Dorsey v. Commissioner ( 1968 )

Stephen H. Dorsey, et al., ^{Dorsey v. Commissioner}

Docket Nos. 3149-65, 6569-65, 6594-65, 6809-65, 6994-65, 7061-65, 206-66, 274-66, 314-66, 439-66, 444-66, 532-66, 570-66, 1317-66, 1319-66, 1440-66, 1441-66, 1787-66, 1872-66, 5878-66, 5879-66, 5887-66, 6164-66

United States Tax Court

49 T.C. 606; 1968 U.S. Tax Ct. LEXIS 163;

March 15, 1968, Filed

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">*163 Decisions in all dockets will be entered under Rule 50.

Petitioners were stockholders of APC, which owned the patents for the first workable automatic pinsetting machine for bowling. On Feb. 4, 1947, APC assigned its interests in the invention to AMF for $ 200,000 cash, 25,000 shares of AMF stock, and 1 percent of all receipts by AMF from the sale or lease of the automatic pinsetting machines for a period of 20 years. APC then adopted a plan of partial liquidation. On or about Sept. 16, 1954, APC was completely liquidated and its assets distributed in kind to its stockholders. Camden Trust Co. was appointed their agent to receive future payments from AMF, and the stockholders of APC surrendered their stock for participating certificates. Held, the rights of petitioners to receive future percentage-of-profits payments had no ascertainable fair market value on Sept. 16, 1954, and therefore the amount received by them are taxable as long-term capital gains. Held, further, the amounts received by the Estate of Harmon Baugh, and Myrtle Oler Teichmann, deceased, are taxable as income in respect of a decedent under sec. 691, I.R.C. 1954.

">*164 George O. Philips and Francis E. Marshall, for the petitioners.

Dennis C. DeBerry, for the respondent.

Dawson, Judge. Simpson, J., dissenting. Raum and Withey, JJ., agree with this dissenting opinion.

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DAWSON

">*165 ">*606 In these consolidated cases the Commissioner determined the following income tax deficiencies against the petitioners: ">*607

Petitioners	Docket	Taxable	Deficiency
	No.	year
Stephen H. Dorsey	3149-65	1961	$ 310.97
Leonard R. Oler and Ida Oler	6569-65	1960	1,091.15
		1961	1,456.21
		1962	2,654.56
		1963	2,463.49
		1964	694.66
Stanley E. Oler and Florence Oler	6594-65	1961	574.91
		1962	752.50
		1963	771.99
		1964	315.38
Helen G. Winchester and Edgar T. Winchester	6809-65	1962	180.21
William B. Dorsey, Jr	6994-65	1961	302.36
		1962	171.00
		1963	166.00
		1964	148.00
William B. Dorsey and Ida S. Dorsey	7061-65	1960	977.78
		1961	1,027.87
		1962	1,476.77
		1963	1,698.59
		1964	1,067.36
Helen S. Hammell	206-66	1961	1,642.54
		1962	1,861.81
		1963	1,952.94
W. Ernest Flemming and Aileen Flemming	274-66	1961	696.44
		1962	609.85
		1963	542.62
		1964	543.82
Paul Hollingsworth and Elizabeth Hollingsworth	314-66	1961	375.09
		1962	449.99
		1963	569.88
Edward W. Howe and Blanche G. Howe	439-66	1961	425.95
		1962	610.30
		1963	624.97
		1964	524.15
Alwyn L. Newman and Lillian R. Newman	444-66	1961	1,201.93
		1962	1,395.15
		1963	1,133.82
		1964	736.56
Ruth Hollingsworth	532-66	1962	123.48
		1963	Elsie H. Luethy	570-66	1961	5,384.38
		1962	6,755.85
		1963	6,827.72
		1964	5,693.32
Estate of Myrtle M. Oler Teichmann
(Edward I. Berry, Executor)	1317-66	1962	15,355.76
		1963	1 10,301.63
Estate of Myrtle M. Oler (Edward I. Berry,
Executor)	1319-66	1960	13,531.66
		1961	13,750.44
		1964	15,098.44
Estate of Harman E. Baugh (Olga G. Baugh,
Executrix)	1440-66	7/25/63-	626.43
		12/31/63
		1964	427.89
Estate of Harman E. Baugh (Olga G. Baugh,
Executirx) and Olga G. Baugh, as survivor	1441-66	1961	1,209.29
		1962	1,294.74
		1963	476.18
William R. Stover and Anna M. Stover	1787-66	1961	403.44
		1962	468.29
		1963	476.16
Joseph C. Clark and Margaret R. Clark	1872-66	1960	49,487.13
		1961	59,770.39
		1962	67,340.66
		1963	74,757.85
		1964	55,697.76
Bruno Gallia and Frances Gallia	5878-66	1961	540.36
		1962	644.98
		1963	412.54
		1964	374.48
Helen G. Winchester and Edgar T. Winchester	5879-66	1963	183.46
		1964	153.86
Mary E. Levis	5887-66	1960	210.67
		1961	264.83
		1962	326.78
		1963	266.22
Matthew Hollingsworth, Jr	6164-66	1961	848.27
		1962	1,081.44
		1963	961.82
		1964	903.88

