Court Opinion

ID: 4603921
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:33:04.65918+00
Date Added: 2024-06-11T07:52:55.700282
License: Public Domain

GEORGE B. MARKLE, JR. III, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  JOHN MARKLE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  ALVAN MARKLE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  JOHN MARKLE, TRUSTEE, ESTATE OF GEORGE B. MARKLE, SR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  ELIZABETH C. R. WYATT AND GIRARD TRUST CO., EXECUTORS OF THE WILL OF FRANCES A. ROBERTS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  CHARLES B. ADAMSON, TRUSTEE, EXTATE OF GEORGE B. MARKLE, II, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  HERMAN M. HESSENBRUCH AND GIRARD TRUST CO., EXECUTORS OF THE WILL OF IDA M. HESSENBRUCH, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Markle v. CommissionerDocket Nos. 3799, 3858, 6208, 17646, 17698, 17780, 17907.United States Board of Tax Appeals10 B.T.A. 763; 1928 BTA LEXIS 4033; February 15, 1928, Promulgated *4033  1.  GAIN OR LOSS. - Petitioners in 1920 disposed of all their stocks and bonds in two corporations and all their bonds in a third company for cash and bonds of a new corporation organized by the purchasers.  The amount of gain resulting thereby is redetermined under paragraph (b) of section 202 of the Revenue Act of 1918.  2.  GAIN OR LOSS. - Some of the petitioners inherited their securities prior and some subsequent to March 1, 1913, and some of the securities were owned by estates at the time disposed of in 1920.  Held, that where such securities were acquired prior to March 1, 1913, the basis for determining gain is the value on the date of death or on March 1, 1913, whichever is higher, and the basis for determining loss is the value on the date of death or on March 1, 1913, whichever is lower; and that where such securities were acquired subsequent to March 1, 1913, the basis for determining gain or loss is the value at the date of the decedent's death rather than the cost to the decedent.  Appeal of Dorothy Payne Whitney Straight, Executrix,7 B.T.A. 177">7 B.T.A. 177; Bankers Trust Co. v. Bowers, 23 Fed.(2d) 941. 3.  GAIN OR LOSS. - The disposition*4034  of certain of the securities held, to constitute an exchange "in connection with the reorganization, merger, or consolidation of a corporation," within section 202(b) of the Revenue Act of 1918.  4.  VALUATIONS. - Fair market value of various securities determined as of various basic dates.  5.  COST ESTABLISHED. - The cost of stocks and bonds taken at par in payment of liabilities is the par value of such stocks and bonds received.  6.  GAIN OR LOSS. - Where the only question is the determination of gain, and petitioners have not submitted cost data where property was acquired prior to March 1, 1913, but have established the March 1, 1913, value, comparison will be made between the March 1, 1913, value and selling price, since the estabishment of the cost could, in any event, only tend to reduce the gain.  M. Carter Hall, Esq., C. C. Carlin, Esq., James A Vaughan, Esq., John H. Bigelow, Esq., and W. Alexander Robinson, Esq., for the petitioners.  Maxwell E. McDowell, Esq., for the respondent.  GREEN *764  In these proceedings the petitioners seek redeterminations of their income-tax liabilities for which the Commissioner has determined*4035  deficiencies as follows: DocketDeficiency letterYear or periodDeficiencyNo.3799Mar. 3, 19251920$21,393.653858do1920120,730.056208Aug. 4, 1925192021,393.6517646Apr. 24, 1926192097,827.5117698Apr. 23, 1926Jan. 1 to Mar. 31, 19208,635.1017780Apr. 24, 192619207,245.0217907Apr. 27, 1926192027,618.86In the first three dockets named the respondent filed amended answers alleging that the deficiencies should be increased to $37,413.24, $135,355.19, and $38,698.67, respectively.  *765  The question involved is the redetermination of the amount of the gain resulting from the sale or exchange by the several petitioners during 1920 of all their stocks and bonds in certain old companies for cash and bonds in a new company.  All the cases were consolidated for trial.  FINDINGS OF FACT.  The East Broad Top Railroad & Coal Co., hereafter referred to as the Railroad Company, was incorporated under the laws of the State of Pennsylvania, July 3, 1871, with authorized common capital stock of 15,065 shares of a par value of $50 each, 11,368 shares of which were issued.  This company upon incorporation*4036  also issued 500 seven per cent bonds having a face value of $1,000 each.  The Rockhill Iron & Coal Co., hereafter referred to as the Rockhill Company, was incorporated under the laws of the State of Pennsylvania March 21, 1872, with authorized common capital stock of 25,000 shares of a par value of $50 each, 24,352 shares of which were issued.  This company upon incorporation also issued 500 seven per cent bonds having a face value of $1,000 each.  George B. Markle, Sr., as an original investor in said companies, in September, 1873, purchased for cash and/or its equivalent, 100 bonds of the Railroad Company for $90,000, and on various dates between September, 1873, and February, 1877, purchased for cash and/or its equivalent 2,024 shares of the common stock of this company for $83,544, at an average price of $41.277 per share; between June, 1874, and July, 1875, George B. Markle, Sr., purchased for cash and/or its equivalent 80 bonds of the Rockhill Company for $72,000, and on various dates between January, 1874, and February, 1877, purchased for cash and/or its equivalent 4,167 shares of the common stock of this company for $197,724 at an average price of $47.45 per share.  *4037  In the promotion and development of the Railroad and Rockhill Companies there were five interests that represented practically 85 per cent of the interests of both bonds and stock of both companies, represented by the Roberts family, the Markle family, the Howe family, Wood, and Lilly.  The securities of both companies were closely held and were in the hands of financially strong people, generally.  This condition obtained continuously and with slight variations down to 1920.  Pursuant to agreements dated April 12, 1883, between the bondholders of the Railroad Company and bondholders of the Rockhill Company respectively, the bondholders agreed (1) to accept a 6 per cent preferred stock of each company, respectively, at par, in lieu of the outstanding scrip theretofore issued for interest on bonds of *766  said companies, together with accrued interest on said scrip and the overdue interest on said bonds for which scrip had not been issued, up to and including all interest on said bonds and scrip of the Railroad Company accruing on January 1, 1883, and all interest on said bonds and scrip of the Rockhill Company accruing on August 1, 1883; and (2) to accept interest on the*4038  bonds of said companies, respectively, at the rate of 4 per cent in lieu of interest at the rate of 7 per cent per annum provided on the face of said bonds, for so long a time only as no dividends should be declared on the common stock of said companies, respectively, and provided that if, in any one year thereafter, dividends should be declared on the common stock of said companies, respectively, then the interest rate on the bonds of the said companies, respectively, for such year, should be paid at the original rate of 7 per cent per annum.  Pursuant to the agreements above referred to George B. Markle, Sr., acquired 1,008 shares of the preferred stock of the Railroad Company, par value $50,400, in payment by said company of its bond interest then due and in default, and 879 shares of the preferred stock of the Rockhill Company, par value $43,950, in payment by said company of its bond interest then due and in default.  On August 18, 1888, George B. Markle, Sr., died and under the terms of his will a portion of the securities above referred to were distributable to his children, who are numbered among the petitioners herein, when they arrive at the age of 40 years.  The remainder*4039  continued to be held in trust subject to certain other provisions of the will.  The companies again failed to pay the interest due on the bonds and in 1903 the principal became payable.  In 1908 the question of refunding the principal and accrued interest was considered by the companies, with the result that the first-mortgage bonds were extended for a period of 50 years from 1908 and 4 per cent second-mortgage bonds were issued to the holders thereof for the accrued interest.  Interest on the second-mortgage bonds was payable only at the option of the corporations.  Petitioners herein in 1908 and 1909, and Frances A. Roberts during her lifetime, received and accepted such second-mortgage bonds of said companies, respectively, in payment of accrued interest, as follows: PetitionerRailroad CompanyRockhill CompanyEstate of G. B. Markle, sr$54,500$42,300John Markle5,6004,700Alvan Markle5,6009,500Ida M. Hessenbruch$11,200$9,400Geo. B. Markle II5,6004,700Frances A. RobertsNone.3,700*767  Upon the death of George B. Markle II, on June 11, 1914, some of the above second-mortgage bonds received by the Estate of George*4040  B. Markle, Sr., and all of such bonds received by George B. Markle II were acquired by George B. Markle III.  On December 22, 1913, the Shade Gap Railroad Co. was merged with and into the Railroad Company under the laws of the State of Pennsylvania.  Payment of the bonded indebtedness of the Shade Gap Railroad Co. was assumed by the Railroad Company and one share of its common stock was issued for two shares of the common stock of the Shade Gap Railroad Co.  The bonds of the Shade Gap Railroad Co. were the same as to security and value as first-mortgage bonds of the Railroad Company.  The following table shows the amount of the various securities of the Railroad Company, the Rockhill Company, and the Shade Gap Railroad Co. acquired by the several petitioners, together with the date and manner of acquisition.  DOCKET NO. 3799 - GEORGE B. MARKLE, JR. IIINature of securityHow acquiredDate acquiredAmountCommon stock Railroad CoInheritanceJune 11, 1914225 shares.Preferred stock Railroad Co do do67 shares.1st mortgage bonds Railroad Co do do$6,000.2d mortgage bonds Railroad Co do do$13,600.Common stock Rockhill Co do do227 shares.Preferred stock Rockhill Co do do58 shares.1st mortgage bonds Rockhill Co do do$5,000.2d mortgage bonds Rockhill Co do do$10,700.Bonds Shade Gap R.R. Co do do$1,500*4041 DOCKET NO. 3858 - JOHN MARKLECommon stock Railroad CoExchange191445 shares.DoInheritance1889134 shares.Do doJune 30, 191540 shares.Preferred stock Railroad Co do188967 shares.1st mortgage bonds Railroad Co do1889$6,000.2d mortgage bonds Railroad CoPurchase1909$5,600.DoInheritanceJune 30, 1915$7,000.Common Stock Rockhill Co do1889277 shares.Preferred Stock Rockhill Co do188958 shares.1st mortgage bonds Rockhill Co do1889$5,000.2d mortgage bonds Rockhill CoPurchase1909$4,700.DoInheritanceJune 30, 1915$5,000.DOCKET NO. 6208 - ALVAN MARKLECommon stock Railroad CoInheritance1889179 shares.DoExchange191445 shares.Preferred stock Railroad CoInheritance188967 shares.1st mortgage bonds Railroad Co do1889$6,000.2d mortgage bonds Railroad Co do1889$7,000.DoPurchase1909$5,600.Common stock Rockhill CoInheritance1889277 shares.Preferred stock Rockhill Co do188958 shares.DoPurchase190855 shares.1st mortgage bonds Rockhill CoInheritance1889$5,000.DoPurchase1909$5,000.2d mortgage bonds Rockhill CoInheritance1889$6,000.DoPurchase1909$9,500.Bonds Shade Gap R.R. CoInheritance1889$1,500.