Court Opinion

ID: 4628247
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:02:59.524832+00
Date Added: 2024-06-11T07:57:10.961923
License: Public Domain

HENRY HUDSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Hudson v. CommissionerDocket No. 54774.United States Board of Tax Appeals39 B.T.A. 1075; 1939 BTA LEXIS 935; May 25, 1939, Promulgated *935  1.  Stockholders of corporation F agreed with an underwriting firm to exchange all of their stock for all of the preferred shares and 120,000 of the common shares of newly organized corporation S.  The shares were all placed in escrow, followed by delivery of the preferred shares and 20,000 of the common shares of corporation S to the stockholders of corporation F.  The remaining 100,000 shares of corporation S were delivered to the underwriters for $2,790,000 cash, which was distributed to the stockholders of corporation F.  Held, that a reorganization was effected between the stockholders of corporation F and corporation S and that the gain realized by the petitioner, a stockholder of corporation F, is taxable under section 203(d)(1) of the Revenue Act of 1926 to the extent of the cash received.  2.  March 1, 1913, fair market value of stock of corporation F determined.  3.  In 1927 and 1928 petitioner purchased additional stock of corporation S, of which he sold some in 1928 and exchanged the balance for stock of corporation R in a nontaxable reorganization, then in 1928 sold some of the latter.  Held, (1) The block of S stock purchased in 1927 and sold in 1928 being*936  identifiable, the basis is cost, and, having been held less than two years, the loss is an ordinary loss; (2) The R stock having been acquired in a nontaxable reorganization, the basis of each share is the total basis of the stock of S exchanged therefor divided by the number of shares of R stock received, Christian W. Von Gunten,28 B.T.A. 702">28 B.T.A. 702, subject, however, to an allocation between common and preferred shares according to value; (3) Some of the R shares sold in 1928 being identifiable with S shares purchased in 1927 and 1928, the gain or loss thereon is ordinary income or loss; the remainder not being identifiable, the period of holding the F and S shares must be added to the period of holding the R stock and such shares were capital assets in 1928.  Sec. 101(c)(8)(A), Revenue Act of 1928.  4.  The provisions of either section 3229 or section 3469 of the Revised Statutes pertaining to compromises and settlements not having been complied with, held, that the respondent is not estopped to claim additional taxes for 1927 and 1928, although petitioner had paid certain additional taxes for 1927 and posted a bond for the payment of additional taxes for 1928 as*937  agreed upon prior to receiving the notice of deficiency herein.  George E. H. Goodner, Esq., and D. F. Prince, Esq., for the petitioner.  L. W. Creason, Esq., and Owen W. Swecker, Esq., for the respondent.  KERN *1076  The Commissioner determined deficiencies in income taxes for 1927 and 1928 in the respective amounts of $5,894.47 and $1,845.20.  The questions involved are (1) whether the transactions herein, which resulted in an exchange of stock for stock and cash, should be regarded, for income tax purposes, as a single transaction or two transactions; (2) whether the gain, if any, realized therefrom is taxable, and if so, to what extent; (3) the March 1, 1913, value of the stock of the Fulton Co.; (4) whether the respondent erred in applying the first in, first out rule in determining gain or loss on the sales of stock in 1928; (5) whether the gains or losses on such sales should be treated as ordinary or capital gains or losses; and (6) whether the respondent is estopped, because of a purported compromise of petitioner's tax liability, to assert the deficiencies herein.  The respondent, in his amended answer, affirmatively alleges*938  error on his part in limiting the taxable profit on the 1927 transaction to the cash received instead of treating such transaction as a sale and the entire profit as taxable, and claims an increase in the deficiency for 1927 accordingly.  The petitioner claims overpayment of taxes for 1927 and 1928.  FINDINGS OF FACT.Petitioner is a resident of Knoxville, Tennessee.  On March 1, 1913, he owned 50 shares of stock of the Fulton Co., a Maine corporation, that he had acquired in 1905 at a total cost of $2,500.  The Fulton Co. was organized in 1904 to succeed a partnership engaged in perfecting and patenting mechanical devices hereinafter more fully described.  *1077  The Fulton Co.'s entire stock was issued in consideration of $15,000 cash and the business and assets of the predecessor partnership, including patents, issued to and applied for by the partners.  The $15,000 was the only cash ever paid in to the company.  The assets and liabilities of the Fulton Co., as reflected by its books of account as of December 31, 1912 and 1913, were as follows: Dec. 31, 1912Dec. 31, 1913ASSETS:Cash$16,394.03$16,227.62Accounts receivable11,974.298,821.82Other receivables697.96101.00Investments500.00Inventory47,089.4570,480.84Plant and equipment94,468.15125,165.80Patents9,908.2111,261.83Total183,032.09232,058.91LIABILITIES:Accounts payable5,052.21Bills payable30,500.0010,000.00John S. Brown1,252.31Unclaimed wages8.448.44Capital stock:Preferred50,000.0050,000.00Common101,271.34166,998.26Total183,032.09232,058.91*939  It is stipulated that on March 1, 1913, the Fulton Co. owned tangible assets of a value of $156,833.21.  The patents owned by the Fulton Co. on March 1, 1913, all covering inventions ofWeston M. Fulton, were as follows: NumberApplication filedPatent issued729,926Nov. 21, 1901June 2, 1903.732,627Dec. 9, 1901June 30, 1903.781,939Feb. 26, 1903Feb. 7, 1905. 947,229Apr. 3, 1907Jan. 25, 1910.971,838July 22, 1909Oct. 4, 1910.The invention under each of the first three patents pertained to and were claimed therein to be "a new and useful Improvement in Collapsible Vessels." Patent No. 947,229 claimed the invention of "new and useful Improvements in Corrugated Metal Walls for Collapsible and Expansible Vessels", and Patent No. 971,838 made claim to "a new and useful Improvement in the Process of Making Tubular Metal Walls." These patents related to the product or device and also to the process of manufacturing it.  None of the patents owned by the company were very Broad patents.  Patent No. 971,838, for a process of making corrugated metal walls, was sustained as a "pioneer or primary patent" and all its claims found infringed by*940  the court in Fulton Co. v. Bishop & Babcock Co., 17 Fed.(2d) 999; affd., 17 Fed.(2d) 1006; Fulton Co. *1078  v. JanesvilleLaboratories, Inc., 21 Fed.(2d) 428; and Bishop & Babcock Manufacturing Co. v. Fulton Co., 37 Fed.(2d) 293. In Fulton Co. v. Bishop & Babcock Co., supra, it was also held that product Patent No. 947,229 was narrowly limited and not infringed.  In addition the company has had other patent litigation. The product or device consists of a bellows called "Sylphon", its real merit lying in its ability to expand and contract longitudinally while resisting any force and tendency to expand in any other direction, and in its ability to resist the chemical action of the ordinary gases, vapors, and chemicals.  The process of manufacturing the device consists primarily of physically forming thin-walled, seamless, and flexible metal tubes of a composition known as soft low brass, consisting principally of zinc and copper, being very low in zinc and very high in copper.  By successive steps these tubes are corrugated so as to form deep folds in their walls to render them*941  collapsible and expansible to pressure lengthwise.  The process of making the tubes added to them certain toughness and temper not possessed by ordinary tubing.  Seamless tubing in large quantities had been made for many years for commercial purposes, but not seamless tubing having a wall as thin as that made under the Fulton process.  All of the products manufactured by the Fulton Co. were based upon some application of the Sylphon bellows.  All of the uses to which the bellows was applied were not new in the sense that the devices performed a function that no other device had ever performed.  The devices to which the bellows was applied performed functions which, for the most part, were being performed by other devices then in use.  A characteristic of the Sylphon bellows was its very long life and replacements were rarely required.  The bellows was applied principally in devices used in the heating, chemical, automobile, and refrigeration industries, and was also applied in devices for controlling depth bombs, submarine mines and air propelled torpedoes.  In some instances a device primarily used in one industry overlapped into another industry.  One of the earliest uses of*942  the bellows was its use in a damper regulator on an ordinary steam heating boiler for domestic heating purposes.  The principal devices in which the bellows was employed at March 1, 1913, were damper regulators for steam and hot water boilers, a temperature control device called the regitherm, packless steam and air valves for use on steam radiators, automatic controls for hot water storage tanks, steam pressure reducing valves, return line radiator traps, automatic radiator supply valves, hermetically sealed expansion joints, automobile thermostats, and automatic electric switch controls.  