">*166

">*608 The principal issue in these cases is whether certain amounts received by the petitioners during the years in controversy are taxable as capital gains or as ordinary income. The answer depends upon whether assets distributed in kind to petitioners, as stockholders of the Automatic Pinsetter Co., had an ascertainable fair market value when the corporation liquidated on September 16, 1954. If the assets distributed to petitioners had an ascertainable fair market value, then we must determine what the fair market value was on September 16, 1954.

A subsidiary issue is whether income received by two of the petitioners -- Estate of Harman Baugh and Estate of Myrtle M. Oler Teichmann -- constitutes income in respect of a decedent under section 691, I.R.C. 1954.

Respondent concedes that, if the decision on the principal issue should be in his favor, the Estate of Harman E. Baugh, docket No. 1440-66, will be entitled to an allocable deduction under section 691(c) for the estate tax paid on the rights received on liquidation. ">*167 In addition, there are certain mathematical adjustments in medical, standard, and itemized deductions which can be given effect in the Rule 50 computations.

FINDINGS OF FACT

Some of the facts have been stipulated by the parties. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference and are made a part of our findings.

The legal residence of the various petitioners at the time they filed their petitions in these proceedings and the district directors of internal revenue with whom they filed their Federal income tax returns, all on the cash basis of accounting, are as follows:

		Income tax returns
Petitioners	Legal residence	filed with district
		director
Stephen H. Dorsey	Westmont, N.J.	Camden, N.J.
Leonard R. Oler and	Camden, N.J.	Camden, N.J.
Ida Oler		Newark, N.J.
Stanley E. Oler and	Camden, N.J.	Camden, N.J.
Florence Oler		Newark, N.J.
Helen G. Winchester and	Philadelphia, Pa	Philadelphia,
Edgar T. Winchester		Pa.
William B. Dorsey, Jr.	Westmont, N.J.	Camden, N.J.
		Newark, N.J.
William B. Dorsey and	Westmont, N.J.	Camden, N.J.
Ida S. Dorsey		Newark, N.J.
Helen S. Hammell	Haddonfield, N.J.	Camden, N.J.
		Newark, N.J.
W. Ernest Flemming and	Camden, N.J.	Camden, N.J.
Aileen Flemming		Newark, N.J.
Paul Hollingsworth and	Moorestown, N.J.	Camden, N.J.
Elizabeth Hollingsworth		Newark, N.J.
Edward W. Howe and
Blanche G. Howe	Somers Point, N.J.	Camden, N.J.
		Newark, N.J.
Alwyn L. Newman and	West Collingswood, N.J.	Camden, N.J.
Lillian R. Newman		Newark, N.J.
Ruth Hollingsworth	Moorestown, N.J.	Camden, N.J.
		Newark, N.J.
Elsie H. Luethy	Pennsauken, N.J.	Camden, N J.
		Newark, N.J.
Estate of Myrtle M. Oler	Executor of estate:	Camden, N.J.
Teichmann, deceased,	Camden, N.J.
(Edward I. Berry, Executor).	Decedent: Riverton, N.J.	Newark, N.J.
Estate of Myrtle M. Oler	Same as above	Camden, N.J.
(Edward I. Berry,		Newark, N.J.
Executor).
Estate of Harman E. Baugh	Executor of estate:	Newark, N.J.
(Olga G. Baugh,	Merchantville, N.J.
Executrix).
Estate of Harman E. Baugh,	Same as above	Camden, N.J.
deceased (Olga G. Baugh,		Newark, N.J.
Executrix)
and Olga G. Baugh.
William R. Stover and	Cape Coral, Fla.	Jacksonville,
Anna M. Stover		Fla.
Joseph C. Clark and	Orlando, Fla.	Jacksonville,
Margaret R. Clark		Fla.
Bruno Gallia and Frances Gallia	Haddonfield, N.J.	Camden, N.J.
		Newark, N.J.
Helen G. Winchester and	Philadelphia, Pa.	Philadelphia,
Edgar T. Winchester		Pa.
Mary E. Levis	Attleboro, Mass.	Boston, Mass.
Matthew Hollingsworth, Jr.	Moorestown, N.J.	Camden, N.J.
		Newark, N.J.