*4042 *768 1 DOCKET NO. 17646 - ESTATE OF GEO. B. MARKLE, SR. Nature of securityHow acquiredDate acquiredAmountCommon stock Railroad CoPurchase1873-772,024 shares.Preferred stock Railroad Co do18831,008 shares.1st mortgage bonds Railroad Co do1873$100,000.2d mortgage bonds Railroad Co do1909$54,500.Common stock Rockhill Co do1873-774,167 shares.Preferred stock Rockhill Co do1883879 shares.1st mortgage bonds Rockhill Co do1874-75$80,000.2d mortgage bonds Rockhill Co do1909$42,300.Bonds Shade Gap R.R. Co doPrior to Mar.1, 1913.  $14,000.2 DOCKET NO. 17698 - FRANCES A. ROBERTS, DECEASED Common stock Railroad CoInheritance1893218 shares. DoExchange191441 shares.Common stock Rockhill CoInheritance1893348 shares. DoPurchase187482 shares.1st mortgage bonds Rockhill CoInheritance1888$2,000. Do do1893$2,000.2d mortgage bonds Rockhill CoPurchase1909$3,700.Bonds Shade Gap. R.R. CoInheritance1893$1,500.*4043 DOCKET NO. 17780 - ESTATE OF GEO. B. MARKLE IICommon stock Railroad CoInheritanceJune 11, 1914196 shares.Preferred stock Railroad Co do do87 shares.1st mortgage bonds Railroad Co do do$8,000.2d mortgage bonds Railroad Co do do$1,000.Common stock Rockhill Co do do355 shares.Preferred stock Rockhill Co do do75 shares1st mortgage bonds Rockhill Co do do$7,000.2d mortgage bonds Rockhill Co do do$1,000.Bonds Shade Gap R.R. Co do do$2,500.DOCKET NO. 17907 - IDA M. HESSENBRUCHCommon stock Railroad CoInheritance1889197 shares. Do do1892202 shares. DoExchange191434 shares.Preferred stock Railroad CoInheritance188967 shares. Do do189262 shares.1st mortgage bonds Railroad Co do1889$6,000. Do do1892$6,000.2d mortgage bonds Railroad Co doJune 30, 1915$13,000. DoPurchase1909$11,200.Common Stock Rockhill CoInheritance1889277 shares. Do do1892250 shares.Preferred Stock Rockhill Co do188958 shares. Do do189253 shares.1st mortgage bonds Rockhill Co do1889$5,000. Do do1892$5,000.2d mortgage bonds Rockhill Co doJune 30, 1915$10,000. DoPurchase1909$9,400.Bonds Shade Gap R.R. CoInheritance1889$1,500. Do do1892$2,000.*4044  In 1920 the petitioners herein owned securities of the aforesaid companies as follows: DOCKET NO. 3799 - GEO. B. MARKLE, JR. IIINature of securityRailroad Co.Rockhill Co.Shade Gap R.R. Co.Common stock225 shares277 sharesPreferred stock67 shares58 shares1st mortgage bonds$6,000$5,000$1,5002d mortgage bonds$13,600$10,700*769 DOCKET NO. 3858 - JOHN MARKLENature of securityRailroad Co.Rockhill Co.Shade Gap R.R. Co.Common stock219 shares277 sharesPreferred stock67 shares58 shares1st mortgage bonds$6,000$5,0002d mortgage bonds$12,600$9,700DOCKET NO. 6208 - ALVAN MARKLECommon stock224 shares277 sharesPreferred stock67 shares113 shares1st mortgage bonds$6,000$10,000$1,5002d mortgage bonds$12,600$15,500DOCKET NO. 17646 - ESTATE OF GEO. B. MARKLE, SR.Common stock1,066 shares1,927 sharesPreferred stock475 shares408 shares1st mortgage bonds$50,000$38,000$14,0002d mortgage bonds$5,500$4,300DOCKET NO. 17698 - FRANCES A. ROBERTSCommon stock259 shares430 shares1st mortgage bondsNone$4,000$1,5002d mortgage bonds do$3,700*4045 DOCKET NO. 17780 - ESTATE OF GEO. B. MARKLE IICommon stock196 shares355 sharesPreferred stock87 shares75 shares1st mortgage bonds$8,000$7,000$2,5002d mortgage bonds$1,000$1,000DOCKET NO. 17907 - IDA M. HESSENBRUCHCommon stock433 shares527 sharesPreferred stock129 shares111 shares1st mortgage bonds$12,000$10,000$3,5002d mortgage bonds$24,200$19,400On February 7, 1920, an agreement was entered into between one John Gilbert, representing Maderia Hill & Co., and one Edward Roberts, representing the stockholders and bondholders of the old companies.  This agreement will hereinafter be referred to as the Gilbert agreement.  By the terms of this contract Gilbert undertook the purchase of at least 95 per cent of the outstanding securities of the old companies, provided Roberts could secure the securities on or before March 15, 1920.  The purchaser agreed to pay in cash the par value of the bonds plus accrued interest and $58.25 a share for the capital stock.  The agreement further provided that the owners of the securities might elect to receive instead of cash the securities of a new*4046  corporation, to be known as the Rock Hill Coal & Iron Co., which was to be formed for the purpose of acquiring the properties *770  of the old companies and an existing corporation known as the Shantung Coal Co.  The Shantung Coal Co. was owned by Maderia Hill & Co.  By virtue of an added clause at the end of the agreement Brown Brothers & Co., a brokerage concern, agreed to provide Gilbert with the funds to carry out the agreement.  The Gilbert agreement referred to in the preceding paragraph is as follows: THIS AGREEMENT, made this seventh day of February, 1920 between JOHN GILBERT, of Philadelphia, representing himself and his associates (hereinafter called the Purchaser, and EDWARD ROBERTS, of Philadelphia, representing stockholders and bondholders of The Rockhill Iron and Coal Company and The East Broad Top Railroad and Coal Company, (hereinafter called the Seller).  Purchaser having made an examination of the properties, affairs and books of the two companies, is desirous of purchasing their entire outstanding capital stock and bonds on the terms hereinafter specified, but is willing to purchase less than the entire outstanding stock and bonds, provided*4047  the Seller can obtain for purchase by the Purchaser hereunder, or for exchange for the bonds or preferred stock of the new company hereafter referred to, on or prior to March 15, 1920, Ninety-five per cent (95%) of the capital stock of each of said Companies and Ninety-five per cent (95%) of the par value of the bonds of each of said Companies.  Seller is willing, in consideration of the agreement of the Purchaser to purchase or provide for the exchange of said stock and bonds as hereinafter set out, to endeavor to procure for purchase or exchange hereunder on or prior to March 15, 1920, as large as possible an amount of said stocks and bonds.  It is mutually agreed as follows between the parties: 1.  Purchaser agrees on or prior to March 15, 1920, to purchase the stock and bonds of The Rockhill Iron and Coal Company and of The East Broad Top Railroad and Coal Company procured by the Seller for purchase hereunder, at the office of the Depository and to pay for the bonds the par value thereof plus accrued interest to the date of settlement and for the stock the sum of Three million twenty-nine thousand four hundred dollars with a proportionate reduction for*4048  shares neither purchased for cash nor exchanged under paragraph 3 hereof, and with a further reduction at the rate of $58.25 per share for shares exchanged in pursuance of paragraph 3 hereof, provided that the Purchaser shall be under no obligation to purchase the said stock and bonds unless on or before the said date of settlement there be deposited for purchase by him, or for exchange as hereinafter provided, at least Ninety-five per cent (95%) of the outstanding capital stock of each of said Companies and at least Ninety-five per cent (95%) of the outstanding bonds of each of said Companies, the total outstanding stock and bonds of said Companies being as specified in Schedule "A" annexed hereto.  2.  Purchaser shall make payment for said stock and bonds so purchased by paying to the Depository for the use of the Seller and his associates on or prior to April 1, 1920, the price above specified, on receipt of the bonds so purchased and of the stock so purchased with duly executed blank powers of transfer.  In case settlement is made subsequent to March 1, 1920, Purchaser shall pay in addition to the price above provided, interest at the rate of Six per cent (6%) per annum*4049  on the purchase price of the stock above provided from March 1st to the date of Settlement.  3.  Purchaser further agrees, in case the holders of any of said stocks or bonds desire to participate in the proposed reorganization, merger and consolidation,*771 to permit and procure for them the opportunity to exchange, direct with the Company to be formed by such reorganization, merger or consolidation, their stock or bonds for the preferred stock or bonds of such reorganized, merged and consolidated corporation, on the basis of par and accrued interest for original bonds and Fifty-eight dollars and twenty-five cents ($58.25) per share (par $50.00) for original stock, as against ninety-six per cent (96%) of par plus accrued interest for new bonds and ninety-eight per cent (98%) of par plus accrued dividends for new preferred stock.  Such new preferred stock and bonds shall be issued by a company to be formed by the merger and consolidation of Shantung Coal Company with the present The Rockhill Iron and Coal Company, the new company to be known as Rockhill Coal and Iron Company.  The bonds to be part of a present issue of Three million dollars ($3,000,000) par value which*4050  shall become a first lien on the present Rockhill properties and be further secured by a coliateral trust on at least ninety-five per cent (95%) of the outstanding stock and ninety-five per cent (95%) of the outstanding bonds of The East Broad Top Railroad and Coal Company.  The preferred stock shall be part of an issue of Two million dollars ($2,000,000) of eight per cent cumulative preferred stock of the new Rockhill Coal and Iron Company.  4.  Seller will endeavor to secure for purchase or exchange hereunder the largest possible amount of stocks and bonds per attached schedule, but shall be under no obligation to secure the above specified percentages.  5.  The Seller states that he has been familiar with the properties and operations of the said Companies for forty years and so far as he knows all outstanding claims against the respective Companies are ascertainable from an examination of their books and papers.  This is neither a representation nor a warranty but merely a statement of Seller's actual present knowledge.  It shall be a condition of the present transaction that prior to the settlement no dividends shall be declared by either Company and none of their assets*4051  shall be sold, encumbered or disposed of except in the usual course of business.  6.  The Depository referred to shall be the Philadelphia Trust Company, and it is expressly understood that the Depository shall not be responsible for the carrying out of any of the covenants or provisions of this agreement, between the Seller and Purchaser, and that the responsibility of the Depository is limited to that of a stakeholder for the safe-keeping of the cash paid and the securities deposited with it and their delivery to the purchaser or return to the Seller in accordance with the provisions of this agreement.  The Depository shall notify the Purchaser by letter addressed to him at North American Building, Philadelphia, whenever there shall have been received by the Depository for purchase under this agreement the respective minimum percentages of stock and bonds above specified.  7.  It is understood that the obligation of the Purchaser is contingent only on the approval of Purchaser's counsel of the titles of the Companies.  