On March 1, 1913, the Fulton Co. had contracts with the American Radiator Co. covering several of the Fulton devices *1079  whereby the American Radiator Co. had exclusive sales rights and agreed to undertake and promote the sale thereof throughout the United States and Canada through its own organization, giving such devices preference over any others.  In 1913 the Fulton Co. was preparing a steam and water mixing valve for the market.  It was also experimenting with carburetors.  It never manufactured carburetors but supplied accessories for them.  It also made some samples of automatic*943  sprinkler heads.  The Fulton Co. produced its first automobile thermostat in 1912 or 1913, at which time samples were supplied for experimental purposes.  It was first sold to garages and repair stations; in 1914 it was adopted by the Cadillac Motor Co., and later was used by a number of other automobile manufacturers.  Modifications were subsequently developed, among which was the application to automobile radiator shutters.  The number of units sold to automobile companies increased from 4,062 in 1914 to 129,769 in 1920.  Sales fell off in 1921 and 1922, but thereafter increased, and in 1926 over 179,000 units were sold.  Automatic switch controls, which prior to 1913 were used for operating elevators, generators, and dynamos, were regarded in 1913 as having possibilities for use in refrigerators.  Sales of this device to refrigerator companies were 54 in 1913, 19 in 1914, 48 in 1915, and 17 in 1916.  Thereafter sales increased rapidly and in 1926 reached a total of 595,610 units.  The following is a statement of the gross sales, net income, number of units sold, dividends paid, and cost of patents as shown by the books and records of the Fulton Co. from 1905 to 1926: YearGross salesNet incomeUnits soldDividends paidPatents1905$2,115.601 $5,482.82356190624,022.523,141.438,718190728,659.325,652.8510,881$46,746.21190834,476.576,310.769,72847,548.41190964,454.3313,706.7020,64245,355.661910124,887.5135,759.2444,8848,484.561911141,030.1128,548.6455,8909,297.481912275,917.1743,639.54130,050$13,500.009,908.211913359,105.8481,518.72209,27215,750.0011,261.831914314,280.8367,672.34190,11418,000.0014,314.301915457,910.76147,251.89340,03722,500.0016,042.951916513,710.90149,819.38318,68724,000.0019,535.801917702,436.34131,615.41431,94124,000.0059,139.6419181,041,506.5078,464.09730,45730,000.0062,955.871919636,790.1622,145.66388,89430,000.0064,827.5219201,038,655.5781,244.80589,45430,000.0067,818.381921775,192.0531,311.85429,79930,000.0069,989.9819221,094,059.58115,960.90(not given)21,942.352 72,745.1819231,314,196.94160,455.63767,779104,583.3481,959.6519241,430,200.73210,192.67766,302115,791.6784,580.8219252,238,963.51785,144.101,086,445183,000.00107,323.2419262,892,228.76999,528.901,538,765551,109.38112,974.44*944 *1080  On or about August 19, 1916, the Fulton Co. purchased letters patent for improvements in thermostatic valves to Noah A. Harter, No. 1,220,985, granted March 27, 1917, for approximately $1,500.  The claims therein conflicted or interfered with claims in an application filed by the Fulton Co. for letters patent on a narrow application of the Sylphon bellows, and it was therefore necessary for the company to either prove its right over Harter or purchase his claims.  Sometime prior to 1925 the laboratories of the Fulton Co. had been working on the development of an improved process for making the bellows known as the hydraulic method.  When a patent thereon was applied for its claims conflicted or interfered with those made in applications filed by Fred K. Bezzenberger which were also based on the hydraulic method.  Consequently, to avoid expensive infringement proceedings and to protect its rights under its application and also its patents previously granted, which were*945  considered very valuable, the Fulton Co. on or about May 29, 1925, purchased for $65,000 the rights of Bezzenberger as embodied in patents numbered 1,506,966, 1,600,750, 1,655,778, 1,667,303, 1,695,948, and 1,698,210, applications for which had been filed during 1924.  After the company acquired these patents it operated under the process developed in its own laboratory.  In acquiring these patents the company followed its customary policy to make settlement with contestants of its patent claims rather than to litigate.  At a special meeting of the stockholders of the Fulton Co. held on March 24, 1922, a resolution was adopted, providing, among other things, that the charter of the company be amended to increase its capital stock from $50,000 to $1,000,000, consisting of 7,500 shares of common stock at $100 each, and 2,500 shares of preferred stock at $100 each.  At this meeting a report was submitted, signed by Fulton, as president, and John S. Brown, as treasurer of the company, in part as follows: That the Patents of The Fulton Company are now carried upon the Books of The Company at a net valuation, after having charged off a supposed depreciation of $50,795.27, and that the*946  Good Will of The Company has never been capitalized or entered upon the Books of The Company at all; and that, in my opinion, the Good Will of The Fulton Company has a very large value, and the Patents have an actual marketable value far in excess of the sum at which they are now carried upon the Books of The Company, and that the value of these two items, "Good Will and Patents", is easily in excess of Three Hundred Thousand Dollars, over and above the sum at which said Patents are now carried upon the Company's Books.  Pursuant to such report a resolution was adopted providing that $300,000 of the capital stock to be issued "be charged against and represent the existing Good Will and Patents of this Company, and the value thereof, which have not heretofore been capitalized or carried into or upon the books or accounts of" the company.  The amendment *1081  to the charter increasing the capital stock from $50,000 to $1,000,000 was recorded with the Secretary of State of Maine on March 25, 1922.  At a directors' meeting of the Fulton Co. held on April 25, 1922, resolutions were adopted providing, among other things, that there be issued and distributed as a stock dividend*947  to the stockholders of record 14 shares of the new common stock of the par value of $100 each for each $100 par value of the common stock then outstanding and 5 shares of the new preferred stock of the par value of $100 each for each $100 par value of the common stock then outstanding (i.e., 14 shares of new common and 5 shares of new preferred for 2 shares of old common), that $650,000 of such stock dividend be charged against the accumulated and undistributed surplus, and that $300,000 thereof be charged against the value of good will and patents, and that the stock of the par value of $50,000 then outstanding be called in for cancellation and that there be issued in its place and stead new common stock in a like amount of par value (i.e., one share of new common for two shares of old common).  Pursuant to such resolution the new stock of the company was issued on April 25, 1922, as follows: After increaseStockholderBefore increase (shares)Common sharesPreferred sharesJohn S. Brown4903,6751,225Weston M. Fulton3902,925975Henry Hudson50375125Brown Prosser70525175Total1,0007,5002,500On the same date, April 25, 1922, the*948  petitioner exchanged his 125 shares of preferred stock for 125 shares of the new common stock issued to John S. Brown.  Thereafter, and until 1927, the petitioner owned 500 shares of common stock of the Fulton Co.On or about April 25, 1922, John S. Brown, who owned 490 shares of stock, and Brown Prosser, who owned 70 shares of stock, disposed of their stock at $1,000 per share.  All of the 2,500 shares of preferred stock were redeemed and retired prior to the end of 1926.  On or about December 20, 1926, certain stockholders of the Fulton Co. entered into an agreement with Charles D. Barney & Co., hereinafter referred to as Barney & Co., as follows: Messrs. CHAS. D. BARNEY & Co., 65 Broadway, New York City.DEAR SIRS: We hereby acknowledge receipt of your certified check for $100,000.00 payable to the order of W. M. Fulton and/or Henry Hudson, trustee for the holders of all of the common stock of the Fulton Company.  *1082  At our request, the plans for the reorganization of the Fulton Company have been materially changed since we gave an option dated November 5th, 1926 to Reynolds Company to acquire for $5,000,000 all of the outstanding common stock of the*949 Fulton Company, which option was subsequently assigned to you by the Reynolds Company for a valuable consideration.  This letter when signed by you at the foot hereof will constitute a new contract between us superseding the aforesaid option.  It is understood that we will, cause to be organized a corporation under the laws of the State of Delaware, to be known as "The Fulton Sylphon Company", with an authorized capital of 15,000 shares of 6% cumulative convertible preferred stock of the par value of $100 each, and 200,000 shares of common stock of no par value, the expenses thereof to be borne by The Fulton Sylphon Company.  When it is organized, we agree to transfer and assign to The Fulton Sylphon Company all of the common stock of the Fulton Company, consisting of 7,500 shares, in exchange for the issuance to us by The Fulton Sylphon Company of 15,000 shares of its preferred stock and 120,000 shares of its common stock.  