">*168 Office of the District Director of Internal Revenue, Camden, N.J., ceased its existence on Dec. 31, 1963

">*609 Prior to 1946 the proprietors of bowling alleys were required to employ boys to perform the work of pinsetting. The duties of a "pinboy" were to remove from the bowling alleys all tenpins which had been knocked down by a bowling ball and, at appropriate times during the course of the game, to place tenpins in a vertical position on the bowling alley in accordance with the rules of the game. They also returned bowler's ball to the bowler after the ball had completed its course. Pinboys were scarce, inefficient, unreliable, and helped to give bowling establishments an unsavory reputation in many communities and their demands for tips helped to increase the true cost of bowling.

During 1940 one of the petitioners, Joseph C. Clark (hereinafter called Clark), and others conceived the idea of inventing a fully automatic machine which would do all the work of a pinboy. When Clark began work on a machine to set bowling pins and to return the ball (hereinafter called a pinspotter or pinsetter), bowling establishments were usually located in large communities, in undesirable">*169 neighborhoods, in cramped locations, and often bore an unsavory reputation. At that time most bowling establishments were small, having 8 to 12 alleys. After the invention of a pinspotter they grew to establishments having as many as 114 alleys. Also at that time most bowlers were adult males.

The most difficult problem to be solved by an inventor of a fully automatic pinspotter was to design a machine that would accurately clear away fallen pins without disturbing the location of pins that remained standing after the first ball had been rolled, even though the pins were no longer at their original location (commonly known as offspot pins).

Clark lacked the money required to complete his work on the invention and to produce a fully automatic pinspotter. He sought financial backing from various manufacturers of machinery, among them Brunswick-Balke-Collender Co. (hereinafter called Brunswick), but had no success.

">*610 Clark and other men interested and experienced in bowling formed on February 17, 1944, a New Jersey corporation known as Automatic Pinsetter Co. (hereinafter called Pinsetter Co.) to which he conveyed all of his drawings, dies, working models, inventions, and">*170 patent applications in exchange for stock. Other stock was sold to friends of the original incorporators at $ 5 per share. At all times pertinent in these cases the number of Pinsetter Co. shares authorized and outstanding was 75,000, all of which was voting common stock. There were about 275 shareholders of Pinsetter Co. Clark owned 17,125 shares and was the largest shareholder. Clark thereafter worked for Pinsetter Co. and was its treasurer.

While Clark, through Pinsetter Co., was working on the invention of a fully automatic pinspotter, other persons and companies completely unconnected with Clark and Pinsetter Co. were attempting to achieve the same objective, among them Brunswick and American Machine & Foundry Co. (hereinafter called AMF).

At a meeting and tournament of the American Bowling Congress held in Buffalo, N.Y., in 1946, AMF demonstrated a pinspotter which it intended to produce commercially. At the same meeting Pinsetter Co. exhibited a motion picture of the Clark machine. At that time Brunswick did not have its pinspotter ready for exhibition or demonstration.

The Clark (Pinsetter) machine performed in conformity to all the rules of bowling, especially with">*171 respect to off-spot pins.

Subsequent to the 1946 meeting of American Bowling Congress in Buffalo, Brunswick offered to purchase from Pinsetter Co., the Clark invention. During the course of such negotiations Pinsetter Co. received a competing offer from AMF to acquire the Clark invention. This occurred on or about October 29, 1946.

The competing offers of Brunswick and AMF to Pinsetter Co. were submitted to a meeting of shareholders of Pinsetter on November 7, 1946. The shareholders rejected the Brunswick offer. They accepted the AMF offer which was in the form of a letter from Moorhead Patterson, president of AMF. The offer provided as follows:

American Machine & Foundry Company hereby makes offer to you as follows:

(a) A cash payment of two-hundred thousand dollars ($ 200,000).

(b) Twenty-five thousand shares of common stock of the American Machine & Foundry Company.

(c) 1%, for a period of 20 years of all receipts by American Machine & Foundry Company from the sale or lease of Automatic bowling pinsetting machines whether or not covered by your patent applications.

These amounts are offered as full payment for all the assets of the Automatic Pinsetter Co., Inc., free and clear">*172 of all encumbrances, except cash items and financial records.

">*611 These purchases [sic] are to be divided as follows:

(a) The two-hundred thousand dollar payment is for the purchase of the tangible assets of the Automatic Pinsetter Co., Inc., including but not limited to all machines, drawings, tools, patterns, dies, alleys, jigs and fixtures, engineering data and records, motion pictures and sales data, all the uncompleted automatic pinsetting machines and parts, but not including any inventions or patents issued or applied for.

