Tex-Penn Oil Co. v. Commissioner

TEX-PENN OIL COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. F. B. PARRIOTT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. M. L. BENEDUM, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Tex-Penn Oil Co. v. Commissioner Docket Nos. 11539, 30989, 30990. United States Board of Tax Appeals 28 B.T.A. 917; 1933 BTA LEXIS 1063; August 8, 1933, Promulgated *1063 1. Upon the facts developed in these cases it is concluded, (1) that petitioner, Tex-Penn Oil Co., received both cash and stock of the Transcontinental Oil Co. as consideration for its assets, and (2) that part of the cash ostensibly paid individuals for lease interests was in fact consideration for their stock in the Tex-Penn Oil Co. Accordingly, the sole consideration received by Tex-Penn for its assets and by the stockholders for their stock, was not stock or securities of Transcontinental, and it is held, that the transaction does not come within those portions of section 202(b) of the Revenue Act of 1918 and article 1567 of Regulations 45 which provide for the nonrecognition of gain or loss from certain types of exchanges, and consequently any gain realized by either Tex-Penn or its stockholders is subject to tax. 2. In the transaction herein involved, two of the stockholders of the Tex-Penn Oil Co. in 1919 received in excess of 50 percent of the total authorized capital stock of the Transcontinental Oil Co. Prior to the receipt of the stock these two agreed with the bankers who had agreed to purchase a block of Transcontinental stock and proposed to form a syndicate*1064 to aid in the marketing of such block, that they would not sell or otherwise dispose of their controlling interest or any part of it during the period of operation of the syndicate. It was originally contemplated that the syndicate would terminate in October 1919, but its duration was extended and it was not terminated until January 8, 1920. The two stockholders did not sell, pledge, or otherwise dispose of any of their Transcontinental stock prior to sometime in February 1920. Held, that the restrictive agreement did not operate to place the stock beyond the reach of the taxing statute to the extent of its fair market value at the time of receipt by petitioners. 3. Fair market value of Transcontinental stock, constructively received by Tex-Penn for its assets, but by agreement issued directly to two stockholders of Tex-Penn, determined. 4. Five individuals owned a seven-eighths working interest in oil and gas leases and brought in a discovery well thereon in 1918. Thereafter they assigned a two-eighths interest to a corporation, retaining to themselves the other five eighths. The corporation thereafter continued the development of the lease and brought in other wells. *1065 The corporation and the individuals sold all of their interests in 1919. Held, that the two of the individuals who are petitioners here are entitled to have their surtax on the gain realized on the sale computed under the limitation provision of section 211(b) of the Revenue Act of 1918. John W. Davis, Esq., Montgomery B. Angell, Esq., Weston Vernon, Jr., Esq., J. C. Adams, Esq., and Harry Friedman, Esq., for all the petitioners. John S. Weller, Esq., and John O. Wicks, Esq., appearing in addition for petitioner Benedum. Brooks Fullerton, Esq., John D. Foley, Esq., and Ottomar Hamele, Esq., for the respondent. ARUNDELL *918 BEFORE ARUNDELL, VAN FOSSAN, AND LEECH. In the deficiency notices sent to these petitioners the respondent proposed deficiencies for the year 1919 as follows: Tex-Penn Oil Co $22,067,960.03 F. B. Parriott 9,797,662.78 M. L. Benedum 12,007,315.11 By amended answers in the cases of the two individuals, Parriott and Benedum, the respondent asserted increases in the deficiencies and prayed that the deficiency in the case of Parriott be redetermined to be $12,156,005.86, and*1066 in the case of Benedum, $24,160,673.77. After the evidence was in, the respondent submitted revised computations proposing deficiencies as follows: Tex-Penn Oil Co $5,189,103.68 F. B. Parriott 2,019,559.48 M. L. Benedum 2,870,337.73 The revised computations take into account the fact that Tex-Penn has been dissolved and propose that Parriott and Benedum will assume *919 its tax liability in the rpoportions of $1,672,303.83 by Parriott and $3,516,799.85 by Benedum. On this theory respondent has reduced by those amounts the income otherwise computed as received by these two from the receipt of Transcontinental Oil Co. stock on surrender of their Tex-Penn stock. It is understood that Parriott and Benedum will be required to assume whatever deficiency may be determined against Tex-Penn by reason of their receiving the Transcontinental stock to which Tex-Penn was entitled for its assets, thus leaving Tex-Penn without means of satisfying its tax liability. This, however, is not an issue in these cases. The three cases arise out of a corporate reorganization whereby in 1919, a newly organized corporation, the Transcontinental Oil Co., acquired among*1067 other properties all the assets of Tex-Penn Oil Co., in which Parriott and Benedum were stockholders. There are three main issues: (1) Whether the reorganization was of the kind defined in section 202(b), Revenue Act of 1918, and article 1567, Regulations 45, upon which neither gain nor loss to the corporations or stockholders is recognized. (2) Assuming that the reorganization was one giving rise to gain or loss, whether income arose from the receipt of the stock by petitioners in view of a restriction on the sale or other disposition of the stock. (3) The fair market value of the Transcontinental stock received in the reorganization. There were originally several minor issues, some of which have been abandoned, and two others, relating to the liquidation of Parriott's stock in the Pittsburgh-Texas Oil & Gas Co. and Benedum's stock in the Riverside Western Oil Co., are decided in this report. By amended answer, counsel for respondent alleged error in applying the surtax limitation in computing the tax on the profit realized by Parriott and Benedum on the sale of their interests in the Duke-Knoles oil and gas leases. This issue is decided in this report. Upon motion of counsel*1068 for petitioners, a tentative severance of issues was granted and a hearing was had thereunder confined to the first two issues above set out and the so-called minor issues. Thereafter, and without decision of the issues first heard, the proceedings were set down for further hearing on all questions in dispute under the issues raised by the pleadings. Upon motion of counsel for respondent the three proceedings were consolidated. By stipulation filed the parties agreed to offer their evidence in the case of Benedum, Docket No. 30990, and further that the evidence in that case should be taken as the evidence in the other two. FINDINGS OF FACT. (1) Tex-Penn Oil Co., the petitioner in Docket No. 11539, in 1919 was a corporation existing under the laws of West Virginia, with *920 its principal office at Pittsburgh, Pennsylvania. It was dissolved in June 1920, but under West Virginia statutes its corporate existence continues for the purpose of suing and being sued and otherwise protecting its rights. (2) F. B. Parriott, petitioner in Docket No. 30989, is a resident of Tulsa, Oklahoma. (3) M. L. Benedum, the petitioner in Docket No. 30990, is a resident of Pittsburgh, *1069 Pennsylvania. (4) During 1917 and the early part of 1918, Benedum and Parriott and three associates, W. E. Wrather, J. L. Kirkland, and J. B. Lantz, acquired some 31 undeveloped oil and gas leases covering between 3,500 and 4,000 acres of land lying chiefly in Comanche County and partly in Erath and Eastland Counties, Texas. (5) The leases so assembled were typical oil and gas leases reserving to the lessor a one-eighth royalty. (6) The respective undivided interests of the five individual lessees in the 31 leases were as follows: M. L. Benedum 6/16ths of 7/8ths F. B. Parriott 3/16ths of 7/8ths J. L. Kirkland 3/16ths of 7/8ths W. E. Wrather 2/16ths of 7/8ths J. B. Lantz 2/16ths of 7/8ths The petitioner Benedum's interest in these leases was carried in the name of the petitioner Parriott, who acted as Benedum's agent in this respect. (7) At the time the above leases (hereinafter called the Duke-Knoles leases) were acquired by the five individuals, the area in which they were located was "wildcat" territory. Sometime during 1915 or 1916 a well had been drilled to a depth of 1,600 feet, with a showing of oil and gas, at the town of Desdemona, *1070 approximately a mile to the north of the northern boundary of the Duke-Knoles leases, but no oil in paying quantities had been discovered in the immediate vicinity of the duke-knoles leases. (8) In the spring of 1918 drilling operations were commenced on the Duke-Knoles leases, and on September 2, 1918, the discovery well known as Duke Well No. 1 was brought in on the J. N. Duke lease with an initial daily production of 500 barrels. The filed surrounding the discovery well was known for a time as the Duke-Knoles Pool, but later as development spread to the north toward the town site of Desdemona it became known as the Desdemona Field. (9) The initial work in developing the Duke-Knoles leases was directed by Parriott, acting as agent for the five individuals. Money necessary for exploration and drilling was contributed by the *921 five individuals in accordance with their respective interests in the leases. (10) On or about October 31, 1918, the five individuals caused to be organized the Tex-Penn Oil Co. (hereinafter called Tex-Penn) for the purpose of taking over the development and operation of the Duke-Knoles leases. The authorized capital stock of Tex-Penn was*1071 $2,000,000, consisting of 80,000 shares of common stock of a par value of $25 per share. Parriott became president of Tex-Penn and Wrather, Lantz and Kirkland became directors. (11) Upon the organization of Tex-Penn, the five individuals subscribed to 4,000 shares of its stock at par, the subscription being made ratably in accordance with their respective interests in the Duke-Knoles leases. Cash in the amount of $100,000 was paid in for the stock and was immediately paid back to the five individuals by Tex-Penn to purchase from them an interest, hereinafter called the two-eighths interest, in the Duke-Knoles leases. (12) The two-eighths interest referred to in the preceding paragraph was assigned to Tex-Penn by an instrument dated October 31, 1918. The first portions of this instrument purported to convey the entire interests of the lessees in the Duke-Knoles leases. But under subsequent provisions there was reserved to the individuals a five-eighths interest with a further provision that one half of the proceeds of said reserved five-eighths interest (or five sixteenths of the proceeds) should be paid to Parriott to be used to make up any deficit in the operations of Tex-Penn. *1072 The instrument further reserved to the five individuals the right to purchase within five years the remainder of Tex-Penn stock at par. In the event such purchase was made Tex-Penn was to have the right to acquire from the individuals their reserved five-eighths interest for the sum of $1. (13) Contemporaneously with the execution of the assignment of October 31, 1918, Parriott, individually and as agent for Benedum, and Kirkland, Lantz, and Wrather, entered into a trust agreement among themselves under which Parriott was designated to represent the five individuals in carrying out the above assignment of October 31, 1918, and to handle the accounting required by that agreement. The trust agreement provided that a duplicate should be served upon Tex-Penn, authorized it to deal with Parriott with the same force and effect as if Parriott were the only party to the assignment of October 31, 1918, and empowered Parriott to receive the moneys derived from the reserved interest owned by the five individuals. The trust agreement further required Parriott to invest one half of the moneys so received, after deducting enough to pay Federal and state income taxes, in stock of Tex-Penn, *1073 and to distribute such stock in the following proportions: F. B. Parriott, nine sixteenths (six sixteenths *922 belonging to Benedum and three sixteenths to Parriott); J. L. Kirkland, three sixteenths; J. B. Lantz, two sixteenths, and W. E. Wrather, two sixteenths. (14) The debits and credits passing between Tex-Penn, on the one hand, and Parriott as agent for the individuals, on the other, were thereafter carried in a set of accounts maintained by Parriott and known as "F. B. Parriott, Attorney" accounts. (15) From time to time, during the latter part of 1918 and the first part of 1919, Parriott, acting for the five individuals under and pursuant to the assignment of October 31, 1918, subscribed for an aggregate of 9,120 shares of Tex-Penn stock for cash at par, paying therefor $228,000, which shares, plus the 4,000 shares originally issued, made the total stock outstanding 13,120 shares. The amounts paid to Tex-Penn for such stock were used by Tex-Penn in the development of the Duke-Knoles leases. (16) Following its organization in October 1918, Tex-Penn proceeded with the orilling of additional wells on the Duke-Knoles leases. On or about December 20, 1918, a well*1074 known as Knoles Well No. 1, located about 800 feet southwest of the Duke Well No. 1, came in with an initial daily production of approximately 500 barrels of oil. This well was deepended in January 1919, and the new initial production from such greater depth approximated 6,000 barrels. Tex-Penn drilled other wells on the Duke-Knoles leases, and by July 30, 1919, 12 wells had been completed upon the properties. The dates of completion and initial production of these wells are as follows: Well Completion date Initial production Bbls. J. N. Duke #1 9/2/18 [600] J. N. Duke #2 6/7/19 [120] J. N. Duke #3 6/9/19 [130] G. W. Knoles #1 12/28/18 1 6,000 G. W. Knoles #2 6/25/19 [530] G. W. Knoles #3 6/3/19 [100] N. E. Payne #1 2/2/19 (Gas) S. E. Snodgrass #1 2/19/19 (Gas) G. W. Crowell #1 6/6/19 (Gas) G. W. Crowell #2 6/4/19 [25] G. W. Crowell #3 7/18/19 [50] Mary Lewis #3 7/30/19 Dry PLANS FOR CONSOLIDATION OF VARIOUS PROPERTIES. (17) Early in 1919, Benedum and Parriott conceived the idea of consolidating*1075 various oil producing and refining properties and distributing facilities into a single company, so as to constitute an integrated unit with facilities for the production, refining and distribution of oil and gas products. At that time, Benedum and Parriott were interested in three other corporations known as Riverside *923 Eastern Oil Co., Riverside Western Oil Co., and Pittsburgh-Texas Oil & Gas Co. It was proposed to consolidate the properties of these companies with the properties of the Tex-Penn Co. and also with the reserved five-eighths individual interest in the Duke-Knoles leases. It was contemplated that the main supply of crude oil for the new company was to eome from the Duke-Knoles leases. (18) The Riverside Eastern Oil Co. (hereinafter referred to as Riverside Eastern) was a corporation existing under the laws of Delaware, and had the following wholly owned corporate subsidiaries: Gasoline Supply Co., Gasoline Distributing Co., and Riverside Oil Co. of Illinois. Riverside Eastern and its subsidiaries were engaged chiefly in the manufacture of casinghead gasoline and in the marketing of refined oil products. (19) The Riverside Western Oil Co. (hereinafter*1076 referred to as Riverside Western) was a corporation existing under the laws of West Virginia, and has one wholly owned corporate subsidiary, the Gasoline Supply Co. (Midwest). Riverside Western and its subsidiary were engaged chiefly in the manufacture of casinghead gasoline and in the marketing of refined oil products. (20) The Pittsburgh Texas Oil & Gas Co. (hereinafter referred to as Pittsburgh-Texas) was a corporation existing under the laws of West Virginia. It owned undeveloped oil and gas leases covering a large amount of acreage in various counties in Texas, several small oil and gas leases in Muskogee County, Oklahoma, and a refinery located at Boynton, Oklahoma. (21) In order to accomplish the merger of the various companies and to provide working capital for the new company, Benedum began negotiations with George W. Kendrick, III, of E. W. Clark & Co., bankers of Philadelphia. Kendrick brought in Prichitt & Co., bankers of New York, and plans were made for the organization of a new company to be known as the Transcontinental Oil Co. (hereinafter referred to as Transcontinental), to which all the above properties were to be transferred. (22) In the course of his*1077 negotiations with E. W. Clark & Co. and Prichitt & Co. (hereinafter referred to as the bankers), Benedum was requested to obtain from his four associates authority to deal for them in the proposed merger. Accordingly, on June 2, 1919, Parriott went to De Leon, Texas, and obtained the following letter: Mr. M. L. BENEDUM, Pittsburgh, Pa. DEAR SIR: You are hereby authorized and directed to sell the entire holdings of the Tex-Penn Oil Company together with the individual interest held by us in the properties operated by the Tex-Penn Oil Company for the net sum of Twelve Million Dollars ($12,000,000), such sale to be made on or before the *924 fifteenth day of July, 1919, the undersigned parties hereby agreeing to accept their pro rata of the net proceeds of such sale as full and adequate consideration for their entire holdings in the Tex-Penn Oil Company as well as for their individual interests in the properties operated by said company. We hereby agree to deliver adequate transfers of title to you or your assigns upon the payment of the above mentioned purchase price, either in cash or in such deferred payments as shall later be mutually agreed upon. Witness our*1078 hand and seal at De Leon, Texas, this second day of June, 1919. J. L. KIRKLAND (SEAL) J. B. LANTZ (SEAL) W. E. WRATHER (SEAL) F. B. PARRIOTT (SEAL) (23) With this letter in hand Bendum proceeded with his negotiations with the bankers. The original estimate of cash necessary to complete the merger was $23,000,000, which was to be paid in to Transcontinental for a block of stock to be acquired by the bankers. The sum of $23,000,000 was to be distributed as follows: $8,500,000 was to remain with Transcontinental as working capital; $12,000,000 was to go to the five individual lessees, and $1,250,000 to each of the Riverside Eastern and Riverside Western companies to pay off their preferred stock at par. (24) The bankers were unable to raise the $23,000,000 originally contemplated, and advised Benedum that they could raise only $20,000,000, thus necessitating a reduction of $3,000,000 in the cash requirements, if the deal was to go through. The bankers insisted that approximately $8,500,000 cash ramin in the new company as working capital. The $2,500,000 to be paid to the Riverside companies could not be reduced, since that amount was necessary to retire the preferred*1079 stock of these companies at par. Kirkland, Lantz, and Wrather, who had authorized Benedum, by the letter of June 2, 1919, to dispose of the entire seven-eights interest in the Duke-Knoles leases and their Tex-Penn stock for $12,000,000, would not consent to a reduction in their share of the proposed $12,000,000 figure, nor would they accept stock of the new company in lieu of cash, since they did not wish to continue as stockholders in the new venture. Benedum's authority from Parriott, Kirkland, Lantz, and Wrather contained in the letter of June 2, 1919, was good only until July 15, 1919, and, in order to put through the deal, Benedum consented to assume and did assume the entire reduction of $3,000,000 out of his share of the cash. (25) On June 17, 1919, Benedum entered into an agreement with the bankers which recited that Transcontinental was being organized with an authorized capital of 2,000,000 shares of no par capital stock, and was to acquire all of the properties of Pittsburgh-Texas, the