After obtaining the stock of The Fulton Sylphon Company, we agree to sell you and you agree to buy 100,000 shares of the common stock of The Fulton Sylphon Company registered in such names as you may direct, for the sum of $2,690,000.  This transaction will*950  complete the payment of the $5,000,000 called for in the aforesaid option dated November 5th, 1926, the difference being paid by the new stock retained by us.  We agree to forthwith deposit in The National City Bank of New York the certificates for 7,500 shares of the Fulton Company common stock, properly endorsed for transfer with instructions that said stock be exchanged for the stock of The Fulton Sylphon Company above mentioned.  It is understood that when we tender you 100,000 shares of The Fulton Sylphon Company common stock, if you fail to pay us the balance of the purchase price, namely, $2,690,000 on or before January 20th, 1927, the $100,000 paid herewith by you shall be forfeited, and the National City Bank of New York shall on demand, return to us the abovesaid 7,500 shares of the Fulton Company common stock, and all obligations hereunder shall cease.  W. M. FULTON WARREN WEBSTER & CO. By W. WEBSTER, Pres.C. N. MYNDERSE HENRY HUDSON J. A. KINNARD JOHNSON SERVICE CO. H. A. ELLIS, Pres.Accepted December 20th, 1926.  CHAS. D. BARNEY & CO. By EDWIN A. FISH On or about December 21, 1926, a letter dated December 21, 1926, signed by all the*951  stockholders of the Fulton Co., hereinafter referred to as the escrow agreement, was delivered to the National City Bank of New York as escrow agent, together with the stock therein referred to.  This letter is as follows: *1083  GENTLEMEN: We hand you herewith 7,490 shares of the Common Stock of The Fulton Company.  Ten additional shares of the Common Stock of that Company will be delivered to you within ten days by the undersigned Henry Hudson.  This 7,500 shares is all of the Common Stock of The Fulton Company.  All of this stock, both that delivered and to be delivered, shall be held and handled by you upon the following terms: There will likewise be placed in your hands 15,000 shares of 6% Cumulative Convertible Preferred stock of the par value of one hundred dollars per share and 120,000 shares of common stock of no par value of a corporation to be organized under the laws of the State of Delaware, and to be known as "The Fulton Sylphon Company".  This stock will be issued in the names and amounts as follows: NAMEPreferred StockCommon StockJohn A. Hurley100,000 sharesJ. A. Kinnard500 sharesWarren Webster and Company5,000 shares10,000 sharesC. N. Mynderse50 shares100 sharesJ. V. Giesler50 shares100 sharesHenry Hudson865 shares2,382 sharesW. M. Fulton6,918 sharesFidelity Trust Company, Trustee5,734 sharesBarbara S. Fulton1,301 sharesJohn T. Creighton2,000 shares*952  There is also to be delivered to you by Chas. D. Barney & Company, on or before January 20, 1927, the sum of $2,690,000.00 in cash.  When such stocks of The Fulton Sylphon Company and such cash shall have been deposited with you, you are authorized and directed to make distribution and delivery thereof as follows: To the Treasurer or other principal officer of The Fulton Sylphon Company, all of the said stock of The Fulton Company.  To Chas. D. Barney & Company, or as it may direct, 100,000 shares of said common stock of The Fulton Sylphon Company.  TO HENRY HUDSON 865 shares of preferred stock, 2,382 shares of common stock, and $153,762.67 in cash [List of stock and cash to be received by others than petitioner omitted] Provided, however - 1.  That if any of the signers hereof shall agree between themselves upon a division of any of the above mentioned stocks of The Fulton Sylphon Company and cash in anywise different from that above set forth, and shall evidence such agreement by a written order directed to The National City Bank of New York, and signed jointly by such of the parties hereto as are affected by such changes in such divisions, such directions shall*953  be observed and division shall be made of said stocks and cash in the proportion so directed.  2.  That if Chas. D. Barney & Company shall fail to make payment to you of said sum of $2,690,000.00 prior to the close of business on January 20, 1927, all right and interest in and to any of said stocks which might otherwise be vested in Chas. D. Barney & Company shall thereupon, without notice, cease and terminate, and you shall promptly thereafter return the stocks of The *1084 Fulton Company so deposited with you to the parties depositing the same in the following amounts: NameNo. of sharesJ. A. Kinnard50Warren Webster and Company2,300C. N. Mynderse100J. V. Giesler100Henry Hudson500Johnson Service Company500D. L. Thompson50John T. Creighton1,820Barbara S. Fulton700W. M. Fulton500Fidelity Trust Company, Trustee880And you shall further deliver to W. M. Fulton all of the above mentioned stocks of The Fulton Sylphon Company after you shall have had the said 100,000 shares above provided to be issued to the nominee of The National City Bank endorsed and assigned to said W. M. Fulton.  * * * This escrow agreement*954  was accepted by the bank.  On or about December 23, 1926, the Fulton Sylphon Co., hereinafter referred to as the Sylphon Co., was organized under the laws of the State of Delaware with a capital of 15,000 shares of preferred stock with a par value of $100 a share and 200,000 shares of common stock of no par value.  At a meeting of its board of directors held on January 4, 1927, the Sylphon Co. accepted the subscription of all the stockholders of the Fulton Co. for 15,000 shares preferred and 120,000 shares common stock of the Sylphon Co., payment to be made therefor by the transfer to Sylphon Co. of the entire outstanding stock of the Fulton Co.By letter under date of January 12, 1927, W. M. Fulton, individually, and as attorney in fact for Barbara S. Fulton, Fidelity Trust Co., trustee, Johnson Service Co., and D. L. Thompson, directed the City National Bank to make distribution and delivery of the stock of the Sylphon Co. and cash when received by it under the escrow agreement of December 21, 1926, as follows: DistributeeCommon sharesPreferred sharesCashChas. D. Barney & Co100,000W. M. Fulton4,788671$71,959.96Barbara S. Fulton457,333.37Fidelity Trust Co., trustee5,987Jehn T. Creighton2,000993,066.67J. A. Kinnard50014,166.67Warren Webster & Co10,0005,000642,666.66C. N. Mynderse1005056,733.33J. V. Geisler1005056,733.33Henry Hudson2,382865153,762.67Johnson Service Co2,000100242,866.67D. L. Thompson130277710.67*955 *1085  Barney & Co. paid $100,000 by check to W. M. Fulton and/or Henry Hudson, trustees, on or about December 20, 1926, which was deposited by the latter with the National City Bank of New York.  On or about January 12, 1927, Barney & Co. paid the $2,690,000 required to be paid under the agreement of December 20, 1926, by check to the National City Bank ofNew York.  These amounts were distributed by the National City Bank on or before January 4 and January 12, 1927, by checks payable to the order of and in the amounts as follows: NameAmountAmountJ. A. Kinnard$666.67$14,166.67Warren Webster & Co30,666.66642,666.66C. M. Mynderse1,333.3456,733.33J. V. Giesler1,333.3456,733.33Henry Hudson6,666.66153,762.67Johnson Service Co6,666.66242,866.67D. L. Thompson666.67710.67John T. Creighton24,266.66993,066.67Barbara S. Fulton9,333.30457,333.37W. M. Fulton6,666.5071,959.96Fidelity Trust Co. of Knoxville11,733.54None100,000.002,690,000.00The Sylphon Co. issued 15,000 shares of its preferred stock and 120,000 of its common stock, which were deposited with the National City Bank of New York. *956  The following is a statement showing the capital stock of the Fulton Co. outstanding prior to the exchange of the entire capital stock of the Fulton Co. for stock of the Sylphon Co. and cash, and the capital stock of the Sylphon Co. outstanding immediately thereafter: Stock of the Sylphon Co.NameStock of the Fulton Co.CommonPreferredSharesSharesSharesJ. A. Kinnard50500NoneWarren Webster & Co2,30010,0005,000C. M. Mynderse10010050J. V. Giesler10010050Henry Hudson5002,382865Johnson Service Co5002,000100D. L. Thompson50130277John T. Creighton1,820None2,000Barbara S. Fulton700NoneNoneW. M. Fulton5004,788671Fidelity Trust Co., trustee880None5,987Charles D. Barney & CoNone100,000NoneTotal7,500120,00015,000Immediately after the above transactions in January 1927, the Sylphon Co. owned all the outstanding stock of the Fulton Co., which was held in its behalf by the National City Bank of New York.  At a special meeting of the board of directors of the Fulton Co.*1086  held February 25, 1927, a resolution was adopted which*957  recited in part as follows: WHEREAS, the Fulton Sylphon Company is the owner of all of the capital stock of the Fulton Company, and WHEREAS, it has been contemplated under a plan of reorganization that the Fulton Sylphon Company should at this time acquire all of the assets of the Fulton Company except certain accounts receivable, investments and patents hereinafter mentioned, and hereafter operate the business of the Fulton Company.  