when property is received in certain kinds of corporate distributions. But valuations are also required in connection with inventories (see Chapter 16), and often in connection with the establishment of bases for depreciation and depletion. (See Chapters 36 and 38.) It is true that in the last case the bases are usually the same as those established for measuring gain or loss 3 but it is with appraisals in connection with gains upon sale or exchange and, in particular, with appraisals as of March 1, 1913, that this chapter has to deal.

General Procedure with Respect to Appraisals

In section 204 (b) (see page 436) the basis for determining gain or loss in certain cases is specified as "the fair market value of such property as of March 1, 1913."

Proof of market value by trade journals.-The Tax Board insists that evidence be competent, but the rules of evidence are not as narrow and harsh as might be inferred from certain decisions. So-called "hearsay" evidence is not admissible, but the rule does not preclude the admission of evidence which can be relied on, even though the author of a pertinent statement may not be present in

court.

Accredited price lists and market reports, including those published in trade journals have been held admissible in evidence. Virginia v. State of W. Va. (238 U. S. 202); Sisson v. R. Co. (14 Mich. 496); Watts v. Phillips-Jones Corp. [211 App. Div. (N. Y.) 523], (The Daily News Record, Textiles); Harrison v. Glover, (72 N. Y. 451); Blanding v. Cohen [101 App. Div. (N. Y.) 442], (Newspaper, Milk Quotations); Burns Mfg. Co. v. Clinchfield Products Corp. [189 App. Div. (N. Y.) 569], (Oil, Paint and Drug Reporter, Chemicals). In most of these cases there was testimony that the reports were recognized in the trade as reliable. Without such "extrinsic proof," the reports were held inadmissible in Cliquot

of cost of old securities to old and new securities, where new securities are received without surrender of the old ones, see pages 480 and 481. Where stock is closely held a valuation of the assets of the old company is required.

As for example sales to stockholders or employees at less than cost (page 397) and distributions of unrealized appreciation since March 1, 1913 (page

"Discovery value" in the case of mines, oil and gas wells is an exception.

v. U. S. (3 Wall. 114); and Whelan v. Lynch, (60 N. Y. 474). See discussion in New York Law Journal, April 22, 1925.

Regard to be given to fair market value of assets.―

LAW. Section 204. (b) . . . . In determining the fair market value of stock in a corporation as of March 1, 1913, due regard shall be given to the fair market value of the assets of the corporation as of that date.

The above sentence is the only statutory instruction given regarding the appraisal of values as of March 1, 1913. It was inserted to prevent the Treasury from using forced or isolated sales of comparatively small blocks of stock as grounds for valuations.*

The law directs that the value shall be "fair," that is, representative and not narrow. The sale of a few shares of stock out of thousands is not a fair criterion. (Walter v. Duffy, 287 Fed. 41.) In addition the price must meet the common definition of "market,” which presumes a willing buyer and a willing seller. Unfortunately in the past the Treasury has often failed to consider the fair market. value of the assets and has leaned too heavily on sales which were not truly representative of values.

The valuations arrived at by the Treasury have in some cases been so arbitrary as to be astonishing even to the courts. A taxpayer sold land in 1917 for $8,000. He fixed the March 1, 1913 value at $5,000. The Treasury reduced the value to $300. The court held:

DECISION. The question with respect to the profit on the sale of meadow land is purely a fact question. . . . . I have no hesitancy in finding that the value of the land in March, 1913, was $5,000, but I do not wish to pass this phase of the case without noting the action of the department in placing arbitrary assessment, as of March, 1913, of $300. Clearly no real estate situate in Newark could increase between 1913 and 1917 over 2,500 per cent, nor is reason assigned for the government's action in selecting a valuation 25 per cent of a city assessment."

In Brown's Appeal [1 B. T. A. 502 (A)] the Board said:

DECISION. The fair market value of stocks and bonds is what willing purchasers pay to willing sellers on the open market even though the assets of the corporation do not reflect such values.

The foregoing reflects the easiest method of arriving at values but the trend of the courts, particularly in tax cases, is to consider as

Report of Senate Finance Committee on 1924 law, pages 19, 20.

Pitney v. Duffy, 291 Fed. 621; affirmed, 2 F. (2d) 230; certiorari denied, 267 U. S. 595.

major factors the book assets and earnings of the properties being valued. The best recent illustration of this trend is Ray Consolidated Copper Co. v. U. S. (268 U. S. 373) which is discussed in Capital Stock Tax Procedure, 1926, page 714.

The importance of submitting competent evidence is shown in River and Rail Storage Co.'s Appeal [1 B. T. A. 1098 (A)]. The Commissioner disallowed the taxpayer's March 1, 1913 valuation. The Board declined to accept either valuation.

DECISION. The taxpayer relied upon the testimony of a qualified real estate expert familiar with the property prior to 1913 who had dealt in nearby property and who, basing his opinions upon sales of property in the vicinity of 1911 and 1912, estimated the March 1, 1913, value of this land without the buildings at 60 cents per square foot, or a total of over $180,000. The lowest price upon any of these sales testified to by him was 48 cents per square foot, and this was for land on the river within 500 feet of the taxpayer's property. The Commissioner relied upon the testimony of a valuation engineer who had never seen the property, was not familiar with values of land in the vicinity, and based his conclusions upon the rental received from a lease of a portion of the land, this lease being to one of the railroad companies upon which the taxpayer depended for cars to carry on its business. Upon this testimony we conclude that the March 1, 1913, value is most reasonably reflected at 48 cents per square foot, or a total of $145,000 for the land without buildings.