two Riverside companies, all the properties of Tex-Penn, and the outstanding five-eighths interest in Duke-Knoles leases. It was *925 provided in the agreement that there should*1080 not be "any outstanding objecting minority interests in the Tex-Penn Company properties, or as to the fractional working interests" in the Duke-Knoles leases. Under this agreement the bankers agreed to purchase 500,000 shares of Transcontinental stock at $40 a share, amounting in the aggregate to $20,000,000; they undertook to organize a syndicate to purchase the 500,000 shares; the entire proceeds of the sale were to be turned over to Transcontinental "to be used by it as working capital and for the acquirement of its properties"; and the bankers were to receive 50,000 shares of Transcontinental stock for their services in financing the company. Simultaneously, but in a separate instrument, Benedum agreed with the bankers to grant the latter an option to purchase from him at any time prior to January 31, 1920, 200,000 additional shares of Transcontinental stock at $1 per share. (26) The two agreements referred to in the preceding paragraph were replaced by a modified agreement between the bankers and Transcontinental bearing the same date, June 17, 1919, which was executed by Transcontinental July 26, 1919. This second agreement in the main was the same as the previous ones*1081 of the same date, the only substantial difference being that the bankers were to receive 25,000 shares as "bankers' commission", and were to have the right to purchase 225,000 additional shares at $1 per share. (27) On June 19, 1919, the bankers organized a syndicate for the marketing of Transcontinental stock, the syndicate agreement reciting, in so far as material here, that they had contracted to purchase 500,000 shares at $40 per share, that they were to be sole managers of the syndicate, which was to continue until October 18, 1919, unless sooner terminated, but with an option to extend it for 90 days. (28) The Transcontinental Oil Co. was incorporated under the laws of Delaware on June 28, 1919, with a capital stock of 2,000,000 shares of no par value. Benedum and Parriott became directors of Transcontinental. (29) Under the laws of Delaware, Transcontinental was not required to fix in its certificate or on its books of account, or otherwise, an amount of capital or an amount of stock issued which might not be impaired by the declaration of dividends. ACQUISITION OF VARIOUS PROPERTIES BY TRANSCONTINENTAL. (30) During the course of the negotiations leading up to*1082 the acquisition of the various properties by Transcontinental, one J. M. Holliday acted as agent for the bankers and for Transcontinental. Parriott acted as agent for the five individuals and Tex-Penn. On June 18, 1919, Holliday made a written offer to Riverside Eastern *926 to acquire all of its assets except bills and accounts receivable for $1,250,000 cash and 41,666 shares of Transcontinental stock. On the same date he made an offer to Riverside Western to acquire all of its assets except bills and accounts receivable for $1,250,000 cash and 41,667 shares of Transcontinental Stock. On July 7, 1919, he made an offer to Pittsburgh-Texas to acquire all of its assets subject to its liabilities for 158,833 shares of Transcontinental stock. The offers so made were duly accepted by the several corporations and the agreed considerations were paid by Transcontinental. There is no issue concerning the acquisition of these properties. (31) On July 12, 1919, Kirkland, Lantz, and Wrather addressed two letters to Parriott. These letters in the order of time of writing, are as follows (with the points of difference italicized): PITTSBURGH, PA., July 12, 1919. Mr. F. B. *1083 PARRIOTT, Benedum-Trees Building, Pittsburgh, pa. DEAR MR. PARRIOTT: In connection with the assignment we have executed today, transferring to the Transcontinental Oil Company all of our right, title and interest in the oil and gas leases on lands in Comanche County, Texas, we are assigning and hand you herewith our shares of stock in the Tex-Penn Oil Company. It is understood that if, for any reason, the proposed organization of the Transcontinental Oil Company should not go through, this stock will be returned to us. We understand that you and Mr. Benedum are transferring to the Transcontinental Oil Company a considerable amount of property that you and he own, either directly or through stock ownership, including your interests in the Tex-Penn leases, and that you and he are to be paid for all these properties partly in cash and partly in stock of the Transcontinental Oil Company. Our entire interests in the stock of the Tex-Penn Company and in the leases covered by the assignment above referred to are paid for in full by the $5,250,000 that is to be paid us in this transaction. Yours very truly, W. E. WRATHER J. L. KIRKLAND J. B. LANTZ PITTSBURGH, PA. *1084 , July 12th, 1919. Mr. E. B. PARRIOTT, Benedum-Trees Building, Pittsburgh, pa. DEAR MR. PARRIOTT: In connection with the assignment we have excuted today, transferring to the Transcontinental Oil Company all of our right, title and interest in the oil and gas leases on lands in Comanche County, Texas, we are assigning and hand you herewith our shares of stock in the Tex-Penn Oil Company, which we hereby agree to sell to you and M. L. Benedum jointly for a consideration of $5.00 payable to each of us. If for any reason the proposed organization of the Transcontinental Oil Company should not go through, this stock is to be returned to us. We understand that you and Mr. Benedum are transferring to the Trans continental Oil Company a considerable amount of property that you and he own, either directly or through stock ownership, including your interests in the Tex-Penn leases, and that you and he are to be paid for all these properties *927 partly in cash and partly in the stock of the Transcontinental Oil Company. Our entire interests in the stock of the Tex-Penn Oil Company and in the leases covered by the assignment above referred to are paid for in full*1085 by the considerations agreed upon between us. Yours very truly, W. E. WRATHER J. B. LANTZ J. L. KIRKLAND (32) Following the assignment by Kirkland, Lantz, and Wrather of their Tex-Penn stock to Benedum and Parriott, the stock was transferred on the Tex-Penn stock book on July 15, 1919, from the names of Kirkland, Lantz, and Wrather to the joint names of Benedum and Parriott. At a special meeting of the stockholders of Tex-Penn, held July 22, 1919, new directors were elected to take the places of Kirkland, Lantz, and Wrather, and in this connection, the minutes stated that the three "had ceased to be stockholders in the company." (33) Wrather, Lantz and Kirland had frequent consultations regarding the sale of their Tex-Penn stock and individual interests in the Duke-Knoles leases. They were willing to have the transaction take the form set out in the second letter of July 12, 1919, inasmuch as under that form they were to receive the $5,250,000 theretofore agreed upon as adequate consideration for both their stock and lease interests, but with the condition attached that in the event the transaction was not consummated so as to net them the cash demanded the stock*1086 was to be retransferred. (34) On July 14, 1919, Kirkland, Lantz, and Wrather delivered the following letter to Parriott: F. B. Parriott, President S. E. Drum, Asst. Sec'-Treas. TEX-PENN OIL COMPANY BENEDUM-TREES BUILDING Pittsburgh, Pa. JULY 14TH, 1919. Mr. F. B. PARRIOTT, Benedum-Trees Building, Pittsburgh, Penn'a. DEAR MR. PARRIOTT: We have this day executed, together with the Tex-Penn Oil Company and yourself, and assignment, transferring to the Transcontinental Oil Company, all our right, title and interest in certain oil and gas leases on lands in Comanche and other counties in the State of Texas, held by us in common. We have also assigned and transferred to you all of our stock in the Tex-Penn Oil Company. The assignment of the leases is delivered to you in escrow and is to be delivered by you to the Transcontinental Oil Company only upon payment to us, or to you for our account, of sums aggregating Five Million Two Hundred Fifty Thousand ($5,250,000) Dollars, which are to be paid to us as follows: J. L. Kirkland $2,250,000.00 J. B. Lantz 1,500,000.00 W. E. Wrather 1,500,000.00 *928 It is understood that*1087 settlement will be made on or before August 1st, 1919. In case of default in payment of above sums by August 1st, 1919, the assignment, together with our shares of stock are to be returned to us. In order that the Tex-Penn Oil Company may be free from debt, we hereby authorize you to apply and deduct from our distributive shares, sufficient of the above amount, not exceeding, however, seven-sixteenths of Five Hundred Thousand ($500,000.00) Dollars, to pay the debts and obligations of the company, after applying thereto its bills and accounts receivable and stocks of oil on hand as of July 1st, 1919; it being understood that you are to bear your nine-sixteenths proportion of such liquidation. Yours very truly, W. E. WRATHER J. L. KIRKLAND J. B. LANTZ (35) The assignment referred to in the above letter of July 14, 1919, was executed on that date and by its terms Tex-Penn and the individual owners assigned all their interests in the Duke-Knoles leases to Transcontinental for a recited consideration of $1,000, and "other valuable consideration." In the assignment the grantors covenanted that the property thereby transferred was "free and clear from all liens and encumbrances. *1088 " (36) During the negotiations it was expressly understood and agreed that the Tex-Penn assets were to pass to Transcontinental free and clear of all liabilities. Tex-Penn did not have on hand, or available under the agreement of October 31, 1918, sufficient funds to meet its outstanding liabilities, and in order to supply the necessary funds the five individuals entered into the agreement set forth in the last paragraph of the letter of July 14, 1919. (37) In order to ascertain what amount would be necessary to pay the Tex-Penn debts, so that the properties could pass free and clear of liabilities, Parriott directed Ehrentraut, the Tex-Penn auditor, to make an estimate of the amount necessary for this purpose, and Ehrentraut reported that approximately $350,000 would be required. (38) On July 24, 1919, Tex-Penn stock issued amounted to 13,120 shares consisting of 4,000 shares originally subscribed, and the 9,120 shares subsequently subscribed for by Parriott on behalf of the five individuals. Thus Tex-Penn had unissued at that time 66,880 shares of its authorized capitalization of 80,000 shares. On that date Tex-Penn accepted an offer from Benedum and Parriott for the remainder*1089 of the stock and actually issued the remaining 66,880 shares to Benedum and Parriott jointly in exchange for the assignment of oil and gas leases covering approximately 33,000 acres in Sutton and Oldham Counties, Texas, and an option to acquire a four-fifths working interest in certain undeveloped oil leases and oil properties in South America. *929 (39) As stated above in the negotiations preceding the acquisition of the various properties, Transcontinental and the bankers financing the consolidation were represented by J. M. Holliday. Holliday also acted on behalf of Transcontinental and the bankers in getting the properties together and disbursing the consideration to be paid by the company for such properties, while Parriott represented the five individuals and Tex-Penn in the negotiations immediately preceding the merger, and in accomplishing the transfer of the properties to Transcontinental. (40) Under date of July 24, 1919, Benedum and Parriott, as parties of the first part, and Holliday, as party of the second part, entered into an agreement reciting in the opening paragraphs that Transcontinental was being organized to acquire certain properties; that Holliday*1090 was arranging to cause the transfer of such properties to Transcontinental; that Benedum and Parriott were to transfer or cause to be transferred certain properties to Transcontinental for which they "will ultimaterly receive $3,400,000 in cash, and * * * 1,007,834 shares out of a total of 2,000,000 shares" of Transcontinental stock. The body of the agreement is as follows: 1. The parties of the first part will transfer to the Transcontinental Oil Company all their right, title and interest in and to the leases enumerated in the schedule hereto attached, marked "Schedule A", in the so-called "Duke-Knoles Pool", for and in consideration of the sum of Three Million Four Hundred Thousand Dollars ($3,400,000) in cash, and the party of the second part will, upon the transfer of such right, title and interest to said corporation, pay or cause to be paid said cash to the parties of the first part. 2. The parties of the first part will cause the Tex-Penn Oil Company to agree to transfer and to transfer to the Transcontinental Oil Company all of its property and assets for and in consideration of Three Hundred and Fifty Thousand Dollars ($350,000) in cash and One Million Seven Thousand*1091 Eight Hundred and Thirty-four (1,007,834) shares of the capital stock of the Transcontinental Oil Company, and the party of the second part will upon the transfer of such property and assets, pay or cause to be paid to said Tex-Penn Oil Company said cash and said shares. The Tex-Penn Oil Company is to receive credit for the oil on hand as of July 1st, 1919 and the cash and equivalent items and accounts and bills receivable as of that date, and it will pay all obligations arising out of its operations of its interest in the "Duke-Knoles Pool." Furthermore the Transcontinental Oil Company will take over at cost price material and equipment delivered on and after July 1st, 1919. 3. The parties of the first part will cause the owners of the outstanding seven-sixteenths (7/16ths) of a five-eighths (5/8ths) working interest in the oil leases on tracts of developed oil lands in Comanche County, Texas, known as the "Duke-Knoles Pool", enumerated in "Schedule A" hereto attached, to transfer to the Transcontinental Oil Company all of their said seven-sixteenths (7/16ths) of said five-eighths (5/8ths) working interest for a consideration of Five Million Two Hundred and Fifty Thousand Dollars*1092 ($5,250,000) cash, and the party of second part will, upon the transfer of such right, title and interest, pay to said owners said cash consideration. *930 4. This agreement shall be binding upon and enure to the benefit of the parties hereto and their respective executors, administrators and assigns. IN WITNESS WHEREOF, the parties have hereunto set their hands and seals the day and year first above written. M. L. BENEDUM (SEAL) F. B. PARRIOTT (SEAL) J. M. HOLLIDAY (SEAL) Witness: GEORGE J. WOLF [Attached schedule of leases omitted.] (41) On the same day, namely, July 24, 1919, Holliday addressed the following letter to Benedum and Parriott, which the latter accepted: PITTSBURGH, PA., July 24th, 1919. M. L. BENEDUM and F. B. PARRIOTT, Pittsburgh, pa. GENTLEMEN: Referring to the agreement between us of this date herewith, in which you undertake to transfer, or cause to be transferred, to the Transcontinental Oil Company of all of your right, title and interest in and to the leases in the "Duke-Knoles Pool" and all of the property and assets of the Tex-Penn Oil Company, in which you own the entire Capital Stock, for an aggregate consideration*1093 of 1,007,834 shares of the stock of the Transcontinental Oil Company and $3,400,000 in cash, I beg to state and confirm our agreement that you will also cause the holders of the outstanding seven sixteenths (7/16ths) of the Five-Eighths (5/8ths) working interest in the leases in the "Duke-Knoles Pool" to transfer their interests to the Transcontinental Oil Company in consideration of $5,250,000 in cash. Please confirm this understanding. Very truly yours, /s/ J. M. HOLLIDAY Accepted: /s/ M. L. BENEDUM /s/ F. B. PARRIOTT (42) On July 24, 1919, Holliday addressed the following offer to the Tex-Penn Co.: PITTSBURGH, PA., July 24, 1919. TEX-PENN OIL COMPANY, Benedum-Trees Bldg., Pittsburgh, pa. GENTLEMEN: A corporation, named "Transcontinental Oil Company" is being organized under the laws of Delaware for the purpose of acquiring and operating properties and assets of several corporations and individuals, so that the new corporation will represent a consolidation of such properties. Pending the organization of said corporation, I have been arranging to acquire and transfer, or cause to be transferred, to the new corporation when organized, the various properties*1094 and businesses that such corporation is being organized to acquire. To this end, I hereby offer to purchase all of the properties and assets of the Tex-Penn Oil Company for a consideration of Three Hundred and Fifty Thousand Dollars ($350,000) Dollars in cash and One Million Seven Thousand Eight Hundred and Thirty-four (1,007,834) shares of the capital stock of the Transcontinental Oil Company, without nominal or *931 par value, to be issued to your company or to your nominees, full paid and non-assessable. It is a condition of this offer that the property and assets to be conveyed by your company will include among other things, assignments of leases upon approximately thirty-three thousand (33,000) acres of oil lands in Sutton and Oldham counties, Texas, which you have recently acquired from M. L. Benedum and F. B. Parriott, and also all your right, title and interest in and to an agreement dated June 24, 1919, between Messrs. Benedum and Parriott, of one part, and Mr. J. W. Leonard and L. Restrepo, of the other part, which agreement, I understand, has been assigned to you by Messrs. Benedum and Parriott, for the acquisition of a four-fifths (4/5) interest, to be taken*1095 over in corporate form, in and to lands or oil leases on lands aggregating approximately eight hundred thousand (800,000) acres of land in the Republic of Columbia. The Tex-Penn Oil Company is to receive credit for the oil on hand as of July 1st, 1919, and the cash and equivalent items and accounts and bills receivable as of that date, and it will pay all obligations arising out of its operation of its interest in the "Duke-Knoles Pool". Furthermore the Transcontinental Oil Company will take over at cost price material and equipment delivered on and after July 1st, 1919. Yours very truly, J. M. HOLLIDAY. (43) The above offer was accepted at a special meeting of the board of directors of the Tex-Penn Co. held July 25, 1919, at which the following resolutions were adopted: RESOLVED, that the offer of Mr. J. M. Holliday contained in the letter be submitted to and spread upon the minutes of this meeting to purchase all of the properties and assets of this company for three hundred and fifty thousand dollars ($350,000) cash and one million seven thousand eight hundred and thirty-four (1,007,834) shares of stock of the Transcontinental Oil Company, without nominal or par value, *1096 full paid and nonassessable, be and the same is hereby accepted, and the officers of this company be, and they are authorized and directed to execute for and in the name of this company, and as its act and deed, all deeds, assignments, bills of sale and other instruments of transfer, as may be necessary or proper to fully transfer and convey to said J. M. Holliday, or his nominee, all of the property and assets of this company, upon the terms and conditions set forth in the offer of J. M. Holliday aforesaid, and to take all such further action as may be necessary or comvenient [sic] to fully carry out the terms and purpose of this resolution. RESOLVED FURTHER, that upon the transfer of all the property and assets to J. M. Holliday, or his nominee, and upon the collection of all amounts due this company as of July 1, 1919, and upon the payment of all debts owing by this company, this company shall be dissolved and its assets distributed among its stockholders and that to facilitate this, the proper officers of this