succession taxes is to be deducted first and then the credits under section 813 (a) (1) and section 813 (a) (2) are to be deducted in that order.

(b) Credit against the additional tax as authorized by section 936 for Federal gift tax paid on gifts made by the decedent cannot exceed an amount which bears the same ratio to the gross additional tax as the value of the property which was included for the purpose of the gift tax and also included in the gross estate bears to the value of the entire gross estate. In computing this ratio, the value of such property is the value determined for the purpose of the gift tax or the value determined for the purpose of the estate tax, whichever is the lower. Furthermore, the credit cannot exceed the difference between the total amount of such gift tax paid and the amount of the credit therefor against the gross basic tax imposed by section 810 or section 860. No credit for gift tax paid under the Revenue Act of 1924 is allowed against the additional tax imposed by section 935.

(c) Property included for the purpose of the gift tax and also included in the gross estate does not embrace any portion of the gift excluded under the provisions of the statute imposing the gift tax, and due allowance must be made for any such exclusions when computing the credit in accordance with the limitations set forth in paragraphs (a) and (b) of this section. For example: A donor, in contemplation of death, transferred property valued at $100,000 to his five children in 1941 and paid the resulting tax. The property is thereafter included in his gross estate for the purpose of the estate tax imposed by the Internal Revenue Code at a value of $90,000. As the total value of the property at the time of the gift was $100,000 and the amount of $20,000 was excluded under the provisions of section 1003 (b) (2), the amount of $80,000, or four-fifths of the property, was included for the purpose of the gift tax. As the total value of the property determined for the purpose of the estate tax is $90,000, the value of four-fifths thereof is $72,000. Since $72,000 is the lower of the two values ($80,000 and $72,000), this amount is used in computing the ratio.

(d) If only a part of the property, included for the purpose of a gift tax im

posed upon transfers made during a certain calendar year, is also included in the decedent's gross estate for the purpose of the estate tax, the gift tax paid in respect of such a part of the property is an amount which bears the same ratio to the total gift tax paid for such calendar year as the value of such part of the property bears to the total amount of the net gifts (computed without deduction of the specific exemption) for such year. For the purpose of computing this proportion the values finally determined for the purpose of the gift tax will control, irrespective of the values determined for the purpose of the estate tax.

(e) If all of the property, included for the purpose of a gift tax imposed upon transfers made during a certain calendar year, is included in the decedent's gross estate for the purpose of the estate tax, the gift tax paid in respect of the property included in the gross estate is the amount of the gift tax paid for that calendar year.

Example. On May 15, 1940, a resident donor gave to his son personal property valued at $52,000, donated cash of $50,000 to a charitable organization, and, in contemplation of death, transferred to his wife real property valued at $100,000. The total amount of gifts for the year for the purpose of the gift tax was $190,000, the amount of $4,000 for each of the three donees being excluded from the total gifts under the provisions of chapter 4 of the Internal Revenue Code. After deducting $40,000 specific exemption and $46,000 for the gift to the charitable organization, the net gifts amounted to $104,000. The gift tax of $7,710 on the net gifts was paid. The donor later died and the value of the real property transferred in contemplation of death was included in his gross estate for the purpose of the estate tax. The gift tax paid in respect of the property included in the gross estate is an amount which bears the same ratio to $7,710 as $96,000 bears to $144,000 or $5,140. Note that $96,000 is the portion of the real property subject to gift tax ($100,000 less the excluded $4,000) and that $144,000 is the amount of the net gifts computed without deduction of the specific exemption, $40,000.

The credit is allowable even though the gift tax is paid by the executor after the decedent's death and the amount of the gift tax is deductible from the gross estate as a debt of the decedent.

(f) For a further illustration of the computation of gift tax credit, see example (3) in § 81.7.

[Regs. 105, 7 F. R. 1429, as amended by T. D. 5239, 8 F. R. 3024]

§ 81.9 Credit for estate, inheritance, legacy, or succession taxes. (a) Under certain conditions a credit is authorized against the basic Federal estate tax for estate, inheritance, legacy, or succession taxes actually paid with respect to the estate of the decedent to any State or Territory or the District of Columbia. If the decedent died after June 29, 1939, the credit against the basic Federal estate tax, is, under the same conditions, authorized by section 813 (b) of the Internal Revenue Code, as amended by section 403 of the Revenue Act of 1939, for estate, inheritance, legacy, or succession taxes paid to any State or Territory, the District of Columbia, or any possession of the United States. The credit is limited to 80 percent of such Federal estate tax, after deduction of the credits allowed, if any, against such tax for Federal gift taxes paid in case the decedent died on or before October 21, 1942, the date of the enactment of the Revenue Act of 1942, and to 80 percent of such Federal estate tax before deduction of the credits allowed for gift tax paid in case the decedent died after October 21, 1942. No credit for payment of estate, inheritance, legacy, or succession taxes is allowed against the additional estate tax imposed by section 935. The credit is limited to the amount of the estate, inheritance, legacy, or succession taxes paid to any State, Territory, possession of the United States, or the District of Columbia in respect of property included in the gross estate of the decedent for Federal estate tax purposes.

