*996OPINION.
: These appeals come before this Board upon numerous assignments of error. In support of some of them the taxpayers have offered no evidence. At the hearing counsel for the Commissioner was permitted to amend his answer to the appeal of the Tractor Co. by alleging that the Commissioner erred in the computation of the invested capital for the year 1918 and that the correct invested capital for that year was $184,375 less than the amount shown on page 3 of the deficiency letter dated October 28, 1924. The net result of the amendment was to increase the deficiency in tax for the year 1918 in the amount of $12,980.
The assignments of error will be taken up in order.
1. The Tractor Co. alleges that the Commissioner erred in finding that the actual cash value of certain patents, patent applications, drawings, blue prints,, tracings, etc., acquired by it in exchange for $650,000 par value of its capital stock, was $50,000 instead of $650,000. In support of his determination the Commissioner contends that, by the agreement made with Wallis, Conger bound himself to transfer his property for one-third of the $650,000 par value of capital stock of the Tractor Co. ostensibly issued therefor and $15,000 in cash; that the other two-thirds of dhe $650,000 capital stock were to go to Wallis upon his promise to pay in to the corporation not over $100,000 for a like amount of the preferred stock as called for by the corporation; and that, for a promise to pay $100,000 for preferred stock, Wallis got twice as large an interest in the corporation as Conger got for the patents, drawings, blue prints, etc.
On behalf of the Tractor Co. it is contended that the actual cash value of the patents, drawings, etc., at the date of acquisition was $650,000; that the board of directors of the Tractor Co. issued *997$650,000 par value of its capital stock for the assets, and that, under the provisions of the statutes of the State of Wisconsin, shares of stock may not be issued except “ in consideration of money or of labor or property estimated at its true money value.” (Section 182.06.) It is claimed that, in the absence of fraud, this is conclusive that the cash value of property paid in to a corporation organized under the laws of the State of Wisconsin is worth at least the par value of the shares of stock issued therefor. In support of this proposition the taxpayer cites National Bank of Merrill v. Illinois & Wisconsin Electric Co., 101 Wis. 247 ; 77 N. W. 185; and State ex rel. Van Dyke v. Cary, (Wis.) 191 N. W. 546.
The Revenue Act of 1918 provides that in computing invested capital there shall be included “ the actual cash value of tangible property” paid in for shares of stock (section 326 (a) (2)) ; also, that the basis for determining gain or loss sustained from the sale or other disposition of property shall be, in the case of property acquired before March 4, 1913, “ the fair market price or Avalué of such property as of that date.” Section 202 (a) (1). The basis for determining deductible depreciation and obsolescence upon such property is cost, or, in the case of property acquired before March 1, 1913, the value on that date. Article 161, Regulations 45. Such “ actual cash value ” or “ fair market price or value ” must be determined in any appeal coming before this Board upon the basis of the evidence of record. The Board will look through mere form to determine the substance of the transaction. Appeal of W. C. Bradley, 1 B. T. A. 111. The par value of the shares of stock issued by a corporation in payment for property is not conclusive evidence as to the actual cash value or fair market price or value of that property. Appeal of The Hotel de France Co., 1 B. T. A. 28; Appeal of Dwight & Lloyd Sintering Co., 1 B. T. A. 179.
The evidence in the instant appeal is to the effect that hundreds of thousands of dollars had been spent in developing the Conger tractor to the point of perfection which it had attained at the time that it was acquired by the Tractor Co. The original inventor ay as a man by the name of Corbett. Conger acquired it from Corbett’s estate, and his .chief engineer testified that Conger had spent several hundred thousand dollars upon it under his direction and supervision. The tractor was unlike any other on the market, and in the opinion of Wallis and his engineers had great possibilities. Many of the good points of the machine were protected either by patents or patent applications. The J. I. Case Plow Works had spent a large amount of money in perfecting gang ploAvs to be tractor drawn. OAving to the increasing practice of manufacturers of tractors to manufacture gang plows to be sold with the tractors, the Plow Works found this branch of its business dwindling. The Plow Works *998was in the market for a tractor. Its engineers and experimental men reported to Wallis that in their opinion it would cost from $500,000 to $1,000,000 to perfect a tractor to the point that the Conger tractor was perfected in 1912. Conger wanted a million dollars for the patents, drawings, etc., connected with his tractor.