In Hunter's Appeal (1 B. T. A. 893) the book value of each share of a small block of stock on January 1, 1913 was $156.44 and on October 1, 1913, $180.18. The taxpayer averaged the two values and contended that the fair market value on March 1, 1913 was $168.95. It was shown that the stock had no free market. A small dividend was paid in December, 1912. It would seem that in nine months the stock earned, net, nearly $24 per share. The Commissioner fixed the value on March 1, 1913 at $106.41. The Board upheld the Commissioner. It is regrettable that the Board rendered no opinion in the case. The decision is not understandable.

In the Kentucky Tobacco Products Co. v. Lucas [5 F. (2d) 723], the Commissioner had rejected a March 1, 1913 value of a contract. The court was confronted with a great mass of testimony and denial of value by the Commissioner. The court said:

DECISION. The contract was undoubtedly of great value on March 1, 1913. The proof is not very satisfactory, as to what its exact value was, but it is so evident that it did have a large value as of that date that the plaintiff should not be deprived of its right to deduct the proper proportion of that value from its gross income for the years 1918 and 1919 because

of its inability to establish to a mathematical certainty that value. The plaintiff has attempted to establish its value by two methods-one, by using the profits of the previous six year period as a basis for fixing its value for the remaining six and one-third years it had to run; the other, by proving the difference between the contract price and the fair market value as of March 1, 1913, of the stems covered by said contract, and multiplying this result by the number of tons of stems it was reasonably apparent would be received under the contract during the remainder of its life. Due to the fact that the profits of the company did not come entirely from the handling of the stems covered by the contract, and to the further fact that the proof does not show just what was the profit realized on the stems covered by the contract, the first method must be rejected. Nor is the second method entirely satisfactory, but is one which the Court under all the circumstances feels justified in adopting.

Treasury instructions as to methods of determining value.— The general regulation on the subject of determining value as at March 1, 1913, is as follows:

REGULATION.

(2)

What the fair market value of property was on March 1, 1913, is a question of fact to be established by competent evidence. In determining the fair market value of stock in a corporation, due regard shall be given to the fair market value of the corporate assets on the basic date. In the case of property traded in on public exchanges, actual sales at or about the basic date afford evidence of value, but in each case the nature and extent of the sales and the circumstances under which they were made must be considered. Thus, prices received at forced sales or prices received for small lots of property may be no real indication of the value of the property. (Art. 1591.)

Possible methods of establishing “fair market value.”—The following extract from a charge to a jury in a case which was sustained (Cliquot's Champagne, 70 U. S. 114) on appeal to the United States Supreme Court throws light upon what the court considered "fair market value" to mean.

The market value of goods is the price at which the owner of the goods, or the producer, holds them for sale; the price at which they are freely offered in the market to all the world; such prices as dealers in the goods are willing to receive, and purchasers are made to pay, when the goods are bought and sold in the ordinary course of trade. .... The defendant asserts . . . . that the only way to arrive at the market value is to take the cost of production, to compute how much the manufacturer has actually disbursed in producing the goods, and that thus you have the actual market value. The United States, however, maintain that . . . . they are freely offered to all the world, and held at known and established rates; . . . . and at which they are ready to furnish them to all the world. If this latter state of facts be true, then it is evident that the prices at which the producers so hold them are the market prices. . . .

The Treasury's definition of "fair market value" is set forth in a ruling quoted on page 389.

In the case of Virginia v. West Virginia (238 U. S. 202) wherein the issue was to determine what proportion of Virginia's indebtedness the new state of West Virginia should pay, it became necessary to make adjustments of certain credits and debits as of January 1, 1861, arising out of the valuation of certain railway stocks and other securities as of that time. Justice Charles E. Hughes, in referring to stock of Richmond, Fredericksburg and Potomac Railroad Company (one lot among the several involved), said:

DECISION. The fact, however, that there was no sufficient proof of market value, was not an insuperable obstacle to the making of a fair valuation. It was clearly proper to introduce evidence tending to show the intrinsic value of the shares. Nelson v. First National Bank, 69 Fed. 798, 803; Critchfield v. Julia, 147 Fed. 65, 73; Henry v. N. A. Construction Co., 158 Fed. 79, 81; Murray v. Stanton, 99 Mass. 345; Industrial Trust Ltd. v. Tod, 180 N. Y. 215, 232; State v. Carpenter, 51 Oh. St. 83; Redding v. Godwin, 44 Minn. 355; Moffitt v. Hereford, 132 Mo. 513.

In another case the U. S. Supreme Court has characterized stock exchange prices as not conclusive of value. (See comment on Ray Consolidated Copper Co. v. U. S., page 487.)

The terms "value" and "market value" are also discussed in the following quotations:

Property concerning which no proof of value in the market can be given, because it is not brought into the course of trade and is incapable of any estimate in the mode, is often the subject of legal valuation. In such cases the value is to be ascertained from such elements of value as the property represents, among which may be the cost of producing an article. . . . The question of value is not to be determined by considering the separate elements of which the property is composed, but by taking it as a whole, where it is, regard being had for the purpose for which it was intended and for which it is to be used."

Where property is destroyed and injured which has a market value, this must be shown as the measure of damages; where it has no market value and a real value is shown, this is the measure of plaintiff's recovery; where it has neither a market value nor a real value, but it is shown what it would cost to replace or reproduce the article, then such cost is the measure of damages. But if the article has no market value nor real value, and it cannot be reproduced or replaced, then in that event it would be proper to show what it was worth to the plaintiff.

Yet, a thing not bought and sold in the market may have a value, as when it is an article fitted for a specific use of the owners, and

Sutherland on Damages, Fourth Edition, Volume 2, Article 448. 'M. K. & T. Ry. Co. v. Crews, 54 Tex. Civ. App. 548.