Before L. HAND, AUGUSTUS N. HAND and FRANK, Circuit Judges.
AUGUSTUS N. HAND, Circuit Judge.
The question to be determined on this appeal is whether the average mean selling price of $23,375 per share on the Montreal Stock Exchange for November 10 and 12, 1936 (November 11 being a holiday) should be taken as the value of stock of Electrolux Corporation in assessing the gift tax on 14,000 shares given by Charles G.Groff to his wife on November 11. On November 10, only 145 shares were sold on the Montreal Exchange and on November 12, 250 shares. During the whole of November 5,861 shares were sold on that Exchange; during December 5,927 shares; during January, 1937, 3,692 shares; during February 5,715 shares, and during March 3,550 shares. The mean average price between high and low during December was $23.75; during January $22.94; during February $21.75 and during March $18.75.
The parties stipulated for the trial that a member of the Montreal Exchange who was an expert familiar with trading in Electrolux stock, would testify that if the 14,000 shares had been added to the supply they could not have been sold within a week of November 11, 1936, for more than $17.25 per share and that $17.25 per share represented the fair market value of the block of stock on November 11, 1936. It was also stipulated that a member of a firm of brokers active on the Montreal Exchange would testify that there was no over-thecounter trading in this stock, that the trading in it on the Exchange was extremely small and that a broker could not have sold the 14,000 shares of stock at a higher price than $17.25 per share had he taken a period of not more than several months to complete the transaction. A broker named Grace testified that as large a block of Electrolux stock as 14,000 shares, would in his opinion have been worth between $16 and $18 per share as of November 11, 1936, if "peddled advantageously and without pressure on the market" over a period of from four to six months. Finally, Robert Horner, a dealer in securities, testified that the block of 14,000 shares testified that the block of 14,000 shares could have been sold on the Montreal Exchange at $17 or $18 per share, if disposed of within from four to eight months after November 11, but that such a block of stock might have been distributed in the American Market at $23 to $24 per share in a so-called "best efforts" deal by organizing a group of brokers to create interest in the stock and make a market, though their charges would have amounted to $3 per share. Under such an arrangement a dealer would contract to buy the stock at $23 or $24 per share and to take and pay for it over a period of a number of months. Horner gave as an example of a "best efforts" deal a purchase by himself of a block of some 20,000 shares of this very Electrolux stock in the year 1938 under an arrangement in which he had an option to purchase at the last sales price on the Montreal Exchange less a broker's fee of $2 per share. The court below regarded the reason for a fee of $2, rather than one of $3 per share, to be that the dealer who had charged $2 had only exercised an option and had not undertaken an absolute obligation to purchase.
Upon the foregoing record Judge Hincks held that "the prices paid on the Montreal Exchange for * * * small lots of the stock * * * on November 12, 1936 and during the ensuing period, were not a proper criterion of the value of the block of 14,000 shares on which the tax here in question was imposed. For if a block of such size had been unloaded on the Montreal Stock Market through brokers in the usual course within a narrow period of time, undoubtedly the prices recorded for the thin volume of actual transactions would have been substantially depressed." He made the specific findings set forth below.*fn1
The issue in the appeal by the administrator of the Collector is whether the sales price per share of the Electrolux stock on the Montreal Stock Exchange on or about the date of the gift is controlling as to the value of the gift.
Section 506 of the Revenue Act of 1932, c. 209, 47 Stat. 169, 26 U.S.C.A. Int. Rev. Code, § 1005, which dealt with gifts in property and was in force in November 1936, provided that: "If the gift is made in property, the value thereof at the date of the gift shall be considered the amount of the gift."
There was a relevant Treasury Regulation - Regulation 79, Article 19 (1936 Ed.), dealing with valuations for gift tax purposes as follows:
"Art. 19. Valuation of property. - (1) General - The statute provides that if the gift is made in property, the value thereof at the date of the tift shall be considered the amount of the gift. The value of the property is the price at which such property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell.The value of a particular kind of property is not to be determined by a forced sale price or by an estimate of what a whole block or aggregate would fetch if placed upon the market at one and the same time. Such value is to be determined by ascertaining as a basis the fair market value at the time of the gift of each unit of the property. For example, in the case of shares of stock or bonds, such unit of property is a share or a bond. All relevant facts and elements of value as of the time of the gift should be considered. Depreciation or appreciation in value subsequent to the time of the gift are not relevant factors and will not be considered. * * *"
"(3) Stocks and bonds. - The value at the date of the gift in the case of stocks and bonds, within the meaning of the statute, is the fair market value per share or bond on such date.
"The value of stocks and bonds listed upon a stock exchange shall be obtained by taking the mean between the highest and lowest quoted selling prices upon the date of the gift. If the gift was made on Sunday or on a legal holiday, the transactions of the next previous business day will govern. If there were no sales on the date of the gift, the value shall be determined by taking the mean between the highest and lowest sales upon the nearest date either before or after the date of the gift, if within a reasonable period thereof.
"If the value of a security cannot be determined by sales, or from bid and asked prices, as prescribed in the preceding provisions of this subdivision, the, in the case of corporate or other bonds, the value is to be arrived at by giving consideration to the soundness of the security, the interest yield, the date of maturity, and other relevant factors, and, in the case of shares of stock, upon the basis of the company's net worth, earning power, dividend-paying capacity, and all other relevant factors having a bearing upon the value of the stock. Complete financial and other data upon which the donor bases his valuation should be submitted with the return.
"In exceptional cases in which it is established by clear and convicing evidence that the value per bond or share of any security determined upon the basis of selling or bid and asked prices as herein provided does not reflect the fair market value thereof, other relevant facts and elements of value will be considered in determining the fair market value. The size of the gift of any security is not a relevant factor and will not be considered in such determination."
It is common knowledge that sales of small lots of stock on an exchange afford no reliable criterion of value per share for large lots which if disposed of rapidly are likely to flood the market and thus depress the price. Every skillful broker who wishes to dispose of a block of stock larger than the market is likely to absorb without sacrifice in price will liquidate slowly by sales of small units. If he disposes of the stock too slowly, he runs the risk that a recession in current prices may occur and that the prices of his sales may suffer on that account. If he sells too quickly, he is likely to suffer from forcing an amount of stock on the market which exceeds the normal demand, so that purchasers will only but at less than going rates. That "the size of the gift of any security is not a relevant factor" for consideration in determining market value, as the Regulations in force in 1936 prescribed, is quite contrary to experience. If the block is large enough and the market thin, size under ordinary circumstances will certainly count. ...