We can not doubt, in the light of all the evidence of record, that such patents, drawings, blue prints, etc., had a large cash value. We think that the value was in excess of the $50,000 found by the Commissioner. We are of the opinion, however, that the value was not as much as $650,000. Although $650,000 par value of capital stock was issued for the assets and that amount of the capital stock was received by Conger, it is' to be noted that he was to hold it only momentarily. All that Conger actually received for the assets for his own use and enjoyment was $180,000 par value of common stock, $35,000 par value of preferred stock, and $15,000 cash. The Tractor Co. claims that a part of the consideration was the promise of Wallis to finance the corporation, and .that in pursuance of such promise he risked his fortune. To our minds this argument is not persuasive. So far as the evidence shows, Wallis was reimbursed for every dollar he advanced to the corporation in financing it. We are of the opinion, from a consideration of all of the evidence, that the actual cash value of the patents, drawings, blue prints, etc., paid by Conger to the Tractor Co. was $230,000, and no more.
2. The second allegation of error is to the effect that the Commissioner erred in refusing to allow a deduction from the Tractor Co.’s gross income for 1918 of $250,000 on account of obsolescence of the-drawings, blue prints, tracings, etc. It appears that $200,000 of this amount was charged against the book value of the original patents, drawings, blue prints, etc., acquired from Conger, and that $50,000 was charged against an account known as “Deferred development.” In this aniount was recorded the cost of making drawings, blue prints, tracings, etc., connected with “ Model B.” In the record of the appeal the tractor acquired from Conger is designated as “Model A.” The Commissioner has disallowed the deduction of $250,000, claimed as a deduction for obsolescence, on the ground that the Tractor Co. “ did not manufacture the- Conger tractor.” It is true that the “ Model A ” tractor was not manufactured by the Tractor Co. The “ Model B ” tractor was, however, manufactured in accordance with the designs covered by the patents and patent applications and in accordance with the blue prints, drawings, and tracings acquired from Conger. The stipulated facts also show that “ Model C ” and “ Model D,” which were made in 1914, 1915, and 1916, respectively, followed closely the original drawings, blue prints, tracings, and data, and also embodied many of the patented features acquired from Conger. In 1918 the Tractor *999Co. came to the conclusion that its financial statements, as a basis for bank credit, were inaccurate bv reason of the fact that its drawings, tracings, etc., acquired from Conger were carried at their original book cost. After careful consultation with its engineer and drafting force, it came to the conclusion that the drawings, blue prints, etc., acquired from Conger could then be destroyed, and also that most of the drawings used in the manufacture of “ Model B ” could also be destroyed. They were then destroyed and their book cost was reduced as indicated above.
We are of the opinion that the deduction of $50,000, representing obsolescence of the drawings made by the taxpayer and used in connection with “ Model B,” was proper. We have found, however, that the actual cash value of the patents, drawings, blue prints, etc., acquired from Conger was only $230,000, and not $650,000, as claimed by* the Tractor Co. In other words, we have found that the actual cash value was only 35.3846 per cent of the book value. We are, therefore, of the opinion that, in determining the amount of obsolescence deductible from gross income for the year 1918, the $200,000 claimed deduction should be reduced in like ratio and that the taxpayer should be allowed a deduction of only $70,769.20 for obsolescence of the original drawings, blue prints, etc., acquired from Conger. The total amount of obsolescence deductible from gross income for 1918 in respect of drawings is $120,769.20 instead of $250,000, as claimed.