(b) The twenty-five thousand shares of American Machine & Foundry Company common stock and the 1% of the receipts from the sale or rental of automatic bowling pinsetter machines referred to above, shall be payment of all right, title and interest, in and to all inventions and patents or applications for patents, whether or not filed on or issued, now owned or controlled by Joseph C. Clark and or Automatic Pinsetter Co., Inc., relating to bowling pinsetting machines and accessories thereto. Receipts as used in this offer shall mean receipts exclusive of installation, transportation and service charges.

A certified check for two hundred thousand dollars">*173 ($ 200,000) is attached as the first payment referred to in this offer. This check may be deposited by you when this offer has been accepted upon approval of the stockholders of the Automatic Pinsetter Co., Inc.

An acceptance of this offer by you constitutes a representation that the machines referred to are designed to function substantially as described in the circular you issued at Buffalo in April 1946, and that you are free to accept our offer.

This offer expires November 12, 1946, unless sooner extended.

The informal terms of the offer letter were later placed in a formal written contract (except for the $ 200,000 which had already been paid) dated February 4, 1947. Upon execution of the contract by AMF and by Pinsetter Co., AMF issued 25,000 shares of its stock to Pinsetter Co. and the latter assigned to AMF all of the Clark patent applications and all rights to the invention.

The contract of February 4, 1947, between AMF and Pinsetter Co. provided, in pertinent part, as follows:

(a) AMF will pay Pinsetter "one per cent of all rentals received" from leasing.

(b) AMF will pay Pinsetter "one per cent of the amount received by AMF" on the first sale of a pinspotter to a purchaser">*174 not controlled by AMF.

(c) There was no provision for any payment by AMF to Pinsetter with respect to Pinspotters operated by AMF itself.

(d) "Such payments shall be made upon receipt from the rental or sale of each bowling pin spotting machine."

(e) "The term 'rental or sale' shall not include charges by AMF to customers for installation, service, maintenance, repair parts . . . ."

(f) Payments are due to Pinsetter irrespective of whether or not AMF used any part of the Pinsetter invention.

(g) All payments shall be made semi-annually with respect to semi-annual periods ending January 31 and July 31 of each year.

(h) Payments will terminate December 31, 1966.

(i) There was no provision for AMF to pay any maximum or minimum to Pinsetter with respect to future sales or leases of pinspotters.

(j) AMF was not required to consult with Pinsetter concerning any of its policies or activities relating to manufacturing, marketing, patent suits, or other ">*612 activities, its only duty to Pinsetter was to render accurate accounts with its remittances, if any.

The assignment of patent applications to AMF contemplated that it would enter the foreign market before the patents expired.

Pinsetter">*175 Co. adopted on February 21, 1947, a plan of partial liquidation under which it paid its shareholders $ 1 per share in cash (or a total of $ 75,000) and one-third of a share of AMF stock for each share of Pinsetter stock (or a total distribution of 25,000 shares of AMF stock). The plan of liquidation provided, in part, that:

This Plan contemplates the eventual complete liquidation of the Company through the distribution of all of its assets to its stockholders, in complete cancellation and redemption of all of its stock. However, only a partial liquidation is contemplated for the immediate future.

* * * *

It is contemplated that the royalty payable under the agreement with American Machine and Foundry Company may not yield any tangible results for a period of time. After payments under this royalty agreement have been received for such a period as to give the officers and directors some basis for forming an opinion as to what the possible yield from the royalty may be, it is believed that they will give consideration to final liquidation of the company and shall communicate such opinion to a special meeting of stockholders to be called for that purpose. [Emphasis added.]

After">*176 such partial liquidation, Pinsetter's remaining assets consisted of $ 125,000 remaining from the $ 200,000 originally paid by AMF, plus its executory contract to receive 1 percent of future sales and leases of pinspotters, plus any other cash that Pinsetter had at the date of partial liquidation. The $ 125,000 undistributed to shareholders of Pinsetter Co. from the $ 200,000 paid by AMF was needed for Federal corporation income taxes.

As a result of the distributions in partial liquidation of Pinsetter Co., each of the original shareholders of Pinsetter recovered his "basis" during 1947.

Between February 4, 1947, and September 1951, there was no commercial installation of a fully automatic pinspotter anywhere in the world by AMF, by Brunswick, or by any other person or corporation. However, AMF had invested several million dollars in the promotion and development of an automatic pinspotter machine.

Between February 4, 1947, and September 1951 both Brunswick and AMF were endeavoring to produce a commercially feasible fully automatic pinspotter.

