. might have been successful in its efforts to acquire only the Shore Line and not the Oregon Eailroad and Navigation. The Oregon Short Line owned a dominating if not a controlling *201block of stock in Oregon Navigation and there is nothing in the record to suggest that the U.P. would not be as successful as it soon was (findings 180, 414) in obtaining the Navigation preferred.
336. (a) (1) The defendant’s expert testified that his opinion that the reacquisition was uncertain was based on the premise that the reorganization committee did not have control, and that in his valuation he had assumed the probability of reacquisition at something better than 50-50, that is, somewhat better than an even chance.
(2) He further testified that if the probability of reacquisition were raised to 75 percent, he would increase his valuation of the Union Pacific common from $22.50 to close to $30, an increase of 33 percent. Further, that while a 75 percent probability would for purposes of valuation be tantamount to a substantially 100 percent likelihood of reacquisition, if the probability of reacquisition were raised to 90 to 95 percent, he would add $2 more to his per share valuation, bringing it up to $32, an increase of 42.2 percent over his first valuation of $22.50.
(b) It is found that on the -basis of the probability of reacquisition having been found to be one of substantial certainty, the probability is comparable to the 90 to 95 percent probability considered by defendant’s expert and thus that the opinion of the defendant’s expert, on the supposition of the finding made herein of substantial certainty, is that the value per share of the reorganization common is $32 per share, greater than the valuation of $31.76 for the same stock derived from the aggregate valuations by the Commissioner of Internal Eevenue of the reorganization and post-reorganization stock (finding 189).
(b) Stock Market Values
(i) The Gammon
337. The holder of a share of old common, who was on payment of the $15 assessment to receive one share of old common plus 15/100ths of one share of new preferred (finding *202208) received trust receipts, later replaced by certificates of deposit, for his old common deposited. Trading in the trust receipts began on the New York Stock Exchange on January 23,1896. The monthly high and low prices and the number of these receipts sold as reported by the Commercial and Financial Chronicle for February 1896 through March 1898 were as shown below. The prices for August 26 through October 19, 1897, were for receipts on which $5 of the assessment had been paid; the prices for October 20 through November 23, 1897, were for receipts on which $10 of the assessment had been paid; and the prices for November 24, 1897, and subsequent dates were for receipts on which the full $15 assessment had been paid.
338. For the period beginning January 3 through March 4, 1898, the daily high, low, and average (for the days after February 1) price of the trust receipts sold on the New York Stock Exchange and the number of receipts sold for each week were as follows:
*203
339. In order to obtain the cash, necessary for payment of the Union Pacific debt to the Government, the reorganization committee sold purchase money certificates to two syndicates. Each certificate had a face value of $1,000 and was exchangeable for $1,000 of new Union Pacific 4 percent bonds and $500 par value of the new Union Pacific preferred stock. The holder of a certificate was entitled to interest at the rate of 4 percent. For each certificate, the committee received $1,000 in cash.
*204340. For the period beginning on December 4, 1897, and ending on February 7, 1898, the purchase money certificates were traded on the New York Stock Exchange. The number of certificates sold and the high and low prices stated as a percentage of $1,000 were as follows:
341. Plaintiff’s common stock was first traded on the New York Stock Exchange on February 25,1898. For the period beginning February 25 and ending March 7,1898, the daily *205high, and low price and the number of shares sold were as follows:
342. The monthly high and low prices (with fractions rounded off to the nearest dollar) of Union Pacific Railroad Company common stock for the years 1898-1901 were as follows:
*206Testimony and other findings are sometimes based on figures not rounded off and may thus vary slightly from the foregoing figures.
343. The annual high and low prices of Union Pacific common stock for the years 1898-1915 were as follows:
(ii) The Preferred
344. The daily high, low, and average prices for plaintiff’s preferred sold on the New York Stock Exchange and the number of shares sold for each week for the period beginning February 2, 1898, and ending March 4, 1898, were as follows:
*207345. The monthly high, low, and average prices of Union Pacific preferred for the first six months of 1898 were as follows:
348. The yearly high, low and average prices of Union Pacific 4 percent preferred stock for the years 1898-1915 (with fractions rounded off in the first 4 years) were as follows:
347. The average prices paid for the stock in sales in the indicated periods on the New York Stock Exchange, compared with the valuations by defendant’s expert, are as follows:
*208
*209(iii) Value Based on Stock Market Prices
348. The defendant’s expert testified that
Consideration has been given, in the valuation of the reorganization stock, to the market prices of Union Pacific securities — to the extent they are available — at the time of reorganization, immediately prior thereto, and shortly thereafter.
349. In 1896, during the reorganization, the common stock of the old U.P. had sold for as low as 3%. In April 1897, less than a year before consummation of the reorganization plan, it sold as low as 4%. From there on, it showed an upward trend as the date drew closer for transferring the assets from the receivers to the new company.
The improved prices of course reflected to a degree the payment of the assessment of $15 per share in three installments of $5 each in September, October and November 1897, although the degree of price rise as reorganization neared was greater than the cash payment.
350. The trust receipts for the predecessor’s common stock deposited with the reorganization committee, with all assessments paid, entitled holders to one share of plaintiff’s common plus $15 of par value in new $100 par value preferred stock. The trust receipts sold at a high of $24% in November, $26% in December, and shortly before the new company came into being at midnight, January 31,1898, they attained a peak of $35%.
351. The derived market prices of a share of U.P. common on January 31, 1898, based upon that day’s high trust receipt price, was $25,875 or $25%.
The derivation is obtained as follows: Since a trust receipt equalled 1 share of common plus 15 percent of 1 share of preferred, the value of 15 percent of a share of preferred was $9,375, obtained by multiplying $62.50, the mean price of a share of preferred on February 2,1898, the first day the shares were traded, by 15 percent. Deducting $9,375 from the $35.25 price of a trust receipt (the high) at midnight January 31,1898, leaves $25,875 or 25% as the derived price of a share of common stock on January 31,1898, based on the price of the preferred on February 2,1898, the first day they were traded. See findings 145,148-150.
*210352. When the new shares were first traded on the New York Stock Exchange on February 25, 1898, U.P. common sold at a high, of $22.50 and a low of $21. The price fell to $16% in March.
353. At the indicated high of about $25% at about the time of reorganization, the market value of the 610,000 shares of the new U.P. common stock outstanding or to be outstanding was approximately $15.8 million. At the low of $16% in March, the market valuation was slightly over $9.8 million.
354. The range of the new preferred stock on February 2, 1898, the first day it was traded, was 63% — 61%, or an average of 62%. In the following month, it fell back to 45%. The high of around 63 was duplicated in June and was decisively surpassed in August when a price of 67% was attained.
355. (a) The defendant’s expert testified that
Considering that the stock was noncumulative and a non-dividend payer, the market’s evaluation of the stock was liberal. It was, however, an era of low money rates, and the possibility of initiation of dividends before too long in the light of growing earnings undoubtedly was a potent market influence.
(b) It is found that the foreseeability of growing earnings from a reconstituted U.P. free of Government restrictions, in an era of rising national prosperity, made the market evaluation not a “liberal” index of its value. The dip in market price soon after February was a natural reaction from the opening, and was not a consequence of substantive negative factors.
356. At the high of 63% established on the first day of trading, the market was placing a value of $47.5 million on the 750,000 shares of the new preferred, while at the low of 45% in the following month, the market value of the issue was about $34.4 million. Higher valuation, both at high and low, would follow from the use of the August high of 67% or the first day low of 61%.
357. The 4 percent bonds of the new company opened at 92 on February 1, 1898, which would give the issue a market valuation of $82.8 million.
*211The high for February was 95% and the low was 92. Three months later, in May, the high and low were 94% and 91%, though in the interim they were as high as 95%, at which level the market value was nearly $86.3 million.
358. Adding up the mentioned market valuations of the new securities of the U.P. at highs and lows around the time of the reorganization, as noted in findings 353-354, produces the following tabulation:
First Mortgage & Land Grant 4s 1947-$86, 300, 000 $82, 800, 000
4 percent Preferred Stock (noneumulative) _ 47, 500, 000 34, 400, 000
Common Stock- 15, 780,000 9, 800, 000
Totals _ 149, 580, 000 127, 000, 000
The foregoing market aggregate values give a range of $127-149.6 million, with a mean of about $138.3 million.
359. (a) The defendant’s expert testified
That the market value of U.P.’s securities in later years— even less than a year after the reorganization — turned out to be substantially greater than around the time of the reorganization hardly appears to have much, if any, bearing on the valuation of the railroad when it emerged from the protection of the courts. Changed conditions that could not have been foreseen had a great deal to do with the later prosperity of the Union Pacific, and Mr. Harriman’s daring, but successful, speculations based on U.P.’s credit, also contributed heavily to the improved market prices. Those closely connected with the U.P. — ranging from receivers to the members of the first board of directors of the reorganized road (with Mr. Harriman probably the only exception on the latter)— saw no basis for any great optimism, let alone prosperity.
(b) The foregoing testimony and conclusion is not accepted.
(1) It is found that Harriman was not alone in seeing a basis for optimism. His board approved his programs, among them his very early program for large expenditures in physical plant (see finding 307).
(2) The steady rise in market prices reflected enhancements in value not so unforeseeable as defendant’s expert testified. The upturn dated from 1896 and Harriman cor*212rectly judged the improving business conditions. The prospects for profits and the enhancements in value soon to come after January 1898 could be appreciated at that time by a reasonably informed investor, although the extent of the coming prosperity could of course not be known. See findings BOO et seq. The inability of those “closely connected” with the U.P. to see the coming prosperity, mentioned by the witness, dates from earlier, depression and receivership times.
360. (a) The defendant’s expert testified that
It must be acknowledged that inasmuch as the U.P. had just emerged from receivership and that its new preferred and common stock were nondividend payers, a great element of speculation existed in the stocks. For this reason, it may be concluded that even the low part of the range of $127 million, in the market aggregate valuation set out in finding 358, was not an unduly and severely depressed one.