3. The third allegation of error is that the sale of the assets of the Tractor Co. and of the Plow Works for all the shares of the capital stock of the Plow Works Co. in 1919 was not such a transaction as could in and of itself have resulted in the realization of income subject to tax. The Commissioner contends that this is a transaction falling under the provisions of section 202(b) of the Revenue Act of 1918, and that, to the extent that the fair market value of the shares of stock received by the taxpayers from the Delaware corporation exceeded the cost to them of the assets transferred, such excess constitutes taxable income; that the question whether the taxpayer received income from the transaction is settled by the decision of the United States Supreme Court in United States v. Phellis, 257 U. S. 156. The taxpayers, on the other hand, claim that the decision of that court in Weiss v. Stearn, 265 U. S. 242, and a line of cases holding that substance and not form shall govern in determining whether income is derived from a given transaction, requires a determination of the issue in favor of the taxpayers.
Since the hearing of these appeals the Supreme Court has rendered a decision in the case of Marr v. United States, 268 U. S. 536, which, in our opinion, supports the Commissioner’s contention. The facts in that case are that, prior to March 1, 1913, the appel-*1000Iant and his wife purchased 339 shares of the preferred and 425 shares of the common stock of the General Motors Co. of New Jersey for $16,400. In 1916 they received in exchange for this stock 451 shares of the preferred and 2,125 shares of the common stock of the General Motors Corporation of Deleware, which (including a small cash payment) had an aggregate market value of $400,866.51. The difference between the cost of their stock in the New Jersey corporation and the value of the stock in the Delaware corporation was $324,466.51. The court held that this amount constituted taxable income of the appellants for the year 1916. In the co3irse of its opinion the court stated:
In the case at bar, the new corporation is essentially different from the old. A corporation organized under the laws of Delaware does not have the same rights and powers as one organized under the laws of New Jersey. Because of those inherent differences in rights and powers, both the preferred and the common stock of the old corporation is an essentially different thing from stock of the same general kind in the new. But there are also adventitious differences, substantially in character. A 6 per cent, non-voting preferred stock is an essentially different thing from a 7 per cent, voting preferred stock. A common stock subject to the priority of $20,000,000 preferred and a $1,200,000 annual dividend charge is an essentially different thing from a common stock subject only to $15,000,000 preferred and a $1,050,000 annual dividend charge. The case at bar is not one in which after the distribution the stockholders have the same proportional interest of the same kind in essentially the same corporation.
Although the Revenue Act of 1916 was under consideration by the Supreme Court in that case, the provisions of the Revenue Act of 1918, so far as they bear upon the facts in issue, are not materially different, and the Board is of the opinion that the court’s reasoning is equally applicable to the Revenue Act of 1918. In the appeals at bar the taxpayers sold assets, without liabilities, for shares of stock of a corporation organized in a different State. The assets of the new corporation were materially different from the assets of either of the taxpayer corporations, separately considered, and the liabilities of the stockholders were also materially different. The taxpayers exchanged assets of one character for assets of an entirely different character, and they are liable to income tax in respect of any profit which may have been realized by them upon the transaction based upon the difference between the cost or fair market value at March 1, 1913, if greater, of those assets and the fair market value, if any, of the shares of stock of the new corporation received in exchange.
4. What was the “ fair market value ” of the shares of stock of the Plow Works Co. received by the taxpayer corporations in exchange for their assets without liabilities? The taxpayers contend that they had no fair market value within the meaning of section *1001202 (b) of the Revenue Act of 1918; that the shares of stock were received under an agreement with the taxpayers’ bankers by which Souders & Co. was to purchase a portion of them; that the balance of the second preferred stock not purchased was to be retained for an indefinite period and the balance of the no par value common •stock not taken was to be retained for a period of at least two years; that, under such circumstances, it can not be said that the shares of stock received had a “ fair market value ” at the date of receipt, for the reason that those not taken by Souders & Co. could not then be sold by the recipients. The Commissioner contends, on the other hand, that the shares of stock received had a fair market value; that the shares were actively dealt in on the Chicago Stock Exchange from some time in October, 1919, and that the stock quotations from the date the shares of stock were first listed on the exchange to the end of 1920 afford a basis for the computation of the fair market value "of the total number of shares received; that the restriction placed upon the sale of the shares of stock by Souders & Co. is no absolute bar to a determination of the fair market value of them.