(b) The credit is also limited to such taxes as were actually paid and credit therefor claimed within four years after the filing of the return, required by section 821 or 864 except as otherwise provided in this paragraph. If a petition was filed with the Board of Tax Appeals for the redetermination of a deficiency within the time prescribed by section 871 (a) (see § 81.73), the credit is limited to such taxes as were actually paid and credit therefor claimed within four years after the filing of the return or before the expiration of 60 days after the decision of the Board becomes final, whichever period is the longer. If an extension of time has been granted for payment of the tax shown on the return or of a deficiency under section 822 (a) (2) section 871 (h), the credit is limited to such taxes as were actually paid and credit there

for claimed within four years after the filing of the return or before the date of the expiration of the extension, whichever period is the longer. Should the executor, in accordance with the provisions of sections 925 and 926, elect to postpone the payment of the Federal estate tax attributable to a reversionary or remainder interest, the credit allowable against the basic tax attributable to such interest is limited to estate, inheritance, legacy, or succession taxes attributable to such interest as are actually paid to any State or Territory or the District of Columbia (or, if the decedent died after June 29, 1939, to any possession of the United States) and credit therefor claimed prior to the expiration of 60 days after the termination of the precedent interest. (See section 927 of the Internal Revenue Code and § 81.79 (b).)

(c) Refund based on the credit, despite the provisions of sections 910, 911, and 912, will be made if claim therefor is filed within the period provided for filing claim for credit. Such refunds will be made without interest.

(d) Before the Commissioner allows any credit for any estate, inheritance, legacy, or succession taxes, there must be submitted to him the following:

(1) Certificate of the proper officer of the taxing State, Territory, District of Columbia, or possession of the United States showing: (i) the total amount of tax imposed (before adding interest and penalties and before allowing discount); (ii) the amount of discount allowed; (iii) the amount of penalties and interest imposed or charged; (iv) the total amount actually paid in cash; and (v) the date of payment.

(2) A certificate of the above-mentioned officer showing whether (i) a claim for refund of such taxes or any part thereof is pending and (ii) whether a refund of such taxes or any part thereof has been authorized. If any refund has been made, the date, the amount thereof, and a description of the property or interest in respect to which such refund was made must be shown in the certificate.

(e) The evidence described in paragraph (d) of this section should be filed with the return, but if that is not convenient or possible, then it should be submitted as soon thereafter as practicable.

(f) The Commissioner may require the submission of such additional proof as is deemed necessary to establish the right to the credit. For example, he may require an itemized list of the property in respect to which such taxes were imposed by the State, Territory, District of Columbia, or possession of the United States, certified by the officer having custody of the records pertaining to such taxes, and an affidavit of the executor stating whether any litigation has been instituted, or appeal taken, or any such action is designed or contemplated, either by him or, to his knowledge, by any beneficiary or other person, the final determination of which may affect the amount of such taxes.

(g) If, subsequent to the allowance of a credit by the Commissioner, a refund is made of any such estate, inheritance, legacy, or succession taxes, the executor, or if the refund is made after the executor is discharged, then any person or persons to whom the refund is made, is required to advise the Commissioner of the date of the refund and the amount thereof, to furnish the Commissioner with a description of the property or interest in respect of which the refund was made, and to pay the Federal estate tax, if any, due as a result of such refund, together with interest.

[Regs. 105, 7 F. R. 1429, as amended by T. D. 5239, 8 F. R. 3024]

§ 81.10 Valuation of property—(a) General. The value of every item of property includible in the gross estate is the fair market value thereof at the time of the decedent's death; or, if the executor elects in accordance with the provisions of § 81.11, it is the fair market value thereof at the date therein prescribed or such value adjusted as therein set forth. The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell. The fair market value of a particular kind of property includible in the gross estate is not to be determined by a forced sale price. Such value is to be determined by ascertaining as a basis the fair market value as of the applicable valuation date of each unit of the property. For example, in the case of shares of stock or bonds, such unit of property is a share or a bond. All relevant facts and elements

of value as of the applicable valuation date should be considered in every case.

(b) Real estate. The property should not be returned at the local assessed value thereof unless such value represents the fair market value as of the applicable valuation date. (See § 81.12 for the manner of listing and describing real estate.)

(c) Stocks and bonds. (1) The value of stocks and bonds, within the meaning of the Internal Revenue Code, is the fair market value per share or bond on the applicable valuation date.