It is further understood that the ownership of the securities of the Companies above specified carries with it all the properties which are properly a part of*4052  these Companies, that is to say, that if there have been secured any options, rights or privileges through the officers of the Companies which would inure to the benefit of the properties as a whole, these will be transferred to the Companies and that there are no leases, rights, privileges or obligations properly belonging to the Companies which will not revert to them.  IN WITNESS WHEREOF, the parties hereto have set their hands and seals the day and year aforesaid.  (Signed) JOHN GILBERT EDWARD ROBERTS *772  In connection with the foregoing agreement between John Gilbert and Edward Roberts and as an inducement to Edward Roberts to execute the same, Brown Brothers & Company have agreed with John Gilbert and do hereby agree with Edward Roberts to provide John Gilbert with the funds required under the above agreement for Gilbert to carry out the same.  (Signed) BROWN BROTHERS & CO.  EDWARD ROBERTS.  SCHEDULE "A"SecuritiesTHE ROCKHILL IRON AND COAL COMPANY1st Mortgage 4% Bonds - due 1958$497,000.002nd Mortgage 4% Income Bonds - due 1958466,700.001st Mortgage 5% Sinking Fund Bonds - due 19565,000.00Preferred Stock268,550.00Common Stock1,127,100,00$2,364,350.00THE EAST BROAD TOP RAILROAD AND COAL COMPANY1st Mortgage 4% Bonds - due 1958$500,000.002nd Mortgage 4% Income Bonds - due 1958464,400.001st Mortgage 4% Shade Gap R.R. Bonds - due 195892,500.00Preferred Stock246,750.00Common Stock691,950.001,995,600.00$4,359,950.00*4053  (Italics supplied.) On the same day, namely, February 7, 1920, an agreement hereafter referred to as the "agreement to merge" was also entered into between Maderia Hill & Co., John Gilbert, Brown Brothers & Co., and Shantung Coal Co. for the purpose of defining "certain of the rights and obligations of the parties in connection with the transaction * * * contemplated" in the Gilbert agreement.  This agreement to merge provided that all rights acquired by Gilbert in connection with the transaction contemplated in the two agreements were acquired and held by him as agent or trustee for Maderia Hill & Co., and that the authorized capital stock of the Shantung Coal Co. was to be increased from $5,000 to $2,250,000, consisting of $2,000,000 preferred and $250,000 common, all of $100 par value.  So far as is here material, the agreement to merge is as follows: Immediately on the acquisition by Gilbert of such of the stocks and bonds of The Rockhill Iron and Coal Company and the East Broad Top Railroad and Coal Company (hereinafter referred to together as the Old Companies or separately as the Old Rockhill Company and the Railroad Company, the latter designation including the Shade*4054  Gap Railroad Company which has heretofore been merged with The East Broad Top Railroad and Coal Company), as he shall purchase for cash under said agreement, Shantung Company will acquire from Gilbert, from bondholders of the Old Companies, from the stockholders of the Railroad *773  Company, and from the stockholders of the Old Rockhill Company who desire to exchange their stock for bonds of the Rockhill Coal and Iron Company (hereinafter called the New Company) their stocks and securities in pursuance of an agreement or agreements to issue or to obligate the New Company (into which Shantung Coal Company will presently be merged and consolidated), to issue to them in exchange for their said stocks and security, the stocks of Shantung Company and securities of such reorganized, merged and consolidated Rockhill Iron and Coal Company, on the following basis: - A.  The stockholders and bondholders of the Old Companies may, at their option, exercised within a reasonable time before the merger proceedings are effected, receive in exchange either: (1) For each $96.00 par value of Old Rockhill Company or Railroad Company stock (preferred or common), $116,50 par value*4055  of New Rockhill Company bonds; (2) For each $98.00 par value of Railroad Company Stock $116.50 par value Shantung Company preferred stock; (3) For each $96.00 par value of Old Rockhill Company bonds, $100 1/3 par value New Rockhill Company bonds; (4) For each $96.00 par value of Railroad Company bonds, $100 2/3 New Rockhill Company bonds; (5) For each $98.00 par value of Old Rockhill Company bonds, $100 1/3 par value Shantung Coal Company preferred stock; (6) For each $98.00 par value Railroad Company bonds, $100 2/3 par value Shantung Company preferred stock.  In each instance in which the holders are to receive Shantung Company preferred stock it will be with the understanding and agreement that on the merger and consolidation which is immediately to follow such Shantung Company preferred stock shall be converted share for share into the preferred stock of the New Rockhill Company as hereinafter provided.  B.  To Gilbert Shantung Company shall issue: (1) $200,500 par value comon stock; (2) Preferred stock of a par value equal to $374,067.75 less the par value of the preferred stock to be issued direct to stockholders and bondholders of the Old Companies under*4056  subdivision A hereof.  (3) Shantung Company will further obligate the New Rockhill Company to issue to Gilbert its bonds of the par value equal to the difference between $3,000,000 and the par value of its bonds issuable to the stockholders and bondholders of the Old Companies in pursuance of subdivision A hereof.  (4) Shantung Company will further transfer to Gilbert all its rights to the issue of New Rockhill preferred stock by virtue of its acquisition of Old Rockhill stock in pursuance of subdivision A hereof.  In consideration of the foregoing (1), (2), (3) and (4) hereof, Gilbert will transfer to Shantung Company all the stock of the Railroad Company and all the bonds of the Old Companies acquired by him under his said agreement with Roberts.  A merger and consolidation will then be effected between the Shantung Coal Company and The Rockhill Iron and Coal Company merging and consolidating said companies into a new Company to be known as Rockhill Coal and Iron Company with an authorized capital stock of $2,000,000 preferred and 20,100 shares of common stock without par value and an authorized indebtedness of $3,500,000.  The merger agreement will provide that for*4057  each $98.00 par value of preferred or of common stock of the Old Rockhill Company the holder will receive *774  $116.50 par value of the preferred stock of the New Rockhill Company, for each $100 par value of Preferred Stock of the Shantung Coal Company the stockholder will receive $100 par value of the preferred stock of the New Company, and for each $100 par value of the common stock of the Shantung Company the holder will receive ten shares of stock without par value of the New Rockhill Company.  The mortgage securing the bonds of the reorganized, merged and consolidated Rockhill Company, to be issued in pursuance of Article II hereof, will be secured by all the mortgageable property acquired by merger with the Old Rockhill Company and by a collateral trust on all the stocks and bonds of the Railroad Company so acquired, which latter stocks and bonds will be at least 95% of the outstanding stock and of the outstanding bonds of the Railroad Company.  The present mortgages of the Old Rockhill Company will be forthwith satisfied if all the Old Rockhill Company bonds are so acquired, and if not the outstanding Old Rockhill bonds will be called for redemption and such mortgages*4058  then satisfied.  The mortgage will provide that any Railroad securities hereafter issued will be deposited as additional securities with the trustee of the mortgage.  In accordance with the Gilbert agreement the bonds of the old companies, to wit, the Railroad Company, the Rockhill Company and the Shade Gap Railroad Co., owned by each of the petitioners were, on or about March 15, 1920, redeemed and retired for cash at par plus accrued interest.  On March 15, 1920, and in pursuance to the said agreement to merge an opportunity to exchange the stocks and bonds of the said old companies for stock and/or bonds in the New Rockhill Coal Co. was provided for those wishing to participate in the proposed reorganization, merger and consolidation through an "Agreement between Shantung Coal Company and Holders of Stock and Securities of The Rockhill Iron and Coal Company and The East Broad Top Railroad and Coal Company for the Exchange of their Stock or Securities for the Stock or Securities of the Reorganized, Merged and Consolidated Rockhill Coal and Iron Company" (hereinafter referred to as the "Shantung agreement").  At least 223 such separate agreements dated March 15, 1920, were entered*4059  into by the individual holders of stocks and securities of the old companies, who elected to participate in the proposed reorganization, merger and consolidation, and to exchange their stocks for bonds of the new Rockhill Coal Co.  The Shantung agreement, in so far as it is material, is as follows: THIS AGREEMENT, made this fifteenth day of March, 1920, between SHANTUNG COAL COMPANY, a Pennsylvania corporation, (hereinafter called the Company), and hereinafter called the Holder, Witnesseth:The Holder is a stockholder, or bondholder, or both, in The Rockhill Iron and Coal Company and The East Broad Top Railroad and Coal Company, or in both companies, (hereinafter called the Old Companies).  The company has an authorized indebtedness of $3,500,000, and an authorized capital stock of $2,250,000 consisting of $2,000,000 preferred stock and $250,000 *775  common stock.  The Company proposes that it shall obligate the Rockhill Coal and Iron Company, into which it is presently to be merged, (hereafter called the New Company), to issue its stock and securities in exchange for the stock and securities of the Holder and of the other holders, on the following basis: (The basis*4060  is the same as set out in the agreement to merge).  * * * The Holder, being the holder of stock and/or securities of the two Old Companies, as follows: * * * hereby agrees to exchange the said stock and/or securities of the reorganized, merged and consolidated Rockhill Coal and Iron Company, in accordance with the arrangement above set out, and the Shantung Coal Company agrees to have issued to the Holder the new stock and/or securities of the class above described, the Holder to receive in exchange: dollars ($ ) par value First and Collateral Trust Mortgage Six Per Cent. Sinking Fund Gold Bonds of the Rockhill Coal andIron Company, Shares Eight Per Cent. Cumulative preferred stock of the Rockhill Coal and Iron Company.  In pursuance to the above Shantung agreement the individual petitioners herein exchanged common and preferred stocks of the old companies for "First and Collateral Trust Mortgage Six Per Cent. Sinking Fund Gold Bonds" of the New Rockhill Coal Co., as follows: Shares of R.R. Co. stock exchangedShares of Rockhill Co. stock exchangedNameCommonPreferredCommonPreferredAmount of bonds of new company received in exchangeGeo. B. Markle, jr. III2256727758$38,044.54John Markle219672775837,680.46Alvan Markle2246727711340,896.35John Markle, trustee1,0664751,927408235,184.38Elizabeth C. R. Wyatt and Girard Trust Co., executors259None.430None.41,806.51Charles B. Adamson, trustee196873557543,262.76Herman M. Hessenbruch and Girard Trust Co., executors43312952711172,812.50*4061  Of the aggregate number of 46,672 shares of both classes of stock of each company outstanding (15 shares of Railroad Company common stock were in the treasury in the name of E. Roberts), 30,525 were exchanged for new bonds, 2,273 for new preferred stock and 13,874 were redeemed for cash at $58.25 per share.  