The resolution declared a dividend of all the property of the Fulton Co., including its good-will and its business as a going concern, excepting certain accounts receivable amounting to $173,308.02 as of December 31, 1926, cash investments amounting to $369,400 as of the same date, and patents numbered 947,229, 967,010, 971,838, and 1,523,951, and authorized the proper officers to execute and deliver all writings necessary to properly transfer such property and assets to the Sylphon Co.  At a special meeting of the board of directors of the Fulton Co. held on March 8, 1934, it was resolved among other things that since the reasons for maintaining the corporate existence of the Fulton Co., i.e., to defend certain litigation in progress on February 25, 1927, were*958  no longer operative, the sole remaining asset of the Fulton Co., consisting of a demand note of the Sylphon Co. in the amount of $396,092.63 dated March 28, 1927, given for the above excepted assets in addition to the assumption of certain liabilities of the Fulton Co., be surrendered to the Sylphon Co.  At a meeting of the stockholders of the Fulton Co. held on April 17, 1934, it was resolved that the Fulton Co. be dissolved.  The stock of the Fulton Co. had a fair market value as of March 1, 1913, of $706,833.21, or $706,83321 a share.  Barney & Co. participated in the foregoing transactions as a member of a syndicate or group of underwriters and also as agent or manager of such syndicate.  The 100,000 shares of common stock of the Sylphon Co. were immediately sold by Barney & Co. at $39 per share.  In January 1927, after the distribution of stock and cash under the escrow agreement, the former stockholders of the Fulton Co. were in possession of cash and stock of the fair market value of $5,000,000 consisting of: Cash$2,790,00020,000 shares of common stock of Sylphon Co. at $37 a share740,00015,000 shares of preferred stock of Sylphon Co. $98at a share1,470,0005,000,000*959 *1087  About October 1928 the Reynolds Metal Co., hereinafter referred to as the Reynolds Co., acquired control of the Sylphon Co. by an exchange of stock as follows: For each share of the Sylphon Co. common stock, one-half share of common and one-half share of preferred stock of the Reynolds Co. stock, and for each share of preferred stock of the Sylphon Co., $100 and accrued dividends in preferred stock of the Reynolds Co. valued for that purpose at $55 a share.  It was stipulated by the petitioner and respondent that the fair market value of the Reynolds Co. stock at the time of such exchange was $20 per share for the common and $60 per share for the preferred.  Between January and September 1927 the petitioner disposed of his 865 shares of preferred stock of Sylphon Co. and acquired additional shares of common stock.  On or about September 1928, 5,343-2/9 shares of common stock of the Sylphon Co. owned by the petitioner, not including the 200 shares held by Barney & Co., were exchanged for 2,671-11/18 shares of common and 2,671-11/18 shares of preferred stock of the Reynolds Co.  In his recomputation of petitioner's tax liability for 1927, the respondent computed the*960  gain realized in 1927 by the petitioner upon the disposition of his 500 shares of Fulton Co. stock as follows: In January 1927 through reorganization there was received cash and stock as follows: Cash$153,762.672,291 shares common stock Sylphon Company stock at $37.00 per share84,767.001,852.22 shares preferred stock Sylphon Company at $98.00 per share181,517.56Total received$420,047.23Cost (50 shares Fulton Company stock at $556.83321 per share)27,841.66Profits on reorganization$392,205.57Limited to cash received, or$153,762.67The respondent in computing the tax treated the amount of $153,762.67 as a capital gain.  On November 18, 1927, the petitioner purchased through Barney & Co. 300 shares of the common stock of the Sylphon Co. for $12,645, or $42.15 a share, which stock remained in the possession of Barney & Co.  On August 17, 1928, upon the order of the petitioner 100 shares of these 300 shares were sold for $3,906.  The petitioner in his 1928 return deducted an ordinary loss of $309 as sustained upon the above sale of the 100 shares, which the respondent disallowed.  The respondent *1088  determined that the petitioner realized*961  a profit of $2,094.95 ($3,906 less $1,811.05 1), which profit he treated as a capital gain.  On July 12, 1928, the petitioner purchased through Barney & Co. 500 shares of the common stock of the Sylphon Co. at $18,825, or $37.65 a share, the certificate for which was delivered to the petitioner on July 18, 1928.  On the same date the Holston National Bank of Knoxville purchased for the petitioner two blocks of common stock of the Sylphon Co. of 400 shares each at an aggregate cost of $30,120, or $37.65 a share.  The certificates for the 800 shares and the 500 shares, or a total of 1,300 shares, were sent with some*962  other stock to the Continental National Bank & Trust Co. of Chicago as collateral for loan.  In or about September 1928, upon the request of the petitioner, the 200 shares held by Barney & Co. and the 1,300 shares held by the above bank were exchanged by them for Reynolds Co. stock at the rate of 1/2 share of common and 1/2 share of preferred of Reynolds Co. stock for each share of the common stock of the Sylphon Co., as a result of which exchange Barney & Co. received 100 shares each of the common and of the preferred stock of Reynolds Co. and the bank received 650 shares each of the common and of the preferred stock of the Reynolds Co.  Thereafter the bank forwarded 565 shares of the common stock of Reynolds Co. in its possession to the National Park Bank of New York as collateral to a loan secured by the petitioner from such bank.  In November 1928 the petitioner sold through Barney & Co. 700 shares of the common stock of the Reynolds Co. for $24,367 and 50 shares of the same stock for $1,740.50, or a total of $26,107.50.  The stock sold included the 100 shares of common stock of the Reynolds Co. held by Barney & Co. received in exchange for the stock purchased in November 1927, *963  and 565 shares of common stock of the Reynolds Co. sent at the request of petitioner to Barney & Co. by the National Park Bank of New York.  *1089  In November 1928, the petitioner sold an additional 550 shares of the common stock of the Reynolds Co. through Bauer, Pogue, Pond & Vivian at Knoxville, Tennessee, for $21,895.50.  The petitioner received in or about March 1930 through the mail in due course 30-day letters (form 850) notifying him of adjustments made affecting his income tax, which adjustments resulted in additional income tax for 1927 in the amount of $18,364.04 and for 1928 in the amount of $2,215.81.  In the computation of petitioner's tax liability a March 1, 1913, value of the 50 shares of Fulton Co. stock at $387.10029 per share was used.  The petitioner objected to such additional taxes.  Various conferences relating to these taxes, and in particular pertaining to the March 1, 1913, value of the Fulton Co. stock and the cost basis of the stock sold in 1928, were had with representatives of the Internal Revenue Bureau at Nashville, Tennessee, on behalf of the petitioner, in some of which the petitioner participated personally.  Finally amounts of petitioner's*964  taxes for 1927 and 1928 were arrived at, which were acceptable to petitioner, and agreed upon, the petitioner's understanding being that this constituted a settlement of his tax liability for the years involved.  The petitioner received, under date of October 11, 1930, notices of assessment and demand for payment (Form 17), of additional tax, being the amount agreed upon, and interest as follows: (1) Inc. tax - 1927 add'l$13,325.86 Agreement Case 2,053.52 6% int. 3/15/28-10/10/30Total due$15,379.38(2) Inc. tax - 1928 add'l$ 1,106.30 104.10 6% int. 3/15/29-10/10/30Total due$ 1,210.40About that time banks in Knoxville, Tennessee, had financial difficulties and the Holston National Bank at Knoxville, in which the petitioner was a stockholder and depositor, went into the hands of a receiver as a result of which the petitioner was unable to pay immediately the above taxes in full.  He applied to the collector at Nashville for an extension of time.  The petitioner received a letter under date of November 4, 1930, from the collector at Nashville, with a copy of a letter of the Commissioner thereto attached, informing him that his application for extension*965  of time for the payment of the tax had been tentatively approved upon condition that the sum of $1,210.40 be paid on or before December 1, 1930, and the balance of $14,379.38 on or before February 1, 1931, plus interest at the rate of 6 percent per annum from October 21, 1930, and that a surety bond guaranteeing payment of such deficiency in tax on *1090  form 1127B or bond with Liberty bonds or other bonds or notes of the United States as security would be required in the amount of $17,140.  The petitioner on or about November 17, 1930, paid the 1928 additional taxes in full, plus $6.05 interest from October 10 to date of payment.  Further correspondence between the petitioner and the collector at Nashville pertaining to an additional extension of time in which to furnish the required bond and to make payment of the 1927 additional tax followed.  While on business in the East in the early part of December 1930 the petitioner had a conference with a representative of the Bureau of Internal Revenue at Washington, by whom he was assured that upon giving the surety bond he would be given the extension of time for payment then agreed upon.  