pear on the books of the individual, firm or corporation, the difficulty of the case is apparent, but the mere absence of definite recorded figures compiled and stated on that exact date does not preclude a legitimate inquiry at a later time and an endeavor to ascertain accurate data as of that date.13 Much of the work of public accountants consists in stating accounts as of a past date, and their findings are almost invariably sustained by the courts. Therefore, if a corporation, say, in 1917, sets up in its books certain assets acquired before March 1, 1913 (but not carried on its books at any valuation, or at a low valuation), credits surplus and declares a large special dividend, it cannot be contended that there is there a distribution of taxable income, unless the undistributed earnings accumulated since March 1, 1913, are sufficient to cover the payment.

AVERAGE OF STOCK QUOTATIONS ON MARCH 1, 1913.— The question has arisen as to which price shall be accepted in case of the sale of stock listed on an exchange, which was sold at varying prices on March 1, 1913. A ruling has been issued covering this point as follows:

RULING. "The fair market price or value of March 1" is held to be the fair market price or value as of the entire day of March 1, which, in the case of variation between "opening and closing price" for the day, would mean the average price for the day. This, however, would be conditioned upon showing that the exchange quotation represented the fair market price or value of the stock, as it is this "fair market price or value" which is to control, however that fact may be ascertained. (Letter to the Corporation Trust Company, signed by Commissioner W. H. Osborn, and dated November 21, 1916.)

In view of frequent references to the March 1, 1913, date it is worth while to note that in legal and commercial usage this refers to facts as they existed at the commencement of

"Doyle v. Mitchell Brothers Company, 247 U. S. 179 (May 20, 1918). Case decided under the 1909 law: "Nor is the fact altered by the mere fact that the increment of value had not been entered upon plaintiff's books of account. Such books are no more than evidential, being neither indispensable nor conclusive. The decision must rest upon the actual facts."

business on March 1, 1913. In the regulations the date January 1, 1909, is often used. In commenting thereon the Supreme Court of the United States has said "December 31, 1908, would have been more precise," meaning that as the date from which to measure changes in values, December 31, 1908, should have been selected instead of January 1, 1909. It may safely be assumed that if called upon to pass upon a case where there was a difference between prices at the close of business February 28, 1913, and the average of prices during the entire day of March 1, 1913, the Supreme Court would uphold the closing prices of February 28, 1913.

New York Stock Exchange prices on March 1, 1913, were substantially the same as on February 28, 1913, so the point probably is of little importance.

WHAT CONSTITUTES "FAIR MARKET VALUE"?—The application of the law depends largely on a proper interpretation of the term "fair market value." This subject is fully covered in other chapters.

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It is obvious that no definite rule can be laid down which will govern all cases. The essence of the term lies in its flexibility. Regulations can do no more than indicate a course of procedure which will assume in each particular case that the individual merits of that case will be considered in coming to a conclusion.

In this the practice of the Treasury is to permit taxpayers to present evidence as to values-not only as to factors known at the time the transaction takes place, but also as to factors which are only brought to light by subsequent developments. The earning power of a property after a transfer, the price at which it subsequently sells, the subsequent prosperity or financial reverses of an enterprise—all are considered to be admissible evidence as to actual or fair market value at the time of transfer.

"Hays v. Gauley Mountain Coal Co., May 20, 1918.

Chapter XV, "Income from Sales and Exchanges," and Chapter XXXVII, "Capital Stock Tax."

Pro rata method-how far valid.-The early regulations under both the 1909 and the 1913 laws16 laid down the rule that in the case of certain appreciations in values extending through a period which began before the effective date of the law, the appreciations should be considered to have accrued evenly throughout the period. The taxable portion, consequently, should be determined by a prorating process which would make the amount taxable depend upon the relative length of the period elapsed before and after the act took effect. The Supreme Court has made it plain that this method, while in itself not illegal as a method, must be considered merely one way of ascertaining the value of the property at March 1, 1913. In certain cases it may be the best or the only way of estimating that value and in such cases the court has indicated its acceptability. In the presence of some less arbitrary and more accurate method of valuing property at the effective date of the law, the pro rata method is not to be considered valid.