(b) The foregoing testimony and conclusion is not accepted. It is found that
1. The recency of the reorganization and the fact that the new stock paid no dividends do not establish that the stocks had a great element of speculation, or that the low of the market was a correct value or a “not unduly and severely depressed” value. These factors alone might tend, if prospects were good, as much or more to bring about a substantial undervaluation. In other words, a company just out of reorganization and not paying dividends may be an exceedingly good investment at a market-undervalued price, if it has prospects.
The nondividend paying quality of the stock was in the past. From the very fact of the nature of the reorganization and where the company was left at its end, these were stocks whose past was past. The road had reasonably hopeful prospects for the future; this is the subject of other findings. The stocks did not have a great element of speculation. They were rather superior investments.
2. The “low part of the range of $127,000,000” was in fact “an unduly and severely depressed one,” if only because it may well have been based on the recency of reorganization and the lack of present dividends, instead of the great potential for *213profit that a unique transcontinental system built on the U.P. could become.
The market lows which, added together produced ¡the $127 million are the low of 16% for the common and 45% or 46 for the preferred, all in March 1898. These are low points in the second month of trading, in a year in which the monthly averages, except for the falter in March, rose steadily. For preferred the monthly average prices rose in the whole year from 57 to 72, with a dip to 52 only in March and April. The highs rose from 63 to 74, and the lows from 51 to 69. For the common, the average monthly prices rose in the whole year from 22 to 40.5, with a dip to 19.5 in March and April. Highs rose from 23 to 44 and lows from 21 to 37. This first half of 1898 was a time of increases in earnings, of physical renewal of the road, of acquisitions of other railroads.
The drops in market price in about March are properly to be regarded not as reflective of enduring value but rather as hesitations or reactions from the strong opening in January and February. They were preceded and succeeded by prices more reflective of investor’s confidence in the fundamental profitability of the road. Because it was to such a degree foreseeable that the upward trend of business profitability would continue and that the U.P. system would be substantially reconstituted and have good and increasing earnings, it is concluded that the low part of the range of $127 million under discussion was in fact an unduly and severely depressed market valuation.
(c) Net Asset Values
361. The cost of constructing the Union Pacific, Kansas Pacific, and the Denver Pacific was approximately $82 million, as follows:
Approximate cost of construction
Union Pacific-$54,200,000
Kansas Pacific_ 22,651,000
Denver Pacific_ 6, 000,000
Total_ 81,851,000
To the foregoing total of $81,851,000 should be added additions and betterments to the original construction. From *2141867 through 1886, capital expenditures on the Union Pacific amounted to $13,765,244.97. In the years 1887-1893, inclusive, expenditures of a similar nature on the Union Pacific (exclusive of branches) amounted to $3,472,602, exclusive of betterments of $1,046,739 charged to operating expense during the period. If the foregoing combined total of $17,237,847 of additions and betterments is added to the above estimated original cost of $81,851,000, the total property investment would be $99,088,847. Capital expenditures during receivership were presumably small. See finding 307.
362. (a) The defendant’s expert testified that
What was actually paid by the reorganization committee for the road in terms of (1) new first mortgage bonds issued to old bondholders and (2) cash for the discharge of legitimate longstanding obligations is of course a reflection of the minimum payments essential to acquisition, free of old debts, of the net assets before the reorganization committee.
Total payments of the type covered under (1) and (2), above, amounted to $94,441,535, as follows:
New first mortgage bonds issued to holders of old bonds-$30, 928, 960
Net amount of cash paid to the United States Government - 64,487,768
Cash paid to nonassenting bondholders_ 7, 753,000
Net amount of cash paid for securities of old collateral trust notes- 1,271, 807
Total cash and bonds paid_ 94, 441, 535
What was given to holders of the old bonds in the form of new preferred stock can be regarded as a bonus to induce them to agree to the plan (see finding 288); likewise, payments made in connection with the reorganization proceedings in cash and securities can be dismissed as not an addition to value, but rather disbursements necessitated by the problems created by earlier inept management. This latter may not have been entirely correct, and there may have been a few millions more in value, since the nature of some of the disbursements made by the reorganization committee is not entirely clear from the records available and there are some discrepancies in these records.
*215These distributions and disbursements indicate that the net assets of the Union Pacific were worth $95-100 million, plus the value of the land grant property (land contracts and unsold lands) and various miscellaneous assets. The land grant assets had a value of about $15 million around the time of the reorganization, and the other miscellaneous assets were worth $5-10 million. This would bring the total net asset value up to around $115-125 million.
(b) The foregoing testimony and conclusion are rejected as substantially incomplete and misleading. The list of payments omits items such as the large amounts indirectly utilized in satisfying the Government debt and the stock issued to persuade holders of soon-to-mature bonds to accept an almost 50-year postponement of maturity and a reduction in interest rate (finding 287). The testimony wrongly depreciates and fails to value the indispensable work and contributions to value of the reorganization committee and the Purchase Money Syndicates, not to speak of the reorganization itself.
363. In the testimony given to the United States Pacific Eailway Commission in 1887 and the Senate Committee on Pacific Eailways in 1896, the valuations placed on the property of the Union Pacific Eailway were consistently well below $100 million. The only exception is the valuation of around $116-120 million which can 'be derived from the testimony in 1896 of Mr. Winslow S. Pierce, counsel for the reorganization committee, regarding the value of the railroad as security for the 4 percent first mortgage bonds to be issued in the reorganization. This valuation is the sum of the following items:
1,477 miles bond-aided, at $50,000 per mile_ $73, 850, 000
350 non-aided miles of U.P., plus 270 miles of branches_ 18, 000, 000
Omaha bridge and terminals at Kansas City and Denver _ 6-9,000,000
Land and land contracts_ 19,000,000
Total- 116-119,850,000
The foregoing valuations given in 1887 and 1896 (other than that based on Mr. Pierce’s views) probably were tinged *216with a great deal of pessimism, skepticism, and even belligerence toward the U.P. The value worked out on the basis of Mr. Pierce’s testimony very likely could be regarded as the optimistic approach, since as counsel for the reorganization committee he had no reason to denigrate the position of the securities holders by understating the value of the security for the new bonds.
364. The defendant’s expert testified that as to what weight should be placed on the price paid by the reorganization committee, the position could be taken that the committee finally paid to the United States Government much more than it considered a reasonable settlement simply to have done with the whole matter and restore the road to the securities holders. The other side of the coin is that the committee may simply have been bluffing — playing a good game of poker, so to speak — in its dealings with the Government, the road’s biggest creditor. Some basis for this view certainly appears to lie in the availability of much more money than was actually required to consummate the reorganization. The summary of the committee’s receipts and disbursements in the period October 15, 1895, to May 16, 1898, shows that $10,605,000 was returned to the reorganization syndicate and another $9,050,000 in advances also was repaid in cash, presumably representing unneeded funds.
365. (a) The defendant’s expert testified that
The value of the net physical assets of the U.P. (including the Kansas Pacific) on January 31,1898, the time of the reorganization, was $115-120 million. This total includes the lands, land contracts, and miscellaneous assets. If the net debt of $90 million as of January 31,1898, is deducted from the $115-120 million net asset value, there is a balance of only $25-30 million for the $75 million of preferred stock or only about $33 to $40 per share and nothing for the common.
(b) It is found that net asset value as computed in the foregoing is to be distinguished from value based on prospects for earnings and appreciation and has little materiality to the fair market value of the stock in issue. Net asset value is the value of the lifeless assets, after a depression and a reorganization. Yet the road was the core of a great trans*217continental system, which though it had gone through lean years was now free to engage in profitable business.
In sum, the total net asset value as computed by defendant’s expert is (a) based at least in part on an incomplete estimate of the “price” paid on reorganization; (b) not material by definition, in that it is based on tangible assets and omits such important considerations as earnings and prospective earnings; (c) belied by stock market values (see finding 247 et seq.) and the judgment of the holders of 610,000 shares of common who paid $15 per share to save their investment; (d) incomplete in omitting any consideration of branches and subsidiaries and the prospects for reacquisition and (e) insofar as it concludes there was “nothing for the common” is contradicted by the final opinion of the defendant’s expert himself, who gave a value of $22.50 per share to 'the common.
(d) Values Based on Ocapitalization of Earnmgs
366. The operating earnings for the years 1889 through 1897 of that part of the old U.P. system acquired by plaintiff in the reorganization were as follows:
As already indicated, the foregoing are not system earnings, but only those generated by the 1,822 miles owned by the predecessor U.P. and acquired by plaintiff in the reorganization. For most of the years 1889-1897 the U.P. system included other, branch and subsidiary roads, and thus included a much larger number of miles than 1,822.
387. During the entire nine years which are the subject of the preceding finding, the average track mileage operated *218was substantially unchanged. It was 1,821.37 in 1889 and a fraction over 1,822 miles in each of the last five years of the period. For the nine year span, 'total net earnings from operations, after taxes, amounted to $57,723,094, or an average of $6,413,677 per year, while for the five year period total net earnings were $25,764,935, or an average of $5,152,987 per year. If the foregoing averages are capitalized at 5,6 and 7 percent, they would produce the following schedule of valuations, compared with the corresponding figures for 1897 alone:
368. (a) The defendant’s expert testified that
Since the earnings of a single year can hardly be given great weight, consideration must be given to the record for the period 1889-1897 along with averages for this span of nine years and the most recent five years, which are the subject of the preceding finding.
The use of a 5 percent rate of capitalization is not warranted because of the generally poor status of the U.P. at the time and its far from clear future. As of January 31, 1898, the U.P. had an unsavory history, unfavorable ton-mile rates, poor physical condition, and lots of competition.