Between February 4, 1947, and September 1951, AMF endeavored to purchase Pinsetter stock by the device of having stockbrokers send postal">*177 cards to Pinsetter shareholders offering to purchase their stock. As a result of the postal card solicitation, AMF was able to acquire at various times and at various prices 945 shares of Pinsetter stock for ">*613 a total of $ 1,405, or an average price of about $ 1.50 per share, as follows:

Date acquired	Number	Certificate
	shares	No.
Sept. 2, 1948	40	419
Oct. 1, 1948	100	420
Oct. 1, 1948	100	421
Jan. 31, 1949	100	422
Jan. 31, 1949	100	423
Feb. 21, 1949	20	424
June 25, 1949	25	425
Sept. 2, 1949	100	426
Feb. 3, 1950	60	427
Feb. 1, 1951	100	428
Feb. 1, 1951	200	429

The last shares of Pinsetter Co. stock acquired by AMF were acquired on February 1, 1951, in the quantity of 200 shares. All of these shares of Pinsetter stock acquired by AMF were acquired at a time when no fully automatic pinspotter had been commercially installed anywhere.

The first commercial installation of a fully automatic pinspotter was an installation of 12 machines by AMF at Mt. Clemens, Mich., in September 1951.

In 1952 only 200 pinspotters were built, and these were all installed after July 31, 1952.

After the installation of pinspotters in September 1951 at Mt. Clemens, ">*178 Mich., AMF was unable to acquire additional shares of Pinsetter by postal card solicitation or privately.

The installation of the 12 machines in September 1951 in Mt. Clemens, Mich., was the first event that resulted in an obligation upon AMF to pay cash to Pinsetter under its contract of February 4, 1947. The first installment payment by AMF to Pinsetter Co. based on the lease or sale of pinspotters was $ 89.18 for the semiannual period ended January 31, 1952, or $ .0012 per share.

The leasing experience and the sums paid to Pinsetter Co. by AMF up to and including the half-year ended July 31, 1954, were as follows:

July 31, 1951, to January 31, 1952, 12 machines leased, $ 89.18 paid.

January 31, 1952, to July 31, 1952, 12 machines leased, $ 81.37 paid.

July 31, 1952, to January 31, 1953, number of machines leased is unknown, $ 1,195.93 paid.

January 31, 1953, to July 31, 1953, 494 machines leased, $ 1,476.15 paid.

July 31, 1953, to January 31, 1954, 1,119 machines leased, $ 5,434.69 paid.

January 31, 1954, to July 31, 1954, 2,345 machines leased, $ 9,492.29 paid.

As of July 31, 1954, there were 494 pinspotters that had been leased for more than 1 year and 1,119 that had been leased">*179 for more than 6 months. The 2,345 pinspotters had been leased for 6 months or less.

">*614 The total payments by AMF to Pinsetter Co. under the installment payment provision of their contract of purchase and sale was $ 5,763,870.01, or $ 76.8516 per share of Pinsetter stock.

The highest number of pinspotters under lease by AMF in any one semiannual accounting period was 77,302 in the 6 months ended July 31, 1962, which declined to 67,497 in the 6 months ended July 31, 1966. The total number of pinspotters sold prior to July 31, 1966, was 12,740 in the United States and 3,395 foreign, or a total of 16,135.

During the period from the Mt. Clemens installation in September 1951 to July 31, 1954, the policy of AMF was to lease pinspotters only to existing bowling proprietors, subject to one exception in the case of a new establishment known as Bowlero because its proprietor was an AMF employee to whom AMF felt it had an obligation. Up to July 31, 1954, AMF was rejecting orders from bowling establishments newly built or still in the planning stage.

During 1954, AMF had outstanding five different lease forms. All of these forms provided that rentals should be a certain number of cents">*180 for each line (i.e., game) bowled by an individual bowler using AMF pinspotters, and that the said sum payable per line should be applicable only if the proprietor's charges to its customers were within a given price range (such as a price from 35 cents to 45 cents). If the proprietor charged less than the lowest sum in the price range, his "per-line" charge would be reduced; and if he charged more than the highest sum in the price range, his per-line charge would increase. The five lease forms varied in the price to be paid per line, and in the lower and upper limits of the price range whereunder the basic per-line charge would apply. Some of the leases provided that the bowling establishment would receive a certain amount of "free" service and maintenance, others provided that the bowling establishment would pay for service and maintenance. Some leases provided that the lessee would pay a minimum rental of $ 1,000, others provided the lessee would pay a minimum rental of $ 800. All of the leases provided that the lessee would be excused from any further payments (including even the minimum payment) if he discontinued business for any reason other than to go into the bowling">*181 business at a new location or under a different name.