In a case under the 1909 law, Hays v. Gauley Mountain Coal Company (decided by the Supreme Court of the United States, May 20, 1918)," the court pointed out the necessity of establishing the value of the capital assets on December 31, 1908, and commented as follows on methods of determining that valuation:

DECISION. Whether this should be done by taking an inventory. upon the basis of market values then existing, or whether the entire increment accruing between the time of acquiring and the time of disposing of the assets should be prorated as if it had arisen through a series of gradual and imperceptible augmentations, is a matter of detail, to be settled according to the best evidence obtainable, and in accordance with valid departmental regulations. Treasury Regulations 31, December 3, 1909, provided for inventories at the beginning and end of each year with respect to manufacturing and mercantile companies; and with regard to a sale of capital assets acquired prior to January 1, 1909, and sold thereafter, required that the amount of increment or depreciation representing the difference

1909 law, Reg. 31, 1909; 1913 law, T. D. 2291, February 8, 1916. "247 U. S. 189.

between the selling and buying prices should be adjusted so as fairly to determine the proportion of the loss or gain arising subsequent to the date mentioned; but without prescribing any particular method of doing this. Subsequent rulings required that sales of stocks and bonds should be regarded as sales of capital assets and accounted for accordingly under Regulations 31, and while still requiring inventories, resorted to the prorating method with respect to real estate, apparently on the ground that increases and decreases in the value of this class of property during particular periods could not be accurately determined. . . . .

The present case was heard upon an agreed statement of facts which contains nothing from which the value of the stock at the time the act took effect may be deduced, otherwise than by the prorating method that was adopted; nor is any objection made by the . respondent to the application of that method. Hence there is no lawful ground for overthrowing the tax.

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Again, in the case of U. S. v. C. C. C. & St. L. Railway Co.,1 decided by the same court on the same day, the court remarked that:

DECISION. Just how this part (the portion taxable because accrued after the effective date of the law) is to be separated from that which previously accrued is a matter of some nicety, as we have shown in the Hays case. The Circuit Court of Appeals adopted the theory of an inventory taken as of the time the act went into effect; and although the assets here under consideration were not acquired for the purpose of sale in the manner of merchandise, but were bought for investment, and hence were not inventoried on December 31, 1908, it accepted the stipulated fact that the stock had a regular market value of $57 per share on that date as supplying the lack of an inventory. This result accords with the views we have expressed in the cases referred to.

Income derived from sale of property acquired by gift and inheritance.

REGULATION. In the case of property acquired by gift, bequest, devise or descent the basis for computing gain or loss on a sale is the fair market price or value of the property at the date of acquisition or as of March 1, 1913, if acquired prior thereto. For the purpose of determining the profit or loss from the sale of property acquired by bequest, devise or descent since February 28, 1913, its value as appraised for the purpose of the federal estate tax, or in the case of estates not subject to that tax its value as appraised in the

"247 U. S. 195.

State court for the purpose of State inheritance taxes, should be deemed to be its fair market value when acquired. (Art. 1562.)

If the recipient of a gift disposes of it during his lifetime he must report as taxable income (if a profit be realized) the difference between the value of the gift the day it was received, or if it was received before March 1, 1913, its value on that date, and the amount realized. If the proceeds of the sale are less than the value on the date of receipt or on March I, 1913, the resulting loss is an allowable deduction.

No income tax is imposed upon the estate for any appreciation in values which may exist at the date of death, but inheritance taxes are based on actual values.

The regulation fails to state whether or not the donor of a gift must report as income the excess of value at the time of gift of the property transferred over the cost (or March 1, 1913, valuation) to him. It would not appear to be a realization, but a versatile Commissioner might deem it to be a realization. Certainly no actual income accrues to the donor. There has been no gain or profit which can be translated into terms of taxable income. There may be a type of income which is intangible, in the form of a satisfaction or gratification to the donor, but it is hardly of the kind which an income tax law could reach.

If it were possible to do so the donor should be taxed. The only feasible method would seem to be to tax gifts as closed transactions, but the difficulty would be to impute any realized gain or profit to the transaction. If the donor were disposing of trade or business assets it might be possible for the Commissioner to require him to take an inventory of his property as of the day before the date of gift.

A vast amount of property is being transferred by gift. When the transactions take place the donees should be advised of the fair market price of the property transferred and further advised of the obligation to return any profits realized when, as and if the property is sold.

The author has heard of some so-called gifts which were