The speculative elements of the enterprise may even have warranted acceptance of a 7 percent rate. However, this is too extreme, so the 6 percent figures of about $93 million for 1897, $86 million for the five years 1893-1897, and $107 million fo,r the nine years 1889-1897 are regarded as the most acceptable. A straight average of these three figures — which has a tendency to give weight to recency of trends — produces a figure of $95 million, which is adopted as the earnings valuation of the Union Pacific.
The various earnings valuations referred to in the foregoing paragraph are based on operating earnings alone. They do not give any consideration to the value of the land grants and miscellaneous other assets. If these are taken to be worth *219(as previously mentioned in finding 362) around $15 million and $5-10 million, respectively, a total of $20-25 million should be added to the earnings valuation of $95 million to produce a January 31, 1898 value of $115 to $120 million predicated on operating earnings and the other stated assets o,r in the same range as the valuation for total physical assets in finding 365.
(b) It is found that the foregoing valuation, based on capitalization of earnings, and, what is more, past earnings in a depression, in reorganization, with a great debt hanging over the road, is immaterial to the valuation of the stock in issue. Defendant’s expert himself seems to be of the same opinion, having based his valuation of the stock on earnings foreseeable, as of 1898, by him.
The valuation by defendant’s witness suffers, too, from an exaggerated criticism of the U.P. as having an unsavory history and from a failure to recognize the imminence of the reconstitution of the U.P. system (encompassing, so to speak, an error as to prospects and an error as to retrospective matters, that is, an overabsorption in the past earnings of the U.P. in reorganization, without its branches and subsidiaries).
369. (a) The defendant’s expert testified that
At any point in time, it may be possible to predict earnings for the next six months. The farther out in time one goes, the more -uncertain the situation becomes. The plaintiff was an agricultural railroad, and its earnings were related to the agricultural situation and, more specifically, crop prices in the United States and Europe. It is very often difficult to determine the crop situation for the current year, and no one can be sure what the crops are going to be in any future year.
To this effect is the following comment in the Chronicle for June 25,1898:
The course of the wheat market is being very closely watched in view of its bearing on the prosperity of the farming classes and also on the outlooks for the Western roads in the immediate future. The sudden great change in the price of the cereal has taken many by surprise, and there is a disposition to think that it materially alters prospects in the West.
*220The close relationship between earnings and the crop situation is also confirmed by the following comment in the Union Pacific report to stockholders for fiscal 1901:
The operating results obtained during the year, as shown above, clearly indicate that the continued prosperity of the territory served by your lines is most encouraging for the future of your properties. The lack of rain in Kansas and Nebraska affected the com crop unfavorably ; but, while the tonnage usually derived from that source will doubtless be reduced, it is expected that the excellent wheat crop and the expansion of general business will prevent diminution of the Company’s income.
As of January 31,1898, one could not have foreseen what plaintiff’s earnings were going to be for fiscal 1899 or the following years.
(b) It is found that while it is difficult to forecast future earnings precisely, or to forecast earnings any long period ahead, the likelihood of increased and steadily increasing earnings for the U.P. was here to be foreseen from the favorable conditions existing. See findings 300-325.
(e) Values Based on Price-Earnings Ratios
370. On the basis of the net operating earnings for each of the years 1894 through 1897 shown in finding 366, assuming other income of $1 million, and deducting fixed charges of $3.6 million and preferred dividend requirements of $3 million, the U.P. had no earnings for its common stock for 1894 through 1896 and only about one-third of a cent per share of common for calendar 1897.
371. In the light of the foregoing finding, it is not feasible to compare Union Pacific common stock with other railroads on January 31,1898, on the basis of past earnings.
372. The company’s first annual report covered only the six months ended June 30,1898. Not until late in 1899, when the fiscal 1899 report was issued, did the road furnish a record of its operating earnings for fiscal 1898. It did this in providing a comparison with results for fiscal 1899 to show what earnings would have been if the road had owned throughout the two-year period the lines acquired by June *22130, 1899. On the assumption that other income and fixed charges in fiscal 1898 would have been the same as in fiscal 1899, earnings on the common stock for fiscal 1898 would have been $2.95 per share after full preferred dividend requirements.
373. (a) The defendant’s expert testified that
It is possible, but rather improbable, that on January 31, 1898, one could have foreseen what Union Pacific’s earnings would be in the fiscal year ended June 30,1898.
The generally improved 1898 earnings figures for railroads would not be known for many months after January 31,1898.
It is probably a fair conclusion that insiders and knowledgeable outsiders had a pretty good idea late in fiscal 1898 that Union Pacific’s earnings for the year would be around $2.50 per share or better. But it is hard to believe this could have been anticipated as early as January 31, despite a general improvement in railroad earnings in the six or seven preceding months.
(b) It is found that knowledgeable investors as early as January 31, 1898, had a pretty good idea that U.P.’s earnings for fiscal 1898 would increase and might reach a figure in the neighborhood of $2.50 per share or better and certainly they knew that earnings would go upwards in view of the general improvement in railroad earnings in the half-year preceding, the generally available knowledge of U.P.’s affairs, presumably not kept from the financial and investing community interested in the emergence from reorganization of so important a railroad, and the prosperity of the country.
374. In any event, consideration was given by defendant’s expert to price-earnings ratios on January 31,1898, based on per share earnings in fiscal or calendar 1897 and in fiscal or calendar 1898.
375. A mean market price of $25.50 may be derived for Union Pacific common on January 31,1898. The derivation is obtained by subtracting from the January 31, 1898 mean market price for the trust receipts of $34,875 (finding 338) the amount of $9,375, the indicated value of the $15 par value of preferred computed as follows: $62.50, the mean price *222for the preferred on February 2, 1898, the first day traded (finding 344), times .15 or $9,375. When the stock was first quoted on the New York Stock Exchange on Friday, February 25, 1898, the range for the stock was 22% — 21 and the volume of trading was 1,600 shares (Ending 341). The February 25th range also proved to be the range for the month. The monthly price range for the remaining months of Union Pacific’s 1898 fiscal year were 'as follows: March 23 — 16; April 21 — 18; May 24 — 20; June 26 — 23. The average of the high and low for the five months was 21%.
376. Such price-earnings ratios as in the preceding but one finding were computed for the common stocks of the following ten roads:
Atchison, Topeka & Santa Fe Railway Co. (AT&SF)
Chicago, Burlington & Quincy Railroad Co. (CBQ)
Chicago, Milwaukee & St. Paul Railway Co. (CMSTP)
Chicago & North Western Railway Co. (CNW)
Great Northern Railway Co. (GN)
Illinois Central Railroad Co.
New York Central & Hudson River Railroad Co.
Northern Pacific Co.
Railroad Co.
Southern Pacific Co. (SP)
The stock of the Great Northern was in fact a preferred, but it was the only stock outstanding and therefore equivalent to a common.
377. Several of these roads had been regular dividend payers for years and therefore their stocks were to be regarded as well-established investments. In this category were the Chicago, Burlington and Quincy, the St. Paul, the North Western, the Great Northern, the Illinois Central, the New York Central, and the Pennsylvania. By contrast, the three other big roads, namely, the Santa Fe, Northern Pacific and Southern Pacific, occupied speculative positions. These railroads differed from each other in the sense that Southern Pacific had some earnings for its common stock throughout the depressed 1890’s, the Northern Pacific demonstrated strong recuperative powers after its reorganization in 1896, and the Santa Fe was somewhat slower in recovery after its reorganization in 1895.
*223378. It is clear that Union Pacific, in emerging from receivership in early 1898 after many lean years, was a good deal more like Northern Pacific and Southern Pacific than those with good records of earnings and dividends. It was therefore only to be expected that the investment grade issues providing regular dividends would command relatively good price-earnings ratios and that the nondividend-paying Union Pacific, Northern Pacific, and Southern Pacific would sell at lower multiples. Moreover, in the later 1890’s, interest rates were low; good dividend-paying stocks were in especial favor and investors were inclined to pay premium price-earnings ratios for roads showing dividend stability.
379. The price-earnings ratios for the common stock of the Union Pacific and the aforementioned ten roads on January 31,1898, based on per share earnings in fiscal or calendar 1897 and in fiscal or calendar 1898, are as follows:
380. Accordingly, on known 1897 earnings, the price-earnings multiples ranged from 8.4 to 27.3 for the roads other than Union Pacific, Sante Fe, Chicago, Burlington and Quincy, and Northern Pacific. Union Pacific and Santa Fe had no earnings and the last two were excluded because their *224reports did not cover a full twelve months. The higher ratios were for the dividend-paying issues, while the low ratio of 8.4 was for Southern Pacific.
381. On the generally improved 1898 figures most of the multiples came down considerably. Except for New York Central’s 24.0, the dividend-paying issues had price-earnings ratios ranging from 6.0 to 15.0. Union Pacific’s ratio — based on the $2.95 level mentioned in finding 379, and a price of $25.50 — was 8.6, about half way between Chicago, Milwaukee and St. Paul’s 10.6 and Great Northern’s 6.0. The ratios of Northern Pacific and Southern Pacific — both nondivi-dend payers, like the Union Pacific — were only 6.1 and 4.1, respectively.
382. (a) Defendant’s expert testified that
From these figures, it is evident that U.P. common stock at $25.50 was far from being undervalued on the basis of earnings for 1898.
(b) The foregoing testimony is rejected. The data on price-earnings ratios is not probative on fair market value but shows only that U.P. common was selling at a certain multiple of the earnings figure employed, a ratio less than many but not all of certain other roads.