AMF and Pinsetter Co. interpreted their contract to permit AMF to deduct from each 1-percent payment a sum for service and maintenance costs irrespective of whether or not the leases specified a separate charge for service and maintenance of pinspotters.

Between the Mt. Clemens installation in September 1951 and July 31, 1954, AMF was worried about the size of its expenses for service and maintenance and decided that it would be poor tactics to deduct the full sum from the 1 percent payable to Pinsetter, hence AMF decided to deduct an arbitrary amount of one-quarter of the total ">*615 rentals before calculating the sum due Pinesetter, promising to give Pinsetter a refund if this should prove excessive, and to reduce the future semiannual deductions to a smaller sum if experience proved that less than one-quarter of rentals was needed for service and maintenance.

AMF had no means of knowing, as of July 31, 1954, or as of September 1954 whether or not it could reduce the cost of maintenance and service, and, if so, how much reduction could be effected.

In 1954 AMF could not determine the probable life of its pinspotters. The">*182 pinspotters were subjected to much harder use than other machines that had been built by AMF for other purposes during its prior corporate existence, and hence its prior experience was not a valid criterion of the useful life of pinspotters.

The cost of service and maintenance was a major consideration in determining how much Pinsetter Co. would receive under its installment contract with AMF.

Ultimately AMF was able to reduce the cost of service and maintenance to approximately 10 percent of rentals with respect to U.S. installations; but with respect to foreign leases the deduction for service and maintenance remained at one-quarter for the duration of the AMF-Pinsetter contract.

In October 1953, AMF attempted to buy all of the shares of Pinsetter Co. which it had not previously acquired (a total of about 74,000 shares) for $ 2 per share. This offer was orally communicated to Clark, who called into the conference Walter Oler, who was then president of Pinsetter. Clark and Oler rejected the offer and did not submit it to the other shareholders. However, at a company meeting of the directors of Pinsetter Co. in October 1953, Clark informed them of the offer. At a meeting of the">*183 shareholders of Pinsetter on January 15, 1954, Clark informed them of the offer of $ 2 per share, and they took no action thereon.

On March 10, 1954, Matthew Hollingsworth wrote the following letter to the stockholders of Pinsetter Co. concerning its liquidation and dissolution:

It is now apparent that the Automatic Pinsetter Company will receive substantial income from the American Machine and Foundry Company because of the "Royalty Agreement." As things stand the amounts we receive as Stockholders will be only about half of whatever the Company receives, due to Corporate Taxes.

I have investigated various possibilities and find that a Trusteeship can be formed whereby the monies due under the agreement with AMF can be assigned to said Trustee, who will in turn distribute these receipts to us without there being any Corporate taxes involved. We will just about double our money in this manner.

I now hold a letter from the Camden Trust Company, Camden, N.J., saying that they will be glad to act as "Trustee" if I can get the support of more than ">*616 50% of the outstanding stock to vote in favor of my "Resolution" demanding that the Automatic Pinsetter Company assign its interest">*184 in this agreement with AMF to Camden Trust Company to act as "Trustee" for us. The Trust Company will issue "Certificates of Participation" in the Trust which we can hold, sell or exchange just like stock.

If you will give me your support by writing to me or signing the enclosed note I will immediately write to the Automatic Pinsetter Company and demand that they call a special meeting of stockholders to receive and vote upon my "Resolution" to have Camden Trust Company appointed as Trustee for us.

I am advised that there will be no taxable transaction involved in this procedure and that the cost of the Trusteeship is very small.

We must act now; please write to me now.

On April 15, 1954, the directors of Pinsetter Co. voted to call a meeting of shareholders to complete the liquidation, which had begun in 1947, by distributing in kind to the shareholders of Pinsetter all of its assets. The only assets of Pinsetter at that time consisted of the contract whereby AMF was to make additional payments to Pinsetter, plus a small amount of cash in banks.

At a meeting of the shareholders of Pinsetter on July 15, 1954, it was voted to liquidate the corporation and distribute in kind. At ">*185 the same meeting the Camden Trust Co. was appointed as their agent to receive semiannual payments due from AMF and to distribute them pro rata to the shareholders of Pinsetter.

The shareholders of Pinsetter Co. surrendered their stock certificates and in exchange Camden Trust Co. issued to them participation certificates evidencing the fact that the holder of a participation certificate was entitled to a fraction of all future payments to be received from AMF, the numerator of the fraction being the number of shares of Pinsetter formerly owned by each shareholder and the denominator being 75,000.