company be and they hereby are authorized and directed tp nitify [sic] and direct Mr. Holliday that the three hundred and fifty thousand dollars ($350,000) *1097 cash payable to this company, in accordance with Mr. Holliday's offer, shall be paid to the treasury of this company, and that the one million seven thousand eight hundred and thirty-four (1,007,834) shares of stock of the Transcontinental Oil Company, deliverable tp [sic] this company under said offer, shall be issued and delivered to M. L. Benedum and F. B. Parriott, jointly, they being the joint owners of all the capital stock of this company issued and outstanding. *932 Parriott was not present at the meeting at which the above resolutions were adopted. (44) On July 24, 1919, Holliday made a written offer to Transcontinental as follows: PITTSBURGH, PA., July 24th, 1919. TRANSCONTINENTAL OIL COMPANY, Benedum-Trees Building, Pittsburgh, Pennsylvania. GENTLEMEN: Pending the incorporation and organization of the Transcontinental Oil Company and on its behalf, I have arranged to acquire and to transfer, or to cause to be transferred, to your company, the various properties for the acquisition of which your company was organized. These properties are described in the letter written to Messrs. Prichitt & Co. of N.Y. on June 17th, 1919 by Mr. F. B. Parriott. *1098 The properties enumerated in Mr. Parriott's letter includes all of the property and assets of the Pittsburgh-Texas Oil & Gas Company, the Riverside Western Oil Company, the Riverside Eastern Oil Company and the Tex-Penn Oil Company. All of the property of the Pittsburgh-Texas Oil & Gas Company is to be transferred to your company as a going concern as of the first day of May, 1919, on which date the company had approximately $500,000 cash in its treasury. It is understood that all of the company's transactions since that date have been made on behalf of your company and that the same is taken over subject to such changes in its balance sheet as have been occasioned in the regular course of business since that date. Your company is to assume all contracts and obligations of the Pittsburgh-Texas Oil & Gas Company, and I enclose herewith a draft of an undertaking to be executed by your company evidencing such assumption. The properties of the Tex-Penn Oil Company include, among other things, leases on approximately 33,000 acres of land in Sutton and Oldham Counties, Texas, which were not included in the description contained in Mr. Parriott's letter of June 17th; also all of*1099 the right, title and interest of the Tex-Penn Oil Company in a contract for options and leases, and in some instances the fee, to an extensive acreage in South America, approximating upwards of 800,000 acres, subject to royalties reserved to the owners of these lands. The beneficial interests in these South American Properties, in their entirety, is to be turned over to your Company, either directly or through subsidiaries to be organized for the purpose, subject to an interest, by way of compensation to the Agents who procured the same, which is not to exceed one-fifth (1/5th). The properties and assets of the Tex-Penn Company are to be transferred to your Company upon the principle that since July 1st, 1919, that Company's business has been conducted for the account of your Company, the Tex-Penn Oil Co. to receive credit for the oil on hand as of that date and the cash items and accounts and bills receivable as of that date and its properties to be transferred to you free of debt. As to the two Riverside Companies, their properties are to be conveyed as of August 1st, 1919, exclusive, however, of cash on hand, bills and accounts receivable, obligations, and exclusive also of*1100 the saleable supplies on hand as of that date. The affairs of the subsidiary companies of the two Riverside Companies will be similarly adjusted and the property and assets of these subsidiary companies will be taken over by your Company either by direct transfer or a transfer of their Capital Stock. I offer to transfer, or cause to be transferred, all of the foregoing properties to your company for Eleven Million Five Hundred Thousand ($11,500,000.00) *933 Dollars cash and One Million Two Hundred Fifty Thousand (1,250,000) Shares of the Common capital stock of the Transcontinental Oil Company, without nominal or par value, said stock to be full paid stock and not liable to any further call or assessment thereon. Yours very truly, J. M. HOLLIDAY. [Signed] J. M. Holliday. (45) The above offer of Holliday was accepted at a meeting of the directors of Transcontinental on July 25, 1919, and in the resolutions of acceptance it was directed that upon the transfer of the properties the proper officers were to "pay to J. M. Holliday or his nominees Eleven Million Five Hundred Thousand ($11,500,000.00) Dollars in cash," and "issue and deliver to J. M. Holliday or*1101 his nominees certificates aggregating One Million Two Hundred Fifty Thousand (1,250,000) shares of the common capital stock" of Transcontinental. (46) On July 29, 1919, Pittsburgh-Texas executed a deed, and on July 30, 1919, Riverside Eastern and Riverside Western each executed deeds transferring their respective properties to Transcontinental. (47) By deed dated July 30, 1919, Tex-Penn conveyed all of its "property, assets, business and good will" to Transcontinental for a recited consideration of $1,000 and "other good and valuable considerations." On the same date by three separate instruments Tex-Penn assigned to Transcontinental its interests in the South American properties, and in the properties in Sutton and Oldham Counties, Texas. (48) On the same date, July 30, 1919, Holliday addressed a letter to Transcontinental regarding the distribution of stock, as follows: PITTSBURGH, PA., July 30, 1919. TRANSCONTINENTAL OIL COMPANY, Benedum-Trees Building, Pittsburgh, pennsylvania. GENTLEMEN: Referring to my contract with your company, in which I agreed to turn over certain properties in consideration of One Million Two Hundred Fifty Thousand (1,250,000) shares*1102 of the capital stock of your Company and Eleven Million, Five Hundred Thousand ($11,500,000) Dollars cash, you will please issue said $1,250,000 Shares of stock to the following: Riverside Eastern Oil Company 41,666 Shares Riverside Western Oil Company 41,667 Shares PittsburghTexas Oil & Gas Company 158,833 Shares Jointly to M. L. Benedum and F. B. 500,00 Shares Parriott (By direction of Tex-Penn Oil Co.) Jointly to M. L. Benedum and F. B. Parriott 507,834 Shares Total 1,250,000 Shares Very truly yours, /s/ J. M. HOLLIDAY. *934 The parenthetical clause in the above letter, namely, "(By direction of Tex-Penn Oil Co.)", applied to both the 500,000 shares and the 507,834 shares directed to be issued jointly to Benedum and Parriott under the Tex-Penn directors' resolutions of July 25, 1919, above set forth. (49) On the same date, July 30, 1919, Holliday addressed a letter to Transcontinental regarding the distribution of cash, as follows: PITTSBURGH, PA., July 30, 1919. TRANSCONTINENTAL OIL COMPANY, Benedum-Trees Building, pittsburgh, pennsylvania. GENTLEMEN: Referring to my contract with your company, in which I agreed*1103 to turn over certain properties in consideration of One Million Two Hundred Fifty Thousand (1,250,000) shares of the capital stock of your Company and Eleven Million Five Hundred Thousand ($11,500,000) Dollars cash, you will please pay out said $11,500,000 cash, as follows: Riverside Western Oil Company $1,250,000.00 Riverside Eastern Oil Company 1,250,000.00 F. B. Parriott, attorney 5,250,000.00 M. L. Benedum & F. B. Parriott (Jointly) 3,400,000.00 Tex-Penn Oil Company 350,000.00 Total $11,500,000.00 Very truly yours, /s/ J. M. HOLLIDAY (50) Pursuant to the instructions contained in the above Holliday letters, Transcontinental on July 29, 1919, issued stock certificates as follows: 1 Certificate to Riverside Eastern for 41,666 shares 1 Certificate to Riverside Western for 41,667 shares 1 Certificate to Pittsburgh-Texas for 158,833 shares 1 Certificate to Benedum and Parriott jointly for 500,000 shares 1 Certificate to Benedum and Parriott jointly for 507,834 shares (51) On July 31, 1919, pursuant to instructions in the Holliday letter of July 30, Transcontinental issued checks as follows: Payee Amount F. B. Parriott, Attorney $5,000,000 do 250,000 M. L. Benedum and F. B. Parriott 3,400,000 Tex-Penn Oil Company 350,000 Riverside Eastern Oil Co 1,250,000 Riverside Western Oil Co 1,250,000 *1104 (52) Pittsburgh-Texas dissolved later in the year 1919, and Riverside Eastern and Riverside Western dissolved in 1920. Each of the three companies distributed their holdings of Transcontinental stock to their stockholders in liquidation. *935 (53) Of the sum of $11,500,000 of Transcontinental checks issued on July 31, 1919, $2,500,000 went to Riverside Eastern and Riverside Western. Of the remaining $9,000,000, the amount of $3,400,000 was paid to Benedum and Parriott jointly and was deposited to their joint account. From this account it was disbursed as follows: August 8, 1919, purchase of Liberty bonds $2,004,699.54 August 12, 1919, F. B. Parriott 1,037,650.23 August 12, 1919 M. L. Benedum 357,650.23 Total 3,400,000.00 The Liberty bonds were distributed equally to Benedum and Parriott, the receipts by each of them out of the $3,400,000, as of August 12, 1919, being as follows: Benedum Parriott Liberty bonds $1,002,349.77 $1,002,349.77 Cash 357,650.23 1,037,650.23 Total 1,360,000.00 2,040,000.00 (54) The sum of $5,250,000 covered by the two Transcontinental checks payable to "F. B. Parriott, Attorney", *1105 was entered in the Parriott, Attorney, account, the entries and explanation thereof being as follows: Transcontinental Oil Co $5,250,000 W. E. Wrather $1,500,000 J. B. Lantz 1,500,000 J. L. Kirkland 2,250,000 Entry on C-7 Ck. from Transcontinental Oil Co. should have been credited as above - being purchase price of W. E. W., J. B. L., and J. L. K. shares of 5/8 interest in Duke-Knoles Pool and Tex-Penn Oil Co. stock. Partial distribution was made of the sum in this account by checks issued in August 1919, as follows: Aug. 12 W. E. Wrather $1,400,000 Aug. 18 J. B. Lantz 1,400,000 Aug. 27 J. L. Kirkland 2,000,000 (55) The remaining item of the several paid by Transcontinental on July 31, 1919, is the $350,000 paid to Tex-Penn. This was reflected in the Parriott, Attorney, accounts by the following journal entry and explanation thereof: August 1, 1919 Tex-Penn Oil Co $350,000 M. L. Benedum $140,000 F. B. Parriott 210,000 *936 To charge money paid by Transcontinental Oil Company to Tex-Penn Oil Company being amount taken out of M. L. B. and F. B. P. share of purchase being amount taken*1106 out of M. L. B. and F. B. P. share of purchase price of Duke-Knoles Pool Property. (56) The entries in the Parriott, Attorney, account were made by Miss Zellman, who was Parriott's secretary and bookkeeper. Sometime between the dates of the above entries and December 31, 1919, and prior to the rendition of any statement of account to the five individuals, Miss Zellman, at Parriott's direction, made another entry in the Parriott, Attorney, account which had the effect of reversing the original debit to Tex-Penn by crediting that amount to Tex-Penn, and charging a proportionate part thereof to each of the five individuals. The entry of December 31, 1919, is as follows: W. E. Wrather $43,750.00 J. B. Lantz 43,750.00 J. L. Kirkland 65,625.00 F. B. Parriott 65,625.00 M. L. Benedum 131,250.00 Tex-Penn Oil Co $350,000.00 The description under entry reads: To correct Journal entry page 5 distributing amount paid by Tex-Penn by Transcontinental Oil Co. and deducted from M. L. B. (Benedum) and F. B. P. (Parriott) cash proceeds of sale of Duke-Knoles property to Transcontinental Oil Co. as this amount was to be apportioned against the sale price received*1107 by all the individual interests reducing scuh sale price of 5/8 int. per agreement to following: W. E. Wrather $1,456,250.00 J. B. Lantz 1,456,250.00 J. L. Kirkland 2,184,375.00 F. B. Parriott 2,184,375.00 M. L. Benedum 1,368,750.00 Total $8,650,000.00 (57) Under date of December 31, 1919, the following entires and explanation were made in the Parriott, Attorney, journal: F. B. Parriott Tex-Penn stock $15.00 F. B. Parriott spec. Penn stock 15.00 W. E. W. Tex-Penn stock $10.00 J. B. L. Tex-Penn stock 10.00 J. L. K. Tex-Penn stock 10.00 Tex-Penn stock of W. E. W., J. B. L. and J. L. K. sold to M. L. B. and F. B. P. as above. The purpose of these entries was to record the transaction that had taken place in July 1919, wherein Benedum and Parriott paid $30 for the Tex-Penn stock transferred to them by their three associates. *937 (58) At the end of the year 1919 there was a balance due each of the five individuals from the transactions above described and such balances were ultimately cleared through the Parriott, Attorney, account. (59) Under the assignment of October 31, 1918, five sixteenths of the*1108 money derived from the Duke-Knoles leases constituted a fund to be made available to Tex-Penn to the extent that its income from its two-eighths interest was insufficient to meet its expenses. On July 31, 1919, this five-sixteenths fund amounted to $286,891.29. This was transferred on the books of Parriott, Attorney, to the credit of "Tex-Penn Oil Co. Indebtedness Fund", and charged ratably to the five individuals by an entry dated December 31, 1919. Both this fund and the $350,000 paid to it by Transcontinental were available to Tex-Penn for the purpose of paying off its debts, and both were used for that purpose up to an unneeded residue amounting to $55,255.24, which residue was distributed to the five individuals by the following entry in the Parriott, Attorney, books: Tex-Penn Indebtedness Fund $55,255.24 W. E. W. Tex-Penn Expense $6,906.90 J. B. L. Tex-Penn Expense 6,906.90 J. L. K. Tex-Penn Expense 10,360.35 F. B. P. Tex-Penn Expense 10,360.35 F. B. P. spec. Penn Expense 20,720.73 To distribute unused Balance in Tex-Penn Ind. Fund This distribution was reflected in the annual statement of Parriott, Attorney, to each of the individuals*1109 rendered on December 31, 1919. At the time of such distribution, Kirkland, Lantz, and Wrather had ceased to be stockholders of the Tex-Penn Oil Co. and Benedum and Parriott had become the sole stockholders of that company. Minor adjustments in the accounts were made during the year 1920. (60) Benedum and Parriott and the Tex-Penn Oil Co. kept their books of account on the cash receipts and disbursements basis. (61) The annual statements of account rendered by Parriott, Attorney, to Kirkland, Wrather, and Lantz on December 31, 1919, segregated the consideration received by them for their interests in the Duke-Knoles properties and for their Tex-Penn stock. In the statements the sales price of the individual interests in the leases were shown as follows: Kirkland: Sale price 3/16th interest in Duke-Knoles Property $2,184,375 Wrather: Sale price 1/8th interest in Duke-Knoles Property 1,465,250 Lantz: Sale price 1/8th interest in Duke-Knoles Property 1,465,250 *938 In each of the statements the "sale price" of Tex-Penn stock was shown as $10. Kirkland's statement showed 2,460 shares sold; and Wrather and Lantz each 1,640 shares. In the statement*1110 rendered to Benedum he was shown as having purchased 3,420 shares of Tex-Penn stock for $15, and in Parriott's statement he was listed as having bought 1,710 shares for $15. 1 (62) At the time Parriott, Attorney, issued his check for $2,000,000 to Kirkland in August 1919, Kirkland executed a receipt as follws: Received this 27th day of August, 1919, from F. B. Parriott, Attorney, TWO MILLION ($2,000,000.00) Dollars, being a payment on account of $2,250,000.00 Dollars, which sum is the full purchase price for all of my right, title and interest in and to three-sixteenths of five-eighths of the working interest in the leases on the "duke-knoles Pool" and all my right, title and interest in and to the stock of the Tex-Penn Oil Company. The balance of said purchase price viz: Two Hundred Fifty Thousand Dollars, is to be retained by said F. B. PARRIOTT until the final adjustment of the taxes and the affairs of the said TEX-PENN OIL COMPANY, at the conclusion of which the said balance is*1111 to be paid to me, less my proportionate share of said expenses. IN WITNESS WHEREOF, I hereunto set my hand and seal this 27th day of August, A.D. 1919. J. L. KIRKLAND (LS) Wrather executed a similar receipt, but regarded it as only a routine matter rather than as having any great importance. While he was aware that in form there had been separate transfers of the stock and lease interests, he and his associates were considering only the ultimate objective, and were not concerned with details of statement of how the transaction was handled. Kirkland and Lantz died prior to the hearing of these causes. (63) In schedule 14 attached to the completed income and profits tax return of Tex-Penn for 1919, which was executed by Parriott as president of the company, the following statement appears: In July 1919, Tex-Penn Oil Company sold and transferred its property to the Transcontinental Oil Company for Three Hundred Fifty Thousand ($350,000.00) Dollars cash and shares of the Transcontinental Oil Company "No Par Value" stock. The Tex-Penn Oil Company is now in course of dissolution. DISTRIBUTION OF TRANSCONTINENTAL STOCK. (64) Of the 1,007,834 shares of Transcontinental*1112 stock for which certificates were issued on July 29, 1919, Parriott received 324,797 shares, and Benedum 683,037 shares. (65) In his 1919 return, filed March 15, 1920, Benedum reported $1,368,750 as profit from the sale of his interest in the Duke-Knoles *939 leases. Parriott, in his 1919 return filed March 15, 1920, reported $2,184,375 as profit from the sale of his interest in the Duke-Knoles leases. No deduction was taken on either return for cost of the lease interests. Neither Benedum nor Parriott reported any gain from the receipt of Transcontinental stock. (66) Tex-Penn filed a tentative return for 1919 on March 15, 1920, and a final return on or about June 15, 1920. In the final return the cost of assets sold to Transcontinental was shown as $2,359,205.69, from which was deducted $350,000, and the remainder, $2,009,205.69 was designated "Value of Stock." Neither of these items, $350,000 and $2,009,205.69, was included in gross income. In a schedule attached to the return it was stated that Tex-Penn had sold its property in July 1919, to Transcontinental for $350,000 cash and stock of Transcontinental, and further that: The cash consideration received is*1113 accounted for in this return; the no par value stock received was not taxable income under section 202(b) of the Revenue Act of 1918 and Treasury Decision 2924, * * *. THE RESTRICTIVE AGREEMENT. (67) The bankers did not contemplate holding the Transcontinental shares as an investment but intended to organize a syndicate to resell the stock and proposed to "develop a market" for that purpose. In June 1919, they organized a syndicate composed of between forth and fifty banking houses for the purpose of reselling the 500,000 shares of Transcontinental stock for which they had agreed to pay $40 a share. E. W. Clark & Co. and Prichitt & Co. were the bankers who formed the syndicate, and after its formation they became syndicate managers. B. Y. Frost & Co. and Joseph F. Feder, bankers of New York, also became affiliated with the syndicate. Participations in the syndicate were offered to a number of banking houses, and the syndicate was oversubscribed about three times, in that there were more applications for participation in the syndicate than could be filled. The syndicate participants did not undertake to purchase or dispose of any part of the syndicate stock, but merely to*1114 take the stock, if any, that was not sold by the syndicate managers at the termination of the syndicate operations. Participations in the syndicate were accepted upon the understanding that during the marketing of the 500,000 syndicate