(f) Comparison of Union Pacific Preferred With Other Stocks
383. (a) The defendant’s expert testified that
(1) Of the ten other railroads considered, only five had preferred stocks outstanding and that of Great Northern was preferred in name only. Of the four true preferreds in the group, those of the North Western and the St. Paul were investment grade issues, while that of the Santa Fe was a speculation. The preferred stock of Northern Pacific was definitely more comparable with Union Pacific preferred, but even it already possessed a distinctly better standing and had initiated regular dividends shortly before issuance of the Union Pacific preferred. Both Union Pacific and Northern Pacific were similar in being long haul light density railroads operating in the sparsely settled west and both had gone through a cycle of receivership and reorganization in *225the 1890’s. Northern Pacific bad been reorganized in the fall of 1896 and issued a report covering only the ten months ended June 80, 1897. In this period, it earned only 65 cents per share on its preferred stock. However, as a spring wheat carrier, it benefitted strongly from the excellent crop harvested in the fall of 1897 and lost no time in inaugurating dividends on the preferred at the 4 percent regular rate provided in the charter. For the fiscal year ended June 30,1898, Northern Pacific earned $8.95 per share on its preferred. Northern Pacific preferred stock sold in the 30’s on the New York Stock Exchange virtually throughout the first six months of calendar 1897, when the earnings’ outlook was drab. In June it started to move out of the 30’s as the outlook for the spring wheat crop took form. In January 1898 it sold as high as 69 and on February 2, the date trading began in U.P.’s 4 percent preferred, it sold at a range of 68%-67%, or a mean of 67%. At this price it provided a current return of 5.90 percent.
(2) By comparison with Northern Pacific preferred, U.P. preferred suffered. On the latter, earnings amounted to just $4 per share on a pro forma basis for the calendar year 1897, a period that closed only a month before issuance of the U.P. preferred. Since there appeared to be no reason to believe dividends would be initiated in the near future and it was too early to estimate earnings for the six months ended June 30, 1898, the U.P. preferred could hardly be considered as anything but a speculation. As such, it could not be regarded as much more than a common stock with something extra added because of its noncumulative claim to dividends of 4 percent per annum and its voting rights. Looked upon as a nondivi-dend-paying common stock, the preferred would not have been worth more than six to ten times the pro forma earnings of $4 per share for 1897. The conclusion that as a nondivi-dend-payer Union Pacific preferred was not worth more than six to ten times its 1897 pro forma earnings of $4 per share is also supported by the record of Santa Fe’s noncumulative 5 percent preferred. In fiscal 1899, when Santa Fe earned close to $4 on its preferred ($3.67 to be exact), the stock reached a peak of 35%. Even in the three months following *226the close of the fiscal year, it only sold as high as 37% and was as low as 31%. Like Union Pacific preferred, Santa Fe preferred was a nond'ividend-payer at the time. Applying a multiple of six to ten to the pro forma earnings of $4 per share of plaintiff’s preferred for calendar 1897 produces a price of $24 to $40 per share, or a mean of $32. Giving consideration to the possibility of dividend payments of up to $4 per share sometime in the future and the voting rights, a fair market value of $45 per share for plaintiff’s preferred is warranted.
(3) As against the valuation of 45 assigned to Union Pacific preferred, the stock actually traded in a range of 63%-61%, with a mean of 62%, when it made its debut on the New York Stock Exchange on February 2,1898. The high of 63% on February 2 proved to be the peak for some time to come and before the short month of February had closed Union Pacific preferred sold as low as 51. In each of the following two months it sold below 50 — as low as 45% in March and 48% in April.
(b) The foregoing testimony and conclusions are rejected.
(1) The witness’ valuation of the preferred presumably assumes the same degree of probability of the U.P.’s reacquisition of the Oregon lines as underlies his valuation of the common. The preferred is as dependent on prospects of earnings, represented by the prospects of reacquisition of the Oregon, as is the common. The valuation by the witness of the preferred is thus as defective, in respect of the reacquisition of the Oregon, as is his valuation of the common.
(2) The valuation by the witness based on past earnings— for 1897 — takes no or too little account of prospectve earnings, the beneficial effect of the reorganization and of increasing prosperity and likely prospective earnings. In short the valuation looks to the past and not the present and foreseeable future.
(3) The valuation is another expression of the witness’ belief that earnings cannot be forecast even a few months before the end of a fiscal year; yet it appears from his recount of the affairs of the Northern Pacific that a favorable outlook in June for the harvest of a spring wheat crop was immedi*227ately taken by investors as evidence of a prospective rise in railroad earnings.
Tbe professed inability to anticipate earnings to be formally reported in a few months is of special significance here.
The “pro forma” earnings of $4 per share are earnings for calendar year 1897, during reorganization. The same pro forma earnings for a preferred share for the fiscal year ending June 30, 1898 are $6.40. The sharp rise is doubtless in large part explained by the fact that the earnings of $6.40 were computed on the basis of lines owned as of June 30,1898 and the earnings of $4 were computed on the basis of the U.P. as it stood during calendar year 1897, in receivership, without branches and subsidiaries. (And even the earnings of $6.40 do not consider earnings based on reacquisition of the Oregon lines, which came formally only in 1899.)
Clearly, then, had the witness anticipated even in part the earnings to be reported only 5 months following reorganization, the resulting valuation would be very different than the valuation he gave.
(4) While the preferred stock went to a low of 46 in March 1898, its highs were 63 when trading began in February, 57 in March, and then 54, 60 and 63 in April, May and June, and upwards thereafter. See findings 344-345. The witness seems to have chosen the low point, a point which should be regarded as a reaction, rather than an indication of enduring market value.
The Northern Pacific stock, the witness says, was selling in the 30’s when earnings for the period ended June 30, 1897 were “drab” — 65 cents per share — and it rose to 69 in January 1898 in anticipation of the June 1898 earnings of $8.95 per share. In the light of these facts, it is difficult to believe that investors were paying $60 for U.P. preferred in 1898, if the witness is correct in his opinion that dividends were not expected.
(5) It is difficult to credit the witness’ opinion that dividends were not expected. The testimony is intrinsically contradictory and confusing and the conclusion is without support. First it is laid down that there appeared to be no reason to anticipate dividends “in the near future”; then a value of *228$32, a mean from the product of a multiple of 6-10 as applied to $4 earnings, is raised to 45, partly as a result of “[gjiving consideration to the possibility of dividends up to $4 per share sometime in the future.”
A pattern in which a derogation from value is followed by a contradictory recognition of value appears often in the testimony of the witness, with a possible appearance of objectivity. Another net impression, however, is that of an over-strong negative, first stated, designed to buttress an ungenerous positive statement of value.
11. Conclusions on the Reorganization Stock
384. The defendant’s expert testified that
Use of the stock values of $22.50 for the common and $45 for the preferred (the witness’ conclusions) plus a value of 92 percent for the bonds produces an aggregate value for plaintiff’s assets of $130.3 million ($82.8 million for the bonds, $33.75 million for the preferred, and $13,725,000 for the common). This is within the range of $127-$149.6 million computed by the witness on stock prices (see findings 348-360) but exceeds the range of $115-120 million based on his valuation of the physical assets and his $95 million valuation based on a capitalization of earnings (see findings 359-365).
385. (a) Defendant’s expert testified that
(1) The excess value of his valuations over the foregoing valuations is warranted by the fact that the holders of the predecessor’s common thought it was worth putting up $15 per share to save their equity and the fact that, since the preferred was noncumulative, there was no danger of piling up accumulations and there was, on the other hand, the possibility of dividend payments on the common at about the same time the preferred might receive them. Other factors warranting these per share values for the reorganization stock were the control value of the preferred and common stocks (both possessed voting rights) and indications that the reorganized road soon would regain control of the Oregon Short Line and the Oregon Railroad and Navigation Company.
*229(2) The value of $22.50 per share for the common is based not so much on established earning power as on voting rights and potentials for the future. It is consistent with the market action of the stock within the five months following the reorganization, as described in finding 370. Finally, it is confirmed by the price-earnings ratios of the other railway common stocks of similar or better quality, as described in finding 379.
(3) The value of $45 per share for the preferred is warranted by the pro forma earnings of $4 per share for calendar 1897 and the market action of the stock in the first few months after its issuance, as described in finding 383. It is also justified by the comparison with the preferreds of Northern Pacific and Santa Fe, as described in finding 383.
(b) The foregoing testimony is rejected insofar as it purports to support the Government’s valuations of the various issues of stock involved.
The testimony refers to a group of factors — control value, “potentials for the future,” indications that the U.P. would “soon” reacquire the Oregon lines and so on — and advances •the proposition that these factors warrant the excess of the aggregate valuation by the Government’s expert of the stock involved over his several “valuations” based on net assets, past earnings, etc.
■Valuations based on such standards as net assets and capitalization of past earnings are in the circumstances of the U.P. not legitimate starting points for a determination of fair market value, and thus it is no support for the conclusion of the Government’s expert on fair market value that an “excess” has been added to such “valuations.”
The evidence described in the prior findings has revealed the negative, valuation-depressing views of the Government’s expert on the potentials for the future, on the probability that the U.P. would soon reacquire the Oregon lines and, indeed, on most or all of the elements bearing on fair market value. These views impeach the credibility of the witness’ conclusion on fair market value, whatever the excess over his valuations by other standards such as net assets.
*230Tbe evidence on tbe probability of tbe U.P.’s reacquisition of tbe Oregon bas indicated an increase of bis $22.50 valuation of tbe common to not less than $32, an increase of 42.2 percent. Tbe same percentage increase of bis $45 valuation of tbe preferred brings tbe value of tbe preferred up to not less than $64.
12. Valuation of the Acquisition Stock
(a) The Exchange of U.P. Stock for Oregon Stock
386. In January 1899, stockholders of tbe Union Pacific ratified a proposal to increase tbe common stock by 274,601 shares of $100 par value and to offer tbe new shares to stockholders of tbe Oregon Short Line on the basis of 1 share of U.P. common for 1 share of Oregon stock plus $3. Tbe U.P. shares so issued to acquire the Oregon common, 273,493 in number, are herein called the post-reorganization stock.
387. There being no evidence to tbe contrary, Kuhn, Loeb presumably retained tbe 125,679 shares of Oregon Short Line bought from tbe U.P. in August 1898 (see finding 334) until tbe exchanges began on January 26,1899 and then exchanged them.
