The corpus of each of the above-mentioned trusts always consisted exclusively of stock of Simons Co. No dividends were paid by Simons Co. for the period 1957 up to the time of the trial herein.

In 1963 or 1964, Simons Co. purchased the business of its principal competitor for a purchase price between $200,000 and $300,000. When Joseph Berzon died on December 10, 1967, Simons Co. purchased his 175 shares of stock pursuant to the aforementioned stockholders' agreement, the purchase price being paid over a 36-month period ending on March 1, 1971.

Simons Co. owned one-half of the building located in New York City at 335-339 Fifth Avenue in which its offices were located. The building was a five-story brick commercial building approximately 60 years old on a corner lot approximately 59 × 95 feet. There was a store on the ground floor and office space on the upper floors. In 1968 Simons Co. purchased the other half of the building from United Merchants & Manufacturers for $375,000.

For the purpose of determining an agreed-upon value per share for the Simons Co. stock each year under the aforementioned stockholders' agreement, the value attributed to Simons Co.'s one-half interest in the building located at 335-339 Fifth Avenue was increased by the arbitrary figure of $100,000 to bring that value more in line with what the property was deemed worth. An appraisal of the fair market value of this building was never obtained by Simons Co.

Simons Co.'s income statements for the years 1963 through 1967 are as follows:

1963
1964
1965
$3,312,397.30 $3,553,740.58 $4,405,581.25

2,728,282.36 2,747,510.55 3,534,234.24 3,696,920.34 3,938,119.36

1966
$4,660,113.09

1967 $5,055,323.76

Net income from sales

Cost of goods sold

Gross profit on sales..

Total deductions_.

Net profit before

provision for

Simons Co.'s end-of-year balance sheets for the years 1963 through 1967 are as follows:

Current assets

1963 1964 1965 1966 1967 $766,679.84 $870,253.50 $1,054,829.98 $1,280,393.28 $1,483,607.12

Simons Co.'s gross sales and total assets approximately doubled during the years 1957 through 1967.

Using the values per share as agreed upon each year under the aforementioned stockholders' agreement, petitioners reported the aforementioned transfers of Simons Co. stock by Fred A. Berzon in the years 1962 through 1968 as follows:

In their gift tax returns for 1962 through 1964 and for 1965 through 1968 each petitioner claimed five and eight, respectively, annual exclusions of $3,000 each.

In his notices of deficiency to petitioners (dated October 5, 1971, in docket No. 8615-71 and September 27, 1971, in docket No. 8616-71), respondent disallowed the claimed annual exclusions for the years 1965 through 1968 upon his determination that the beneficiaries received future interests in property. The respondent also redetermined the fair market value of the stock of Simons Co., and hence the total amounts of gifts for the years 1965 through 1968, as follows:

The respondent determined that the gifts of Simons Co. stock by Fred A. Berzon in the years 1962 through 1964 were also gifts of future interests for which exclusions under section 2503 were not allowable and thus increased the aggregate sum of taxable gifts of each petitioner as of the beginning of the calendar year 1965 by $45,000, which is the amount of claimed annual exclusions of each petitioner for those years which he claims should have been disallowed.

OPINION

The first issue for decision requires our determination for gift tax purposes of the value of the stock of Simons Co. transferred by petitioner Fred A. Berzon to eight trusts during the years 1965 through 1968. In reporting the gifts of Simons Co. stock on their respective gift tax returns, petitioners valued the stock each year at the purchase price for the stock agreed upon yearly by the stockholders of Simons Co. in accordance with a stockholders' agreement. For purposes of determining this agreed-upon purchase price, the value attributed to the Simons Co.'s one-half interest in a building located at 335-339 Fifth Avenue was increased by the arbitrary figure of $100,000 to bring that value more in line with what the property was deemed worth.