shares no other stock would be placed on the market to interfere with the disposition on the syndicate stock. (68) Prior to the issuance of the 1,007,834 shares of Transcontinental stock to Benedum and Parriott, and in order to prevent such shares from getting into the market during the operation of the *940 syndicate, the bankers exacted from Benedum and Parriott an oral agreement that such shares would not be sold or disposed of in any way or under any conditions or circumstances during the life of the syndicate. The parties to the agreement were, on the bankers' side, E. W. Clark & Co., Prichitt & Co., B. Y. Frost & Co., and Joseph F. Feder, while the parties to the agreement on the other hand were Benedum and Parriott individually, and Parriott as president of Tex-Penn. At the time the restrictive agreement was made, Feder, acting for the bankers, knew that Benedum and Parriott were to become the sole stockholders of Tex-Penn. In entering*1115 into this restrictive agreement, E. W. Clark & Co. and Prichitt & Co. acted in the dual capacity of bankers and managers of the syndicate. (69) Pursuant to the option vested in the syndicate managers, the syndicate was extended on October 17, 1919, for a period of 90 days from October 18, 1919, but it was actually terminated January 8, 1920. The syndicate was successful in marketing about 400,000 out of the 500,000 shares offered. (70) By a letter dated July 29, 1919, S. A. McCaskey, who was secretary and a director of Transcontinental, directed the Central Union Trust Co., as transfer agent, and the Guaranty Trust Co. of New York, as registrar, to issue two certificates, one for 500,000 and one for 507,834 shares, in the joint names of Benedum and Parriott. The two certificates were delivered in New York to McCaskey, who carried them to Pittsburgh. McCaskey put the certificates in an envelope and placed the envelope in Benedum's safe deposit box. Some days later the certificates were taken out of this box in the Pittsburgh Trust Co. and deposited in a second box in the Pittsburgh Trust Co. to which McCaskey, Benedum, and Parriott had access. Parriott had no access to the*1116 first box in which the certificates were deposited. McCaskey at that time was an employee of Benedum but was working under Parriott's direction. The certificates remained in the second box until about February 6, 1920. (71) The restrictive agreement was complied with and none of the 1,007,834 shares of Transcontinental stock were transferred on the books of the transfer agent of Transcontinental or sold, pledged or otherwise disposed of by Benedum or Parriott prior to sometime in February 1920, which was after the termination of the Bankers' Syndicate. (72) A restriction was also placed upon the 250,000 shares issued to the bankers, 25,000 shares of which represented their commission and 225,000 shares had been purchased at $1 per share. Under date of August 7, 1919, the secretary of Transcontinental addressed a letter to the transfer agent and registrar for the Transcontinental stock, requesting that the certificates for the 250,000 shares which had been *941 issued in the name of Prichitt & Co. were not to be further registered or transferred except upon consent of the New York Stock Exchange. On November 24, 1919, the secretary of Transcontinental addressed a letter*1117 to the Committee on Stock List of the New York Stock Exchange requesting that the 250,000 shares be subject to further registration and transfer. On December 5, 1919, the secretary of the New York Stock Exchange wrote to the registrar giving authority for the transfer and registration of the 250,000 shares "without restriction so far as this Exchange is concerned." (73) The bankers had agreed to purchase 500,000 shares of Transcontinental stock at $40 per share, and had an option to purchase 225,000 additional shares at $1 per share. The option was exercised, thus making a total of $20,225,000 due to Transcontinental from the bankers. Of this sum the bankers paid $10,070,000 on July 30 and 31, 1919. They made a further payment of $2,000,000 on August 5, 1919. The balance, $8,155,000, was paid in a number of installments over the period August 7, 1919, to April 23, 1920. (74) Transcontinental stock was traded in on the New York Curb Exchange from June 21 to August 14, 1919, on a when issued basis at prices ranging from a low of $43 to a high of $49.75 per share. Sales in the latter part of July and on August 1, 1919, were as follows: Date Shares sold High Low Close July 29 7,200 49 3/4 48 1/4 48 3/8 July 30 9,900 48 3/4 [48] 48 1/4 July 31 5,000 48 1/4 47 5/8 [48] August 1 9,600 48 1/4 47 1/4 47 3/4 *1118 The stock was approved for listing on the New York Stock Exchange on August 13, 1919, and the first quotation on it on that exchange appeared on August 15. Sales thereafter by months through March 1920, and the price ranges were as follows: Month Shares sold High Low [1919] August (15th to 30th) 58,400 49 1/2 [43] September 510,300 59 3/8 49 1/2 October 290,600 61 1/8 [55] November 653,300 62 5/8 45 1/8 December 577,700 45 1/2 34 3/4 [1920] January 698,969 38 3/4 23 3/8 February 179,100 [20] March 348,800 28 5/8 21 5/8 (75) About August 1, 1919, the demand for securities of oil companies was strong and the market was active. The bankers who were *942 sponsoring the Transcontinental issue, and who were also managers of the syndicate, controlled the market for that stock and during the operations of the syndicate supported the market by buying and selling the stock. PROPERTIES ACQUIRED BY TRANSCONTINENTAL. Pittsburgh-Texas Assets. (76) The assets of Pittsburgh-Texas Co. acquired by Transcontinental consisted of a group of undeveloped oil leases in Texas and Oklahoma, a refinery with related facilities at Boynton, *1119 Oklahoma, and certain current assets. At August 1, 1919, the fair market value of these assets was as follows: Oil leases $238,000.00 Boynton refinery 500,000.00 Net current assets 439,901.39 Total 1,178,401.39 Riverside Eastern Assets. (77) At August 1, 1919, the properties of Riverside Eastern and its subsidiaries consisted of 10 casinghead gasoline plants, 2 blending stations, 2 compounding plants, 13 distributing plants, 3 small producing oil and gas leases in Ohio and West Virginia, a number of casinghead gas purchase contracts, and certain rolling stock and equipment. The aggregate book value of the physical properties less depreciation was $646,619.03. Consolidated net profits in 1916 were $140,103.48 and in 1917 they were $59,957.02. In 1918 a loss was sustained in the amount of $25,976.31, and for the first 7 months of 1919, a loss was sustained in the amount of $74,195.43. The fair market value of Riverside Eastern assets acquired by Transcontinental was $160,000. Riverside Western Assets. (78) The properties of Riverside Western and its one subsidiary which were acquired by Transcontinental consisted of seven casinghead gasoline*1120 plants, two blending stations in Oklahoma, one compounding plant, six distributing stations in Nebraska, Iowa, and South Dakota, and certain gas purchase contracts. The aggregate book value of plant and distributing facilities at August 1, 1919, was $860,594.05. Profits and losses of Riverside Western and its subsidiary for the period 1913 to 1918, and the first seven months of 1919, were as follows: [1913] $11,150.45 [1914] 3,541.67 [1915] loss -3,437.72 [1916] 124,452.62 [1917] 146,158.14 [1918] $58,387.01 1919 (7 mos.) loss -42,675.77 Total 297,576.40 Average yearly profits 45,200.00 *943 The fair market value of Riverside Western assets acquired by Transcontinental was $233,608. Tex-Penn Assets. (79) Financial Condition of Tex-Penn. - The balance sheet of the Tex-Penn Oil Co. as of July 31, 1919, was as follows: Assets Liabilities and capital Cash $11,225.20 Notes and accounts $530,094.41 payable Notes and accounts 58,581.62 Advances - F. B. 288,000.00 receivable Parriott, Attorney Due from Trans- 81,188.37 Capital stock 2,000,000.00 continental Oil Co Inventory - Oil 92,981.44 Surplus 68,478.60 Inventory - Ware- 158,418.25 house supplies Well farm investment 633,828.32 Leaseholds 1,835,223.29 Deferred charges 15,126.52 Total 2,886,573.01 Total 2,886,573.01 *1121 The item under the heading "Due from Transcontinental Oil Co." represents the charges which were made to that company during the month of July 1919, for drilling costs and operating expenses on sundry Duke-Knoles leases, as the Tex-Penn properties were taken over by Transcontinental as of June 30, 1919. The items of "Well farm investment" and "Inventory-warehouse supplies" are shown at cost. (80) The item entitled "Leaseholds" included the assigned two-eighths interest in the Duke-Knoles leases at a figure of $100,000. In addition to the Duke-Knoles leases, Transcontinental acquired from Tex-Penn an option for the acquisition of a four-fifths interest in certain undeveloped leases and oil properties covering 810,000 acres in the Republic of Colombia, South America, a half interest in oil leases covering 1,055 acres in Louisiana, a half interest in leases covering about 67,000 acres scattered through seven counties in Texas, and the entire interest in certain leases scattered through seven counties in Texas covering 63,107 acres. The aggregate value of these properties other than the interest in the Duke-Knoles leases on August 1, 1919, was $221,500. (81) The surplus item*1122 of $68,478.60 represents operating profit before providing for depreciation and depletion. Proper allowance for depreciation and depletion in the amount of $70,000 produces a loss of $1,521.40 for the period November 1, 1918, to July 31, 1919. (82) At July 31, 1919, the current liabilities of Tex-Penn exceeded its current assets by $286,117.78. *944 Duke-Knoles Leases. (83) The Duke-Knoles leases acquired August 1, 1919, from Tex-Penn and the five individuals covered some 3,600 acres of land chiefly in Comanche and partly in Erath and Eastland Counties, Texas. They were part of the so-called Desdemona Field located around the intersection of those three counties in north central Texas. The leases were originally owned by the five individuals who assigned a two-eighths interest therein to Tex-Penn on October 31, 1918, following the bringing in of the discovery well. The interest therein assigned and the five-eighths interest reserved by the five individuals were reunited in Transcontinental by an assignment executed by Tex-Penn and the five individuals conveying the entire seven-eighths interest to Transcontinental. (84) The discovery well of the Desdemona*1123 Field was the J. N. Duke Well No. 1 on the Duke-Knoles leases. This well was completed September 2, 1918, with an initial production of approximately 600 barrels. The nearest producing field at that time was at the Ranger Field, some 18 or 20 miles north of Duke Well No. 1. Oil had been discovered at Ranger in the McCloskey well on October 27, 1917. Some 30 miles northwest of the Ranger Field lay the Breckenridge Field, which was discovered in June 1917. (85) Production in all three of the above mentioned fields was from the Bend Arch structure. In the field farthest north, the Breckenridge Field, oil was found in a fractured or porous limestone formation. At Ranger and Desdemona the oil was found in a sandy lens. The Desdemona and Ranger Pools were therefore similar in that both produced from sandy lenses, but such lenses were thinner and less productive at Desdemona than at Ranger. (86) At Breckenridge production was found at depths of from 3,000 to 3,100 feet; at Ranger from 3,200 to 3,400 feet, and at Desdemona at about 2,700 feet. (87) It was well known to the oil industry prior to August 1, 1919, that both the Desdemona and Ranger Fields were of a spotty character*1124 and that the rate of decline in both fields was rapid with a low ultimate yield per acre. The areas in the Desdemona Field where oil was found did not extend unbroken for any considerable distance, and such areas were not uniformly productive. Dry holes or gas wells frequently offset wells which were producing large amounts of oil, and the result of drilling could not be predicted with certainty from one well location to another. (88) Between March and May 1919, wells were drilled to the north of the Duke-Knoles leases which were substantial producers, some of them producing from 200 to 5,000 barrels per well. In June the largest well ever drilled in the field, with an initial production of 8,000 barrels, was completed about a mile to the north of the *945 Duke-Knoles leases. By July 1, 1919, additional productive spots had appeared in the northern portion of the field. Wells drilled to the east, south, and west - with the exception of one well something over a mile to the west of the leases - were either dry holes, gas wells or produced too small a quantity of oil to be profitable. By August 1, 1919, about 140 wells had been drilled in the entire Desdemona Field, of*1125 which approximately one third had an initial production of 300 barrels or more. Sufficient drilling had been completed by that date on and around the Duke-Knoles leases to demonstrate that the better part of the Desdemona Field lay to the north of those leases. (89) By August 1, 1919, 12 wells had been completed on the Duke-Knoles leases. Of this number eight showed an initial production of oil, three were gas wells, and one was a dry hole. At the end of July 1919, five of the 12 were producing oil. The initial production and average daily production of these wells from the dates of completion through July 1919, are set out in the following table. Average daily production Well Date Init- [1919] com- ial pleted pro- duction Nov. Dec. Jan. Feb. Mar. Apr. May June July Bbls. Bbls. Bbls. Bbls. Bbls. Bbls. Bbls. Bbls. Bbls. Bbls. Duke #1 9/2/18 [27] Knoles 12/28/ [114] 2,148 2,002 2,009 2,149 1,417 [448] #1 [18] 6,000 Payne 2/2/19 Gas #1 Snod- 2/19/19 Gas grass #1 Knoles 6/3/19 [137] #3 Crowell 6/4/19 [25] #2 2 Crowell 6/6/19 Gas #1 Duke #2 6/7/19 [83] Duke #3 6/9/19 [53] Knoles 6/25/19 [344] #2 Crowell 7/18/19 [50] #3 2 Mary 7/30/19 Dry Lewis #3 *1126 Monthly production, in barrels, from these wells was as follows: Duke #1 Duke #2 Duke #3 Knoles #1 Knoles #2 Knoles #3 Total [1918] Bbls. Bbls. Bbls. Bbls. Bbls. Bbls. Bbls. Novem- 16,261.46 16,261.46 ber Decem- 9,856.14 3,527.17 13,383.31 ber [1919] January 2,527.46 66,547.85 69,075.31 Febru- 7,939.42 56,055.22 63,994.64 ary March 5,025.85 62,296.84 67,322.69 April 1,971.26 64,483.37 66,454.63 May 647.48 43.926.75 44,574.23 June 813.68 2,374.72 3,729.68 20,288.14 2,587.24 8,229.06 38,022.52 June 1 971.00 8,058.00 9,029.00 July 2,570.44 1,644.98 13,894.32 10,679.08 4,233.62 33,022.44 46,013.75 4,945.16 5,374.66 339,077.66 13,266.32 12,462.68 421,140.23 *946 (90) During the period January to July 1919, production from Desdemona Field as a whole was as follows: Bbls. January 78,121 February 105,158 March 117,736 April 154,033 May 259,257 June 396,349 July 740,500 *1127 (91) The acreage covered by the Duke-Knoles leases was almost a solid block. In the center of the block one tract of 70 acres was under lease to the Magnolia Petroleum Co., which drilled a well to offset the Tex-Penn wells completed in 1918. This well, known as Magnolia-Duke No. 1, was completed January 4, 1919, with an initial production variously reported at from 450 to 1,000 barrels. Production from this well through July 1919, was as follows: Bbls. January 13,695 February 24,789 March 22,361 April 19,886 May 7,294 June 3,309 July 1,153 (92) On August 1, 1919, the price paid for crude oil in the midcontinent area was $2.25 per barrel, and this was the accepted price for oil in the Desdemona Field. From 1878 to 1916 the average price of crude oil had not exceeded $1.20 per barrel. During the period 1916 to 1919, inclusive, the increased demand for oil caused by the World War, and the belief expressed in some quarters that there was an impending shortage of oil, caused the price of oil to rise rapidly. In 1916 the low price for oil was 85 cents, from which figure it increased steadily until the middle of 1918, when the price was $2.25 per*1128 barrel. The price remained steady at that figure until the latter part of 1919, when it rose rapidly to a high point of $3.50 early in 1920. In 1921 the price dropped sharply from $3.50 to $1 per barrel, and by the end of that year it went up to $2. The average price which might be expected to be received for oil from the Duke-Knoles leases would not exceed $2 per barrel. (93) The estimated average cost of drilling a well in the Desdemona Field in 1919 was $37,500. Actual drilling costs of Transcontinental in putting down the wells on the Duke-Knoles leases averaged $23,112.66 per well. A reasonable estimate of operating expenses in the Desdemona Field was 25 cents per barrel. (94) The Duke-Knoles leases were within the anticline structure known as the Bend-Arch structure, which crosses that region in a north and south direction. That type of anticline is regarded by geologists as favorable for the production of oil or gas. (95) The development that had taken place in the Desdemona Field at August 1, 1919, indicated that an average ultimate yield would *947 not exceed 70 barrels of oil for each barrel of the initial production. The term "initial production" means*1129 the amount of oil produced in the first full 24 hours of production. On the basis of the probable ultimate production from wells in the Desdemona Field, the prices that might reasonably be expected for oil and drilling and operating costs, an average initial production of 300 barrels per well was necessary to insure profitable production. (96) Gas wells in the Desdemona Field had no commercial value at August 1, 1919, although there was a possibility that a gas well might turn into an oil producer. There were no trunk gas lines in the field at that time and the only market for gas was a small amount used for drilling purposes. The proceeds from sales for this purpose were negligible. The three gas wells on the Duke-Knoles leases, two of which were completed in February, and one in June of 1919, at no time produced any oil. One well, approximately a half mile north of the Duke-Knoles leases and about a mile and a half or two miles northeast of the Duke discovery well, which was brought in as a gas well in April 1919, produced a daily average of 2,600 barrels of oil in July 1919. Another well nearby (originally a gas well) produced a daily average of 450 barrels of oil in July*1130 1919. (97) During the latter part of 1918 and up to August 1, 1919, there were numerous leases made in the Desdemona Field on tracts of land varying in distance from three fourths of a mile to five miles or more from the Duke discovery well. The tracts ranged in size from that of town lots in the town of Desdemona to tracts of 70 acres. Prices ranged from $50 per acre to $10,000 for a lease on a town lot. Prices paid as bonuses for leases varied according to the distance of the location from the nearest producing well and the production of such well. The tracts of land involved in leases from September 1918, through July 1919, averaged 65 acres each. (98) By April 1919, drilling in the Desdemona Field had progressed sufficiently to indicate the spotty character of the field and the larger companies in that territory lessened their lease buying activities. By August 1, 1919, a number of locations on properties near the Duke-Knoles leases had been abandoned and in some cases rigs which had been erected were torn down without drilling. (99) After August 1, 1919, Transcontinental drilled 28 wells on the Duke-Knoles leases. Of these, 13 were dry holes, four were gas wells, *1131 and the other 11 were small producers, the initial production ranging from five to 100 barrels. These 28 wells were distributed in all four directions from the discovery well. Drilling operations prior to August 1 had demonstrated that the area to the south of the Duke-Knoles leases was of little value. By the latter part of *948 September or October 1919, it was generally known that