388. Between January 26 and tbe end of March, most of tbe Short Line shares were exchanged; by June 30, 265,053 shares had been exchanged and as of that date the U.P. owned about 96y2 percent of the Oregon Short Line stock and the Oregon in turn owned a majority of the common stock of the Oregon Eailroad and Navigation Company, henceforth called Oregon Navigation.
Thereafter the relatively few remaining shares were exchanged or — as to a very few- — acquired by the U.P., which eventually owned all the 273,507 Oregon common shares outstanding.
389. The 273,493 shares of acquisition stock were issued at the following times:
*231
(b) The Dollar Valuations ~by Defendant's Expert of the Ü.P. Acquisition Stock
390. (a) The defendant’s expert valued the 137,301 post-reorganization common shares issued in January-February, 1899 at $35 per share. He testified that in the succeeding months of 1899 the value of a common share rose by $1.25 per month. On this basis he valued the 267,019 shares issued between January 26 and December 1, 1899 as follows:
(b) He valued the 3,688 shares of common issued between December 2,1899 and June 30,1900 at $72 per share.
(c) He valued the 2,636 common shares issued between July 1,1900 and June 30,1901 at $112 per share.
'(d) A recapitulation of these valuations, with aggregate valuations, is as follows:
*232(e) The foregoing valuations compared with contemporaneous market averages (finding 347) are as follows:
(f) The parties are agreed on a valuation of $175 per share for the 150 shares issued following June 30,1901. There were 50 such shares issued between July 1, 1901 and June 80, 1902 and 100 such shares issued between July 1, 1907 and June 30,1908.
(c) Value of the Oregon Short Lme at the Time of the Exohcmge Offer
(i) Value of the Oregon Itself
391. At the time of the exchange offer, the market price for Oregon Short Line stock was in a good trend upwards ranging from 41 to 48. The stock had quadrupled since it sold at 11 in March 1897, when the line took over the properties of its predecessor. See finding 326. The rise had been a steady one, from 11 to 19 at the end of 1897, on to 40 at the end of 1898 and to 48 in January 1899, without display of serious weakness or violent price fluctuations. The favorable market behavior may have reflected both the rise in Oregon’s earnings, to be detailed below, and confidence in its prospects, as well as anticipation of the prospective exchange offer, coupled with confidence in the prospects of the U.P. The U.P.’s intention to reacquire its branches and subsidiaries was well-known, the program of buying Oregon stock on its behalf was very likely known to investors, and some form of exchange was doubtless anticipated substantially in advance.
392. The monthly high and low prices of Oregon Short Line common stock as reported by the Commercial & Financial Chronicle for the years 1897, 1898 and for the first 3 months of 1899 (fractions rounded off to the nearest dollar) were as follows:
*233
The foregoing are stipulated figures. In apparent contradiction of the figures for February and March 1899, it is also stipulated that during February and March 1899 the stock sold at a high of 44.
393. At the time of the exchange offer, revenues and earnings of the Oregon Short Line were on a sharp trend upwards.
394. (a) The defendant’s expert in his testimony implied that the marked uptrend began in fiscal 1899, having been stimulated by the Spanish-American War and the acquisitions of the Philippine Islands and the Hawaiian Islands, which significantly increased traffic to the West Coast.
(b) It is found that the trend upwards dated from the reorganization of the line in 1897 and was as strong in 1898 as in 1899.
395. The trend upwards may be seen from the following:
Oregon Short Line
*234396. (a) At the time of the exchange offer, the physical condition of the Oregon was improving.
(b) Defendant’s expert testified that nevertheless the physical condition of the Oregon “still left a good deal to be desired.”
(c) It is found that the testimony in the foregoing sub-paragraph (b) is rejected as vague and subjective, unsupported and unconvincing.
397. (a) The defendant’s expert testified that
(1) For the 9-year period 1889-1898, adjusted earnings for the Oregon and its predecessor, exclusive of interest on Oregon bonds held by the reorganization committee and dividends received on Oregon Navigation preferred stock, averaged $2,379,076, while for the 5 year period 1893-1898, on a comparable basis, earnings averaged less, at $2,150,987. Neither of these averages was equal to the pro forma fixed and contingent charges of $2,804,710 for the fiscal year ending June 30, 1899. In the fiscal year ended June 30, 1898, operating earnings rose to $2,728,598, to which approximately $60,000 of other income may be added. In the fiscal year ended June 30, 1899 — which covered a period ending beyond the acquisition of most of the Oregon stock by the U.P. — earnings amounted to $2,961,197 as adjusted.
(2) If the foregoing figures are capitalized at 5, 6 and 7 percent, the following earnings valuations result:
Oregon Short Line and Predecessor
(3)Comparably to finding 366, regarding capitalization of U.P.’s earnings, a 5 percent rate also seems unwarranted for the Oregon on the basis of the road’s financial difficulties, though recognition must be given to the fact that the Oregon Short Line and Utah Northern had very poor earnings only in 1894. Considering the not too unsatisfactory past record of earnings, a 7 percent rate of capitalization perhaps would *235suggest too speculative an appraisal, an approach not warranted by the facts. Thus a 6 percent rate appears to be a reasonable rate of capitalization. This, according to the above table, produces a range of around $35.8 million to $49.3 million. Again, to give recognition to recency of earnings and admittedly an improving position for the reorganized Oregon, it is appropriate to average the four figures — which produces an earnings valuation of about $42.8 million. Similar treatment of the 5 percent capitalization rate would produce an earnings valuation of $51.4 million. The mean between these two foregoing figures, or $47.1 million — which would produce about a 5y2 percent capitalization rate — is justified on the basis of the reasonably stable past record of earnings and the strong uptrend at the time of the Oregon acquisition by U.P. This earnings valuation figure of $47.1 million was the fair market value of the Oregon, exclusive of the value of the Oregon’s stockholdings in Oregon Navigation Company.
(b) It is found that the foregoing testimony and conclusions are rejected as conclusions on fair market value, as overemphasizing past earnings and giving too little weight to current earnings, to the good prospects for future earnings, to the significance of the essential position of the Oregon Short Line and Oregon Eailroad and Navigation in the reconstitution of the U.P. system and to the increasing national prosperity.
(ii) Value of the Oregon's Holdings in Oregon Navigation
398. The Oregon Short Line held $976,900 par value 4 percent participating preferred (of a total of $11 million) and 162,814 shares of common (of a total of $24 million) of Oregon Navigation Company. Oregon Navigation was the successor to the Oregon Eailway and Navigation Company, which had been in receivership from 1893 to August 7,1896. As noted above, the significance of Oregon Navigation was that it gave the Oregon Short Line an extension to the West Coast from the end of the Oregon Short Line at the Idaho-Oregon border. On the subject of Oregon Navigation and its place in the U.P.-Oregon system, see findings 326-331.
*236399. In the year ended June 30, 1898, the last fiscal year preceding the U.P.’s exchange offer for Oregon Short Line stock, Oregon Navigation enjoyed a sharp upsurge in earnings to $6.12 per share on the common.
400. Dividends were initiated on the new preferred stock in July 1897, in the first year after reorganization, with a payment of 1 percent, and were followed by similar payments in October 1897 and in January and April 1898, so that the full 4 percent was paid in the fiscal year ended June 30, 1898. The full 4 percent was also paid in the 1899 fiscal year, including 2 percent on July 2,1898. On the latter date, a 1 percent dividend was paid on the common, the only dividend payment on the common up to the time of the exchange offer.
401. (a) Defendant’s expert testified that
At the time of the exchange in the early months of 1899, Oregon Navigation had been operating free of the protection of the court for only about 2% years and that the stocks of the reorganized company therefore were unseasoned and no dividend record of any significance existed.
(b) It is found that the foregoing testimony is rejected. The implication of fragility from the phrase “free of the protection of the court for only about two and one-half years” is misleading. The road was flourishing. Earnings were on the rise. Profit in fiscal 1898 was outstandingly good, jumping to an impressive $6.12 per share on the common stock; in the following year, in which the exchange took place, earnings declined slightly to $5.88 per share. Dividends had begun and prospects for earnings and continued rise in values were good. The reference to lack of “seasoning” and no “dividend record of any significance” is an unwarranted coloration of the underlying values. Many roads were reorganized following the Panic of 1893. A first dividend after reorganization, so soon after reorganization as in this case, is a good sign and not an occasion for pessimistic notes. Defendant’s expert characterized Northern Pacific’s dividend in 1897, after its reorganization in 1896, as one which the declaring road “lost no time” in declaring after it “benefited strongly from the excellent crop harvest in the fall of 1897.” Oregon Navi*237gation doubtless benefited from tlie same harvest and defendant’s expert could just as well have said that Oregon Navigation, too, “lost no time” in declaring its first dividends, in 1897.
402. (a) The defendant’s expert testified that
(1) In the 9% years, December 1889-June 1898, earnings of Oregon Navigation available for fixed charges had averaged $1,327,783 annually. On a pro forma basis for the 9% years (after allowing for approximate depreciation on water equipment and fixed charges in the fiscal year ended June 30, 1898, the first full year of operation following emergence from receivership), net income averaged about $373,000, a sum which would be insufficient to cover the new post-reorganization preferred dividend requirements of $440,000 in full, let alone leave something for the new common stock. In fact, the amount by which net income fell short of what would be preferred dividend requirements ($67,000) was equal to 28 cents per share on the common stock.
(2) In the 5% year period, January 1,1893-June 30,1898, average earnings were slightly poorer than in the aforementioned 9% year record. As a result, net income in that period fell short of what would be the new preferred dividend requirements by an amount equal to 45 cents per share. Notwithstanding the mentioned inadequacy of earnings in the two periods mentioned, the profit in the last fiscal year in each of them was outstandingly good, jumping to an impressive $6.12 per share on the common stock in the fiscal year ended June 30, 1898. In the following fiscal year, during which the U.P. exchanged its stock for most of the Oregon Short Line stock outstanding, earnings on Oregon Navigation common stock declined slightly to $5.88 per share.
