or if they had any fair market value such was not more than $100,000.

The respondent has determined a value of $21 a share and his determination is prima facie correct until overcome by preponderating evidence. To sustain the burden of proof the petitioners have relied upon expert testimony, from which we may, if satisfied with. the conclusions drawn, find that (1) the stock had no fair market value whatsoever, or that (2) its fair market value was merely "nominal ", varying from $1.50 to $3 a share.

The majority of the witnesses testified that the stock had no fair market value whatsoever and the others more or less reluctantly testified to a nominal value, both groups giving as the principal

reason for their conclusions the fact that the stock was restricted. A similar proposal was made in T. W. Henritze, 28 B. T. A. 1173, where we rejected the contention that stock containing a restrictive clause was without fair market value, saying:

A contractual obligation assumed by the recipient of shares not to exercise an owner's right of sale does not as a matter of law establish the absence of fair market value. Newman v. Commissioner, 40 Fed. (2d) 225; rehearing denied, 41 Fed. (2d) 743; certiorari denied, 282 U. S. 858; Henry S. Parker, 11 B. T. A. 1336, 1350; H. H. Champlin, 28 B. T. A. 264; Tex-Penn Oil Co., 28 B. T. A. 917. The restrictive provisions, although stamped upon the share certificates are not inherent attributes of the shares. Between the corporation and the shareholder exist all of the normal legal incidents of such a relation. The restriction deprives the shareholder of none of his rights qua shareholder and adds nothing to either the rights or duties of the corporation. Held, for example, by a trustee prohibited by the trust to sell, they would nevertheless have fuli market value. Like any other property, such as land, buildings or chattels, they may have substantial fair market value despite a local or temporary obstacle to their cash realization by the one who happens to own them at a given time.

The very purpose of the restriction in this instance is shown by the evidence to be for the protection and enhancement of value rather than its destruction. The hypothesis of fair market value is the existence of willing seller and willing buyer, and it is a manifest anomaly to attempt an ascertainment of what a willing seller would take in respect of property which by reason of a voluntary contractual inhibition he has made himself unwilling to sell. Could it be said, for example, that one who receives as compensation for services a marketable railroad bond, with the agreement with his employer that he will not sell it for a year, has received nothing of fair market value? Cf. Harry B. Hurd, 12 B. T. A. 368; H. L. Carnahan, 21 B. T. A. 893. Instances of wide diversity come to mind which would make the statute incredibly vulnerable. It has been held in other connections that taxpayers may not, by private contracts or definitions, determine their income tax liability. Lucas v. Earl, 281 U. S. 111; Mitchel v. Bowers, 15 Fed. (2d) 287; certiorari denied, 273 U. S. 759; Phelps v. Commissioner, 54 Fed. (2d) 289; certiorari denied, 285 U. S. 558. And the doctrine is, we think, applicable to a contractual restriction upon the sale or disposition of income received. The petitioners' point, therefore, that because of the restrictive clause upon the shares they were without fair market value, is rejected.

We must, therefore, reject the contention that these shares had no fair market value. See also Tex-Penn Oil Co., 28 B. T. A. 917.

Nor can we, upon the record, sustain the contention that only a nominal value should be assigned. Nearly all of the witnesses were reluctant to attach any fair market value to the restricted shares, notwithstanding the unrestricted shares were selling on the New York Curb Exchange at $33 a share. Their sole reason for assigning only a nominal value was substantially the same reason that they gave for declaring that the shares had no fair market value whatThree bank officials testified that the stock had no "collateral” value for loan-making purposes. Obviously this testimony is of little assistance in determining the fair market value. Another witness, a "statistician" and "customers' man ", testified that the 46,400 shares, subject to restriction, sold in bulk, all or none, would bring about $100,000 irrespective of what the balance sheet of the company might have shown at that time. In other words, his testimony was influenced by the restriction exclusively upon sale. So that we can give very little credit to this witness' testimony. One witness, a stock broker, testified to a value of from $2 to $3 a share, subject to the restrictions. While admitting that other factors than the restriction placed upon the stock, such as the ability of the officers of the corporation, the state of their health, the stability of the concern itself, and the condition as shown by the balance sheet, should be considered, he admitted that he knew nothing about those factors. His answer, he further admitted, was based purely upon the restriction. Considering all of the testimony of the witnesses, giving full force and effect to their experience and fitness to testify upon the subject matter in controversy, we are of the opinion that the evidence adduced fails to overcome the correctness of the respondent's determination, which we find ourselves impelled to sustain.