the Desdemona Field as a whole would be unprofitable. (100) Ultimate production of nine wells on the Duke-Knoles leases through August 8, 1930, was an average of 66 barrels per barrel of initial production. Of the wells drilled by Transcontinental after August 1, 1919, only two were producing in 1930, one at the rate of three barrels per day and the other at the rate of less than one barrel per day. (101) The total production from the Duke-Knoles leases from August 1, 1919 to August 20, 1930, amounted to 258,742.43 barrels, the yearly production being as follows: Bbls. 1919 (after Aug. 1) 76,976.05 [1920] 49,584.54 [1921] 37,771.05 [1922] 27,449.17 [1923] 21,213.41 [1924] 14,146.25 [1925] 10,122.48 [1926] 8,427.82 [1927] 6,147.62 [1928] 3,478.89 [1929] 2,206.02 [1930] 1,219.13 Total 258,742.43 *1132 (102) The operations of the Duke-Knoles leases by Transcontinental resulted in a loss of $415,857.77 in the period from August 1, 1919, to August 20, 1930. It expended $1,106,289.03 in current operating expenses and the drilling of wells in that 11-year period, and the oil and gas produced over the 11-year period on these properties returned a gross income of $690,431.26. (103) The bankers agreed to pay Transcontinental $20,225,000 for 725,000 shares of stock. Of this amount, a part of which had been paid by August 1, 1919, and the balance thereafter, Transcontinental was obligated to pay $11,500,000 for the properties of the Tex-Penn, Pittsburgh-Texas, and the Riverside Eastern and Western companies. Thus, at August 1, 1919, the assets of Transcontinental included cash and unpaid bankers' commitments amounting to $8,725,000. (104) When the bankers agreed to purchase Transcontinental stock they insisted that $8,500,000 of the proceeds should go into Transcontinental as working capital. The contract between Transcontinental and the bankers provided that the entire $20,000,000 which the bankers agreed to pay for 500,000 shares of stock should be "used and employed" by Transcontinental*1133 "as working capital and in the acquirement of properties." The syndicate agreement stated that the entire proceeds of the sale of the stock were to be paid to Transcontinental "for the acquirement of properties and to provide working capital." In the application to list Transcontinental stock on the New York Stock Exchange it was stated that part of *949 the $20,000,000 was to be used to acquire properties and the balance "constitutes working capital of the company." (105) During the 11 months following August 1, 1919, Transcontinental expended $8,258,116,15 of the $8,725,000 in acquiring new leases, in drilling operations, the acquisition and improvement of refineries, the purchase of equipment, distributing stations, pipe lines, and other capital additions. (106) The operations of Transcontinental for the period August 1, 1919, to December 31, 1924, resulted in a deficit of $6,254,400.89. (107) No dividends were paid on the common stock of Transcontinental until May 1930, when a dividend of 30 cents a share was declared. (108) In a letter dated June 17, 1919, addressed to Prichitt & Co., one of the bankers, Parriott described at some length the various properties*1134 which it was proposed that Transcontinental should acquire. With respect to the Duke-Knoles acreage he stated: "This is one of the most prolific pools of high grade oil ever discovered, being entirely surrounded by wells producing from one hundred to eight thousand barrels per day. The company's holdings are located in what is generally deemed the best section of this proven oil territory." Under the heading of "Earnings", Parriott's letter reads as follows: With adequate transportation facilities from the Duke-Knoles Pool, the present earnings would be in excess of $25,000.00 per day, and upon the completion of the pipe lines and shipping facilities now under construction it is confidently expected to have earnings far in excess of this amount within the next few weeks. With its present and potential production from proven territory alone and upon completion of proposed refineries and gasoline plants, the company's earnings should run conservatively from $30,000,000 to $40,000,000 per annum. Upon the development of the company's holdings in the United States and the large properties in South America which are now under contract, together with those being acquired, it is*1135 reasonable to expect that the earnings will be more than double the amount stated. (109) The 1919 income and profits tax return of Tex-Penn was executed by Parriott as president and S. E. Drum as assistant treasurer on June 5, 1920, (a tentative return having previously been filed) and was filed with the collector at Pittsburgh, Pennsylvania, on that date. One of the schedules attached to the return contained the following statements: ESTIMATED AMOUNT OF OIL IN FIELD AS OF 30 DAYS AFTER DUKE 1 CAME IN. At the time this well came in, among oil men the field was variously estimated to be worth from $12,000,000.00 to $18,000,000.00. A report was circulated after the discovery of the property that the property had been sold for $18,000,000.00 *950 and no surprise was manifiested at the price. One estimate was placed as high as $30,000,000.00. The central location of the well and the geological information acquired gave assurance that an entire new field had been opened up, rivaling in extent Cushing, Glen Pool and others, and as Cushing had developed additional sands as the years went by it was difficult to place a limit upon the possibilities of the field. With an*1136 acreage of 3,479, a well producing an initial flow of 600 barrels per day, and the well in the center of the plot, there was no reason to doubt but that an enormous pool was beneath the entire territory. With room for over 300 wells, conservatively spaced, good reason to expect them to come in as well as the others, or for conservatism even 100 barrels a day, at a price of $200.00 flush production, the field would be worth $60,000,000.00. With these points in mind a valuation of $15,000,000.00 was placed upon the property as representing a true value from conditions arising within 30 days after the drilling in of Duke No. 1, the Discovery Well of the Field. (110) The same statements as quoted in the preceding paragraph were attached to the original returns of Benedum and Parriott, each of which was executed by the taxpayer on March 15, 1920. (111) The balance sheet of Transcontinental, as of August 1, 1919, was as follows: Assets Cash $27,697.39 Accounts Receivable 39,774.63 Bankers' Subscription to Stock 9,377,115.00 Inventories 207,583.73 Property Acquired at Organization 187,290,001.00 Deferred Charges 3,200.93 Total Assets $196,945,372.68 Liabilities Accounts Payable $490,470.29 Common Capital Stock 1.00 Capital Surplus 196,454,901.39 Total Liabilities and Capital $196,945,372.68 *1137 ULTIMATE FINDINGS ON THE MAJOR ISSUES. (112) The consideration received by Tex-Penn on or about August 1, 1919, in exchange for its assets consisted of $350,000 in cash and 1,007,834 shares of Transcontinental stock of no par value. (113) The cash received by Wrather, Lantz, and Kirkland from Transcontinental was consideration for both their stock in Tex-Penn and their interests in the Duke-Knoles leases. (114) The seven-eighths interest in the Duke-Knoles leases on or about August 1, 1919, had a substantial fair market value. (115) The fair market value of the 1,007,834 shares of Transcontinental stock issued to Benedum and Parriott jointly on or about August 1, 1919, was $7 per share. THE MINOR ISSUES. Benedum's Riverside Western Preferred Stock. (116) During 1916 and 1917 Benedum acquired by purchase in the market 740 shares of Riverside Western preferred stock at an aggregate cost of $13,260.64. In 1916 and 1917 he also acquired from *951 Riverside Western three lots of stock, one consisting of 2,115 shares of preferred and an equal number of shares of common stock, another of 1,696 shares of preferred and an equal number of common, and the other*1138 of 1,160 shares of preferred with an equal number of common shares. In all three instances the common stock came as a bonus with the preferred. The total cost of the three lots, comprising 4,971 units, was $124,275. The aggregate cost was not separated on Benedum's books between the preferred and common stock. (117) In 1917 Benedum sold 122 units - each unit consisting of one share of preferred and one share of common - out of the 4,971 units referred to in the preceding paragraph, receiving therefor $3,050. In 1919 he surrendered to Riverside Western the remainder of his preferred stock in the number of 5,589 shares, and received therefor $25 per share, or an aggregate of $139,725. He did not dispose of his Riverside Western common until 1920. (118) None of Riverside Western common stock was ever issued separately for cash; the preferred was sold for cash and the common given as a bonus. Both classes of stock were closely held, and in 1916 and 1917 there were only a few isolated sales recorded. (119) In computing the profit realized by Benedum upon the retirement of his preferred stock in 1919, the respondent used as a basis a cost of $15 per share for the preferred*1139 stock. Parriott's Pittsburgh-Texas Stock. (120) Transcontinental issued 158,833 shares of its stock to Pittsburgh-Texas in exchange for the assets of the latter. The stock was the sole consideration for the assets. Parriott, as the owner of certain Pittsburgh-Texas stock, upon liquidation of that company received 455 5/6 shares of Transcontinental stock. The respondent treated the 455 5/6 shares as a liquidating dividend, valuing the stock at $47.55 per share, without allowance of any amount as cost of the Pittsburgh-Texas stock. Limitation of Surtax under Section 211(b) (121) In computing the deficiencies in the cases of Benedum and Parriott, the respondent computed the tax at 20 percent on what he determined to be the "proportion of income from sale of discovery oil property." OPINION. ARUNDELL: These cases arise out of the acquisition by the Transcontinental Oil Co. of certain properties owned by the petitioners. The first issue to be decided is whether the transactions whereby *952 these petitioners transferred their properties to Transcontinental constituted a taxable or nontaxable reorganization under section 202(b) of the Revenue Act of 1918*1140 and article 1567 of Regulations 45. If the conclusion be reached that the transactions constituted a nontaxable reorganization, this will dispose of the cases and there will be no tax due. A contrary conclusion will require that other questions be decided. The facts may be briefly summarized without attempting at this point to notice all the details or to give our construction of them. Petitioners Benedum and Parriott and their three associates were stockholders in the petitioner, Tex-Penn, a corporation. Tex-Penn owned a two-eighths interest in the Duke-Knoles oil leases in Texas and the five individuals owned a five-eighths interest in the same leases. Benedum and Parriott had interests in other properties under oil and gas leases, and they owned stock in three companies which were engaged in various phases of the oil and gas business. The Transcontinental Oil Co. was organized for the purpose of acquiring all of these properties, it being Benedum's idea that such a consolidation would result in an effective operating unit which would combine all phases of the oil business from production of the crude oil to the marketing of the refined products. Following the organization*1141 of Transcontinental, the two Riverside companies transferred their assets to it for cash and Transcontinental stock. Pittsburgh-Texas conveyed its assets to Transcontinental for stock and the assumption of its liabilities. The five individuals sold their five-eights interest in the Duke-Knoles leases to Transcontinental for cash. Tex-Penn conveyed its two-eighths interest in the Duke-Knoles leases and its other assets to Transcontinental. Here arises the first question. Was the consideration for Tex-Penn's property cash and stock of Transcontinental, or stock only? Though this is a question of fact to be determined upon the evidence, it is necessary, as a background, to examine the applicable taxing statute and regulations. The parties are agreed that this question is to be solved according to whether or not the facts bring the transaction under section 202(b) of the Revenue Act of 1918 and the respondent's interpretation thereof in article 1567 of Regulations 45. The statute and regulations are set out in the margin. 1 *1142 *953 Article 1567 of the Regulations has been in effect in substantially the same form since its original promulgation shortly after the passage of the Revenue Act of 1918, and the parties appear to be agreed that it correctly interprets section 202(b) of the statute and should be so accepted in solving the questions presented here. We are not disposed at this late date to question this interpretation, although it may not be amiss to point out that the validity of the provisions which allow property (other than securities) to be exchanged for securities without recognition of gain has not gone unchallenged. See Insurance & Title Guarantee Co. v. Commissioner, 36 Fed.(2d) 842. The laws of Delaware, under which Transcontinental was incorporated, permit the issuance of no par value stock without requiring the corporation to set up an amount of capital or an amount of stock issued which may not be impaired by dividends. In view of this situation the parties are agreed that, within the meaning of article 1567, the no par stock of Transcontinental is to be regarded as having no greater aggregate or face value than the par stock of Tex-Penn. See S.M. 2244, *1143 III-2 C.B. 33. Throughout the consideration of these cases it should be borne in mind that the statute recognizes that gain may be realized or loss sustained on exchanges of property, and where a gain is realized it is subject to tax unless specifically excepted. Section 213 specifically includes in income the gain realized from dealings in property. For the purpose of determining the amount of gain or loss on an exchange, the property received is to "be treated as the equivalent of cash to the amount of its fair market value, if any." Sec. 202(b). It is only in the exceptional case, and where such case meets clearly the *954 conditions specified in the statute, that a realized gain from an exchange is not recognized for tax purposes. Some of the cases have construed the "nonrecognition of gain" provisions of this and other revenue acts as providing merely for "postponement" of the imposition of the tax (David B. Gann,23 B.T.A. 999), and others as allowing "exemption" from tax. Insurance & Title Guarantee Co. v. Commissioner, 36 Fed.(2d) 842; *1144 Pinellas Ice & Cold Storage Co. v. Commissioner,287 U.S. 462; Cortland Specialty Co. v. Commissioner, 60 Fed.(2d) 937. Whichever of these may be the correct rule in construing the statute, in any event the burden is on the taxpayer to bring itself unequivocally within the terms of the statute under which it seeks to avoid recognition of a gain. The particular portion of section 202(b) with which we are concerned is as follows: * * * 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 * * *. This language has been construed by the respondent in article 1567 as including cases of the exchange of property of one corporation for stock of another. Restating article 1567 by eliminating the parts not applicable at this point, and substituting the corporate names for the letter designations, the article would read as follows: In general, where two (or more) corporations unite their properties by either * * * (d) the*1145 merger of Tex-Penn into Transcontinental, or (e) the consolidation of the corporations, no taxable income is received from the transaction by Transcontinental or Tex-Penn or the stockholders of either, provided the sole consideration received by Tex-Penn and its stockholders in * * * (d) is stock or securities of Transcontinental, and by Transcontinental and Tex-Penn and their stockholders in (e) is stock or securities of the consolidated corporation. It is to be noted that the nonrecognition of taxable gain is conditioned upon "the sole consideration" being stock or securities of Transcontinental. Consequently, if either Tex-Penn or its stockholders received anything other than Transcontinental stock or securities upon the transfer of Tex-Penn's assets to Transcontinental, they cannot qualify as coming within section 202(b) and article 1567 and they will all be subject to tax on any gain realized. It is here that the first point of difference between the parties arises. Petitioners contend that the sole consideration for the assets of Tex-Penn was stock of Transcontinental, which stock by agreement of all concerned was issued directly to Tex-Penn's two stockholders, *1146 Benedum and Parriott. The respondent claims that Tex-Penn received as consideration for its assets not only Transcontinental stock, but also $350,000 in cash. *955 This difference between the parties requires an investigation into the facts surrounding the item of $350,000. There is no dispute concerning the actual payment of the $350,000 by Transcontinental to Tex-Penn; this is not only established by the evidence, but petitioners admit that Tex-Penn received the money and used at least a part of it to pay outstanding obligations. They claim, however, that the money was no part of the consideration for Tex-Penn assets, but was part of the $9,000,000 consideration for the reserved five-eighths interest in the Duke-Knoles leases owned by the five individuals, and, by agreement among themselves, was permitted to be "diverted" to Tex-Penn for the purpose of paying off that company's debts so that its assets could be conveyed free and clear of all claims. Both parties here cite the fundamental rule that questions of taxation must be determined by what was actually done rather than by the design and purpose of the participants. *1147 United States v. Phellis,257 U.S. 156; Weiss v. Stearn,265 U.S. 242; Anna M. Harkness,1 B.T.A. 127. The difficulty in applying this admittedly sound rule lies in the conflict in the evidence as to whether or not the $350,000 was part of the consideration for the Tex-Penn assets. Two avenues of approach are open to us in determining what was actually done. First, a study of the contemporaneous written records of the transaction, and second, an analysis of the subsequent testimony of interested parties who now contend the records are wrong. Let us first examine the written records. On July 24, 1919, Benedum and Parriott agreed in writing with Holliday that they would cause Tex-Penn to transfer all of its properties to Transcontinental "for and in consideration of Three Hundred and Fifty Thousand Dollars ($350,000) in cash and * * * stock" of Transcontinental. On the same day Holliday addressed a letter to Tex-Penn offering to purchase all the Tex-Penn properties "for a consideration of Three Hundred and Fifty Thousand ($350,000) Dollars in cash and * * * stock" of Transcontinental. The next day, July 25, 1919, a special*1148 meeting of Tex-Penn directors was held at which it was resolved to accept Holliday's offer of purchase "for three hundred and fifty thousand dollars ($350,000) cash and * * * stock," and at the same meeting it was further resolved to "direct Mr. Holliday that the three hundred and fifty thousand dollars ($350,000) cash payable to this company, in accordance with Mr. Holliday's offer, shall be paid to the Treasury of this company." By letter of July 30, 1919, Holliday directed Transcontinental to pay $350,000 to Tex-Penn. On July 31, 1919, Transcontinental issued its check to Tex-Penn for $350,000. On the Parriott, Attorney, accounts under date of August 1, 1919, the item of $350,000 was charged to Tex-Penn and credited to Benedum and *956 Parriott. In the income tax return of Tex-Penn for 1919 it reported that it "sold and transferred its property to the Transcontinental