(3) On the basis of the average earnings over the periods of years, preferred and common stocks of the reorganized Oregon Navigation would appear to have had little intrinsic value.
(b) It is found that the foregoing testimony and conclusions are rejected for the same reasons as in the case of the Oregon Short Line, set out in finding 397 (b).
403. Reflecting the rising fortunes of Oregon Navigation, the publicly held voting trust certificates (referred to here*238after as “vtc”) for its preferred and common stocks experienced sharp advances in the year prior to acquisition of most of the Oregon Short Line stock by the Union Pacific. In 1898, the vtc’s for the preferred stock rose from a low of 651^ on March 29 to a high of 78 on November 11. At the end of January, 1899, they sold at 76 and did not vary too much from this level during the rest of the first half of the year, prices generally having been around 72-73. Common stock vtc’s rose sharply from a low of 35% on January 7, 1898, to 61% on August 22 of the same year. In January, 1899, they fluctuated between a high of 52 and a low of 48%, ending the month on a quotation of 49%-51.
404. The mean between the high and the low for the Oregon Navigation preferred stock vtc’s in 1898 was 71%, while that for the common stock vtc’s was 48%. Neither of these differed too materially from the January 1899 month-end quotations of 76 for the preferred vtc’s and 49%-51 for the common vtc’s. During the rest of the first half of 1899 — while most of the Short Line stock was being exchanged for the common stock of the Union Pacific — the vtc’s for the preferred showed general firmness due to the payment of full dividends, while the vtc’s for the common were in a generally declining trend.
405. Actual sale prices and quotations (the latter indicated by “*”) for Oregon Navigation’s preferred and common vtc’s at or close to the end of each month in the first half of 1899 were as follows:
406.(a) The defendant’s expert testified that In the light of the foregoing earnings figures — showing inadequate net income over 9% year and 5% year periods, but good profits in the 1898 and 1899 fiscal years — it appears that the fair valuations to use for the preferred and common vtc’s as of January 1899 are the average market prices for 1898. On this basis, the 9,769 preferred stock vtc’s of the Oregon Navigation Company held by the Oregon Short Line would have a value of $700,926 ($9,769X71%), while the 162,814 com*239mon. stock vtc’s hold would have a value of $7,896,479 ($162,814X48^2), a combined total of $8,597,405. If prices for the common stock vtc’s in the first half of 1899 were taken into consideration, the market valuation would be lower. However, inasmuch as earnings of the Oregon Navigation held up well in the 1899 fiscal year, there appears to have been no basic reason for the declining trend for the common stock vtc’s. Accordingly, the aforementioned combined total of $8,597,405 is the fair market value adopted for the Oregon Short Line’s holdings of Oregon Navigation during the Oregon Short Line-Union Pacific exchange. If this valuation is added to the previously adopted fair market value of $47.1 million for Oregon Short Line (exclusive of its holdings in Oregon Navigation), the total would be approximately $55.7 million.
(b) The foregoing testimony and conclusion are rejected for the reasons stated in finding 397 (b), and as overly influenced by past earnings in depression and reorganization years; as an unwarranted adoption of stock market prices as the fair market value for large blocks of stock; and as giving too little weight to current and prospective earnings and values, to the significance of the essential position of the Oregon Short Line and Oregon Navigation in the reconstitution of the U.P. system and to increasing national prosperity.
(iii) Defendants Conclusion on the Value of the Oregon Short Line a/nd Its Holdings
407. (a) The defendant’s expert testified that
Oregon Short Line stock at the time of the exchange offer from Union Pacific appears to have been overpriced if consideration is given to (1) the probable absence of asset value for Oregon Short Line common stock, (2) the fact that the improved earnings of the Oregon Short Line for the 1899 fiscal year (exclusive of dividends received from Oregon Navigation or equity in its earnings) still amounted to only 57 cents per share before sinking funds, and (3) the value of the Oregon Navigation preferred and common stocks owned by the Oregon Short Line, as calculated above. To *240have justified a price of around 42 would have required a valuation of around $65.6 million for Oregon Short Line, a level apparently not warranted on the basis of either property or earnings, plus the value of Oregon Navigation stock held. The inference may be drawn that stockholders of the Oregon Short Line received more than adequate treatment.
(b) It is found that the foregoing testimony and conclusions — particularly the conclusion that at the market price of 42 the Oregon Short Line stock “appears to have been overpriced” and that the stockholders of the Oregon Short Line received “more than adequate treatment” in the exchange — are rejected for the reasons stated in findings 397 (b) and 406(b) and as overly influenced by past earnings in depression and reorganization years and by asset values, as giving too little weight to current earnings, the prospects for increasing earnings and to the significance of the essential position of the Oregon Short Line and the Oregon Navigation in the reconstitution of the U.P. system and to increasing national prosperity.
(d) Value of the U.P. at the Time of the Exchange
408. The influences which were bringing about increases in the earnings of the Oregon lines, described above, were at work, too, on behalf of the U.P., so that at the time of acquisition of the Oregon Short Line, the U.P. in a brief time had become a considerably stronger road than it had been when it emerged from reorganization. Its earnings were in a strong upward trend, as its report for the fiscal year ended June 30, 1899, subsequently disclosed. Furthermore, considerable progress already had been made on the ambitious program of property and equipment improvement initiated under the leadership of Mr. Harriman. In addition, between November 1, 1898, and February 1, 1899, the U.P. reacquired 924.66 miles of its former branch lines free and clear of mortgages other than those acquired and held 'by the U.P. itself. These lines, along with another 88 miles bought in June 1899, were purchased for $5,518,248.23 in cash without the issuance of stocks or bonds to reimburse the road’s treasury. Acquisition of control of the Oregon *241Short Line then gave the U.P. possession of 2,543.59 additional miles of line, 1,480.78 operated 'by the Oregon Short Line and 1,062.81 miles by the Oregon Railroad and Navigation Company. In addition, people close to the U.P. undoubtedly were aware at least as early as 1899 that the road would be entitled to receive a substantial cash distribution at some not too distant date from the receivers of the old Union Pacific Railway Company upon claims against that company, the new company having purchased substantial unsecured claims at large discounts. The distribution was made in November, 1899, with $5,249,089.97 going to the Union Pacific Railroad Company. See finding 325(b) (3).
(e) The Value of the Several Blochs of Shares Issued in the Exchange
(i) The Stock. Issued in 1899
409. Of the 273,493 shares issued in the exchange, 267,019 were issued in 1899, in the period from January 26 through December 2, 1899.
410. Union Pacific common stock itself had without doubt become worth substantially more at the time of the exchange offer than when it was issued in the reorganization of early 1898. Marketwise it was reflecting its improved status in a rising trend on the New York Stock Exchange.
411. The prices for 1898 were as follows:
412.From a low of 16 in March, the stock advanced vigorously in increasingly heavy trading volume, to 44% in December, and to a peak of 50% in February 1899 before it began a downward drift that culminated in a low of *24238% in June before a recovery developed. In tlie early weeks of the offer to the Oregon Short Line, the range of Union Pacific common was 50%~43% — which corresponded roughly to the price of the Oregon Short Line, allowing for the $3 payment required for Oregon Short Line stockholders. See finding 342.
413. In its strong rise from March 1898 to February 1899, the U.P. common was reflecting its advancing earnings and basically improved position, as well as the prospective exchange offer for the Short Line and the good earnings up-trends of the Short Line and the Oregon Navigation. Recognition should (defendant’s expert testified that “some recognition probably should”) also be given to earnings for fiscal 1899. Although it was of course impossible to know in January and February of 1899 the exact amount of earnings for the fiscal year ended June 30, investors would have a pretty good idea of a substantial improvement in earnings.
414. In fiscal 1899 net income amounted to $5,788,209. After allowing for full dividends on the preferred stock (instead of the 3% percent actually paid), the remaining balance would have been $2,788,209, equal to $3.19 per share on the outstanding common stock, amounting to 875,053 shares of $100 par value. Moreover, since the U.P. owned as of June 30,1899 about 96% percent of the Short Line’s stock and the Short Line in turn owned a majority of the common stock of the Oregon Navigation, the U.P. had substantial equity earnings in these properties not included in the abovementioned earnings of $3.19 per share of plaintiff’s common. The total of $6.38 of course would have some influence on investors, aside from U.P.’s power to dispose of its affiliates’ earnings.
Not until a number of other financial transactions involving the Short Line and Oregon Navigation were completed late in 1899, however, was the Union Pacific actually in a position to determine the disposition of the earnings of these affiliates. Plaintiff issued additional preferred stock in exchange for Navigation preferred, and it issued additional common in exchange for Navigation Company common.
*243415. After allowing for the abovementioned transactions, consolidated earnings of the U.P., the Short Line, and Oregon Navigation available for plaintiff’s common stock on a pro forma basis would have amounted to $5.12 per share in the fiscal year ended June 30,1899, on the basis of U.P.’s books.
The sum of $1,926,357 for permanent improvements was charged to operating expenses, and to that extent earnings were understated, although generally to the extent no depreciation was charged, the earnings were overstated. This sum of $1,926,357, amounting to $2.20 per share of common stock, if added to the $5.12, would bring total earnings to $7.32.
416. Notwithstanding the acquisition of the Oregon Short Line and the Oregon Navigation in 1899 and the achievement of distinct improvement in earnings in fiscal 1899, the common stock of the U.P. dipped in the middle of 1899, and did not rise substantially throughout calendar 1899. After setting a high of 50% in February, the stock trended downward and made its low for the year at 38% in June, just about as the good fiscal year was drawing to a close. From then on it rose to establish a new high of 51% in November.