On March 15, 1920, an agreement of merger and consolidation (hereinafter referred to as the "merger agreement") was entered into between the Shantung Coal Company and the Rockhill Company, whereby and pursuant to which it was provided that upon the due approval thereof by the stockholders of each of said corporations and on the filing of such agreement or copy thereof and the certificate of the secretary of each of said corporations ratifying the approval of this agreement by the stockholders of the corporation of which he was an officer, in the office of the Secretary of the Commonwealth of Pennsylvania and elsewhere as required by law, *776  said corporations should be deemed and taken to be one corporation by the name, style and title provided in said agreement, to wit: Rockhill Coal & Iron Co. possessing all the powers and privileges, properties, rights, franchises*4062  and assets, and subject to all the debts and liabilities of each of said corporations.  Thereafter, by unanimous action of the stockholders of each of said corporations said merger agreement was duly approved, ratified and confirmed, and said merger agreement was duly executed and duly filed in the office of the Secretary of the Commonwealth of Pennsylvania and Letters Patent dated March 16, 1920, duly signed by the Governor and Secretary, respectively, of the Commonwealth of Pennsylvania, were issued to ROCKHILL COAL AND IRON COMPANY.  On March 17, 1920, the new Rockhill Coal Co. authorized its indebtedness to be increased to $3,500,000 and the proper officers of the company were authorized and directed to execute and issue said company's "First and Collateral Trust Mortgage Six per cent Sinking Fund Gold Bonds" in the aggregate amount of $3,000,000 par value, and the trustee named in the mortgage and deed of trust was authorized to certify and deliver temporary bonds in the principal amount of $3,000,000 for the delivery to the former holders of preferred and common stock of the Rockhill Company in the par value according to their respective rights.  None of the petitioners*4063  herein disposed of the whole or any part of said "First and Collateral Trust Mortgage Six per cent Sinking Fund Gold Bonds" of the new Rockhill Coal Co. during the taxable year 1920.  The excess in par or face value of the bonds of the new Rockhill Company received by the petitioners herein, over the par or face value of the old common and preferred stocks exchanged by them, respectively; the fair market value of said new bonds received by them, respectively, as of the date of the exchange; and the excess, if any, of the fair market value of such new bonds received, over the book value on March 1, 1913, in five of the cases, and the book value on July 1, 1914, in two of the cases of said old stocks given in exchange, were as follows: Excess in par of new bonds over old stocksFair value of new bonds Mar. 15, 1920, at 93Book value, old stocksDocket No.Mar. 1, 1913July 1, 1914Excess of fair value of new bonds over old stocks3799$6,694.54$36,522.76$33,198.13$3,324.6338586,630.4636,173.24$38,240.20None.62086,846.3539,260.5041,371.80None.1764641,384.38225,777.00232,605.20None.176987,356.5140,134.2540,976.60None.177807,612.7641,532.2537,490.674,041.581790712,812.5069,900.0074,126.56None.*4064 *777  The total sales of stocks and bonds of the Rockhill Company and the Railroad Company during the year 1913 were as follows: EAST BROAD TOP RAILROAD & COAL CO.  Common stock: September 4, 1913 - From the Philadelphia Trust, Safe Deposit & Insurance Co., assignees of George R. Wood to Charles W. Finninger, 26 shares.  Preferred stock: July 29, 1913 - From Charles Lilly to Charles D. Jones, 74 shares, to Samuel J. Livingston, 10 shares.  Aug. 27, 1913 - From Richard P. and Frank McGrann to estate of Martha P. Roberts, 2 shares.  First-mortgage bonds: April 14, 1913 - From Richard P. McGrann to The Peoples National Bank, Lancaster, Pa., $5,000.  Aug. 11, 1913 - From Charles Lilly to S. J. Livingston, $8,000.  Oct. 8, 1913 - From Richard P. and Frank McGrann to William H. Keller and John A. Nauman, $1,000.  Second-mortgage bonds: April 14, 1913 - From Richard P. McGrann to The Peoples' National Bank, Lancaster, Pa., $5,100.  Aug. 11, 1913 - From Charles Lilly to S. J. Livingston, $7,400.  ROCKHILL IRON & COAL CO.  Preferred stock: July 29, 1913 - From Charles Lilly to S. J. Livingston, 14 shares.  First-mortgage bonds: Aug. 11, 1913 - From*4065  Charles Lilly to S. J. Livingston, $1,000.  Second-mortgage bonds: Aug. 11, 1913 - From Charles Lilly to S. J. Livingston, $900.  During the year 1913 there were outstanding 4,935 shares of preferred and 11,368 shares of common stock of the Railroad Company, and first mortgage bonds $500,000 and second mortgage bonds $464,400.  During the same year there were outstanding 5,371 shares of the preferred and 24,352 shares of common stock of the Rockhill Company, and first-mortgage bonds, $497,000, and second-mortgage bonds, $466,700.  During the years 1912 and 1914 there were a few scattered purchases of stock of the Rockhill Company and Railroad Company by S. J. Livingston and Charles D. Jones, who were, respectively, secretaries of the Rockhill Company and of the Railroad Company.  The bonds of the Railroad Company and of the Rockhill Company purchased in 1913 from Richard P. McGrann and from Charles Lilly, amounting to approximately $25,000, were sold by the parties owning them in order to liquidate loans for which the bonds had been hypothecated as collateral.  The lands of the Rockhill Company consist of about 18,587 acres, lying on Broad Top Mountain and in Trough Creek*4066  Valley in Huntingdon, Fulton, and Bedford Counties of south central Pennsylvania, in the foothills of the Allegheny Mountains, of which they were *778  once a part.  About 13,243 acres are classed as coal land, and are covered with valuable timber - oaks, pine, spruce, hemlock and chestnut, the remaining 5,344 acres on Black Log Mountain and in the Aughwick Valley, contain timber, and deposits of low-grade iron ore, ganister rock, limestone, clay, etc.  The Rockhill Company's mining population has been provided with excellent frame houses, all in a good state of repair and many of which are new and of modern design and equipment.  There is a new office building, at Robertsdale, containing the office of the general superintendent and his staff, a railroad station and post office of concrete block construction, a hotel of about 17 rooms and a large store building which is rented to a company conducting a general mercantile business.  There are approximately 14,000 acres of coal, comprising the well proven commercial areas of three different seams of coal, the Fulton, Barnet, and Kelly beds, in ascending order.  The Fulton (No. 1 or Cook) is the lowest workable coal in the field. *4067  It has been extensively developed in the Robertsdale-Woodvale mines, where it shows a quite regular section of 4 feet 2 inches.  The Barnet lies about 40 feet above the Fulton, and averages 4 feet in thickness.  The Kelly seam lies 90 feet above the Barnet and underlies a limited area in the western portion of the properties.  This seam has not been worked, but several openings show an average thickness of three feet.  Estimates, made at various times by prominent geologists and mining engineers of the available amount of coal on the properties show from 40,000,000 to 100,000,000 tons, but, based on development, prospect, drifts, bore holes, etc., taking a conservative average per acre for each foot of thickness this tonnage would show: Average thicknessSeamFeetInchesAcresTonsFulton426,50640,667,312Barnet405,95835,750,880Kelly301,7426,626,250Total14,20683,044,442Less coal mined to Dec. 31, 192412,378,213Remaining70,378,213insuring a further life of 50 to 60 years for an annual output of 1,000,000 tons.  The coal produced from all mines and beds is essentially of the same character. *4068  It has always been sold under the trade name "Rockhill" and has been long known in the eastern markets, winning a reputation as a high-grade coal.  Its high calorific value and low percentage of volatile matter, giving almost smokeless combustion *779  when properly fired, adapts it for steam and domestic use in and near cities, and in large power plants and in localities where excessive smoke from stacks and chimneys is prohibited.  The coal runs uniform and lumpy.  It can also be stored with little or no danger of spontaneous combustion.  The importance economically of the East Broad Top coals rests not alone on their nearness to the eastern markets and seaboard and the excellent transportation facilities, but also on their distinctive qualities, peculiar to the field, differing physically from other soft coals further west.  They are shipped as clean, lustrous, high-grade coals, comparable with the best types of Pocahontas, New River and Georges Creek products, and, as such, compete with and command a price equivalent to these standard fuels and sell at a premium above other Pennsylvania high-grade coals.  The railroad is a narrow-gauge line consisting of 72 miles of*4069  track, including branches, located in Huntingdon County, pennsylvania, extending southerly from a connection with the main line of the Pennsylvania Railroad at Mt. Union.  The main line extends to Alvan, and there are three principal branches known as the Shade Gap, Rocky Ridge, and Coles Valley Branches, besides two short branches or spurs for industrial purposes.  The railroad has been well constructed, cuts and fills being of good width and the entire line showing evidences of intelligent location and construction.  The gauge of the track is 3 feet.  Rail is generally of 60 and 70 pounds per yard, though there is some rail in use of 75 and 85 pounds per yard.  The rail in the yards and sidings is generally 60 pounds and 70 pounds.  The ties are generally of white or red oak, of a very good quality, produced locally along the line at several convenient points.  The switches are of the stub and split variety and other track material such as points, spikes and bolts are of the usual quality and design for such weights of rail.  The traffic of this railroad consists principally of coal from the mines in the vicinity of Robersdale on the main line, three mines on the Coles Valley*4070  Branch, and two mines on the Rocky Ridge Branch.  The mines at Robertsdale at present produce over 600,000 tons per year.  The mines on the Coles Valley Branch now produce about 200 tons per day, and plans are being developed to increase this output to 1,000 tons per day.  It is estimated that this location will develop a total output of 1,000,000 tons before being exhausted.  This branch was constructed in 1915.  The Rocky Ridge Branch has one operating coal mine producing about 200 tons per day.  There is also another mine on this branch which has produced about 100 tons per day.  