Oil Company for Three Hundred and Fifty Thousand ($350,000) Dollars cash and shares" of Transcontinental stock. There are other records showing indirectly, but none the less clearly, that at the time the deal was consummated the $350,000 cash was a part of the consideration moving to Tex-Penn and was not, *1149 as contended by petitioners, consideration to the five individuals and by them contributed to Tex-Penn. In the so-called correcting entry of December 31, 1919, in the Parriott, Attorney, accounts, it is explained that the effect of the $350,000 being paid to Tex-Penn was to reduce the "sale price" of the five-eighths interest to $8,650,000. In the statements of account dated December 31, 1919, the sale price of each individual share is shown as a pro rata portion of $8,650,000 and not $9,000,000 as it would be had the $350,000 been consideration to the five individuals. In the 1919 returns of Benedum and Parriott they reported as profit from the sales of their interests in the leases the net amounts they received out of $8,650,000. In the face of this solid phalanx of written records describing the $350,000 as consideration for Tex-Penn assets, the petitioners stoutly maintain that the sole consideration was Transcontinental stock and that the recitals in the records are erroneous. It may be taken for granted that Benedum and Parriott wanted, if possible, to avoid any income tax being imposed on the proceeds of the transaction. During the negotiations they were represented*1150 by an attorney who testified that he was familiar with the provisions of article 1567 and that the parties were most solicitous to keep within those provisions. In that situation it would seem obvious that all parties concerned would naturally be careful to avoid any mention of cash or anything other than stock as a consideration of the Tex-Penn assets. What, then, is the explanation for the repeated statement of $350,000 cash as consideration? The attorney who prepared the agreement of July 24, 1919, between Benedum, Parriott, and Holliday, the letter of the same date to Tex-Penn offering to purchase all of its assets, and the minutes of the Tex-Penn directors' meeting of July 25 - all of which recite that the $350,000 was part of the consideration - gave as his explanation that the $350,000 was placed in the several documents through inadvertence in the pressure of matters requiring attention incident to the closing of the deal. We are unimpressed by his testimony that, "possibly as a result of talking with the bookkeeper who was tallying up the figures, that figure got into that situation as money going to Tex-Penn." It would be less difficult to accept such an explanation for*1151 an error of omission than in a situation such as exists in this case. If, as the testimony goes, *957 the parties carefully planned to keep cash out of the transaction between Transcontinental and Tex-Penn because of their familiarity with article 1567, it is difficult to understand how such an important change could be made in several documents through mere inadvertence, and, if so made, how it could escape detection by some of the interested parties. With respect to the minutes of the Tex-Penn directors' meeting it is carefully explained that two drafts were prepared in advance of the meeting. The first, which was not offered in evidence, it is said contained no reference to the $350,000, the testimony being that "We were most particular to avoid that particular feature." However, just before the meeting a second draft was prepared. This draft, containing the recitation of $350,000 as part consideration, became the official record of the action of the directors. The claim that this insertion was by inadvertence does not commend itself to us as a sufficient explanation. It is almost beyond belief, if the parties intended to omit reference to this peculiarly important*1152 item, and did so in the first draft, that it could have crept into the second draft solely by inadvertence, as suggested by petitioners. It is said that the direction in Holliday's letter of July 30, 1919, to Transcontinental to pay $350,000 to Tex-Penn was given upon instructions from Parriott. This attempted explanation adds nothing to the situation. It had previously been agreed that Tex-Penn was to receive the cash, and the Tex-Penn directors when accepting the offer of purchase had adopted a resolution whereby the officers of the company were to direct Holliday that the "cash payable to this * * * shall be paid to the treasury of this company." Had Parriott instructed Holliday otherwise there might be some reason for an explanation. As the matter stands he merely carried out the previously recorded understanding of the interested parties. Nor does Holliday's testimony to the effect that Parriott told him that the five individuals had agreed to make up a fund sufficient to clear Tax-Penn of debts, and that Parriott directed him to deduct the agreed amount from the $9,000,000, lead us to a different conclusion from that already indicated. Though it is true that in a*1153 sense the $350,000 was to be deducted from the $9,000,000 which the individuals had at one time expected to receive, this does not establish that they were to receive the $9,000,000 in full and then pay a part of it over to Tex-Penn. The consent of the individuals to have the $350,000 deducted from their distributive shares, coupled with the definite characterization of that amount as consideration moving to Tex-Penn, indicates clearly that the individuals intended to allow a reduction by that amount in the consideration coming to them. The inference from Holliday's further testimony that the block of Transcontinental stock was the sole *958 consideration for Tex-Penn assets is not supported by the documents he signed at that time. The Parriott, Attorney, book entries relating to the $350,000 are set out in the findings of fact. Petitioners speak of these entries as convincing evidence of the origin and character of the $350,000. As we read the entries made at the time of the transaction, they properly reflect the consideration paid under the agreement that had been reduced to writing on July 24, 1919, whereby, in so far as Transcontinental was concerned, Benedum and*1154 Parriott were to get $3,400,000 and Tex-Penn $350,000. The later so-called correcting entry, instead of changing the records on this item, when read with the explanation appended, substantiates what was previously recorded, namely, that the $350,000 was consideration to Tex-Penn. The explanation is that the $350,000 by being paid to Tex-Penn had the effect of "-reducing such sale price", that is, the sale price of the five-eighths interest, to $8,650,000. The agreement among the five individuals whereby Benedum and Parriott had a right of contribution against the other three which would eventually give them more than $3,400,000 does not serve to change the consideration agreed to be paid and actually paid by Transcontinental. It is also significant that as late as June 1920, Tex-Penn in its income tax return, signed by Parriott, reported that it had sold its assets for $350,000 cash and Transcontinental stock. In our opinion the communications addressed by Wrather, Lantz, and Kirkland to Parriott are not decisive of the questions concerning the $350,000. Petitioners point to the letter of July 14, in which those three authorize Parriott "to apply and deduct from our distributive*1155 shares" a sufficient amount to satisfy the obligations of Tex-Penn. The only one of those three men now living, Wrather, testified that in executing the several documents in connection with the sale of their interests the three were considering only "the net results * * * the ultimate objective," rather than the details. In other words, they were not concerned with the treatment of the $350,000 as between Tex-Penn and Transcontinental as long as they received $5,250,000 less whatever amount was necessary to clear Tex-Penn of its debts. And it is to be noted that Tex-Penn and Transcontinental were not parties to any alleged agreement that a part of the consideration to the five individuals was to be diverted. The agreements on this matter were only between the individuals. This may explain why in some places in the documents it is stated that Benedum and Parriott were to receive $3,400,000 instead of the amount they actually received. Having authority from their associates to exact contributions for a pro rata portion of the $350,000, they were not particularly concerned that the consideration coming *959 to them was stated in an amount less than the amount they actually*1156 received. Viewed in this way there is not the inconsistency between the various written records that petitioners claim exists and which they say makes the records unreliable. But of a certainty the understanding of these three men among themselves, whatever it was, or the construction to be put on their letters, whatever it be, could not change the consideration agreed upon between Transcontinental and Tex-Penn for the assets of the latter. Even though Benedum and Parriott, who were the sole stockholders of Tex-Penn at the time, may have had a different concept of what was intended, we cannot accept their testimony as sufficient to overcome the legal effect of the considered and recorded action of the directors of the corporation as shown on the minutes of the meeting at which they accepted the offer of Transcontinental. As pointed out above, article 1567, upon which both parties rely as a correct interpretation of the statute, requires, as a condition of nonrecognition of gain, that the sole consideration be stock or securities, and the burden is on the taxpayer to bring itself clearly within the statute and regulations. *1157 We have examined all the evidence on this phase of the question and in our opinion the written contemporaneous documents are a more reliable record of the true agreement of the parties than the oral testimony of what was intended. In Georgetown Water, Gas & Electric Co.,28 B.T.A. 321, we said: In a controversy of this nature what was actually done is much more important than post factor testimony to show intention not evidenced by the terms of the governing agreements. C. W. Ray,19 B.T.A. 1154; J. Hampton Hoult,24 B.T.A. 79. In our opinion the answer to the question here must be determined by study of the two agreements through which the transaction was effected. The written agreements herein indicate clearly that there was a cash consideration to Tex-Penn of $350,000. We are not convinced by the oral evidence that that was not a fact. Accordingly, we hold that the petitioners have not brought themselves within section 202(b) of the Revenue Act of 1918, and article 1567 of Regulations 45, so as to escape recognition of gain. Our conclusion that the transaction is not within the nonrecognition provisions need not rest*1158 solely on our finding that the $350,000 was part of the consideration for Tex-Penn assets. It may with reason be held that Tex-Penn stockholders received cash for their stock. Under article 1567 of Regulations 45, which the parties agree correctly interprets section 202(b) of the 1918 Act, it is not only necessary that Tex-Penn receive as a consideration only stock or securities, but it is also necessary that the stockholders receive only stock or *960 securities for their Tex-Penn stock. If the stockholders receive other than stock or securities, the transaction is taxable, regardless of whether any cash passed to Tex-Penn. When negotiations were pending with the bankers for the purpose of arranging to finance the proposed Transcontinental Co., Wrather, Lantz, Kirkland, and Parriott, under date of June 2, 1919, authorized and directed Benedum to sell the entire holdings of Tex-Penn and their individual interests in the leases for $12,000,000, which sum they agreed to accept pro rata "for their entire holdings in the Tex-Penn Oil Company as well as for their individual interests in the properties operated by said company." They thereafter executed, together with Tex-Penn, *1159 a joint conveyance of the entire seven-eighths interest in the property, which instrument was placed in escrow and was later delivered to Transcontinental, and thereby became the means of transferring and conveying to that company all interests in the Duke-Knoles leases. Although changes were made from time to time as Benedum negotiated with the bankers and Transcontinental, and he was required to forego $3,000,000 of his share in cash (apparently to be compensated for in stock), the other individuals, and particularly Wrather, Lantz, and Kirkland, persisted in their demand for their proportionate part of the sum as originally fixed. It is true the shares of Tex-Penn went to Benedum and Parriott and the reserved interests to Transcontinental, but we think it must be conceded that the sum received, particularly by Wrather, Lantz, and Kirkland, covered all their interest in the Duke-Knoles Knoles leases and Tex-Penn stock. It cannot be seriously urged that the $30 paid for the stock served to compensate them for their interest in Tex-Penn; some part of the cash from Transcontinental included payment for those shares. This was the original agreement; that amount (less the $350,000) *1160 was entered on the Parriott, Attorney, accounts as consideration for both the stock and lease interests and the receipts given for the cash acknowledged that it was in payment for both. Wrather, Lantz, and Kirkland did not consider that they were completely and irrevocably out as stockholders upon the assignment of their stock, but, on the contrary, in the event the full consideration was not paid they would resume their positions as stockholders, and they so stipulated when they assigned their interests to Parriott. The petitioners, however, insist that effect must be given to two sales - one of the reserved interest to Transcontinental, and the other the sale of the shares of Tex-Penn to Benedum and Parriott. We are not here concerned, however, with the matter of the recognition of separate transactions, but with determining whether or not the consideration passing to Wrather, Lantz, and Kirkland was consideration *961 for both their reserved interests in the Duke-Knoles leases and their stock in Tex-Penn. To accept $30 as the actual consideration when the finality of the sale is made to depend expressly upon the receipt of $5,250,000 recited as consideration for other*1161 property, and in the face of the fact that this large sum is the exact amount formerly agreed upon as consideration for both, would require us to ignore pertinent facts indicating that the nominal consideration stated was not the real consideration. Moreover, to treat such recited consideration as the actual one, although unsupported by any fact or circumstance indicating it to be the fair consideration other than its bare recital as such, is unreasonable on its face. The transfer of their shares in Tex-Penn by Wrather, Lantz, and Kirkland to Benedum and Parriott for the nominal sum of $30 in our opinion was obviously but a step in the consummation of the broad plan originally undertaken. The reasonable conclusion is that some part of the cash received by Wrather, Lantz, and Kirkland represented consideration for their stock. Though disposition of their stock was "in connection with a reorganization, merger or consolidation" under section 202(b), it does not come within the nonrecognition provisions because the "sole consideration" was not stock or securities of Transcontinental as required by article 1567. Consequently, the entire transaction becomes subject to the gain or*1162 loss provisions of the statute. THE RESTRICTIVE AGREEMENT. Petitioners maintain that even though the Transcontinental-Tex-Penn consolidation was outside the scope of the nonrecognition of gain provisions, no income was realized in 1919 upon the receipt of the Transcontinental stock because of the restriction imposed by the bankers against the sale or other disposition of the block of stock during the life of the bankers' syndicate. An inquiry into the circumstances surrounding the so-called restrictive agreement leads to the conclusion that the restriction thereby imposed was not so extensive as the bare words "restrictive agreement" would indicate. It was a purely oral agreement and we must gather its full import from the testimony of several witnesses. The testimony is that the agreement was between Benedum and Parriott on the one hand and the bankers on the other. Parriott testified that in entering into this restrictive agreement he acted as president of Tex-Penn as well as individually, and it is claimed that Tex-Penn was bound thereby. It does not appear, however, that Tex-Penn as a corporation was a party to the agreement or that it ever took any corporate action*1163 recognizing in any way that it was bound. While it is recognized that the president has more or less limited *962 powers in respect of ordinary routine business matters of the corporation (Fletcher on Corporations, sec. 2012) certainly this rule does not extend to the imposition of a general restriction on the use of the bulk of the corporation's property. Likewise, it does not appear that Transcontinental was ever a party to or recognized the agreement. Neither of these corporations as far as the record shows placed any restriction on the use or disposition of the stock, which was constructively received by Tex-Penn and actually received by Benedum and Parriott. While these omissions in the evidence, whether they be the result of oversight or the lack of provable facts, decidedly weaken petitioners' claim of a binding restriction, we do not find it necessary to rest our decision on them. The important point requiring decision here is the effect of the agreement on the stock in the hands of Benedum and Parriott. This question must be solved in the light of the statute, which treats as income property received to the extent of its fair market value, if any. Whether section*1164 202 of the statute requires the fixing of some amount as a fair market value, as is necessary under other sections where that phrase occurs, does not require decision at this point. However, it would seem that the use of the words "if any" recognizes the possibility of situations where there may be no fair market value and it is perhaps that on this premise, without a critical analysis of the statute, it has been held, on a clear showing, that in fact property received had no fair market value and hence gave rise to no income. Be that as it may, for the purpose of the point before us it must be assumed that, the restrictive agreement aside, the stock had a fair market value. Otherwise we would have reached the end of the case before this. We cannot believe that the taxing statute may be read in such a way that property otherwise having a fair market value may be said to have been deprived of that value because the owner voluntarily agrees with some other person not to dispose of it for a limited time. It would hardly be said under other circumstances that the value of property is wholly destroyed by reason of an agreement to withhold it from the market for the time being. For*1165 example, it is not at all unusual for members of a cooperative marketing organization to refrain from marketing their produce at harvest time and to agree to hold it until a specified time or until the market price reaches a certain figure. Again, if a group of manufacturers or processors agree to withhold from the market a part of their stock on hand, it would not be said that the merchandise should be written out of inventory as having no value. The settlor of a revocable trust does not destroy the value of property by placing it in trust and thereby limiting his control over it for the time being. If in such cases *963 market value is not destroyed, the withholding in the case of securities has even less effect because of the lack of variation between units of the article. Each share of stock withheld is exactly like each share traded in on the market. Of course, the dumping of a large block might depress the value, but each share would be affected exactly to the same extent. The resort to restrictive or withholding agreements is usually prompted by selfish motives. The party agreeing to withhold feels that he stands to gain thereby, and the result to be achieved is*1166 quite the opposite of that urged by the petitioners in these proceedings. There is evidence here that the bankers who had obligated themselves to pay $20,000,000 for 500,000 shares of Transcontinenal stock would not have undertaken to do so but for the promise of Benedum and Parriott to withhold their block from the market temporarily. With the assurance given by Benedum and Parriott the bankers proceeded, as one of them put it, "to develop a market" for the stock. It was further testified that without a restriction on the large block going to Benedum and Parriott "a successful operation" in the marketing of the bankers' stock would have been impossible. As a result of the efforts of the bankers and of the 40 or 50 syndicate participants a market for Transcontinental stock was created which otherwise could not have existed and to the extent that the market for the stock was thus enlarged Benedum and Parriott reaped a benefit by withholding their stock for the time being. Petitioners ought not to be heard to say that a stand voluntarily taken to support the value of property at the same time destroys the value of that portion of the property owned by them. We cannot believe*1167 that the Government can be deprived of its legal right to tax the receipt of property because the taxpayer, to serve some end of his own, agrees not to dispose of it immediately. He may refrain from receiving the property by contract, but once having received it had the deal having been consummated, he can not either postpone or destroy the sovereign right to tax it by agreeing not to dispose of it for a time. If this be not true, an agreement to withhold the sale of a security even for a day would destroy its fair market value. The taxing act must be regarded as operative at all times and as reaching income the moment received whether it be in the form of cash or property. The fact that the recipient of the property has agreed to limit his use of it cannot retroactively disengage the fastening of the tax upon its receipt measured by its fair market value. The phrase "if any" in section 202(b) is designed to recognize the situation where property in fact has no fair market value and not the case where there is a present existing fair market value, but the taxpayer by his voluntary action and to serve his own ends fails to avail himself of it. *1168 *964 This is the view taken by the court in Wright v. Commissioner, 50 Fed.