The stockholders' agreement provides basically that, except for gifts of Simons Co. stock to or for the benefit of that stockholder

and any descendants or spouses of descendants of that stockholder, no stockholder shall transfer or encumber his stock without consent of the other stockholders unless he shall first have offered to sell at a price determined in accordance with the stockholders' agreement all his Simons Co. stock to the corporation and, if the corporation does not elect to purchase the offered stock, to the other stockholders. Upon the death of any stockholder, it was further agreed that the decedent's personal representative would sell and the corporation (or the other stockholders if the corporation did not have sufficient surplus to permit it lawfully to purchase) would purchase at the aforementioned price all of the deceased stockholders' Simons Co. stock. According to its terms, the stockholders' agreement was binding on the parties thereto, their heirs, legal representatives, and assigns, and notice of the agreement was to be printed on each certificate of stock. The terms of the stockholders' agreement could be modified or waived only by action of all the parties thereto. The stockholders' agreement would terminate in the event of liquidation, bankruptcy, receivership, or dissolution of the corporation, or by mutual consent of all the parties thereto.

Petitioners contend that the yearly agreed-upon value per share of stock determined in accordance with the aforementioned stockholders' agreement controls the value at which the gifts of stock in question must be reported for gift tax purposes. Respondent, on the other hand, argues that such agreed-upon value is not controlling and that the value reported by petitioners was understated due to Simons Co.'s arbitrary manner of valuing, without an appraisal, its one-half interest in a building located at 335-339 Fifth Avenue. In determining the value of the stock in question respondent contends that the fair market value of the above-mentioned building at or near the dates of the respective gifts, as determined from appraisals made by a qualified appraiser, must be taken into account.

Section 2512(a) provides for valuation of gifts as follows:

(a) If the gift is made in property, the value thereof at the date of the gift shall be considered the amount of the gift.

The Code itself does not define the term "value" but the regulations (section 25.2512-1, Gift Tax Regs.) under section 2512 state that "The value of property is the price at which such property would change hands between a willing buyer and a

willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts." In particular, section 25.2512-2(a), Gift Tax Regs., states that the value of stocks is the fair market value per share on the date of the gift.

Petitioners contend that the value of the stock in question is determined solely by the yearly agreed-upon purchase price arrived at in accordance with the stockholders' agreement. This is so, they argue, because of the restrictions on transfer of that stock.

There have been a number of cases involving the valuation of stock subject to restrictions on transfer. See Estate of Pearl Gibbons Reynolds, 55 T.C. 172, 188-189 (1970), and cases cited therein. In the instant case any appeal lies to the Court of Appeals for the Second Circuit and thus we must consider that court's interpretation of the law in this area. Jack E. Golsen, 54 T.C. 742, 756-757 (1970), affd. 445 F. 2d 985 (C.A. 10, 1971), certiorari denied 404 U.S. 940 (1971). Several early opinions of that court held in estate tax valuation cases that the fair market value of securities, which were restricted by a right of first refusal during life and by options held by the other stockholders to purchase the stock of a deceased shareholder at a price based on book value, was limited to the purchase price determined according to the agreements granting the rights of first refusal and options. Lomb v. Sugden, 82 F. 2d 166 (C.A. 2, 1936); Wilson v. Bowers, 57 F. 2d 682 (C.A. 2, 1932).

However, in Commissioner v. McCann, 146 F. 2d 385 (C.A. 2, 1944), reversing 2 T.C. 702 (1943), the Second Circuit discussed its two prior decisions and opted for a different rule of law in that case. Commissioner v. McCann involved the question of valuation of gifts of class B McCann-Erickson, Inc., stock which was restricted by that corporation's bylaws with the restrictions printed on the face of each stock certificate. No transfer of the stock was allowed there during life except with special permission of the board of directors. At termination of employment for any reason including death, the employee or his estate was required to sell and the corporation to buy all the employee's class B stock for book value. The court held that the restrictions placed on transfer of the stock did not limit its value for gift tax purposes solely to the book value of the stock and that other factors must be considered in determining the value of the stock.