The Railroad Company has a direct connection with the Pennsylvania Railroad at Mt. Union, Pa., connecting with the old line *780  of that road, a portion of which is leased by the East Broad Top Railroad, together with the old Pennsylvania passenger station.  The stations of the two companies are about 500 feet apart.  In the yard at Mt. Union, used for interchange, the tracks are laid with three rails, permitting the use of either standard or narrow-gauge equipment, and this is the only railroad connection which the Railroad Company has at present.  There is, however, a branch line of 11 miles*4071  in daily operation which is in direct line for a connection with the Western Maryland and Baltimore & Ohio Railroads, and it also owns 6 miles of additional right of way beyond the 11 miles of track.  From prior to 1883 until 1911, the Railroad Company and the Rockhill Company, though separately incorporated, were conducted practically as a single operation and were managed together under one set of officers and directors.  In 1911, the management was separated and the officers divided between the two companies, but the stock ownership continued substantially the same until 1920.  On May 24, 1912, the board of directors of the Rockhill Company passed the following resolution: Whereas the property accounts of this company shown on the balance sheet as of March 31, 1912, have never been adjusted on inventory or real value, and in the judgment of the officers of this company, after consultation with and approval of Mr. Edward Ross of the firm of Lybrand, Ross Brothers & Montgomery, Public Accountants, this should be done in view of the report made by Mr. A. E. Lehman and other mining engineers, showing about 90,000,000 tons of workable coal underlying the lands belonging to this*4072  company directly and indirectly, which reports were determined on bore hole test and geological surveys, and whereas - it is estimated that this coal is worth at least two and a half cents per ton in place, but in order to safeguard and possibility of over-valuation, the quantity is reduced for valuation to 50,000,000 tons.  It is, therefore, unanimously resolved that the property accounts of this company be appraised and adjusted on the basis of their present value, as shown in the statement presented at this meeting, copy of which follows these minutes, and that whatever balance remains in the property adjustment account, after all entries have been made, be closed out to profit and loss account.  On January 10, 1924, the Commissioner of Internal Revenue wrote a letter to the Rockhill Company in connection with its income and excess-profits-tax liability for the years 1918 and 1919, and it appears from Schedule 1(a) attached to said letter that the said Commissioner had determined for depletion purposes that the intrinsic value of the coal lands of the Rockhill Company as of March 1, 1913, was $1,287,858.96.  The basis upon which this valuation was arrived at was explained in the*4073  said letter as follows: Estimated tons recoverable in a forty-year life at an annualproduction capacity of 600,000 tons24,000,000Value of coal based on royalties receivable as shown by 1912lease, at $0.18 royalty, discounted at 8% for a forty-year life$1,287,858.96*781  On May 2, 1911, for a valuable consideration a two-year option was given to the Columbia Trust Co. of the City of New York within which to purchase the common and preferred stocks of the Railroad and Rockhill Companies at $10 per share.  The parts of that option which are material here are as follows: AGREEMENT made this 2nd day of May A.D. 1911 by and between the PROVIDENT LIFE AND TRUST COMPANY, of Philadelphia (hereinafter called the "DEPOSITARY") party of the first part; such owners of stocks of the ROCKHILL IRON AND COAL COMPANY, the EAST BROAD TOP RAILROAD AND COAL COMPANY * * * as may deposit the same under the terms of this agreement, (hereinafter called the "SELLERS"), parties of the second part; and the COLUMBIA TRUST COMPANY of the City of New York, a corporation organized under and pursuant to the laws of said State (hereinafter called the "PURCHASER") party of the third*4074  part; WITNESSETH: WHEREAS, the "Purchaser" desires an option to purchase the outstanding stocks of the aforesaid corporations belonging to the "Sellers" and the "Purchaser" is willing to consider such option provided the owners of 100 per cent. of par value of the outstanding stocks of such corporations are willing to sell the same at the prices and subject to the conditions hereinafter set forth.  NOW THIS AGREEMENT WITNESSETH, that the parties hereto for the considerations hereinafter set forth, mutually covenant and agree as follows: FIRST: The undersigned "Sellers" agree to sell to the "Purchaser" or its assign, all their stocks of the Rockhill Iron and Coal Company, the East Broad Top Railroad and Coal Company * * * for the prices and upon the terms hereinafter set forth * * *.  * * * THIRD: Each certificate of stock so deposited, shall be accompanied with an absolute bill of sale and irrevocable power of attorney to transfer the same in blank * * *.  FOURTH: The "Sellers" agree that the "Purchaser", its assigns, or the corporation hereinafter referred to shall have the option to purchase the said stocks, at the prices and subject to the conditions hereinafter set*4075  forth, for the term of two years after 80 per cent. of the outstanding stocks of the said companies mentioned in the First Paragraph of this agreement, have been deposited with the "Depositary"; * * * * * * SIXTH: The "Purchaser", its assigns, or the corporation to be organized, as aforesaid, shall have the right to purchase the stock of the corporations named in paragraph first of this agreement, and in case the said "Purchaser", its assigns, or the said corporation shall elect to purchase the said stocks, it or they shall pay to the "Depositary" at the time of such election, For each share of the Common Stock of the East Broad Top R.R. and Coal Co $10For each share of the Preferred Stock of the East Broad Top R.R. and Coal Co $10For each share of the common Stock of the Rockhill Iron and Coal Co $10For each share of the Preferred Stock of the Rockhill Iron and Coal Co $10* * * FOURTEENTH: Whereas, it is in contemplation, that upon the purchase of the stocks of the several companies, provision shall be made in the near future for *782  liquidating and paying the first mortgage bonds and the second mortgage income bonds of the several companies; *4076  and whereas, if the stocks hereinbefore mentioned shall be purchased as hereinbefore stated, the owners thereof will be able to control the election of the directors of the several companies, which would leave the present bondholders, who are also stockholders, of the companies without representation on the boards of directors; and whereas, it is the understanding and agreement that until the said first mortgage bonds and second morgage bonds of the several companies are paid off, that the present bondholders shall have a representation on the boards of directors of the several companies equal to fifty per cent. thereof, * * * FIFTEENTH: It is understood and agreed by all the parties hereto, that the five hundred thousand dollars ($500,000) mentioned in this agreement and provided to be expended upon the coal properties by the corporation to be organized as hereinbefore stated, is in part, the consideration for the option herein contained; * * * On August 26, 1913, the stockholders and bondholders of both companies signed agreements between themselves in which they agreed to sell their stock in accordance with the option given on May 2, 1911, namely, at $10 per share, and also*4077  agreed to sell their bonds at par plus accrued interest.  The pertinent part of these agreements is as follows: And I do further authorize and empower the said DR. H. M. HOWE, ALVAN MARKLE, EDWARD ROBERTS and STUART WOOD, or a majority of them, to sell my said stock as above mentioned upon the following basis; $10 per share for each share of the common and preferred stock of the East Broad Top Railroad and Coal Company, the Rockhill Iron and Coal Company, * * * BASIS OF EXCHANGE: For each first mortgage bond of the Rockhill Iron and Coal Company, each first and second mortgage bond of the East Broad Top Railroad and Coal Company, and each first mortgage bond of the Shade Gap Railroad Company, an equal amount par value of the new securities of the merged railroad company as above set forth.  For each second mortgage bond of the Rockhill Iron and Coal Company, an equal amount (par value) of the new securities of the merged coal company as above set forth.  The option expired by limitation without being accepted.  During the pendency of this option there was a verbal offer of $2,000,000 cash for all of the securities.  This offer was declined, since by its terms the stockholders*4078  would have received nothing.  The first dividends on the capital stock of the Rockhill Company were paid in 1918, with the exception of a $500 payment in 1883.  Interest was paid on the first-mortgage bonds from 1908 but none was paid on the second-mortgage bonds until 1918.  The Railroad Company paid no dividends until 1914.  Interest was paid on its first-mortgage bonds from 1908 and on its second-mortgage bonds from 1914.  On January 6, 1908, Mr. Seibert, then president of both companies, wrote a letter to the petitioner John Markle, in which he advised *783  against creating a sinking fund to provide for the retirment of bonds and said, in part: I know that the security for the Railroad mortgage has improved 50% during the past few years, and, with further improvements and extensions contemplated, which will be paid for from earnings, the security will be further strengthened, so that we will be fully justified in deferring the sinking fund provision until the next refunding period arrives.  The same argument holds good as to the Rockhill property as we have enough workable coal to maintain our present output for three hundred years.  If the present generation yields*4079  its right of income for the past thirty years and is willing to rehabilitate the properties without charge to capital account, the next generation should provide for the sinking fund, * * * It was provided in the respective mortgages securing the second-mortgage mortgage income bonds, that in order to ascertain, for the purposes of said mortgages, "the amount of surplus net earnings of any six months, applicable to the payment of interest on the income bonds," the directors might deduct all "operating expenses," which, for the purposes of the mortgages, were defined to include expenses for "maintenance, repairs, renewal, and replacements of the furnaces, coke ovens, coal and ore mine equipment, and other properties," and also "cost of all equipment, including the cars, tracks, machinery and buildings of the ore and coal mines, and the extensions and extension development of the ore and coal property and mines." The net cash surplus earnings of the respective companies available at all times for the payment of interest on said second-mortgage income bonds, from October 1, 1908, to January 20, 1914, in the case of the Railroad Company, and to February 1, 1918, in the case of the*4080  Rockhill Company were as shown by the following table: DateNet cash surplus, Rockhill CompanyNet cash surplus, Railroad CompanyOct. 