(2d) 727, where there was an agreement that certain stock was to be placed in trust for a period of five years, and it was contended that the profit could not be ascertained until the termination of that trust. The court said: The contention on behalf of the petitioners that the taxable profit accruing to them could not be ascertained until the end of the period fixed in the trust agreement of five years is not sound. Were such an agreement held to fix the date of taxation of profits in a transaction of this kind the government would be at the mercy of the purchaser and seller in each contract of sale, and if the taxing date could be postponed for five years by such a contract between purchaser and seller, it could be postponed for twenty years. True, in that case the trusteed stock was being disposed of by the taxpayer, rather than received as here, but the quoted excerpt from the opinion is equally applicable to either situation. There seem to be but few cases that have dealt with the question we have here, but those that have been decided indicate a trend of decision contrary*1169 to the holding petitioners would have us make. In Newman v. Commissioner, 40 Fed.(2d) 225; affirming 10 B.T.A. 158, property was turned in to a corporation for cash and stock, and the recipient of the stock agreed with the other two holders of substantially all the remaining stock that the stock of all three was to be pooled and that none of the three would sell without the consent of the others. It was held that the pooling arrangement did not prevent the receipt of the stock from being treated as income, the court's opinion reading in part as follows: Where a person voluntarily exchanges his property for other property under conditions that vest the power to sell the property received jointly in him and other persons, he receives taxable income to the extent of the profit derived from the transaction, if the property received has a market value and is salable by those in whom the power of sale is vested under his voluntary agreement. Undoubtedly, in the present case, the syndicate managers might have lifted the restriction within the year, and in that view they and Benedum and Parriott were in very much the same position as the joint owners*1170 considered in the Newman case. In fact the syndicate agreement only provided definitely for a continuation to October 18, 1919, and according to its terms might have been terminated before that date. In denying a petition for rehearing in the Newman case (41 Fed.(2d) 743) the court said: Taxation is an intensely practical matter. Income taxes are levied upon the basis of an annual accounting period. Rates are based upon the needs of the Government for revenue and are continually changing. Annual accounting periods must be adhered to and arbitrary shifting of income from one year to another must be prevented in order to enable Congress to successfully adjust *965 the rates to the needs of the Government. These have become fixed requirements in federal revenue taxation. We are of the opinion that a taxpayer cannot legally avoid such requirements by the simple expedient of an agreement with friends or associates not to sell until all agree and thereby select to his own liking the year in which his tax liability shall arise. In *1171 Fesler v. Commissioner, 38 Fed.(2d) 155 (affirming 13 B.T.A. 1356), the recipient of securities in an exchange contracted in writing not to sell, or negotiate for a sale for present of future delivery, or pledge them, for a period of six months. It was held that the securities received had a readily realizable market value within the meaning of the Revenue Act of 1921, and the court in referring to the restrictive agreement said that "this is rather persuasive of the fact that the securities had some market value" at the time of receipt. In Wallis Tractor Co.,3 B.T.A. 981, two consolidating companies received stock in the newly organized company for their assets. They agreed to retain the common stock received for a period of two years and agreed not to sell or dispose of the second preferred stock received - except to employees who must likewise agree not to sell - during the operations of the syndicate formed to market the stock of the new company. We held that in view of these restrictive agreements and the agreement of syndicate members to support the market at a certain price, the exchange quotations afforded little basis*1172 for the determination of fair market value. The case does not go so far as to hold that by reason of the restrictive agreements the stock received was not income. In Rodrigues v. Edwards, 40 Fed.(2d) 408, it was held that stock received by an employee as compensation, which could not be sold except with the written consent of the company or its chief stockholder, constituted income. The court said in part: The requirement of consent by a third person is not an absolute bar to negotiations * * *; on the contrary, it implies that, if such consent be secured, the stock or trust certificate is assignable. The situation here is different from such cases as K. E. Merren,18 B.T.A. 156, and Otto Braunwarth,22 B.T.A. 1008, where the consideration was placed in escrow and was not to be released until a subsequent year. Here Benedum and Parriott had the consideration in their possession, subject only to a restriction as to its use, with a possibility of the restriction being lifted within the year. The case of *1173 Eisner v. Macomber,252 U.S. 189, much relied upon by petitioners, does not hold that that which is received must be susceptible of use in any way the recipient sees fit in order for it to be income. Nor does Corliss v. Bowers,281 U.S. 376, so hold. There the income was subject to the taxpayer's "unfettered command" and the court merely held that such income was taxable to him. The *966 recent case of Burnet v. Wells,289 U.S. 670, goes far towards pointing out the fallacy of petitioners' claim that property must be free from any restriction whatsoever before it can be treated as income under the taxing statutes. There the Court sustained the taxation of trust income to the grantor in so far as the income was used to maintain insurance on the grantor's life, and said in part: Government in casting about for proper subjects of taxation is not confined by the traditional classification of interests or estates. It may tax not only ownership, but any right of privilege that is a constituent of ownership. *1174 Nashville, Chattanooga & St. Louis Ry. Co. v. Wallace,288 U.S. 249, 268; Bromley v. McCaughn,280 U.S. 124, 136. Liability may rest upon the enjoyment by the taxpayer of privileges and benefits so substantial and improtant as to make it reasonable and just to deal with him as if he were the owner, and to tax him on that basis. A margin must be allowed for the play of legislative judgment. To overcome this statute the taxpayer must show that in attributing to him the ownership of the income of the trusts, or something fairly to be dealt with as equivalent to ownership, the lawmakers have done a wholly arbitrary thing, have found equivalence where there was none nor anything approaching it, and laid a burden unrelated to privilege or benefit. In this case it seems plain enough that in receiving the Transcontinental stock the petitioners acquired at least a "right or privilege that is a constituent of ownership" which may properly be treated as income to the extent of its value. We conclude that the restrictive agreement did not operate to place the 1,007,834 shares of stock beyond the reach of the taxing statute to the extent of their*1175 fair market value at the time of receipt by petitioners. VALUATION OF THE STOCK. Thus we come to the question of determining the amount of the gain realized by Tex-Penn upon the constructive receipt of the block of 1,007,834 shares of Transcontinental stock, and the amount realized by Benedum and Parriott on the distribution to them of that block of stock. Section 202(b) of the Revenue Act of 1918, above quoted in full, contains the following provision relative to the determination of gain or loss on exchanges: 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 * * *. Our problem, then, at this point is to determine the "fair market value, if any," of the 1,007,834 share block of Transcontinental stock. In determining the deficiencies in these cases the respondent used a fair market value of $47.55. He has now abandoned that figure and asserts that the stock had a fair market value of $12 per share in the hands of Tex-Penn and $10 per share in the hands of Benedum and Parriott. *967 In the course*1176 of the trial of these cases, counsel for petitioners used as a test of "fair market value" the following: By this is meant, as distinguished from intrinsic value, the fair market value then presently realizable in cash or its equivalent and ascertainable with fair certainty. Counsel for respondent defined the term in this way: By "fair market value" is meant a price upon which a buyer, willing but not compelled to buy, and a seller, willing but not compelled to sell, will agree, both being informed as to the property, which price is in money or its equivalent, is ascertainable with fair certainty, and is realizable within a reasonable time. Upon analysis, the parties are not far apart in their definitions. The petitioners state that fair market value is the amount "presently realizable in cash or its equivalent and ascertainable with fair certainty," while respondent states it is the price "in money or its equivalent * * * realizable within a reasonable time" and "ascertainable with fair certainty." The respondent's regulations have long defined fair market value as being "that amount which would induce a willing seller to sell and a willing buyer to purchase." Art. 201*1177 of Regulations 45, 62, 65; art. 221, Regulations 74. The necessity that the buyer and seller be willing parties may be taken for granted as otherwise the requirement of "fair" market value would not be met. In Andrew B. C. Dohrmann,19 B.T.A. 507, we said that the term means: * * * the cash price at which a seller willing but not compelled to sell and a buyer willing but not compelled to buy, both having reasonable knowledge of all the circumstances, will trade. In that case we quoted from Phillips v. United States, 12 Fed.(2d) 598, in which it was said: This [fair market value] may be defined to be the value of the property in money as between one who wishes to purchase and one who wishes to sell; the price at which a seller willing to sell at a fair price and a buyer willing to buy at a fair price [will trade], both having reasonable knowledge of the facts. This definition seems to us to be the most nearly accurate of the several called to our attention and accords substantially with that of the parties. We deem it unnecessary to discuss in detail the difference between fair market price and fair market value. *1178 The statute here involved uses only the term "fair market value, if any," and the respondent is not now claiming that the current prices at which stock of Transcontinental sold on the Curb Exchange on August 1, 1919, ranging from 47 1/2 to 48 1/2, represents the fair market value at that date. That there is a distinction between the terms is commonly recognized. *968 Kountz v. Kirkpatrick,72 Pa. 376. The failure of the quoted prices to reflect fair market value, however, does not mean that the stock had no value; it simply means that resort must be had to other evidence for the purpose of determining whether such value existed and, if so, what it was. Wallis Tractor Co., supra.In North American Telegraph Co. v. Northern Pacific Ry. Co.,254 Fed. 417, it is said: The term "market value" as the words fairly import, indicates price established in a market where the article is dealt in by such a multitude of persons, and such a large number of transactions, as to standardize the price. * * * The term is, however, frequently used in a figurative sense, as meaning the fair or reasonable value of the property - that*1179 is such a value as the property would have if it were dealt in according to the practices of a market overt. For many weeks testimony was offered by the respective parties bearing on the value of the assets of Transcontinental, and while the fair market value of the stock may not be determined solely by reference to the value of the assets of the company, such value is a pertinent consideration in reaching the fair market value of the stock of Transcontinental. Ray Consolidated Copper Co. v. United States,268 U.S. 373. Pittsburgh-Texas, Riverside Eastern, and Riverside Western Assets. The fair market value of leases owned by Pittsburgh-Texas is stipulated to be $238,500. Evidence offered by petitioners establishes that the Boynton refinery of Pittsburgh-Texas had a value of $500,000. The values of assets of Riverside Eastern and Riverside Western are established at, respectively, $150,000 and $233,608. The values found are those established by petitioners' witnesses and represent values of physical properties such as land, refinery, blending, and distributing stations. Nothing has been included for any intangibles in view of the poor record of*1180 earnings. Counsel for respondent says that for this reason - unsatisfactory earnings - but little consideration has been given to the assets of these companies except as they tended to round out the facilities of the new company as a complete unit in the oil industry. In view of this situation we are satisfied to accept the values above found without inquiry as to why $2,500,000 was paid to the Riverside companies and substantial blocks of stock issued to each of the three companies for assets of such comparatively insignificant value. Tex-Penn Assets. The only assets of this company of value were its leases. It is stipulated that its leases, other than the Duke-Knoles leases, had an aggregate value at August 1, 1919, of $221,500. *969 The Duke-Knoles Leases. The block of Duke-Knoles leases in Texas, covering some 3,500 to 4,000 acres of land, is the only Transcontinental asset concerning which there is serious dispute. When we speak of these leases we mean the seven-eighths working interest acquired by the five individuals in 1917 and 1918, which was later severed when a two-eighths interest was conveyed to Tex-Penn, and then in 1919 the full seven-eighths*1181 interest was acquired by Transcontinental. The petitioners contend that the leases did not, on August 1, 1919, have any "fair market value then presently realizable in cash or its equivalent and ascertainable with fair certainty." The respondent claims that the fair market value of the leases on the date mentioned was $12,000,000. The evidence entirely convinces us that the Duke-Knoles leases did have on August 1, 1919, a very substantial market value and we have so found in our findings of fact. Undoubtedly the men who discovered and developed the Duke-Knoles Pool (or Desdemona Field as it was later called) were of the opinion throughout the year 1919 that the Duke-Knoles leases were tremendously valuable. They negotiated for the sale of the leases on the basis of a value of $12,000,000 and the testimony of Wrather is that that figure, prorated among them according to their individual interests, gave them "substantially what we thought we should have." True, the sum originally demanded was later reduced, but the reduction came out of Benedum's share and the others each received an amount equal to the share he was entitled to out of the original price of $12,000,000 - less the*1182 $350,000 hereinbefore discussed. Benedum's loss in cash by reason of the reduction in the total cash price was presumably made up by his receipt of Transcontinental stock. At the time of organization of Transcontinental it was expected that the main source of supply of crude oil would be the Duke-Knoles Pool. This pool was described by Parriott in a letter to the bankers as "one of the most prolific pools of high grade oil ever discovered," and he predicted that within a few weeks, upon completion of facilities then under construction, earnings would be in excess of $25,000 per day. Both Benedum and Parriott, in their income tax returns for 1919, filed in 1920, reported that at the time the discovery well came in the field was estimated among oil men "to be worth from $12,000,000 to $18,000,000," and they reached the figure of $15,000,000 "as representing a true value from conditions arising within thirty days after the drilling in of Duke No. 1, the Discovery Well of the Field." The same statements were made in a schedule attached to the return of Tex-Penn which Parriott executed as president. These statements were made in connection with depletion deductions based on discovery*1183 value, which under *970 the statute (secs. 214(a)(10) and 234(a)(9)) meant "fair market value of the property at the date of discovery, or within thirty days thereafter." Benefum, Parriott, and Wrather all appeared as witnesses at the first hearing in these proceedings, but not at the second hearing, which was devoted largely to the question of value of the Duke-Knoles leases, although as far as we know all were available. No attempt was made by petitioners to reconcile their expressed 1919 opinion of the value of