Thereafter the petitioner received a letter*966  under date of January 12, 1931, from the collector at Nashville, with a copy of a letter (form 1127B) from the Commissioner attached, granting the petitioner an additional extension of time within which to pay the taxes for 1927.  The petitioner completed arrangements for a bond, which was executed by the American Surety Co. as surety and by the petitioner as principal.  In the afternoon of the day the petitioner mailed the bond to the collector at Nashville he received the notice of deficiency upon which this proceeding is based.  Neither the Commissioner nor any one in his behalf has ever returned to the petitioner the payment of $1,216.45 or the surety bond, or attempted so to do.  OPINION.KERN: The respondent in determining the deficiencies herein treated the exchange of stock in 1922 and the exchange of Sylphon Co. stock for Reynolds Co. stock in 1928 as nontaxable exchanges.  He also treated the transactions completed in 1927 between the stockholders of the Fulton, Co., the Sylphon Co. and Barney & Co. as a statutory reorganization, the gain realized therefrom being recognizable under section 203(d)(1) of the Revenue Act of 1926 "in an amount not in excess of the sum of*967  such money" received in the exchange.  In his answer to the second amended petition the respondent affirmatively alleges that the transaction whereby the petitioner received cash and Sylphon Co. stock for his Fulton Co. stock was a sale consummated in accordance with the stockholders' agreement with Barney & Co. and the escrow agreement, and that therefore all the gain is recognizable.  He contends that the steps taken in carrying out the plan were inseparable and constituted the consummation of one indivisible contract, the underlying purpose and result of which was the sale by the stockholders of the Fulton Co. of their stock for $5,000,000, as originally contemplated by the *1091  option given the Reynolds Metal Co., namely, that the earlier stock of the Fulton Co. was purchased by Barney & Co. as agent or manager of a syndicate, of which it was a member, for cash and shares of stock of the Sylphon Co., and that the entire amount of the gain is recognizable under the general rule set forth in section 203(a) of the Revenue Act of 1926. 2 He claims an increased deficiency.  *968  The petitioner contends that there were two separate transactions, i.e., (1) an exchange by the stockholders of the Fulton Co. of all their stock for 15,000 shares preferred and 120,000 shares common stock of the Sylphon Co., constituting a nontaxable reorganization under sections 203(b)(2), (h)(1)(A), and (h)(2) of the Revenue Act of 1926, 3 and (2) a sale by the former stockholders of the Fulton Co. of 100,000 shares of the common stock of the Sylphon Co. to Barney & Co. for $2,790,000, the amount of the gain realized or the loss sustained on such sale depending upon the determination of the March 1, 1913, value of the Fulton Co. stock.  *969 Whether the various steps taken to carry out the agreement herein constitute one transaction or two separate and distinct transactions is a question of fact.  Commissioner v. Harris, 92 Fed.(2d) 374; Helvering v. Ward, 79 Fed.(2d) 381. It is our opinion that what was done herein must be regarded for income tax purposes as a single transaction and that as such it constituted a reorganization under clause A of section 203(h)(1) of the Revenue Act of 1926.  The Fulton Co. and Sylphon Co. were each a "party to a reorganization" under section 203(h)(2) of the 1926 Act, which provides that such term includes "both corporations in the case of an acquisition by one corporation of at least a majority of the voting stock * * * of another corporation." The Sylphon Co. acquired all of the outstanding stock of the Fulton Co.  In Groman v. Commissioner,302 U.S. 82">302 U.S. 82, the United States Supreme Court, referring to section 112(i)(2) of the 1928 Act, corresponding to section *1092  203(h)(2) of the 1926 Act, stated that that section "is not a definition but rather is intended to enlarge the connotation of the term 'a party to*970  a reorganization' to embrace corporations whose relation to the transaction would not in common usage be so denominated or as to whose status doubt might otherwise arise." Barney & Co. was not a party to the reorganization effected.  That a party not a party to the reorganization effected was instrumental in bringing about such reorganization by furnishing the cash is not material under the circumstances herein.  In Croman v. Commissioner, supra, the Glidden Co. entered into an agreement with the stockholders of the Metals Refining Co., pursuant to which the assets of the latter were transferred to a newly organized company, and the stockholders of the Metals Refining Co. received in exchange for their stock shares of preferred stock of the Glidden Co., shares of preferred stock of the new company, and cash, which cash had been paid by the Glidden Co. to the new company for all of its common stock.  In that case the United States Supreme Court stated: The exchange was between Indiana's [Metals Refining Co.] shareholders and Ohio [new company].  Do the facts that Glidden contracted for the exchange and made it possible by subscribing and paying for Ohio's common stock*971  in cash, so that Ohio could consummate the exchange, render Glidden a party to the reorganization?  No more so than if a banking corporation had made the agreement with Indiana's shareholders and had organized the new corporation, and, by subscription to its stock and payment therefor in money and the banking company's stock put the new company in position to complete the exchange.  Not every corporate broker, promoter, or agent which enters into a written agreement, effectuating a reorganization, as defined in the Revenue Act, thereby becomes a party to the reorganization.  It was held therein that a reorganization was effected under section 112(i)(1)(A) of the Revenue Act of 1928 by the transfer of all the stock of the Metals Refining Co. to the new company.  The Court further held that, since the Glidden Co. was not a party to the reorganization, the gain realized by the taxpayer, a stockholder of the Metals Refining Co., on the reorganization was taxable under section 112(b)(5), (c) of the 1928 Act to the extent of the cash and the fair market value of the Glidden Co. stock received by him.  To constitute a reorganization within clause A, the dissolution of the Fulton Co. was*972  not necessary.  Helvering v. Minnesota Tea Co.,296 U.S. 378">296 U.S. 378; G. & K. Manufacturing Co. v. Helvering,296 U.S. 389">296 U.S. 389. A large part of the consideration may be cash.  G. & K. Manufacturing Co. v. Helvering, supra;Helvering v. Minnesota Tea Co., supra;Nelson Co. v. Helvering,296 U.S. 374">296 U.S. 374; and Western Power Corporation,34 B.T.A. 618">34 B.T.A. 618; affd., 94 Fed.(2d) 563. Participation in the management, and the acquisition of a controlling interest, in the acquiring corporation is not requisite under clause A.  Nelson*1093 Co. v. Helvering, supra. The interest of the stockholders of the Fulton Co. acquired in the Sylphon Co. was definite and material and represented a substantial part of the value of the thing transferred.  See Nelson Co. v. Helvering, supra, wherein the stockholders of a corporation transferred all the corporation's assets except cash in exchange for cash and preferred stock of the acquiring corporation.  The United States Supreme Court therein held that the "owner of preferred stock is not without substantial*973  interest in the affairs of the issuing corporation, although denied voting rights." The stockholders of the Fulton Co. were entitled to receive all of the preferred stock of the Sylphon Co. and in addition 20,000 shares of its common stock.  A substantial change in the relationship of the transferor to the assets conveyed is not inhibited by the section 203(b)(2) applicable herein.  Helvering v. Minnesota Tea Co., supra; see also Helvering v. Watts,296 U.S. 387">296 U.S. 387; Commissioner v. Freund, 98 Fed.(2d) 201; Commissioner v. Kitselman, 89 Fed.(2d) 458. It is immaterial that one stockholder having a 7/75 interest in the Fulton Co. received cash only.  Since section 203(b)(2) is applicable, we need not regard section 203(b)(4), which allows tax deferment only if the existing proportion of interest is substantially preserved.  There was a substantial continuity of interest, since all the remaining stockholders of the Fulton Co. continued to be represented in the Sylphon Co. either by common or preferred stock or both.  The respondent argues that the original plan of the stockholders of the Fulton Co. was to*974  sell all their stock for $5,000,000, to which end the option of November 6, 1926, acquired by Barney & Co. was executed, and that the intent of the Barney & Co. contract was only to provide in detail the manner in which the consideration of $5,000,000 for the entire stock of the Fulton Co. viz., $2,690,000, plus $100,000 in cash and $2,210,000 in common and preferred stock of the Sylphon Co., might be paid.  It does not clearly appear who the respondent claims to be the purchaser of the Fulton Co. stock.  We are not concerned here with the original option given to the Reynolds Co., which is not in evidence but apparently gave that company an option to acquire all of the outstanding stock of the Fulton Co. for $5,000,000, whether in cash or stock is not disclosed.  