The language of section 202 (b) of the Revenue Act of 1918 applicable to this situation is as follows:
When property is exchanged for other property, the property received in exchange shall for the purpose of determining gain or loss be treated as the equivalent of cash to the amount of its fair market value, if any; * * ⅜
The question of what constitutes the “ fair market price or value ” of shares of stock as of March 1, 1918, within the contemplation of the Revenue Act of 1916, was before the Circuit Court of Appeals for the Third Circuit in the case of Walter v. Duffy, 287 Fed. 41. In the course of its opinion the court stated:
Now, what is the market price? What is the fair market price of the statute? We say “fair," since every word used by Congress must be given •due effect in the construction of this widely applicable statute, for obviously, while a stock might be bought and sold — and so marketed — and might thus be said to evidence some market price, yet it is obvious that Congress by the addition of the words " fair market price,” certainly meant that not only must the market price be ascertained by sales, but that sales so made, the circumstances under which they were made, the subject-matter of the sales, all the attendant circumstances, were to be considered to determine whether such sales served to evidence not alone a market sale, but the fair price which Congress said should be the statutory start or base from which subsequent “ gain derived ” should be determined.
We start, then, with the fact that we are here dealing with the existence of a market, and a market price evidenced by sales in such market; so that our first and basic inquiry is whether there actually was a market for the sale of this insurance stock. Now, market implies the existence of supply and -demand, for without the existence of either factor no market value is shown. Standing alone, offers to sell, with no takers, or offers to buy, with no sellers, *1002show no such concurring willing action of buyer and seller as is involved where a market is made by buyers and sellers who by their respective sales and purchases make a market price which the law takes as evidence of value. * * *
In a more recent case before the United States District Court for the Western District of Pennsylvania, Phillips v. United States, 12 Fed. (2d) 598, the question presented was the fair market value as of March 1, 1913, of certain shares of stock of the Pure Oil Co. In the course of its opinion the court stated:
It is well settled that the fair market price or value of the property as of March 1, 1913, is a question of fact under all the circumstances of the case. No method of determining this value can be stated which will adequately meet all circumstances. The stock sales made from time to time are to lie considered, together with the nature and extent of the sales, and the circumstances under which they were made, hence forced sales, or sales of small lots, may often be no real indication of the value. The test is the fair market value. This may be defined to be the value of the prophrty in money as between one who wishes to purchase and one who wishes to sell; the price at which a seller willing to sell at a fair price and a buyer willing to buy at a fair price, both having reasonable knowledge of the facts. Prior to 1924, it appearing that the Treasury Department in valuing the stock of close corporations, had given insufficient weight to the value of the assets and too great weight to forced or isolated sales of comparatively small blocks, there were inserted in the Revenue Act of 1924 these words: “ 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.” ⅛ ⅞ -⅜
In the instant appeal the taxpayers, at the time they received the shares of stock from the Plow Works Co., had an agreement with Souders & Co. by which it ivas to purchase all of the first preferred stock of the new company, 35.714 per cent of the second preferred stock, and between 48 and 49 per cent of the common stock. Souders & Co. were to pay $87.50 per share for each share of first and second preferred stock purchased, each share to be accompanied by one share of common stock as a bonus. One of the conditions upon which Souders & Co. made the purchase was that the second preferred stock not purchased was to be held by the taxpayer corporations for a period of approximately six months until Souders & Co. and their associates had disposed of the stock acquired by them, and that the common stock retained was to be held for a period of two years. Wallis was to continue to serve as president of the corporations for the two-year period. In view of these facts, the price paid by Souders & Co. for the shares taken is no indication of the fair market value of such shares. .