Monthly price fluctuations in calendar 1899 were as follows:
417. (a) The defendant’s expert testified that
(1) The basic value of Union Pacific common stock increased substantially between the consummation of the Union Pacific reorganization in early 1898 and the exchange of Oregon Short Line stock in late January and February 1899. The substitution of some solid investment value behind Union Pacific common served to displace some of the potential speculative value that existed at the inception of the new company. The net effect was to add around $10-$15 per share to the fair market value of $22.50 for the stock at the reorganization period. Therefore, at the time of the Oregon Short Lina exchange in January and February 1899, Union Pacific common stock had a fair market value of $35 per share.
*244(2) As it became increasingly apparent that Union Pacific was enjoying significant improvement in its earnings as the close of its fiscal year was drawing near, the conclusion must be drawn that the road’s common stock steadily was gaining in fundamental value. By the time all the facts as to Union Pacific’s earning power for the fiscal year ended June 30,1899, were known in mid-December, 1899, the stock had become worth $45-$50 per share. Therefore, over and above the valuation of $35 per share indicated for January-February, 1899, there was an increment in value of about $1.25 per share each month for the rest of the year 1899, resulting in the following values for the Union Pacific common issued in 1899:
(b) The foregoing testimony and conclusions are rejected (1) as vague and imprecise (“increased substantially,” “some solid investment value,” “some of the potential speculative value,” “around”); (2) as based on a conclusion (that the value of the stock was $22.50 in January 1898) which has been rejected (finding 385(b)) and because of the reasons for that rejection; (3) as containing an unwarranted implication of “potential speculative” value at January 31,1898 (findings 320 et seq.); (4) on the ground that the conclusion that the “net effect” was to add no more than $10-$15 to the fair market value at the earlier date is unreasoned and arbitrary; (5) as giving too little weight to current and prospective earnings and to the reflection of improving values and the value of the acquisition of the Short Line to the U.P. system in the rise in stock market prices from 25% in January 1898 to 50 in January 1899, and (6) as another instance of the witness’ reluctance to give sufficient weight to anticipation of formal reports of earnings by even a few months, and thus *245by implication confirming his failure to give sufficient weight to prospective earnings.
The expert’s conclusion that the stock was worth $35~$36 in January-March, 1899 (when most of the stock in question was issued) and $47.50 in December, 1899 (when a relatively minute number of shares were issued) is, therefore, an unreasonable postponement by at least a number of months of the increase in value of the 233,411 shares issued in January-March, 1899 warranted by the improving earnings capable of being appreciated by investors in the second half of the fiscal year 1899.
(ii) The 3,688 Shares Issued December 8,1899-June 30,1900
418. Between December 2, 1899 and June 30, 1900, the U.P. issued 3,688 additional shares of its common pursuant to the exchange.
419. (a) The defendant’s expert testified that
On the basis of Union Pacific’s consolidated earnings of $8.76 per share in fiscal 1900 (computed without deduction for the appropriations from income which are the subject of count 8) compared with $5.12 a year earlier, there can hardly be any question that the road’s common stock had achieved an entirely new value. Furthermore, it was becoming more apparent that the property was in sound condition and that the earning power was resting on a solid basis. The low operating ratio (operating expenses divided by gross revenues) of 51.59 also attested to the soundness of the operation. The Union Pacific common stock was entitled to sell at about 10-12 times earnings by the time well-informed investors could have become aware of the fiscal 1900 earnings. This presumably would have been in about July or August 1900. A 10-12 times multiple would have indicated a price of around 88-105 or a mean of around 96%. While this would represent a phenomenal gain over the valuation of 47% indicated for December 1899 (finding 417 (a) (2)), the supporting evidence warrants this finding. The fair market value of the 3,688 shares of Union Pacific issued between December 2, 1899, and June 30, 1900, was $72 per share, the average be*246tween the 47% value as of December 1899 and the 96% value as of July-August 1900. For the 3,688 shares issued, this produces a value of $265,586.
(b) The foregoing testimony and conclusions are rejected as based on valuations as of earlier dates which have been rejected and for the reasons for such rejection; as vague and subjective, unreasoned and arbitrary; as giving too little weight to current and prospective earnings; and as expressions again of the witness’ reluctance to anticipate formal reports of earnings by even a few months.
(iii) The 2,636 Shares Issued Julyl, 1900-Jwne 30,1901
420. Between July 1, 1900 and June 30, 1901, that is in the fiscal year 1901, the U.P. issued, pursuant to the exchange, 2,636 additional shares of its common, the last of the shares whose valuation is in issue.
421. (a) The defendant’s expert testified that
Determining the fair market value of the 2,636 Union Pacific shares issued in the 1901 fiscal year poses a more complex problem because of the road’s speculative ventures at the time, described above in findings 305-325. Earnings of the Union Pacific from its own normal railroad operations continued to move ahead soundly. Eeported earnings for fiscal 1901 amounted to $9.09 per share (computed without deduction for the appropriations from income which are the subject of count 8), but would have been higher, had it not been for increased interest charges and an increase in the number of shares of common stock outstanding. These latter two developments were mainly due to the issuance of $100 million first lien convertible 4s, some of which already had been converted by the end of the 1901 fiscal year. Piad it not been for these events, earnings would have been $10.31 per share and probably a price-earnings multiple of 12 would have been justified, giving consideration to the quality of the earnings and their trend. This would have indicated a valuation of around 124 for the stock.
(b) It is found that (1) the first sentence of the foregoing subdivision (a) of this finding is rejected because of the *247characterization as “speculative” of the ventures which are the subject of findings 305-325; the reasons for the rejection appear in the cited findings; (2) the fifth and sixth sentences, being the last two sentences of the foregoing subdivision (a) of this finding, are rejected for failure to give sufficient consideration to prospects for rising earnings from the U.P.’s investments in Southern Pacific and Northern Pacific; the witness would charge the interest cost of these profitable investments against earnings and thereby lower his valuation, but he does not increase his valuation by any or any sufficient factor taking into account the prospective profits to the U.P. by reason of these profitable investments; and (3) the remaining sentences (the second through fourth sentences) are accepted, and the facts therein are found.
422. Union Pacific’s fiscal 1901 total earnings on its common stock, with the addition of equity earnings on its investments in Northern Pacific and Southern Pacific, amounted to $14.81 per share, an improvement of $5.72 over the $9.09 earned by U.P. alone, as follows:
At a multiple of 12 the earnings of $14.81 would give a value of $177.72 per share. At 11, the value would be $162.91.
423. (a) The defendant’s expert testified that
It should be noted that dividends on the Northern Pacific preferred and common stocks held would have produced at $4 per share (the rates paid in fiscal 1901) a total of $3,-124,320, or less than the interest requirements on the new first lien 4s. The equity earnings in Southern Pacific common stock amounted to $4,447,500 (750,000 shares times *248$5.93), equal to $4.36 per share of Union Pacific common. Since Southern Pacific’s earnings were not of as good quality as Union Pacific’s or Northern Pacific’s, this indicates that the net addition to Union Pacific’s per share earnings warrants a lower price-earnings multiple.
(b) The foregoing testimony is rejected, not because of the arithmetical facts stated, but because of unwarranted implied depreciations of value, as follows: (1) the witness puts aside the equity earnings on Northern Pacific, $4,520,087 (see finding 322(a)) in favor of a lower figure, $3,124,320, the dividends paid; (2) the lower figure is then noted to be less than the interest requirements on the new bonds (if $3,131,-900 for 10 months, then $3,758,280 for 12 months); (3) then the equity earnings of Southern Pacific are asserted to be not of as good quality as those of Northern Pacific, upon which it is concluded that as the “net addition” to U.P. earnings they “warrant (s) a lower price-earnings multiple” by which is presumably meant a value-earnings multiple. The net addition to earnings was in fact $5,835,687 or $5.72 per share for the 1,020,300 shares outstanding (see finding 418(a)). Even if a lower multiple than that impliedly admitted by the witness to be warranted for the U.P. were utilized, the valuation would be:
424. (a) The defendant’s expert testified that
In order to determine the true earning power of Union Pacific common stock in fiscal 1901, the pro forma earnings (including equity earnings in Northern Pacific and Southern Pacific) should be calculated on the assumption of full conversion of the new first lien 4s. This would eliminate the interest requirements on these bonds but increase substantially the number of Union Pacific common shares outstanding from 1,020,300 to 1,959,870. On this basis, earnings *249on the common (including equity earnings in Northern Pacific and Southern Pacific) would have been equal to $9.63 per share, including $2.27 per share in Southern Pacific’s profits. Thus, on a fully converted basis, earnings on Union Pacific common would have improved only slightly over the actual $9.09 per share and would have deteriorated quality-wise. However, because of the potentially strategic value of the Northern Pacific and Southern Pacific acquisitions, a genuine improvement occurred in the value of Union Pacific common. Therefore, by the end of the 1901 fiscal year, the fair market value of Union Pacific common was around 120-125, or a mean of 122% (or about 12.7 times the earnings figure of $9.68). Giving double weight to the significant events of the second half of the fiscal year, the fair market value for the 2,636 shares of U.P. common issued during the fiscal year was $112 per share, resulting in an aggregate valuation of $295,232.
(b) The foregoing testimony and conclusion are rejected because
(1) They are based on earlier valuations which have been rejected and contain the same faults as those valuations, and they are unwarrantedly depreciative of current earnings and fail to recognize the current and prospective additions to value of the U.P.’s investments in Northern Pacific and Southern Pacific.
(2) To assume full conversion of the new bonds is unrealistic and serves only to depress earnings per share in the current year. The convertibility feature of the bonds was so designed as to bring about conversion only when profits rose (as in fact occurred, see finding 309). Full conversion came when U.P. was at a high point of profits and had just declared a 10 percent dividend. If full conversion were to be assumed, in fairness it would be appropriate also to assume the profits which would bring about full conversion and be available as per share earnings for an estimate of value.