It is apparent that the plan of reorganization of the Fulton Co., as disclosed by the Barney & Co. agreement and the escrow agreement, did not contemplate a reorganization involving an exchange of stock of the Fulton Co. for stock of the Sylphon Co. only, and a subsequent sale of 100,000 shares of the common stock of Sylphon Co. to Barney & Co., as contended by the petitioner, but that it contemplated at the outset the acquisition*975  of cash through Barney & Co. by means of a sale of the 100,000 shares of common stock of the Sylphon Co. so that the stockholders *1094  of the Fulton Co. would receive stock of the Sylphon Co. and cash in exchange for their holdings in the Fulton Co.  The 100,000 shares of Sylphon Co. stock were to be issued, as provided in the escrow agreement, to one John A. Hurley, who was not a stockholder, and the escrow agent was directed to deliver the same to Barney & Co. or as it might direct, upon the payment by it of the additional $2,690,000.  In the distribution of the Sylphon Co. stock and cash directed to be made in the escrow agreement the transaction was treated as an entirety.  The Barney & Co. agreement provided that if that company should fail to pay the additional sum of $2,690,000 on or before January 20, 1927, the escrow agent on demand should return to the stockholders of the Fulton Co. their respective number of shares deposited with it and that all obligations under the agreement should cease.  The escrow agreement provides that the escrow agent should return promptly to the stockholders of Fulton Co. their respective shares deposited with it in the event Barney & Co. *976  should fail to make the additional payment prior to the close of business on January 20, 1927, and all the Sylphon Co. stock was to be delivered to Fulton.  Thus it appears that the delivery of the Fulton Co. stock to the Sylphon Co., which was necessary to effect a reorganization at all, was dependent upon the payment of the cash by Barney & Co.  On brief the petitioner calls attention to the language of the Barney & Co. agreement, viz., "After obtaining the stock of the Fulton Sylphon Company, we agree to sell you and you agree to buy 100,000 shares" etc., as showing a sale of such shares to Barney & Co.  Whether this was a sale or a part of the plan of reorganization must be tested by the entire agreement and "by what in fact was done rather than by the mere form of words used in the writings employed." Helvering v. Tex-Penn Oil Co.,300 U.S. 481">300 U.S. 481. The case of Commissioner v. Harris, supra, relied upon by the petitioner, is distinguishable upon the facts.  In that case the acquiring company agreed to exchange six shares of its stock for one share of stock of another company and also agreed to procure the agreement of a banking house to*977  purchase one-half of its own stock given in exchange.  It was held therein that the sale was not to be identified with the exchange of stock for stock and that there were two transactions, one of which was a reorganization within clause (A) of paragraph (1) of subdivision (h) of section 203 of the Revenue Act of 1926. Peir v. Commissioner, 96 Fed.(2d) 642, is likewise distinguishable upon the facts.  The facts therein clearly disclose two separate and distinct transactions, i.e., (1) a reorganization effected by the exchange of the assets of Western Oxygen for 16,342 shares of Air Reduction stock and the assumption of the liabilities of the *1095  former by the latter company, followed by (2) a sale of 1,811 shares of Air Reduction stock by Western Oxygen to obtain funds with which to retire its own preferred stock.  Thereafter it distributed the remaining Air Reduction stock, except 342 shares which were transferred to its president as compensation, pro rata to its common stockholders and dissolved.  In both cases the reorganization was complete and effective without the sale.  Herein the reorganization was dependent upon the sale of 100,000 shares of Sylphon*978  Co. stock through Barney & Co., and the gain resulting from the exchange is taxable pursuant to section 203(b)(1) of the Act of 1926 to the extent of the cash received.  That section provides that if an exchange would be within the provisions of paragraph (2) of subdivision (b), "if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of * * * money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money * * *." In order to determine the gain, if any, recognizable under section 203(d)(1), supra, and applicable herein, it is necessary to determine the basis of the Fulton Co. stock.  Under section 204(a)(6) and (b) of the 1926 Act, the basis for determining the gain, if any, is the cost of the original 50 shares of Fulton Co. stock acquired by petitioner prior to 1913, or the fair market value as of March 1, 1913, whichever is greater.  The petitioner contends that the fair market value of the petitioner's 50 shares of Fulton Co. stock as of March 1, 1913, was not less than $329,000, or $6,580*979  a share.  The respondent determined a value of $27,841.66, or $556,83321 per share.  The respondent determined that the assets of the Fulton Co. as of March 1, 1913, had a value as follows: Tangible assets, $156,833.21, and intangible assets, $400,000, or a total of $556,833.21.  There is no controversy as to the fair market value of the tangible property owned by the Fulton Co. as of March 1, 1913.  The parties differ as to the March 1, 1913, value of the intangible property owned by the Fulton Co., and in particular as to the value of the patents owned by the Fulton Co.On behalf of the petitioner, Fulton testified that in his opinion the patents owned by the Fulton Co. had a value as of March 1, 1913, of $6,580,000.  This amount represents 33 1/3 percent of estimated prospective earnings or net profit from 1913 to 1927, or a period of 14 years, in the amount of $19,740,000.  This amount was based on prospective estimated sale of 1,015,000 units per year and net profits of $1,410,000 per year.  In examining the evidence submitted it appears that in 1912 and 1913 only 130,050 and 290,272 units, respectively, were sold, and that from 1913 to 1927 the unit sales per year *1096 *980  were far below the estimate of Fulton except 1925 and 1926, in which the unit sales amounted to 1,086,445 and 1,538,765 respectively.  It also appears that the average annual sales from 1913 to 1927, omitting 1922 however, amounted only to 599,072 units, or over 400,000 less than the estimate of Fulton.  In comparing the annual net profit of $1,410,000 estimated by Fulton with the actual net income of the company, it appears that the net income of the company never reached Fulton's estimate, even in the best years of 1925 and 1926.  As compared with estimated annual net profits of $1,410,000, the company in fact had average net profits from 1913 to 1927 over a period of 14 years of approximately $219,000.  The petitioner in his reply brief argues that there is nothing in the record to show what relation "unit profits" as estimated by Fulton bore to "net income" and that to assume that they are one and the same thing is erroneous.  Eliminating the comparison between "net profits" as estimated by Fulton and the "net income" as reflected by the books of account of the company, there still remain the discrepancies between Fulton's estimated unit sales and the actual unit sales as shown*981  by the records of the company.  Petitioner further argues that Fulton's estimate was based on facts as of March 1, 1913, augmented by his judgment and opinion, and that what happened afterward is immaterial.  In Sinclair Refining Co. v. Jenkins Petroleum Process Co.,289 U.S. 689">289 U.S. 689, the United States Supreme Court stated: * * * A patent is a thing unique.  There can be no contemporaneous sales to express the market value of an invention that derives from its novelty its patentable quality.  * * * The law will make the best appraisal that it can, summoning to its service whatever aids it can command.  * * * At times the only evidence available may be that supplied by testimony of experts as to the state of the art, the character of the improvement, and the probable increase of efficiency or saving of expense.  * * * This will generally be the case of the trial follows quickly after the issue of the patent.  But a different situation is presented if years have gone by before the evidence is offered.  Experience is then available to correct uncertain prophecy.  Here is a book of wisdom that courts may not neglect.  We find no rule of law that sets a clasp upon its*982  pages, and forbids us to look within.  See also Nachod & United States Signal Co. v. Helvering, 74 Fed.(2d) 164; Miller Industries Co. v. Commissioner, 61 Fed.(2d) 412; Simmons Co. v. Commissioner, 33 Fed.(2d) 75. It is clear that the expectations of Fulton of unit sales, upon which he based his estimated net profits and value of the patents, are not justified by the subsequent sales of the company.  On behalf of the respondent a patent lawyer, engaged in the practice of patent law since 1920, testified that in his opinion the patents here involved had a value as of March 1, 1913, of $113,312.11.  He arrived at this value by taking 5 percent of $2,266,242.30, which amount represents gross sales of the Fulton Co. from 1905 to March 1, *1097  1913, a period of 8 1/6 years, in the amount of $755,414.10, plus twice that amount, or $1,510,828.20, representing in his opinion gross sales reasonably to be expected for the next 8 1/6 years.  