The petitioners appear to have abandoned the third issue. At any rate there is no evidence from which we can determine the amount of surplus available for dividends, which is quite necessary if the respondent's determination of that issue is to be answered. Cf. John S. Woodard, 30 B. T. A. 1216.

Judgment will be entered under Rule 50.

SECURITY COMPANY, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 57090. Promulgated October 24, 1935.

Profit which was derived by a member of an affiliated group from the sale of stock of another member of the group, where the stock in question was acquired in the form of stock dividends and the sale of the same did not break the affiliation, is liable to income tax.

Claude I. Parker, Esq., and John B. Milliken, Esq., for the petitioner.

Ralph E. Smith, Esq., for the respondent.

OPINION.

SMITH: This is a proceeding for the redetermination of deficiencies of $93,353.10 and $106,111.80 in income tax for the years 1927 and 1928, respectively.

The question in issue is whether profit which was derived by a member of an affiliated group from the sale of stock of another member of the group, where the stock in question was acquired in the form of stock dividends and the sale did not break the affiliation, is taxable.

The facts are contained in a signed stipulation of the parties. They may be briefly summarized as follows: The Security Trust & Savings Bank (hereinafter sometimes referred to as the bank) is a California corporation, organized in 1889. The petitioner, Security Co., is a securities affiliate of the bank. It is a California corporation, incorporated December 18, 1922, with its principal place of business at Los Angeles. It was incorporated "for the purpose of engaging in certain undertakings which are closely connected with and incidental to, but not technically within, the field of banking activities." It was affiliated throughout the years 1927 and 1928 with the bank and with. the bank filed consolidated returns for those years, and tax liability has been computed by the respondent upon a consolidated basis.

The entire outstanding capital stock of the petitioner has at all times been held by trustees for the benefit of the stockholders of the bank, and throughout the years 1927 and 1928 each outstanding certificate representing a share or shares of the capital stock of the bank was endorsed as follows:

Under the terms of a certain Trust Agreement dated July 1, 1922, between the Security Trust & Savings Bank, party of the first part, and J. F. Sartori and others as Trustees, party of the second part, and William H. Allen, Jr., and others as stockholders of the said bank, parties of the third part, the registered holder of the share or shares of stock of the Security Trust & Savings Bank represented by this certificate of stock is the owner of a beneficial interest in the capital stock of the Security Company, a corporation organized pursuant to said agreement, from time to time held by the Trustees under said agreement rateably with all other stockholders of the said bank who have a beneficial interest in the capital stock of the said Security Company; the said beneficial interest is transferable only by the transfer on the books of the said bank of the shares of stock represented by the within certificate of stock, and any transfer of said stock carries with it a proportionate beneficial interest in the stock of the Security Company.

Under the declaration of trust the original capital of the petitioner was provided by a special dividend from the bank, to which the

stockholders waived claim. The declaration of trust further provided that:

any other or further special dividends, whether cash dividends, or stock dividends, which may be in the future declared by the Board of Directors of the said bank for the purpose of supplying additional capital or surplus of the Security Company, may likewise be paid to the said trustees, and to this end the stockholders hereby assign and transfer to the trustees all their right, title and interest in and to said other or further special dividends declared for such purpose, and do empower and direct the bank to pay any such dividend or dividends to the trustees for such purpose.

In conformity with the provisions of the trust agreement, the bank declared and distributed several stock dividends, among which the following only are involved in the proposed income tax deficiencies for the years 1927 and 1928:

Date of distribution

December 28, 1925.

April 1, 1927.

May 2, 1927__

Shares distributed

2,500

2,250

5,000

These stock dividend shares of the bank were issued to the aforesaid trustees after first endorsing thereon the legend set out above and the trustees immediately transferred such stock dividend shares to the petitioner. The petitioner in turn issued shares of its capital stock to the trustees, in whom the legal title to such shares of petitioner has at all times been vested in conformity with the provisions. of the trust agreement.