It would be realistic and fair to reason that the interest cost of the bonds, just issued, is a deduction from the profits realized, and then consider the enduring and increasing profits realized, for purposes of valuation. This the witness does *250not do. Eather, first he converts these bonanza investments of the U.P. into a slight improvement, with a decline in quality, in U.P.’s earnings and then, grudgingly recognizing a “potentially” strategic value for U.P. in Northern Pacific and Southern Pacific, he finds a “genuine improvement” over his valuation of $72 for the next earlier period (finding 419 (a)). This improvement he assesses, as a matter of'his unexplained judgment, at $40.
(f) Price-Earnings Ratios amd Other Comparisons for 1899-1901
425. (a) The defendant’s expert testified that
(1) The fair market values determined above for Union Pacific common for January 26,1899, through June 30,1901, are also warranted by reference to the price-earnings ratios for Union Pacific common and the ten other railroad stocks listed in finding 379. Consideration was given first to the price-earnings ratios as of January 26,1899, based on earnings for fiscal or calendar 1898 and fiscal or calendar 1899. These were as follows:
*251Due to the fact that the prices of the stock uniformly were higher on January 26, 1899, than on January 31, 1898, the price-earnings ratios based on fiscal or calendar 1898 earnings were higher too. Except for New York Central’s very high 28.0 (attributable in part to the fact that reported earnings of that System were understated because they were not reported on a consolidated basis), the price-earnings ratios of the dividend-paying railroads — whose ranks were joined by Northern Pacific — ranged from 17.3 to 7.2. The multiple for Southern Pacific was 7.9, while that of Union Pacific (based on a market price of 48.3125 and earnings of $2.95) was 16.4, a figure not much below the Pennsylvania’s 17.3 and Chicago, Burlington and Quincy’s 16.6, and above the ratios of all the other dividend-paying railroads, save for the New York Central. Utilization of fiscal 1898 earnings and the above-determined fair market value of $35 for Union Pacific common as of January 26,1899, results in a multiple of 11.9, which is still in excess of the multiples for Great Northern, Northern Pacific, and Southern Pacific.
(2) On the fiscal or calendar year 1899 earnings, the ratios of the dividend-paying rails on January 26, 1899, ranged from 23.4 to 8.4, while the nondividend-paying Southern Pacific had a multiple of 8.5. Union Pacific’s ratios of 14.0 based on the market price of $48 and 10.2 based on the fair market value of $35 exceeded the multiples of 8.5 for Southern Pacific and 8.4 for Northern Pacific, and the former but not the latter also exceeded the multiples of 11.2 for the St. Paul and 12.6 for the North Western.
(b) The foregoing testimony and conclusion — that the price-earnings ratios cited “warrant” or support the conclusions of the witness on the fair market value of U.P. common issued from January 26, 1899 through June 20, 1901— are rejected for the following reasons:
(1) The testimony has no relation to and gives no support to the witness’ conclusion — basic to his valuations for January 26,1899-June 30,1901 — that U.P. common issued in January 1899 was worth $35 per share.
*252(2) For, also, tbe reasons stated in finding 382.
(3) The U.P. earnings used to compute the witness’ ratios are $3.19 or $3.44 per share, not $5.12 as would be more correct, or $7.32, also tenably correct (see finding 415).
(4) The witness at some points compares a ratio which is the product of a ratio of (his) value of U.P. share to earnings with a ratio which is the frice of other railroads to earnings, a comparison which conveys nothing.
426. For the two periods during which relatively small amounts of Union Pacific common stock were issued in exchange for Oregon Short Line stock — namely, December 2, 1899-June 30,1900, and July 1,1900-June SO, 1901 — the fair market values testified to by defendant’s expert herein, $72 and $112, respectively, are considerably above market price at the time. See finding 342. The period was one of undervaluation for railroad stocks generally. For the most part, earnings were strong in fiscal and calendar 1900. In the following year, results were even more spotty, with' some roads showing moderate declines while others realized further gains. In the two-year period the common stocks of many roads sold at relatively low price-earnings ratios, several in fact at less than ten times earnings.
427. (a) The defendant’s expert testified that
The average monthly price of Union Pacific common (51.34) in the seven-month period December 1899-June 1900 was only 5.9 times the earnings of $8.76 realized in fiscal 1900. This ratio was no better than that for Atchison, Topeka and Santa Fe common, which was just emerging from a string of deficits. Average monthly prices of the common stocks of the Milwaukee, the North Western, the Northern Pacific, and the Southern Pacific were about ten (or less) times the earnings for fiscal 1900. Thus, of the eleven roads considered, six were in this classification. Even Pennsylvania (on a calendar year basis) and Illinois Central, two of the strongest roads of the era, sold at less than 12 times earnings. It is concluded that rail stocks at the time were unreasonably low and the value of $72 determined for Union *253Pacific common for tbe period covered represents fair market value more accurately than did the actual market price. The value of $72 is 8.2 times the earnings of $8.76 for fiscal 1900, a multiple in excess of the 6.8 for Northern Pacific and 5.9 for Santa Fe and not much below the multiples of 9.4 for Southern Pacific and 9.7 for the North Western.
(b) The foregoing testimony and conclusion are rejected
(1) as vague and inconclusive.
(2) because the testimony that $72 represents fair market value “more accurately” than the market price of $51.34, in view of the Government’s position and the witness’ testimony, is no support for a valuation of $72. Such testimony is consistent with the proposition that $100 or $200 may represent market value still “more accurately.”
(3) because the testimony concerning price-earnings ratios, presumably factual enough, has no relation to and offers no support for the witness’ conclusion of a $72 fair market value for the stock issued between December 1899 and June 1900; see the reasons for the rejection of comparative price-earnings data stated in finding 382.
(4) finally, the witness in the last sentence of subdivision (a) of this finding again compares (his) value (of U.P.)earnings ratios with (other railroads’) pricesarnings ratios.
428. For the last period, fiscal 1901, the price-earnings ratios for the eleven roads considered show that, although average monthly prices in fiscal 1901 were a good deal higher than in the preceding seven months, general undervaluation still persisted. In terms of earnings for fiscal or calendar 1900, price-earnings ratios had improved, but, for many roads, they were still low with respect to profits for fiscal or calendar 1901, particularly in the light of the general prosperity of the period. In fact, four of the six roads with price-earnings ratios of about ten or under, based on fiscal or calendar 1900 earnings, fell in the same category on 1901 earnings. Similarly, Pennsylvania and Illinois Central continued to sell at modest ratios, considering their stature. U.P.’s average monthly price of 79.83 for the 12 months ended *254June 30, 1901, was a conservative 8.8 times earnings of $9.09 per share for the same period. Moreover, it was only 5.4 times earnings of $14.81, including equity in the earnings of Northern Pacific and Southern Pacific. The price-earnings ratio would have been 8.3 if allowance is made for conversion into common stock of the outstanding first lien convertible 4s, resulting in earnings of $9.63.
Regardless of the approach taken, the average monthly price of U.P. common in the 12 months ended June 30,1901, was low at 79.83. Recognition of this did occur as the fiscal year progressed, for the average price in June 1901 was 110.38, compared with 54.19 in July 1900, and the trend was almost continuously upward. In May 1901, just before the brief “Panic of 1901” broke loose, the stock attained a peak of 133. It had crossed 100 for the first time in April 1901, reaching a high of 120 that month.
429. (a) The defendant’s expert testified that
The correctness of the fair market value of $112 determined for U.P. common for fiscal 1901 is also confirmed by the fact that, based on the earnings figure of $9.63, it reflects a multiple of 11.6 which was significantly exceeded by the multiples for only three of the ten other roads studied: the Burlington, Great Northern, and the New York Central. The multiple of 12 was about the same as the multiples of 13.3 for the St. Paul, 12.1 for the Illinois Central, and 12.9 for the Pennsylvania.
(b) The foregoing testimony and conclusion are rejected for the reasons stated for the rejection of the testimony and conclusion recounted in findings 370-382, 382(b).
13. Oouri’s Oonckisions on Vafoie
430. The court finds the New York stock exchange prices for the U.P. stock provide the best evidence of value in this case.
431. The average between high and 'low for the U.P. preferred on February 2, 1898 (see finding 236, the valuation date adopted by the court) was $62.50 (see finding 344).
*255432. The value of the U.P. preferred issued in the reorganization was, therefore, $62.50 x 750,000 shares or $46,875,000.
433. The derived price for the U.P. reorganization common on February 2, 1898 is $26,625. This is derived from the average price of trust receipts on February 2, 1898 (see finding 338) of $86. Since one trust receipt was exchangeable for one new share of U.P. common and 15/iqo of a share of new preferred (x%oo °f $62.50 is $9,375), by subtracting the value of the preferred increment ($9,375) from the trust receipt value ($36.), we derive the price for U.P. reorganization common on February 2,1898 of $26,625.
434. The value of the 610,000 shares of U.P. common issued in the reorganization was, therefore, 610,000 x 26.625 or $16,241,250.
435. We find that the following time periods, and average market prices for such time periods represent the most accurate values for the U.P. acquisition common. (See finding 347.)
436. We, therefore, find a value for the acquisition common of $12,769,188.
437. The total value for the U.P. stock issued in the reorganization ($16,241,250 for the common; $46,875,000 for the preferred) and the acquisition ($12,769,188 for the common) of $75,885,438.
*256C03STCLTJSI0K OF LAW
Upon the foregoing findings of fact and opinion, which are adopted by the court and made a part of the judgment herein, the court concludes as a matter of law that plaintiff is entitled to recover on its claims in Parts I, "V" and some sections of Part X; that plaintiff may not recover on its claims in Parts II, IY, VI and VII; and that defendant has the right to recover on its additional defenses in Parts VIII, IX and XI. The amount of the recoveries will be determined pursuant to Rule 131(c). Further, the court hereby remands Part III to the trial division for further proceedings consistent with this opinion.
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