The gross sales of the Fulton Co. from March 1, 1913, to the end of 1918 were in excess of $5,000,000.  In arriving at this valuation he took into consideration among other things*983  a large number of patents which in his opinion constituted the prior art, the possibility of competition under such patents, and the possibility that the Fulton patents might be declared invalid within a period of five to 8 1/6 years because of such prior art, any any monopoly inherent therein disappear.  He testified that in his opinion in view of the prior art the Fulton patents did not create a monopoly or establish a new industry.  He further testified that, assuming there were no competitive patents in existence, the value of the Fulton patents as of March 1, 1913, would, in his opinion, be approximately 10 percent of his estimated gross sales of $2,266,242.30.  The respondent introduced numerous patents as illustrative of the prior art and its scope, as to which this witness testified at great length.  It was the opinion of this witness that any competitor coming into this field could make the bellows under the Blair machine, Patent No. 17,356 of 1889, or the Koffler machine, Patent No. 700,662 of May 20, 1902, without coming within the scope of the claims of the Fulton Patent, No. 971,838, and that therefore the Fulton process patent could not be exclusive.  In *984 Fulton Co. v. Bishop & Babcock Co., 17 Fed.(2d) 999, (February 13, 1925); affd., 17 Fed.(2d) 1006, the court, after considering the prior art, including the Blair patent, stated as to the Fulton patent, No. 971,838, as follows: * * * Fulton's patent is entitled to rank as a pioneer or primary patent and to have the range of equivalents accorded to patents of that class.  He produced an article of commerce hitherto unknown.  The process by which he did so had never before been successfully practiced, although its desirability was pointed out by Webster in 1856.  His labors may be said, not only to have answered the problem, but to have ended the search.  He has founded an art.  * * * In that case the Bishop & Babcock Co. claimed upon application for rehearing that it was operating a machine strictly in accordance with the disclosures of the Blair patent, but the court held that it was not, but had "merely constructed new rolls, different in substantial respects from the rolls of the Blair patent, and installed them on spindles of its infringing machine in lieu of the Fulton type of rolls." *985 Bishop & Babcock Manufacturing Co. v. Fulton Co., 37 Fed.(2d) 293. In Sturtevant Co. v. United States,18 Fed.Supp. 28; affd., 99 Fed.(2d) 72, which involved the determination of the value of certain patents and patent rights as of March 1, 1913, the court received a great number of patents in evidence for the purpose of showing the *1098  state of the art in 1913.  As to such evidence the court stated as follows: * * * The record is barren of any evidence tending to show what impression these earlier patents made upon the art, or whether they met with any commercial success.  Assuming that these patents were properly admitted, they can be given no weight in this case in the absence of evidence showing that they had an effect upon the business which the petitioner was able to carry on by virtue of its patents.  There is no evidence herein showing what effect, if any, the prior art had upon the business of the Fulton Co.  The evidence, however, discloses that, whatever the situation may have been in 1913 and prior thereto, and although there were on the market other devices performing functions similar to those performed*986  by many of the Fulton products, the Fulton Co. was able nevertheless to, and did, establish itself and increased its unit sales from 356 in 1905 to 209,272 in 1913 and its gross sales from $2,115.60 in 1905 to $359,105.84 in 1913.  An engineer of the Engineering Appraisal Section of the Bureau of Internal Revenue since 1920 also testified as to the value of the Fulton patents.  In his opinion the value of such patents as of March 1, 1913, was $400,000, which is the value used by the respondent in determining the deficiencies herein.  This witness determined such value as follows: He assumed an average profit until October 1927 equal to the profits of 1913 in the amount of $82,363.32.  He deducted therefrom the profits due to tangibles (8 percent of $156,833.21), which left a profit of $69,816.67 attributable to the patents or intangibles over a period of 15 years.  By the use of Hoskold's Formula at 12 percent profit and 4 percent sinking fund ($69,816.67 X .392293 equals $410,828.86) he arrived at the value of $400,000, which he recommended in a report under date of November 5, 1930, in connection with another matter involving the value of the stock of the Fulton Co. as of March 1, 1913, in*987  which the petitioner herein was not involved.  The witness testified upon cross-examination that at the time he determined such value "he needed any amount of information and did not get it" and that he particularly wanted some data as to what the conditions were on March 1, 1913; likewise, as to what happened in 1925, 1926, and 1927.  Another witness, an investment counsel, statistician, and economist, also testified in behalf of the respondent.  In his opinion the value of the Fulton Co. stock as of March 1, 1913, did not exceed $500,000.  In reaching such opinion of value he did not evaluate the patents.  He testified that he did not do so as he made no claim of ability to value patents.  Section 204(b), supra, provides that "In determining the fair market value of stock in a corporation as of March 1, 1913, due regard *1099  shall be given to the fair market value of the assets of the corporation as of that date." The respondent also submitted capital stock returns of the Fulton Co. for the years 1916 to 1926, inclusive, excepting 1920, signed by Fulton, for whatever they might be worth as a part of the cross-examination of Fulton in connection with his testimony pertaining*988  to the value of the patents.  In Nachod & United States Signal ,Co. v. Helvering, supra, the court stated that "capital stock returns are of no probative force in an inquiry as to the value of the patents." To the same effect is Sturtevant Co. v. United States, supra.The valuation of patents is a question of fact to be determined on all the evidence.  Sturtevant Co. v. Commissioner, 75 Fed.(2d) 316. In our determination of the March 1, 1913, value of the Fulton Co. stock, we have considered all the evidence, and in particular all the facts in existence or within reasonable expectation on March 1, 1913, and as fairly corroborated by subsequent events.We have not overlooked the written report under date of January 25, 1926, made by Fulton to the directors of the company in which he attributes the outstanding results of 1925 to the unusual activity in general business, the marked increase of almost 200 percent in the automobile and special engineering sales, the winning of two important patent suits in the lower courts, and the most able business and factory management of its then general manager and his organization. *989  While this report discloses that the management was a "highly potent factor" in producing such favorable results, the report also discloses that prior to April 1922, when a change in management took place, the factory organization, sales organization, and management of the company were such as seriously to hinder and impede the efficient operation of the company's business and to affect unfavorably its trade relations.  This may be an explanation in part of the low earnings of the company during 1918 and 1921 inclusive, as shown in our findings of fact.  In that connection, it is to be noted that while the gross sales in 1918 and 1920 were substantially higher in amount than in any previous year, the net income was lower than in 1913.  It has been stipulated that the tangible assets of the Fulton Co. had a value on March 1, 1913, of $156,833.21.  After giving due consideration to all of the evidence, we have reached the conclusion and have so found that the stock of the Fulton Co. had a value of $706,833.21 as of March 1, 1913.  The next questions to be considered are whether the respondent erred in disallowing a loss of $309 claimed by the petitioner on the sale of 100 shares of*990  Sylphon Co. stock in 1928 and in applying the first in, first out rule in determining the gain on all sales in 1928.  The petitioner purchased 300 shares of the common stock of Sylphon *1100  Co. in November 1927 at $42.15 a share through Barney & Co., the stock remaining in the possession of Barney & Co.  In August 1928 that company, upon the direction of the petitioner, sold 100 of the 300 shares for $3,906.  This is uncontradicted.  The shares were purchased at the same time in a lot of 300 shares at the same price per share and remained in the possession of Barney & Co.  The result would have been the same whatever hundred of these 300 shares had been sold.  In our opinion, the designation of a definite number of shares in a particular lot is sufficient to overcome the first in, first out rule.  Certificates of stock are not the only possible means of identifying stock.  