The Commissioner determined the profit made by each taxpayer corporation from the sale of its assets, without liabilities, to the Plow Works Co. upon the basis that the shares of stock sold to Souders & Co. had a fair market value equal to the amount paid *1003for them by Souders & Co. and that each share of second preferred and common no par value stock retained had a fair market value of $71.216544 and $15.906233, respectively. The basis for the determination of the value of each share of second preferred and no par value common stock retained is the prices at which these classes of stock were sold on the Chicago Stock Exchange from the time the shares were listed in October, 1919, to approximately December 31, 1920. It is to be noted, however, that from the time the shares were listed until February 27, 1920, the prices of the shares were controlled by the syndicate. The members of the syndicate had agreed among themselves not to sell any shares of stock on the exchange below a given price. The syndicate purchased all shares of stock offered below a given price to support the market. In all such instances the names of the sellers were taken, and if am' member of the syndicate sold shares at less than the price agreed upon, such member was required immediately to repurchase the shares. A few members violated their agreements - with the other members and were immediately required to repurchase the stock. Immediately after the syndicate was dissolved the prices of the shares broke badly, and within a very short time there were practically no sales of the shares on the exchange. Clearly, the prices during the syndicate period were not fair market prices, and it was the testimony of witnesses that it would have been practically impossible to sell as much as 1,000 shares of the stock after the syndicate was dissolved at anything like market quotations. It may also be noted that one or two pools were formed in 1920 to keep up the prices of the shares on the exchange, and that the subscribers to the pools lost heavily. In the light of this evidence, we are of the opinion that the quotations for the shares upon the Chicago Stock Exchange afford little basis for the determination of the fair market value of the shares at the time those shares were received by the taxpayer corporations. We therefore reject the method used by the Commissioner for determining the value of the shares at the date of receipt by the taxpayer corporations.
If the quoted prices for the shares do not afford a basis for determining fair market value, may that' value be determined in any other way? The shares of stock of the Plow Works Co. were received by the taxpayer corporations in exchange for their assets, without liabilities. May it be assumed that the shares of stock had the same fair market value as the assets for which they were substituted? If so, what was the fair market value of the assets ? The book value of the fixed assets of the Tractor Co. were appreciated as of June 30 or July 1, 1919, to the extent of $103,718.69, and those of the Plow Works to the extent of $1,031,456.24. The appreciation of the Plow Works’ assets was in addition to an appreciation of those assets made *1004in 1912 of $293,403.69. The appreciation made in 1919 in the case of each company was upon the basis of valuations made by Arthur Young & Co., certified public accountants. Did such valuations have any reference to the fair market value of the assets? We are of the opinion that they did not. In the case of the Tractor Co., the original patents, drawings, etc., relating to the Conger tractor acquired from Conger in 1912, were written up on the books of account to the extent of $200,000, or from $450,000 to $650,000. We have found, however, that the depreciated cost of those assets as of June 30, 1919, was only $159,230.80 ($230,000 value at the date of acquisition less $70,769.20 obsolescence in 1918), and we are of the opinion that the fair market value of those assets at that date was not in excess of that amount. After appreciating the value of the assets of the Tractor Co. to the extent of $594,487.89, the accounting firm found that their value was $1,730,644.73. We are of the opinion that the true market value of the assets was more nearly represented by the books of account before the appreciation was made. We have found that the depreciated cost of the assets was $1,127,214.22, and we are of the opinion that that was their fair market value on June 30,1919. The Commissioner and the taxpayer have stipulated that $4,271,055.08 was the depreciated cost (enhanced by appreciation in value occurring prior to March 1, 1913) of the assets of the Plow Works transferred to the new company. We think that the fair market value of the assets of the Tractor Co. and of the Plow Works transferred to the Plow Works Co. for all of its shares of stock was the sum of these two amounts, or $5,398,269.30, and that that amount represents the fair market value of the shares of stock of the Plow Works Co. received in exchange.