1, 1908$67,312.47$144,038.88Apr. 1, 190955,297.86133,157.01Sept. 30, 190933,616.87122,780.54Apr. 1, 191046,548.94121,261.16Sept. 30, 1910No statement.115,238.21Mar. 31, 191174,358.84114,384.85Dec. 31, 1911112,811.2328,442.53Mar. 31, 1912104,407.6953,420.89Sept. 30, 191266,066.04108,755.51Dec. 31, 1912No statement.139,280.22Mar. 31, 191337,807.43152,770.18Sept. 30, 1913No statement.182,270.45Mar. 31, 1914$105,685.49Interest paid.Aug. 31, 1914107,710.14Interest paid.Dec. 31, 1914125,439.71Interest paid.Apr. 22, 1915135,898.59Interest paid.Oct. 1, 1915128,691.71Interest paid.Feb. 29, 1916128,150.38Interest paid.Sept. 30, 1916124,085.24Interest paid.Nov. 30, 1916105,383.13Interest paid.Mar. 31, 1917177,205.72Interest paid.Sept. 30, 1917391,147.68Interest paid.Mar. 31, 1918471,697.01Interest paid.The condensed combined profit and loss accounts of the Rockhill Company and the Railroad Company for*4081  the years ended December 31, 1911 to 1916, inclusive, prepared from the books without audit thereof, show earnings on the capital stock of both companies outstanding at the end of each year, after payment of interest but before *784  deducting depreciation, property charged off, depletion and additions to "Contingent Reserve," as follows: 1911191219131914191519165.446.518.27.439.567.74During the same years the two companies expended for betterments the following sums: YearAmount1911$21,749.411912140,616.091913106,244.521914130,825.721915195,542.101916313,183.65The amount of $130,825.72 expended in 1914, as set out above, does not include property acquired through the merger of the Rocky Ridge Railroad and Shade Gap Railroad with the East Broad Top Railroad & Coal Co.At the end of each of said years, the net assets of both companies, ordinarily considered as current, were as follows: YearAmount1911$249,261.901912227,592.431913313,132.661914365,474.931915387,144.911916238,779.99The combined net income of both companies for said years, *4082  before deducting depreciation, property charged off, depletion, and additions to contingent reserve, was as shown by the following table: YearAmount1911$125,226.001912149,857.711913199,006.631914180,233.151915231,849.521916180,633.48In an unsigned letter dated February 10, 1920, addressed to Edward Roberts, Esq., and purporting to be from one H. S. Drinker, the following statements are made: While you are under no obligation to advise these security holders as to their rights and obligations in connection with the proposed transaction, yet your relation with them has been so close for so long a period that you asked me to advise you as to the effect of the income tax law on the proposed transaction as related to the interests of the different assenting stockholders and bondholders, in order that in case any of them should consult you, you would be in a position to give them assistance.  * * * I understand that you have been advised that income tax appraisers have taken a book value of its assets as shown by the Company's books as indicative *785  of the fair value of its stock.  While this method might of course be adopted and*4083  might go through and doubtless has gone through many times with other companies on similar transactions, I do not believe that you can expect that all these security holders could sustain as the basic price the value of the stock shown by the Company's books on March 1, 1913, since this would show a value of approximately $60.00 a share and since there were a number of sales, particularly of the stock, about 1913 at figures running from $6.00 a share up to $10.00 a share.  I understand that as far as the bonds are concerned there will be considerable hope of sustaining the proposition that they were worth par or substantially par in 1913 but I should think that the stockholders should figure on a 1913 value for the stock at not over $10.00 per share.  The cost of the second-mortgage bonds acquired by the various petitioners in 1909 was par.  The fair market value of the various securities of the Railroad Company, the Rockhill Company, and the Shade Gap Railroad Co. on the following dates was as set out in the following schedule.  EAST BROAD TOP RAILROAD & COAL CO.StocksBondsCommonPreferred1st mortgage2d mortgageAug. 18, 1888$41.277Aug. 18, 1888$50Aug. 18, 188890% parMar. 1, 1913par188941.277188950188990% parJune 11, 1914par189241.277189250189290% parJune 30, 1915par189341.277Mar. 1, 191310Mar. 1, 1913parMar. 1, 191310June 11, 191410June 11, 1914parJune 11, 191410June 30, 191510*4084 ROCKHILL IRON & COAL CO.Aug. 18, 1888$47.45Aug. 18, 1888$50188890% parMar. 1, 1913par188947.45188950Aug. 18, 188890% parJune 11, 1914par189247.45189250188990% parJune 30, 1915par189347.45Mar. 1, 191310189290% parMar. 1, 191310June 11, 191410189390% parJune 11, 191410Mar. 1, 1913parJune 11, 1914parSHADE GAP RAILROAD CO.Bonds188990% par.189290% par.189390% par.Mar. 1, 1913Par.June 11, 1914Par.OPINION.  GREEN: The broad question presented in these proceedings is the amount of the gain resulting from the disposition by the several petitioners during 1920 of all their stocks and bonds in thd old companies for cash and bonds in the new company.  This question may be conveniently divided into three subquestions: (1) What is the basis for determining gain or loss under section 202 of the Revenue Act of 1918 in those cases where the property disposed of in 1920 *786  had been inherited by the person making the disposition or was owned by an estate?  (2) Did the transaction by virtue of which the petitioners*4085  disposed of their capital stock in the old companies and acquired the bonds of the new company constitute a sale within the meaning of section 202(a) of the Revenue Act of 1918, or an exchange in connection with a reorganization, merger or consolidation as provided in section 202(b) of the same Act?  (3) What was the fair market price or value of the securities of the old companies on the various basic dates? The first subquestion has already been decided by us in the . See also . It follows that the basis for determining gain or loss in those cases where the property disposed of in 1920 had been inherited by the person making the disposition or was owned by an estate, and where the decedent died subsequent to February 28, 1913, is the value of the property at the date of the decedent's death rather than the cost to the decedent.  See also , and *4086 . Cf. Matthiessen v.United States (Ct. Cls.) 6 Am.Fed. Tax Rep. 7105. If, however, the death occurred prior to March 1, 1913, the basis for determining gain would be the value on the date of death or on March 1, 1913, whichever is higher, and the basis for determining loss would be the value on the date of death or on March 1, 1913, whichever is lower.  ; ; ; . The second subquestion is to determine whether the disposition of the stocks of the old companies in 1920 by the several petitioners for bonds of the new company comes within the provisions of section 202(a) of the Revenue Act of 1918 or section 202(b) thereof.  This section is quoted in full, as follows: SEC. 202. (a) That for the purpose of ascertaining the gain derived or loss sustained from the sale or other disposition or property, real, personal, or mixed, the basis shall be - (1) In the case of property*4087  acquired before March 1, 1913, the fair market price or value of such property as of that date; and (2) In the case of property acquired on or after that date, the cost thereof; or the inventory value, if the inventory is made in accordance with section 203.  (b) 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; but when in connection with the reorganization, merger, or consolidation of a corporation a person receives in place of stock or securities owned by him new stock or securities of no greater aggregate par or face value, no gain or loss shall be deemed to occur from the exchange, and the new stock or securities *787  received shall be treated as taking the place of the stock, securities, or property exchanged.  When in the case of any such reorganization, merger or consolidation the aggregate par or face value of the new stock or securities received is in excess of the aggregate par or face value of the stock or securities exchanged, a like amount in par or face value of the new stock or securities received*4088  shall be treated as taking the place of the stock or securities exchanged, and the amount of the excess in par or face value shall be treated as a gain to the extent that the fair market value of the new stock or securities is greater than the cost (or if acquired prior to March 1, 1913, the fair market value as of that date) of the stock or securities exchanged.  The petitioners contend that the disposition of the stocks in question comes within section 202(b), whereas the respondent contends that such disposition comes within section 202(a).  The respondent originally in Docket Nos. 3799, 3858, and 6208 made his determinations, as evidenced by his deficiency letters, upon the theory that the transaction came within section 202(b).  In his original answer as a proposition of law, he stated that, "The exchange of common and preferred stock of a predecessor company or companies for bonds of a successor company, pursuant to a reorganization, constitutes a closed transaction for income tax purposes, the taxable gain from which is to be measured in this case in accordance with" section 202(b) of the Revenue Act of 1918.  Subsequently, however, he obtained leave to file amended answers*4089  in which he alleged as an affirmative defense that the petitioners "sold and exchanged" their stocks in the old companies for bonds of the new and that this exchange was not made pursuant to or in connection with a reorganization, merger, or consolidation.  In the remaining four cases the deficiencies determined by the respondent were upon the theory that the exchange in 1920 of stocks of the Railroad Company and of the Rockhill Company for bonds of the Rockhill Coal Co. was not in connection with a reorganization, merger and consolidation under section 202(b) but was taxable under section 202(a).  The respondent argues that the petitioners can not be said to have "exchanged" their stock in the old companies for bonds of the new "in connection with the reorganization, merger, or consolidation of a corporation," for the reason that the petitioners changed their status entirely with respect to the business being conducted by the old companies from that of owners, namely, stockholders and bondholders to that of creditors, namely, bondholders only; that all the petitioners did was to "sell" their stock in the old companies in consideration for bonds in the new; that the Gilbert*4090  agreement should be held to control the question here involved; and that the Shantung agreements were only drawn to lend color to the entire transaction.  *788  We do not agree with the respondent in any of his contentions on this point.  There is no evidence whatever in the record that would tend to show in the least that any of the agreements referred to in our findings of fact were anything else than bona fide.  In our opinion a proper determination of this question depends upon a consideration of all four agreements rather than any particular one to the exclusion of the others.  