Helvering v. Rankin,295 U.S. 123">295 U.S. 123; Miller v. Commissioner, 80 Fed.(2d) 219. Therefore, on this sale the petitioner sustained a loss of $309 (one-third of $12,645 less $3,906).  Since the 100 shares were held less than two years, the loss sustained must be treated*991  as an ordinary loss in the computation of petitioners' tax liability for 1928 under Rule 50.  In November 1928 the petitioner sold through Barney & Co. 750 shares of the common stock of the Reynolds Co. at $34.81 a share, and 550 shares of the same stock through Bauer, Pogue, Pond & Vivian for $39.81 a share.  The petitioner claims that the 750 shares of Reynolds Co. stock sold were a part of the shares of Reynolds Co. stock received in exchange for the 200 shares of Sylphon Co. stock held by Barney & Co. and a part of the lot of 300 shares purchased in November 1927 at $42.15 a share, and for the 1,300 shares of Sylphon Co. stock purchased in July 1928 at $37.65 a share, and that one-half of the purchase price of the Sylphon Co. stock is the basis to be used in determining gain on the sale of the 750 shares of common stock of the Reynolds Co. sold in 1928, and that such gain should be treated as ordinary gain.  As to the 550 shares sold through Bauer, Pogue, Pond & Vivian, the petitioner testified that he "was inclined to think [they] were certificates obtained in exchange for original stock through the various transmutations." The respondent on brief states that he determined*992  the bases of both the 100 shares of Sylphon Co. stock and the 1,300 shares of Reynolds Co. stock sold by petitioner under the first in, first out rule because there was no identification of the particular shares sold.  In computing petitioner's tax liability, he treated the gain determined by him as capital gain.  In September 1928, after the sale of the 100 shares of common stock of the Sylphon Co., the petitioner exchanged all of his Sylphon Co. stock for Reynolds Co. stock in a nontaxable exchange.  The Board and the courts have held that upon receipt of stock of a different corporation in a reorganization the first in, first out rule is not applicable, but that the cost or other basis of *1101  the stock exchanged is the basis of the stock received and that such basis must be allocated equally to all shares received.  Christian W. Von Gunten,28 B.T.A. 702">28 B.T.A. 702; affd., 76 Fed.(2d) 670; Olive Hume Oliver,30 B.T.A. 1381">30 B.T.A. 1381; affd., 78 Fed.(2d) 561; P. L. Wheeler,32 B.T.A. 917">32 B.T.A. 917; *993 Lewis K. Walker,35 B.T.A. 640">35 B.T.A. 640; Jacob Epstein,36 B.T.A. 109">36 B.T.A. 109; Harry M. Runkle,39 B.T.A. 458">39 B.T.A. 458; Helvering v. Stifel, 75 Fed.(2d) 583. Under the rule of such cases the basis for the stock received is the total of the fair market value of the Fulton Co. stock as determined by us and the purchase price of the additional stock purchased by him, less the cost of the 100 shares of common stock of the Sylphon Co. sold prior to the exchange of Sylphon Co. stock for Reynolds Co. stock.  Since the petitioner received both common and preferred stock of the Reynolds Co. in exchange, however, the basis should not be allocated equally to all shares, but should be allocated to the common and preferred stock in the proportion that the fair market value of each class bears to the total fair market value of both classes.  Frances Elliott Clark,28 B.T.A. 1225">28 B.T.A. 1225; affd., 77 Fed.(2d) 89; Philip D. C. Ball,27 B.T.A. 388">27 B.T.A. 388; affd., 69 Fed.(2d) 439; *994 Clifford Hemphill,25 B.T.A. 1351">25 B.T.A. 1351. We must now determine whether the gain or loss realized or sustained by the petitioner on the respective sales of the 750 shares and 550 shares of common stock of the Reynolds Co. is ordinary or capital gain or loss.  Section 101(c)(8)(A) of the Revenue Act of 1928 provides in substance that where property is acquired on an exchange and the property acquired takes the basis of the property exchanged for the purpose of determining gain or loss, then the period of holding the property exchanged shall be added to the period of holding of the property acquired in determining the period for which the taxpayer held the property acquired.  The Commissioner has not yet published a regulation under this section dealing with the question of the period of holding stock under circumstances such as are here present, although the acvisability of such a regulation was suggested by us in both Epstein's case and Runkle's case.  In the briefs filed in the instant proceeding both parties, in considering the question of the time of holding the stock, assume that the question here involved has to do only with the identification of the dates*995  of acquisition by petitioner of the Sylphon Co. stock exchanged for the Reynolds Co. stock.  It is, therefore, apparent that both have assumed that a method analogous to the first in, first out rule should be applied to the solution of this problem.  In the absence of a regulation of the Commissioner on this question containing a better method for its solution we shall, for the purposes of this case, adopt the method apparently followed by the parties.  *1102  The evidence shows that Barney & Co. held 200 shares of Sylphon Co. stock which had been purchased in November 1927, and that the bank in Chicago held 1,300 shares as collateral which had been purchased in July 1928.  As a result of the exchange of Sylphon Co. stock for Reynolds Co. stock, Barney & Co. received 100 shares of common stock of the Reynolds Co., together with 100 shares of its preferred stock, and the bank received, in addition to 650 shares of preferred stock, 650 shares of the common stock of the Reynolds Co., 565 shares of which it forwarded to the National Park Bank of New York as collateral to a loan made by the petitioner.  These 565 shares were forwarded by the New York bank to Barney & Co.  Hence, *996  of the 750 shares of Reynolds Co. common stock sold by Barney & Co., 100 shares are clearly traceable to the 200 shares of Sylphon Co. stock purchased in November 1927, and 565 shares thereof are clearly traceable to the 1,300 shares purchased in July 1928.  It is our opinion, therefore, that the gain or loss on 665 shares of the 750 shares sold by Barney & Co. should be treated as an ordinary gain or loss.  However, the evidence fails to identify the remaining 85 of the 750 shares sold by Barney & Co. and the 550 shares of stock sold through Bauer, Pogue, Pond & Vivian.  Hence, the gain or loss computed on these shares must be treated as capital gain or loss in the computation of petitioner's tax liability.  The petitioner contends that his tax liability for 1927 and 1928 was settled and compromised and that the respondent is therefore estopped, under the circumstances herein, to claim any additional taxes for such years.  The evidence in the record on this question fails to disclose that there was a compromise under the provisions of either section 3229 or section 3469 of the Revised Statutes.  Under the former the Commissioner is authorized to compromise any civil or criminal*997  case arising under the internal revenue laws "with the advice and consent" of the Secretary of the Treasury, and under the latter, the Secretary of the Treasury is authorized to compromise any claims in favor of the United States upon the report and recommendation of certain officials designated in the statute.  What was said by the Court in Botany Worsted Mills v. United States,278 U.S. 282">278 U.S. 282, is equally applicable herein: * * * Here the attempted settlement was made by subordinate officials in the Bureau of Internal Revenue.  And although it may have been ratified by the Commissioner in making the additional assessment based thereon, it does not appear that it was assented to by the Secretary, or that the opinion of the Solicitor was filed in the Commissioner's office.  * * * When a statute limits a thing to be done in a particular mode, it includes the negative of any other mode.  See also, Hughson v. United States, 59 Fed.(2d) 17; certiorari denied, 287 U.S. 630">287 U.S. 630; and Hanby v. Commissioner, 67 Fed.(2d) 125. Decision will be entered under Rule 50.Footnotes1. Loss.  ↩2.  In 1922 an account was set up, in addition to the "Patent" account then on the books, entitled "Good Will and Patents" in the amount of $300,000 as herein after more fully described. ↩1. Cost basis of 100 shares determined by respondent as follows: Allocation of value to common and preferred stock:2,291 shs. com. Sylphon Co. stock at $37 a sh$84,767.00$8,862.901,852.22 shs. pfd. Sylphon Co. stock $98at a sh181,517.5618,978.76$266,284.56$27,841.66Cost basis allocated to Sylphon Co. com. stk$8,862.90Cost of additional stock purchased:1,300 shares$48,945.00 300 shares12,645.00Scrip15.0061,605.00$70,467.90$70,467.90 / 3891 shs. com. stk. = $18.11048 per sh. X 100 sh. = $1,811.05 ↩2. SEC. 203. (a) Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 202, shall be recognized * * *. ↩3. SEC. 203(b)(2).  No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.  * * * (h) As used in this section and sections 201 and 204 - (1) The term "reorganization" means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation * * *.  (2) The term "a party to a reorganization" includes a corporation resulting from a reorganization and includes both corporations in the case of an acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation. ↩