During 1927 and 1928 petitioner sold certain of the stock dividend shares of the bank (endorsed with the legend provisions referred to). The stipulation provides:

If the sale by petitioner, as a member of the affiliated group, of shares of the capital stock of its affiliate, the Security Trust & Savings Bank (with aforesaid legend endorsed thereon) which shares were received by petitioner pursuant to the trust agreement dated July 1, 1922, was such a transaction as gave rise to the receipt of taxable income, then the amount thereof for each of said years is as follows:

For the year 1927.

For the year 1928.

$645, 275. 30
650, 151. 36

Taxable profit in the amount of $217,934.75 was reported by petitioner for the year 1927 with respect to the sale of Security Trust & Savings Bank stock, endorsed as aforesaid, a part of which represented profit on shares purchased from and sold to the public, and a part profit on the sale of the stock dividend shares.

Certain issues raised by petitioner have been settled by stipulation of the parties. The petitioner admits liability for income tax upon the profit realized by it from the sale of shares of stock of the bank purchased by it from the public, and by it sold to the public.

It is the contention of the petitioner herein that the sale by it of the stock dividend shares of its affiliate, the Security Trust & Savings Bank, was a capital transaction in the stock of another member of the affiliated group, and therefore, could result in no taxable income. In support of this contention it cites United Drug Co. v. Nichols, 21 Fed. (2d) 160; Farmers Deposit National Bank, 5 B. T. A. 520; H. S. Crocker Co., 5 B. T. A. 537; Interurban Construction Co., 5 B. T. A. 529; Liberty Agency Co., 5 B. T. A. 778; Baker-Vawter Co., 7 B. T. A. 594; John Scowcroft & Sons Co., 18 B. T. A. 532; Ohio Central Telephone Co., 28 B. T. A. 96.

The Board cases mentioned above were cited upon the theory that an affiliated group constitutes a unit which for income tax purposes is to be regarded as a single taxpayer. Since the decision of the Circuit Court of Appeals for the Seventh Circuit in Commissioner v. Van Camp Packing Co., 67 Fed. (2d) 596, this Board has reversed its position upon this subject. Thus, in James McCutcheon & Co., 30 B. T. A. 1177, this Board said:

Inasmuch as under more recent decisions, as indicated above, affiliated corporations filing a consolidated return are not to be treated as one and the same taxpayer, but as taxpayers retaining their separate identities, and as not all dealings by the corporation in its capital stock are to be considered purely as capital transactions resulting in neither taxable gain nor deductible loss, it appears that the basis upon which our decisions in the Scowcroft and Van Camp cases were reached can not be sustained.

See also Founders General Corporation, 30 B. T. A. 1256. In Founders General Corporation v. Commissioner, 79 Fed. (2d) 6, the court observed:

That the business unity which is the basis of affiliation does not permit corporate identities to be ignored as a general rule is clearly established. See Helvering v. Post & Sheldon Corp., 71 Fed. (2) 930; Commissioner of Internal Revenue v. Liberty Nat. Co., 58 Fed. (2) 57. The affiliation makes the group which files of right a consolidated return a tax computing unit but leaves the individual corporations the taxpayers. Woolford Realty Co. v. Rose, 286 U. S. 219; Commissioner v. Ben Ginsburg Co., 54 Fed. (2) 238. There would be little substance to this distinction, if for tax purposes the stock of a parent when owned by its subsidiary were to be treated, in disregard of the actual fact, the same as though it were the capital stock of the subsidiary. On the contrary, common ownership of the business by means of the requisite amount of stock ownership by the same interests to produce an affiliated group ordinarily cuts no deeper than to make taxable income computable by the elimination of certain intercompany transactions in determining both the profit and loss of the taxpayers to arrive fairly at the net taxable income of each. The parent's stock is property in the hands of the subsidiary in every practical sense as much when acquired directly from the parent as it is when acquired by the subsidiary from outside sources.

In the instant case it is clear that the stock dividend shares in the hands of the petitioner constituted property owned by it. It is stipu