the leases with the entire lack of worth for which they now contend. We have set out at some length in our findings the history of the discovery and development of the Duke-Knoles leases, the conditions as they existed at August 1, 1919, and some of the subsequent developments which tended to confirm in some instances, and to contradict in others, opinions based on known conditions at the basic date. We need say but a few words on this. There is no doubt that surface indications pointed to at least a possibility of the Duke-Knoles leases being extremely valuable. They were favorably located from a geological point of view. Of the 12 wells drilled prior to August*1184 1, eight showed an initial production of oil, and on that date five of these were actually producing oil. One of the wells, Knoles No. 1, was an unusually large well, having an initial production in December 1918, of 500 barrels, and after being deepened in January 1919, it had an initial of 6,000 barrels. Another well within the borders of the Duke-Knoles block, but owned by another company, came in with an initial production of 1,000 barrels. From November 1918 through July 1919, the wells on the Duke-Knoles leases produced 421,137 barrels of oil. There was a strong demand for oil and the price was high - $2.25 per barrel, and before the close of 1919 it went to $2.50. From the time the discovery, well came in, September 1918, through at least the early months of 1919, there was feverish activity among lease buyers throughout the entire Desdemona district. On the other hand, to the student of conditions facts were available which detracted somewhat from the optimistic predictions based solely on obvious conditions such as above outlined. It had been ascertained that the entire field was decidedly "spotty", that is, it was not at all unusual to have a dry hole adjacent to*1185 a large producer, and because of this condition there was no reasonable assurance that production would be obtained at any point. Perhaps the most serious condemnation of the field was the rapid rate of decline of the producing wells. The rapidity of the decline was known prior to August 1, 1919, and is shown clearly in the tabulations appearing in the findings of fact. For instance, the largest well, Knoles No. 1, with an initial production of 6,000 barrels in *971 January 1919, had an average daily production of only 448 barrels in July 1919. The next largest well, Duke No. 1, with an initial production of 600 barrels, was not producing in July. The Duke well of the Magnolia Petroleum Co., which was within the Duke-Knoles tract and produced initially 1,000 barrels in January, produced only 80 barrels in July. By August 1, 1919, the trend of development in the Desdemona Field was definitely to the north of the Duke-Knoles leases. This result was occasioned by the fact that larger wells were brought in to the north, partly in and near the town site of Desdemona, rather than on or near the Duke-Knoles leases. Wells drilled in other directions around the Duke-Knoles*1186 leases were either dry holes or gas wells, or produced too small a quantity of oil to be profitable. By August 1, 1919, a number of locations in the field had been abandoned and in some cases rigs were torn down without drilling. While it appears that lease-buying activity continued until some time after August, it also appears that the leases which changed hands related to areas comparatively small with relation to the Duke-Knoles tract and varied in distance from three quarters of a mile to five miles or more from the Duke discovery well. While these factors no doubt were discouraging and served to temper the over-optimism that had prevailed by reason of the patently favorable conditions, we cannot but believe that the Duke-Knoles leases had a very substantial value when acquired by Transcontinental. We cannot close our eyes to the fact that here was a large producing field located favorably for the production of oil, and that there was a strong demand for oil at the highest price quoted in many years. Nor can we cast aside the expressed opinions, near the basic date, of the men who discovered and helped develop the field, and the very substantial sum for which they sold their*1187 interests. It is our studied conclusion that the Duke-Knoles leases had a substantial value which may properly be taken into consideration in determining the fair market value of Transcontinental stock. Other Assets of Transcontinental. The bankers were obligated to pay Transcontinental a total of $20,225,000 for the stock they had agreed to take. Of this sum Transcontinental in turn was obligated to pay $11,500,000 for the properties of Tex-Penn, Pittsburgh-Texas, and the two Riverside companies, thus leaving in the Transcontinental treasury $8,725,000. This had not been paid in full on August 1, but the petitioners make no claim that the commitment was not worth its full face value. At August 1, Transcontinental had cash on hand in the amount of $27,697.39, which apparently came from some source other than the *972 bankers. Consequently on August 1, 1919, Transcontinental had available for its own use cash and other liquid assets with a cash value of over $8,750,000. The fact that this money was a part of the working capital of Transcontinental, available for the further development and acquisition of properties, makes it none the less an element of stock value. *1188 It is not to be presumed that the directors would squander the money, but rather that they would exercise sound judgment in its disbursement. Value of the Stock. Both parties called expert witnesses to testify as to the fair market value of the 1,007,834 shares of stock with which we are concerned. On the one side, petitioners' witnesses gave it as their opinion that the stock had no fair market value, while those testifying for the respondent fixed the fair market value at about $12 per share if unrestricted and $10 per share subject to the restrictive agreement. In James Couzens,11 B.T.A. 1040, where expert witnesses called to value the stock reached widely varying results, we remarked that the conflict of opinion and the diversity of reasoning applied demonstrated that the problem of valuation has not been devellped to the extent that any particular method of reasoning is authoritative or any particular class of persons recognized as experts. Where men of sound judgment, having the same facts before them, reach such widely varying results it becomes our duty to undertake independently the problem of fixing the fair market value of the stock. *1189 This is a task involving the weighing of many factors and circumstances. It is an undertaking that may not be accomplished by the simple application of a chosen formula to the facts and figures at hand. It is not a mere matter of mathematics. As said by the Supreme Court in Standard Oil Co. v. Southern Pacific Co.,268 U.S. 146, "the ascertainment of value is not controlled by artificial rules. It is not a matter of formula, but there must be a reasonable judgment having its basis in a proper consideration of all relevant facts." In James Couzens, supra, we said: The method of valuation is in itself unimportant, so long as it gives due regard to all the facts and relevant evidence, and results in a value which has a reasonable relation thereto. There may be no slavish adherence to a formula, Minnesota Rate Case,230 U.S. 352; Georgia Ry. Co. v. R.R. Comm.,262 U.S. 625, and whether the method should proceed from a definite study of, say, original cost, see *1190 Donaldson Iron Co.,9 B.T.A. 1081, or cost of reproduction new less depreciation, see Paducah Water Co.,5 B.T.A. 1067, and compare Rockford Malleable Iron Works,2 B.T.A. 817, or from general opinions of qualified witnesses, or from book value, or from recognized market quotations or other data, must depend upon the nature of the property under consideration and the extent to which such evidence bears a relation to its value. Moreover, since it is the stock we are considering and not the corporation's tangible or intangible *973 assets, we are not directly concerned with a method, like, for instance, that set forth in A.R.M. 34, 2 C.B. (1920) 31, for arriving at the value of good will or other intangibles separately from the tangible or other assets, or a method for classifying or segregating the constituent parts which are reflected in the value of the stock representing the whole. [p. 1162.] The determination of fair market value requires the application of judgment to proven facts. Established facts are precise, but inferences drawn therefrom vary widely. It is chiefly in the formulation of inferences*1191 that opinions vary. And it is in the reasonableness of inferences that the soundness of judgment shows itself. If the judgment applied to the facts be sound the result is reasonably accurate; if it be faulty the result will be correspondingly inaccurate. We deem it unnecessary to this report to restate the facts in detail or to review and criticize the opinions of the many witnesses called by the parties. In the findings of fact agreed values are indicated for certain assets. As to the Duke-Knoles leases, after careful study of the facts and opinions presented, we are convinced that they possessed a subtantial value. In arriving at the value of the stock we have given such weight as in our judgment should be given, to the several factors bearing thereon. We do not assign a specific value to each nor do we rely solely on the value of the assets. In the formation of a judgment of value the length of each step taken in reaching the ultimate result may not be measured with nicety nor can the weight of each contribution be precisely determined. The value which we have found is less than that asked by the Government, much less than the market price, and far less than the optimistic*1192 opinions of petitioners as expressed at about the basic date. It represents our reasoned judgment of the fair market value of the stock after studied consideration of all pertinent facts and applicable factors. Approaching the problem at hand in the light of these somewhat obvious observations, considering, testing and weighing the manifold facts in evidence, and the inferences to be drawn therefrom, and applying to the task our best judgment based on experience in many cases involving similar questions, we have determined that the fair market value of the stock of Transcontinental Oil Co. received by petitioners in the transaction before us was $7 per share. THE MINOR ISSUES. Benedum's Riverside Western Preferred Stock. Petitioner Benedum alleges that respondent erred in computing the gain, if any, derived from the retirement of his Riverside Western preferred stock. There is no question as to the amount received by Benedum upon the surrender of this stock in 1919. It was $25 *974 per share for 5,589 shares, making a total of $139,725. The question is as to the cost basis, the respondent having assigned to the stock a cost of $15 per share. As set out*1193 in the findings of fact, Benedum acquired 740 shares by purchase in the market for $13,260.64, making an average cost of a trifle under $17.92 per share. The balance of the stock was acquired from the Riverside Western in units, each unit consisting of one share of preferred and one of common at an average price of $25 per unit. No common stock was ever issued separately for cash but was issued as a bonus with the preferred. Both classes of stock were closely held and there is a record of only a few isolated sales in 1916 and 1917 when Benedum acquired his stock. The prices paid on such sales are not in evidence. The 740 shares purchased by Benedum in the market should undoubtedly take cost as the basis. Section 202(a)(2), Revenue Act of 1918. As to those shares, a recomputation using cost as the basis is directed. As to the remaining stock, petitioner has not shown that respondent erred in allocating to it a cost of $15 per share. Article 39 of Regulations 45 requires that the purchase price "be fairly apportioned" between the classes of stock, and only where it is impracticable to make such allocation is recognition of gain postponed until recovery of total cost. One*1194 witness testified that upon an examination of brokers' records listing transactions in the stock it was not possible for him to make an allocation between the two classes of stock. This does not establish that an allocation was impracticable. The respondent's action here is in harmony with the decision in Collin v. Commissioner, 32 Fed.(2d) 753, in which the court, upon finding that some part of the purchase price was paid for the common stock, remanded the case for further hearing to determine whether it was "practicable to obtain data or facts upon which a fair apportionment" might be made. In Kirkland v. Commissioner, 57 Fed.(2d) 608, it had been stipulated that it was impracticable to apportion cost, and the court held that the taxpayer was chargeable with taxable gain only after he had recovered full cost. In this case the petitioner's evidence is insufficient to overcome the prima facie correctness of respondent's determination, and on this point the respondent must be sustained. Moreover, the prices paid by Benedum on his cash purchases of preferred stock indicate that respondent's allocation is not far out of the way. Parriott's*1195 Pittsburgh-Texas Stock. By amendment to his petition, Parriott alleges that respondent erred in finding that he received in 1919 certain Transcontinental *975 stock as a liquidating dividend from Pittsburgh-Texas Oil & Gas Co., and further erred in finding that gain was derived from the alleged receipt of the stock. At the hearing counsel for Parriott conceded that in 1919 he received 455 5/6 shares of Transcontinental stock by reason of his ownership of Pittsburgh-Texas stock, and the parties stipulated that "the consideration for the transfer by the Pittsburgh-Texas Company to the Transcontinental Oil Company in 1919 of all of its assets, consisted of 158,833 shares of Transcontinental stock, and such stock only." There is no question as to Transcontinental's acquisition of the Pittsburgh-Texas assets being in connection with a reorganization under section 202(b), and, as the sole consideration was stock, the transaction comes within article 1567 and results in no gain to either Pittsburgh-Texas or its stockholders. Decision on this point is for petitioner. Limitation of Surtax. In determining the deficiencies asserted against Benedum and Parriott, the respondent*1196 applied the 20 percent surtax limitation under section 211(b) of the Revenue Act of 1918 to the gain that he determined these petitioners realized on the sale of their reserved interests in the Duke-Knoles leases. By amended answers counsel for respondent asserts that it was error to apply the limitation and asks for increased deficiencies by reason thereof. Section 211(b) of the statute provides as follows: In the case of a bona fide sale of mines, oil or gas wells, or any interest therein, where the principal value of the property has been demonstrated by prospecting or exploration and discovery work done by the taxpayer, the portion of the tax imposed by this section attributable to such sale shall not exceed 20 per centum of the selling price of such property or interest. Counsel for respondent argues that the instrument of October 31, 1918, by which a two-eighths interest in the leases went to Tex-Penn was technically an instrument of assignment or sale, as distinguished from a sublease, and the individual lessees thereby parted with their property interests in the leases. Under the instrument of October 31, 1918, there was reserved to the individual lessees something*1197 more than the mere royalty right of an assignor. There was reserved to them a five-eighths interest in the production. Throughout the trial of these cases the interest reserved to the five individuals has been regarded as a substantial property interest and in our opinion it is properly to be treated as an interest in oil or gas wells within the meaning of the statute. Cf. Palmer v. Bender,287 U.S. 551, holding that for purposes of depletion the distinction between the interest of an assignor and a sublessor is unimportant. *976 It is further contended by the respondent that the principal value of the property was demonstrated by discovery work of Tex-Penn rather than by the individual lessees. It is established beyond question that the individuals made a discovery within the meaning of the statute in what had theretofore been wildcat territory. True, a larger well was thereafter brought in by Tex-Penn, but this alone does not establish that the principal value was attributable to that well rather than to the earlier discovery well. The burden of proof on this issue rests on respondent and he has not sustained it to the point of convincing us that*1198 he erred in applying the provisions of the statute limiting the amount of surtax. Miscellaneous. In the petitions of Benedum and Parriott they allege error on the part of respondent in failing to allow as an ordinary and necessary expense any amount for certain Transcontinental stock set aside by petitioners as compensation for services to employees of Transcontinental. They allege that they set aside a block of 99,500 shares, of which Benedum contributed 59,078 and Parriott 40,422. The respondent denies error in this respect and denies the facts alleged. No mention was made of this question either in oral argument or in petitioners' briefs, from which it would appear that if they did not intend to abandon it they at least are not disposed to urge it seriously. In any event, the evidence is insufficient to support their claim. The only evidence offered by petitioners on this point is the testimony of one witness that out of the block of 1,007,834 shares of stock, 284,375 shares were delivered to and retained by Parriott, that Benedum and Parriott jointly delivered 99,500 shares to a so-called employees' fund, and that the balance went to Benedum. This obviously does*1199 not establish the right to a deduction. Reviewed by the Board. Decision will be entered under Rule 50. Footnotes 1. This well originally came in at 500 barrels. It was later deepended and in January 1919 showed a new initial of 6,000 barrels. ↩ 1. The difference between the number of shares shown as sold by Wrather, lantz and Kirkland, and the number purchased by Benedum and Parriott, amounting to 610 shares, is not explained. ↩ 1. This well originally came in at 500 barrels. It was later deepened and in January 1919 showed a new initial of 6,000 barrels. ↩ 2. No runs prior to August 1, 1919. ↩ 1. Oil on hand. ↩ 1. [Section 202(b), Revenue Act of 1918.] 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 face value, no gain or loss shall be deemed to occur from the exchange, and the new stock or securities received shall be treated as taking the place of the stock, securities, or property exchanged. [Article 1567, Regulations 45.] 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 holders in (a), (b), (c), and (d) is stock or securities of A, and by A and B and their 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 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. So-called "no-par-value stock" issued under a statute or statutes which require the corporation to fix in a certificate or on its books of account of otherwise an amount of capital or an amount of stock issued which may not be impaired by the distribution of dividends, will for the purpose of this section be deemed to have a par value representing an aliquot part of such amount, proper account being taken of any preferred stock issued with a preference as to principal. In the case (if any) in which no such amount of capital or issued stock is so required, "no-par-value stock" received in exchange will be regarded for purposes of this section as having in fact no par or face value, and consequently as having "no greater aggregate par or face value" than the stock or securities exchanged therefor.