On September 16, 1954, the shareholders of Pinsetter Co. voted to dissolve the corporation and on October 5, 1954, the Pinsetter Co. was formally dissolved by act of the Department of State of the State of New Jersey. The trustees in dissolution, being the former directors of Pinsetter, paid its debts and distributed in cash 4 1/2 cents per share to each of the former shareholders.

As of the date of liquidation of Pinsetter, there was no way that AMF could judge the time when it might be able to expand its sales to cover the entire United States, or when it would be able to service pinspotters">*186 throughout the United States.

At all times prior to the liquidation of Pinsetter in September 1954, Brunswick was the dominant factor in the bowling sport or industry. From 1900 to 1954 it had furnished over 80 percent of the bowling alleys, balls, pins, and other bowling equipment, and its name and salesmen were known nationwide to every bowling alley proprietor. Brunswick had been in bowling for 109 years.

">*617 Until AMF exhibited its model pinspotter at the American Bowling Congress meeting in Buffalo in 1946 it was relatively unknown to the bowling industry. Until the Mt. Clemens installation in September 1951, AMF had no experience in placing any bowling equipment in any alley anywhere for commercial use.

Throughout the period from 1946 to the date of liquidation of Pinsetter in September 1954, it was known by AMF and by the shareholders of Pinsetter who were familiar with bowling, and by anyone who read the bowling magazines, that Brunswick was working upon the production of a fully automatic pinspotter to compete with AMF.

After its exhibition of automatic pinspotters in Buffalo in 1946 and until its first commercial installation in Mt. Clemens in September 1951, AMF">*187 used a force of five or six salesmen to keep its name before the bowling industry throughout the Nation. In 1954 Brunswick had 28 branches spread over the United States and salesmen calling upon the proprietors of all bowling establishments.

As early as March 28, 1946, Brunswick notified proprietors of bowling establishments that it was working on the production of a fully automatic pinspotter which would be ready in a short time, with delivery in quantity in 1947.

From 1946 to 1954 Brunswick attempted to persuade proprietors of bowling establishments to wait for its production of a fully automatic pinspotter rather than to use the competing AMF pinspotter.

Brunswick advertised in 1954 that it would have a new fully automatic pinspotter early in 1955; that its machine would be "Worth Waiting For"; and that Brunswick would sell its machine instead of leasing, implying that sales instead of leases would be superior to the AMF plan.

Brunswick offered free distribution of a moving picture film describing its proposed new fully automatic pinspotter which was entitled "Worth Waiting For."

An article in Fortune Magazine for October 1954 stated that Brunswick has "practically a proprietary">*188 interest in the bowling industry." The same article stated that Brunswick relies on its long-nurtured customer relations for preference in acquiring pinspotters; and that an automatic pinspotter would (a) eliminate a troublesome labor problem, (b) enable alleys to operate around the clock, (c) elevate the tone and attractiveness of bowling alleys.

In the October 1954 issue of Bowling Magazine, Brunswick advertised that its pinspotter "is now ahead of schedule" and that January 1955 will see "our pinsetter in action."

An article in National Bowlers Journal and Billiard Review for November 1954 stated that the Brunswick pinspotter was ahead of schedule and would be tested in December 1954.

">*618 On the date of liquidation of Pinsetter in September 1954 neither its shareholders nor the executives of AMF had any knowledge or means of knowledge of the date when Brunswick would become a competitor, except as stated in the Brunswick advertising. And neither Pinsetter's shareholders nor the executives of AMF had any knowledge or means of knowledge of the character or of the quality of the advertised Brunswick fully automatic pinspotter.

On the date of liquidation of Pinsetter in September">*189 1954, the officers of AMF and the shareholders of Pinsetter feared the effect of Brunswick competition whenever it should occur.

The national prestige and the commercial contacts of Brunswick were important elements in creating in shareholders of Pinsetter Co. and in officers of AMF genuine concern about the effects of Brunswick competition.

On the date of liquidation of Pinsetter in September 1954, the officers of AMF could not measure or evaluate the impact that the impending Brunswick competition would have upon installations by AMF.

The first commercial installation of a fully automatic pinspotter by Brunswick occurred in Roselle Park, N.J., on April 10, 1956.

When Brunswick began commercial installations of fully automatic pinspotters it had $ 32 million in orders. If sold at $ 8,000 per machine, this was equivalent to the cost of approximately 4,000 machines.

The total number of pinspotters sold by Brunswick from April 10, 1956, to the date of the expiration of the AMF-Pinsetter contract on December 31, 1966, was approximately 75,284.

Successful competition by Brunswick with AMF reduced the sums otherwise payable by AMF to Pinsetter under their contract of February 4, 1947.