But even if we were to decide the question on the basis of the Gilbert agreement alone we could not sustain the respondent's contention.  This agreement clearly was not a sale in praesenti. At best it was no more than an agreement to either purchase or exchange at some future time provided Roberts was successful in obtaining "for purchase by the Purchaser hereunder, or for exchange for the bonds or preferred stock of the new company hereafter referred to, on or prior to March 15, 1920," 95 per cent of the capital stock and bonds of each of the old companies.  Paragraph three of the Gilbert*4091  agreement clearly indicates that at that time there was contemplated a "proposed reorganization, merger and consolidation." The purpose of the "agreement to merge," which was entered into on the same day as the Gilbert agreement, was "to define certain of the respective rights and obligations of the parties in connection with the transaction * * * contemplated" in the Gilbert agreement.  After setting forth certain of such rights and obligations the "agreement to merge" provided that: A merger and consolidation will then be effected between the Shantung Coal Company and the Rockhill Iron and Coal Company merging and consolidating said companies into a new company to be known as Rockhill Coal and Iron Company * * *.  On March 15, 1920, an agreement of merger and consolidation was entered into between the Shantung Coal Co. and the Rockhill Company, whereby and pursuant to which it was provided that upon the due approval thereof by the stockholders of each of said corporations and on the filing of such agreement or copy thereof and the certificate of the secretary of each of said corporations ratifying the approval of this agreement by the stockholders of the corporation of which*4092  he was an officer, in the office of the Secretary of the Commonwealth of Pennsylvania and elsewhere as required by law, the said corporations should be deemed and taken to be one corporation.  Thereafter the stockholders of both companies unanimously approved, ratified and confirmed the said merger agreement, which was duly executed and filed as provided by law, and, as a result thereof, on March 16, 1920, letters patent signed by the Governor and the Secretary, respectively, of the Commonwealth of Pennsylvania, were issued to the new company, namely, the Rockhill Coal & Iron Co.  Also as a result of the option to either sell or exchange contained *789  in the Gilbert agreement, at least 223 holders of stock of the old companies agreed (referred to in the findings as the Shantung agreements) "to exchange" their stock in the old companies for bonds "of the reorganized, merged and consolidated Rockhill Coal and Iron Company." As set out in our findings of fact, all of the petitioners exchanged all of their stocks in the old companies for bonds of the new.  The words "reorganization, merger, or consolidation" as used in section 202(b), supra, are not defined in the Act.  But*4093  giving to such words their ordinary meaning, we are clearly of the opinion that what happened between February 7 and March 16, 1920, as set forth above, as far as the old Rockhill Company was concerned, amounted to a "reorganization, merger or consolidation" within the meaning of those terms as used in section 202(b).  See ; , and . The situation is not precisely the same in the case of the exchange of the stock of these petitioners in the East Broad Top Railroad & Coal Co. for the bonds of the new company, namely the Rockhill Coal & Iron Co.  So far as the petitioners were concerned, the transaction took exactly the same course, an exchange of stock for bonds, but the plan of reorganization did not contemplate that upon the acquisition by the new Rockhill Company of all of the oustanding stock and bonds of the Railroad Comapny, the latter would be merged into the former as was the plan in the case of the old Rockhill Company.  It was contemplated that while the new Rockhill Company should own all of the securities*4094  of the Railroad Company, still the identity of the Railroad Company should be maintained and its assets should not be transferred to the new company.  We are therefore called upon to determine whether such a transaction may be classed as "a reorganization, merger, or consolidation." The Commissioner's regulations relative to the statute here under consideration would seem to include this transaction within the provisions of the statute.  Article 1567, in part, reads as follows: ART. 1567.  Exchange of stock for other stock of no greater par value. - In general, where two (or more) corporations unite their properties, by either (a) the dissolution of corporation B and the sale of its assets to corporation A, or (b) the sale of its property by B to A and the dissolution of B, or (c) the sale of the stock of B to A and the dissolution of B, or (d) the merger of B into A, or (e) the consolidation of the corporations, no taxable income is received from the transaction by A or B or the stockholders of either, provided the sole consideration received by B and its stockholders in (a), (b), (c), and (d) is stock or securities of A, and by A and B and their*4095  stockholders in (e) is stock or securities of the consolidated corporation, in any case of no greater aggregate par or face value than the old stock and securities surrendered.  The term "reorganization," as used in section 202 of the statute, includes cases of *790  corporate readjustment where stockholders exchange their stock for the stock of a holding corporation, provided the holding corporation and the original corporation, in which it holds stock, are so closely related that the two corporations are affiliated as defined in section 240(b) of the statute and article 633, and are thus required to file consolidated returns.  Article 1569 reads as follows: ART. 1569.  Exchange of stock for other stock of greater par value. - If in the case of any reorganization, merger, or consolidation the aggregate par or face value of the new stock or securities received is in excess of the aggregate par or face value of the stock and securities exchanged, income will be realized from the transaction by the recipients of the new stock or securities to an amount limited by (a) the excess of the par or face value of the new stock or securities over the par or face value of*4096  the old and (b) the excess of the fair market value of the new stock or securities over the cost or fair market value as of March 1, 1913, of the old.  In other words, the taxable profit will be (a) or (b), whichever is less.  Upon a subsequent sale of the new stock or securities their cost to the taxpayer will be the cost or fair market value as of March 1, 1913, of the old stock and securities, plus the profit taxed on the exchange.  One of the pertinent provisions of the Gilbert agreement was that Gilbert was under no obligation to acquire from Roberts the stocks and bonds of the old Rockhill Company and the stocks and bonds of the Railroad Company unless Roberts was able to deliver to him at least 95 per cent of each class of security in each corporation.  This agreement was carried out and through the various agreements the new Rockhill Company came into possession of at least 95 per cent of the stock and bonds of the Railroad Company and the corporations were consequently affiliated within the meaning of that term as used in the Revenue Act of 1918.  This being true, the transaction falls squarely within the last quoted sentence of article 1567.  This transaction*4097  differs from the one relating to the stocks and bonds of the old Rockhill Company only in that subsequent to the acquisition of the stocks and bonds of the Railroad Company, its assets were not transferred to the new Rockhill Company.  The ownership and control of these assets for all practical purposes were vested as completely in the new Rockhill Company as if there had been an actual transfer of the assets.  Likewise the beneficial interest of the stockholders of the new Rockhill Company would be, for all practical purposes, the same whether the companies were actually merged or not.  At any time it was within the power of the new Rockhill Company to transfer the assets of the Railroad Company to itself and either continue the Railroad Company in existence or liquidate it as it saw fit.  The plan adopted contemplated the acquisition of the stocks of both companies with the ultimate control of the assets of both vested in the new corporation, and the acquisition of the stocks and bonds of each of the corporations was equally important.  We, therefore, conclude that the exchange of securities *791  of the Railroad Company for securities of the new Rockhill Company was an exchange*4098  in connection with a reorganization, merger, or consolidation, and that the gain or loss resulting therefrom should be computed as to these securities in the same manner as it should be computed on the stocks of the old Rockhill Company.  We, therefore, hold that the bonds of the new Rockhill Company received by the stockholders of the old Rockhill Company and the Railroad Company in place of their stocks in the old companies, were received by them "in connection with the reorganization, merger, or consolidation of a corporation," and since the aggregate par or face value of the new securities was in excess of the aggregate par or face value of the stock exchanged, the gain, if any, should be computed in accordance with the last paragraph of section 202(b) of the Revenue Act of 1918.  What was the fair market price or value of the securities of the old companies on the various basic dates?  Based upon our decision regarding the first two subissues as set out above, a proper determination of gain or loss in the disposition of the various securities in 1920 requires findings of fact as to the fair market price or value, and/or cost of such securities on the following dates: EAST BROAD TOP RAILROAD & COAL CO.StocksCommonPreferredValue, June 11, 1914.Value, June 11, 1914.Value, 1889.Value, 1889.Value, Mar. 1, 1913.Value, Mar. 1, 1913.Value, June 30, 1915.Value, Aug. 18, 1888.Value, Aug. 18, 1888.Value, 1892.Value, 1893.Value, 1892.*4099   EAST BROAD TOP RAILROAD & COAL CO.Bonds1st mortgage2d mortgageValue, June 11, 1914.Value, June 11, 1914.Value, 1889.Cost, 1909.Value, Mar. 1, 1913.Value, Mar. 1, 1913.Value, Aug. 18, 1888.Value, June 30, 1915.Value, 1892.ROCKHILL IRON & COAL CO.StocksCommonPreferredValue, June 11, 1914.Value, June 11, 1914.Value, 1889.Value, 1889.Value, Mar. 1, 1913.Value, Mar. 1, 1913.Value, Aug. 18, 1888.Cost, 1908.Value, 1893.Value, Aug. 18, 1888.Cost, 1874.Value, 1892.Value, 1892.ROCKHILL IRON & COAL CO.Bonds1st mortgage2d mortgageValue, June 11, 1914.Value, June 11, 1914.Value, 1889.Cost, 1909.Value, Mar. 1, 1913.Value, Mar. 1, 1913.Cost, 1909.Value, June 30, 1915.Value, Aug. 18, 1888.Value, 1888.Value, 1893.Value, 1892.SHADE GAP RAILROAD CO.BondsValueJune 11, 1914Value1889ValueMar. 