It will be noted from the findings of fact that the assets of the two taxpayer corporations were sold to the Plow Works Co. for 35,000 shares first preferred, 35,000 shares second preferred, and 125,000 shares common stock of the new company. In the absence of any stipulation by the parties as to the allocation of value to the several classes of stock received, the Board must determine the value from the evidence submitted. As the result of a number of computations made, the Board reaches the conclusion that the fair market value of each share of preferred stock was $69.40631957 and of each share of common stock $4.31861. The Tractor Co. received 17,500 shares of preferred stock and 31,250 shares of common stock; the Plow Works received 52,500 shares of preferred stock and 93,750 shares of common stock. The fair market value of the shares of stock received by the Tractor Co. was $1,349,567.15 and that of the shares received by the Plow Works $4,048,701.94. Since the depreciated' cost of the assets sold by each of the taxpayer corporations for the shares of stock received was $1,127,214.22 and $4,271,055.08, respec*1005tively, the Tractor Co. realized a profit from this transaction of $222,352.14 and the Plow Works a loss of $222,353.14.
In reality the sales of assets, without liabilities, by the two corporations to the Plow Works Co. for certain shares of stock of the Plow Works Co., and the sale to Souders <& Co. by each of the taxpayer corporations of a portion of the shares of stock of the Plow Works Co. received, were separate transactions. The basis for the computation of gain or loss upon the sale of shares of stock to Souders & Co. is the “ cost thereof.” Section 202 (a) (2), Eevenue Act of 1918. The sale by each taxpayer corporation of its assets, without liabilities, to the Plow Works Co. constituted a closed and completed transaction. The fair market value of each share of preferred stock received was $69.406319 and of each share of common stock $4.31861. These figures represent the “ cost ” of each share of stock of the Plow Works Co. received by the taxpayer corporations, and are the basis for computing gains and losses upon the sales of those shares. The Tractor Co. sold to Souders & Co. 8,750 shares of first preferred, 6,900 shares of second preferred, and 15,315 shares of common stock of the Plow Works Co., receiving in exchange therefor $1,255,625. The shares of stock sold cost the Tractor Co., upon the basis of the values above stated, $1,062,120.19, and the profit realized upon the sale to Souders & Co. was $193,-504.81. The profit realized by the Plow Works from the sale of 26,250 shares of first preferred, 16,900 shares of second preferred, and 45,935 shares of no par value common stock of the Plow Works Co., computed in a similar manner, was $582,366.98.
The net result of the refinancing operations carried out by the Tractor Co. during the calendar year 1919 was a profit on the sale of its assets, without liabilities, to the Plow Works Co. of $222,352.93, and a further profit upon the sale to Souders & Co. of a portion of the shares received of $193,504.81, or a total profit for the year in respect of the transactions of $415,857.74. The result of similar transactions of the Plow Works was a loss upon the first transaction of $222,353.65 and a profit upon the second transaction, the sale to Souders & Co., of $582,366.98, or a net profit on both transactions of $360,013.33. The Plow Works received a further profit during its fiscal year ended June 30, 1920, from the sale of 1,187 shares of its second preferred stock, accompanied by a bonus of 1,187 shares of common stock, at $90 per unit. The profit on each unit was $16.275065, and the total profit from the sale of 1,187 units was $19,318.51.
5. The taxpayers request relief from alleged excessive taxes, for the years 1918 and 1919, under section 328 of the Eevenue Act of 1918.' No evidence of comparatives was submitted by the taxpayer corporations. We are of the opinion that the net incomes of the *1006Tractor Co. for 1919 and of the Plow Works for the fiscal year ended June 30, 1920, were abnormal by reason of profits realized from the sale of capital assets, and that they should have any relief to which they may be entitled under section 328 of the Act. The determination of relief made by the Commissioner will be final. Appeal of H. T. Cushman Mfg. Co., 2 B. T. A. 39.
Order of redetermination will he entered on 30 days’ notice, under Rule 50.