(2) In the case of stocks and bonds listed on a stock exchange the mean between the highest and lowest quoted selling prices on the valuation date shall be considered as the fair market value per share or bond. If there were no sales on the valuation date, such value shall be determined by taking the mean between the highest and lowest sales on the nearest date before and the nearest date after the valuation date (both such nearest dates being within a reasonable period), and by prorating the difference between such mean prices to the valuation date, and by adding or subtracting, as the case may be, such prorated portion of the difference to or from the mean price obtaining on such nearest date before the valuation date. For example, assume that sales of stock nearest the valuation date (June 15) occurred two days before (June 13) and three days after (June 18) and that on such days the mean sale prices per share were $10 and $15, respectively. The price of $12 shall be taken as representing the fair market value of a share of such stock as of the valuation date. If, however, on June 13 and June 18 the mean sale prices per share were $15 and $10, respectively, the price of $13 shall be taken as representing the fair market value of a share of such stock as of the valuation date. If the security was listed on more than one exchange, the records of the exchange where the security is principally dealt in should be employed. In valuing listed stocks and bonds the executor should observe care to consult accurate records to obtain values as of the applicable valuation date.

(3) In the case of stocks and bonds which are not listed upon an exchange, but are dealt in through brokers, or have a market, the fair market value shall be determined by taking the mean between the highest and lowest selling prices as of the valuation date; or, if there were no

sales on that date, such value shall be determined by taking the mean between the highest and lowest sales on the nearest date before and the nearest date after the valuation date (both such nearest dates being within a reasonable period), and by prorating the difference between such mean prices to the valuation date, and by adding or subtracting, as the case may be, such prorated portion of the difference to or from the mean price obtaining on such nearest date before the valuation date. If quotations are obtained from brokers, or evidence as to the sale of securities is obtained from the officers of the issuing companies, the executor should preserve in his files the letters furnishing such quotations or evidence of sale for inspection when the return is verified by an investigating officer.

(4) If actual sales are not available during a reasonable period beginning before and ending after the valuation date, the fair market value may be determined by taking the mean between the bona fide bid and asked prices on the nearest date before and the nearest date after the valuation date (both such nearest dates being within a reasonable period), and by prorating the difference between such mean prices to the valuation date, and by adding or subtracting, as the case may be, such prorated portion of the difference to or from the mean price obtaining on such nearest date before the valuation date.

(5) If actual sale prices or quoted bona fide bid and asked prices are available on a date within a reasonable period prior to the valuation date, but if no actual sale prices or bona fide bid and asked prices are available on a date within a reasonable period after the valuation date, or vice versa, then the mean between such highest and lowest available sale prices or bid and asked prices may be taken as the value.

(6) If actual sales or bona fide bid and asked prices are not available, then, in the case of corporate or other bonds, the value is to be arrived at by giving consideration to the soundness of the security, the interest yield, the date of maturity, and other relevant factors, and in the case of shares of stock, upon the basis of the company's net worth, earning power, dividend-paying capacity, and all other relevant factors having a bearing upon the value of the stock. Among such other relevant factors to be considered

are the values of securities of corporations engaged in the same or a similar line of business which are listed on an exchange. However, the weight to be accorded such comparisons or any other evidentiary factors considered in the determination of a value depends upon the facts of each case. Complete financial and other data upon which the valuation is based should be submitted with the return.

(7) In cases in which it is established that the value per bond or share of any security determined on the basis of selling or bid and asked prices as provided in this paragraph does not reflect the fair market value thereof, then some reasonable modification of such basis or other relevant facts and elements of value shall be considered in determining fair market value.

(8) The full value of securities pledged to secure an indebtedness of the decedent should be included in the gross estate. If the decedent had a trading account with a broker, all securities belonging to the decedent and held by the broker at the date of death must be included at their fair market value as of the applicable valuation date. Securities purchased on margin for the decedent's account and held by a broker should also be returned at their fair market value as of the applicable valuation date. The amount of the decedent's indebtedness to a broker or other person with whom securities were pledged will be allowed as a deduction from the gross estate in accordance with §§ 81.29, 81.36, and 81.52. (See § 81.12 for manner of listing and describing stocks and bonds.)

(d) Interest in business. (1) Care should be taken to arrive at an accurate valuation of any business in which the decedent was interested, whether as partner or proprietor. A fair appraisal as of the applicable valuation date should be made of all the assets of the business, tangible and intangible, including good will, and the business should be given a net value equal to the amount which a willing purchaser, whether an individual or corporation, would pay therefor to a willing seller in view of the net value of the assets and the demonstrated earning capacity. Special attention should be given to fixing an adequate figure for the value of the good will of the business in all cases in which the decedent has not agreed, for an adequate and full consid