1, 1913Value1893Value1892*792  The respondent on page 18 of his brief "admits error in using March 1, 1913, as a basic date, a position of necessity taken by him on the nonproduction of facts and proof of*4100  any other basic date, but submits that petitioners have not proven values in excess of those allowed by him as of March 1, 1913." He determined that the March 1, 1913, value of all the first-mortgage bonds was 60 per cent of par; of all the second-mortgage bonds, 40 per cent; and of all the stock, both common and preferred, of all companies, $10 per share.  In 1920 all the bonds were redeemed at par plus accrued interest, and all the stock of the petitioners was exchanged for bonds of the new company having a fair market value of 96 per cent of par.  It is, therefore, apparent at the outset that in all those cases where the securities disposed of in 1920 were acquired subsequent to March 1, 1913, the respondent is wrong in principle in comparing with the selling price an alleged March 1, 1913, value thereof.  It is also apparent that he has also committed error in those cases where the securities disposed of were acquired prior to March 1, 1913, and the cost or acquisition value was in excess of the March 1, 1913, value determined by him.  *4101 ;The petitioners contend that on March 1, 1913, there had been established no fair market price on any of the securities and that, taking into consideration all of the evidence, the fair market value of all of the securities on that date was at least equal to the cost or acquisition value.  Between 1873 and 1877, George B. Markle, Sr., as an original investor, purchased for cash and/or its equivalent 2,024 shares of the common stock of the Railroad Company at an average price of $41.277 per share and 4,167 shares of the common stock of the Rockhill Company at an average price of $47.45 per share.  He also purchased between those dates $100,000 par value of the Railroad Company first-mortgage bonds for $90,000 and $80,000 par value of the Rockhill Company first-mortgage bonds for $72,000, both purchases of bonds being at 90 per cent of par.  In 1883 he accepted as payment of interest on the first-mortgage bonds of both companies, then due and in default, 1,008 shares of preferred stock of the Railroad Company at $50 par value per share and 879 shares of preferred stock of the Rockhill Company*4102  at $50 par value per share.  He died August 18, 1888.  In accordance with his will part of the above securities passed to his heirs, the remaining petitioners herein, in 1889 and 1892 and 1893, and part was still held by his estate at the time all of the securities were disposed of in 1920.  In 1909 the petitioners accepted as payment of interest on the first-mortgage bonds of both companies then due and in default, second-mortgage bonds of both companies at par.  The petitioners contend that the original cost of the preferred stocks and second-mortgage bonds taken in *793  payment of liabilities owing to them should be found to be the par value of such stocks and bonds.  The relationship between a corporation which has mortgaged its properties and its bondholders is that of debtor and creditor.  The result of accepting preferred stock or second-mortgage bonds in payment of interest is in effect the same as if the corporation had paid its first-mortgage bondholders cash and they in turn purchased with that cash preferred stock and second-mortgage bonds in the corporation at par.  In *4103 , certain creditors were attempting to enforce liability upon the stockholders of a corporation in receivership on the ground that they had not fully paid for their stock under a statute providing for payment of capital stock in money.  The court said: So far as the stock was issued for property bought of Whitney and French, no question is here raised, but as to Jones it is said the turn made of the debt due to him from the company for work in constructing its furnaces was not a payment of money upon the capital stock within the meaning of section 14 of the act of 1848.  If the company had paid the money to Jones in discharge of the debt due him, and then Jones had handed back the same money as a payment upon his stock, no question could have arisen.  Precisely that was the substance of the transaction, although the form of passing the money was omitted.  We think the payment was sufficient.  We do not find from the evidence that at the time the securities were inherited in 1889, 1892, and 1893, the securities had depreciated any in value from the original cost price of such securities.  The question now remains as to what*4104  was the fair market value of all the securities on March 1, 1913, and June 11, 1914, and of the second-mortgage bonds of both companies and the common stock of the Railroad Company on June 30, 1915.  There were no actual sales of any consequence on or about those dates.  The petitioners argue that for this reason and the fact that the stocks of both companies were closely held there is nothing in the record to justify a finding that the stocks and bonds on March 1, 1913, June 11, 1914, and June 30, 1915, were worth less than was originally paid for them, since the intrinsic value of the assets and the book values of such securities were equal to at least the original cost thereof.  They cite , in which, at page 1029, we said: In the valuation of closely held stock the book value must serve as a basis, if the result, as stated by one court, is to be anything more than a "dignified guess." In , the court stated the following basis for valuing closely held securities: "The method adopted by the courts in arriving at the fair or clear market value*4105  of closely held securities is sound.  It is to value the corporate assets in the manner that a buyer would value them; to ascertain the cash value of the property which the shares represent, assigning to each share its proportionate worth.  The book value of stock is its intrinsic value.  If there have been no *794  sales, the assessor must necessarily fall back upon the book value as the nearest approximation to the fair market value.  In the absence of sales , the book value must be taken as the basis of computation.  Any other rule would be illogical, and create an impotent conclusion.  The use of the words "fair market," or "clear market" value, when applied to closely held stock, is meaningless.  Because there is no market to guide, such stock must be appraised at its value in money - its intrinsic worth.  It can only be compared and measured in money value, according to the assets as shown by the balance sheet, less liabilities.  The assets of the balance sheet is the inventory value.  Authorities in abundance support this method.  [Citing cases.] The method adopted in these cases has been followed in *4106 ." We do not think that the book values of the stocks are controlling in the instant case.  On March 1, 1913, there was outstanding a written option in which the stockholders were willing to sell their stocks at $10 per share.  They were also offered a flat cash price which, while netting the bondholders par plus accrued interest, would not have assured to stockholders anything over the $10, if that.  One of the officers of the Railroad Company (C. D. Jones) testified on cross-examination that he did not consider the $10 a fair market value at that time but, as all the stockholders were willing to sell at that price, we do not consider Mr. Jones' testimony as convincing that the fair market value of the stocks on March 1, 1913, was any more than the price at which all were willing to sell.  The record shows that the stock was held by financially strong people generally, so that the offer to sell at $10 could not be considered a forced offer on their part.  Part of Mr. Jones' testimony referred to above is as follows: Q.  You are familiar with the agreement of September 1913, are you?  A.  That is - somewhat familiar. *4107  Q.  Wherein the stockholders agreed to sell that stock for $10 a share?  A.  Yes.  Q.  At that time you considered that a fair market value, did you not?  A.  No.  Q.  You did not consider that a fair market value?  A.  No.  Q.  You were willing to sell it for much less?  A.  Sell it for less?  Q.  Yes; than the market value.  A.  On, not to sell it for less.  Q.  You were willing to sell it for $10 a share?  A.  Well, perhaps I agreed to do it at that time, but I didn't think it was right - didn't think it was a fair value.  Q.  But you agreed to do it?  You, as a stockholder, agreed to sell it at $10?  A.  Possibly I did.  I don't recall it.  Q.  Under the agreement of that time, when the option expired, you, together with the rest of the stockholders, left that stock in the hands of a trustee, pending negotiations for the sale to other banks or other purchasers at $10 a share? A.  Yes.  *795  Q.  And at that time, March 1, 1913, you were willing to sell your stock for $10 a share?  A.  I think, perhaps, I would have gone along with the rest at that time, whether I thought that was the right thing to do or not.  Q.  Of course, knowing*4108  what has happened since that time, you would not have been willing to sell?  A.  Sure not.  I say, I would have been willing to go along at that time, whether I thought it was the right thing to do or not.  Sometimes we do those things under a combination of circumstances.  Q.  You had never received any dividends on that stock, which you owned, prior to March 1st, 1913?  A.  Prior to that, no.  Q.  No return at all from the capital invested in those stocks?  A.  No; put right back into the property.  With respect to the fair market value of the bonds on March 1, 1913, we think the record clearly supports a finding of at least par value for both the first and second-mortgage bonds of both companies, and we so find.  The petitioners concede in their brief that the findings as to March 1, 1913, may also be said to apply to the dates of June 11, 1914, and June 30, 1915.  We are, therefore, of the opinion that the fair market value of both the common and preferred stocks of both companies on March 1, 1913, and June 11, 1914, was not in excess of $10 per share; that the fair market value of both the first and second-mortgage bonds on those dates was par; that the fair market*4109  value of the common stock of the Railroad Company on June 30, 1915, was not in excess of $10 per share; and that the fair market value of the second-mortgage bonds on June 30, 1915, was par.  In Docket No. 6208, there is no evidence as to the cost of the 55 shares of preferred stock of the Rock Hill Company purchased in 1908 or the $5,000 par value first-mortgage bonds of the Rockhill Company purchased in 1909.  Also, in Docket No. 17698, there is no evidence as to the cost of the 82 shares of the common stock of the Rockhill Company purchased in 1874.  In those three computations of gain or loss one of the factors necessary for an accurate determination is missing.  But we have here only the question of gain, and since the establishment of cost could in any event only tend to reduce the amount of gain, we believe the computation should be made by comparing the established March 1, 1913, values and selling prices.  . The deficiencies should be redetermined in accordance with the foregoing.  Reviewed by the Board.  Judgment will be entered on 20 days' notice, under Rule 50.ARUNDELL and MILLIKEN did not participate. *4110 Footnotes1. Securities acquired prior to 1888 were acquired by George B. Markle, Sr., individually.  He died Aug. 18, 1888. ↩2. By Frances A. Roberts individually.  She died Mar. 31, 1920. ↩