">*190 Possible antitrust litigation against AMF would have reduced the sums otherwise payable by AMF to Pinsetter under their contract of February 4, 1947.

The outbreak of war would have adversely affected the amounts that AMF would be required to pay Pinsetter under their contract of February 4, 1947.

A change in public taste for bowling would have adversely affected the amounts that AMF would be required to pay Pinsetter under their contract of February 4, 1947.

Rentals charged bowling establishments by AMF were reduced both before and after the date of liquidation of Pinsetter in September 1954. The new leases progressively reduced the per-line charge from 12 cents, to 11 cents, to 10 cents, to 9 cents, to 8 cents, and to 6 cents.

The amount collectible by AMF from any establishment was determined from a meter installed with each pinspotter to record the number ">*619 of "lines" bowled against each pinspotter by the customers of the bowling establishments. Meters could be and were tampered with by dishonest persons. Insofar as tampering with meters was successful, the sum payable by proprietors to AMF was reduced, and the sum payable by AMF to Pinsetter was proportionately reduced.

">*191 At all times during the existence of the contract between AMF and Pinsetter of February 4, 1947, the words "receipt" and "received" were interpreted by AMF to mean, inter alia, the following:

(a) That AMF had no obligation to Pinsetter unless cash was actually brought into the possession of AMF before December 31, 1966.

(b) That AMF had no obligation to Pinsetter with respect to foreign leases until funds were received from foreign lessees of foreign purchasers in United States funds.

As of December 31, 1966, the termination date of the AMF-Pinsetter contract of February 4, 1947, AMF had bowling receivables of $ 112,700,000, had an inventory of repossessed pinspotters valued net at $ 914,000, and had provided $ 11,547,000 for bowling receivable reserves. AMF's losses from bowling accounts in 1966 were $ 7,100,000.

Management of AMF stated in 1966 that bowling is adversely affected by more competition from other sports and other leisure opportunities, by the growth of spectator events and TV football, and by a sharp drop in "open" bowling, which has not been offset by the annual rise in popularity of sanctioned league bowling. On the other hand, an increase in junior and college">*192 age bowlers and women bowlers is an element of strength.

New inventions and improvements in the AMF pinspotter subsequent to the liquidation of Pinsetter in September 1954 increased the attractiveness of the AMF machine to bowling establishments.

At no time did AMF have any assurance that minimum rentals would be collectible.

On the date of the liquidation of Pinsetter in 1954, AMF thought that perhaps portions of its machine infringed patents held by others.

On the date of the liquidation of Pinsetter in 1954, AMF did not know whether or not patentees outside the AMF organization would succeed in infringement litigation.

On the date of the liquidation of Pinsetter in 1954, a patent interference proceeding had been commenced by Brunswick against AMF. If AMF had lost in the patent litigation it could have terminated its ability to manufacture and lease its pinspotters. There was no way that AMF could measure the ultimate success of the AMF pinspotter so long as there were patent infringement problems.

On the date of liquidation of Pinsetter in September 1954, the most recent available figures from American Bowling Congress showed that the number of certified alleys in existence was">*193 58,982 of which 57,243 ">*620 were in the United States and 1,739 were foreign, these figures being compiled as of the end of the bowling season on July 31, 1954. These figures did not reflect the influence of fully automatic pinspotters except for the years 1951, 1952, and 1953.

The amount of payments received by Pinsetter from AMF pursuant to the February 1947 agreement for semiannual periods ending January 31 and July 31 to and including July 31, 1956, were as follows:

Jan. 31, 1952	$ 89.18
July 31, 1952	81.38
Jan. 31, 1953	1,195.93
July 31, 1953	1,476.15
Jan. 31, 1954	5,434.67
July 31, 1954	9,492.29
Jan. 31, 1955	$ 21,428.49
July 31, 1955	24,187.97
Jan. 31, 1956 (expense
refund)	2,119.39
Jan. 31, 1956	49,620.99
July 31, 1956	54,341.85

Many of the Pinsetter stockholders were also stockholders of AMF. They attended annual meetings of AMF. Clark was a stockholder of AMF through 1954 and received AMF annual reports.

AMF annual reports for 1951 through 1954 made statements, had pictures, and contained optimistic progress forecasts with respect to the automatic pinspotter machine and its relation to overall AMF operations. The cover of the 1953 annual report">*194 stated:

AMFAutomatic Pinspotter

The production schedule of 1,000 Automatic Pinspotters, announced in last year's report, was met, and 1,050 machines were produced. These, together with 1952 production, make a total of 1,250 machines. At December 31, 1953, 998 machines had been installed and were earning rentals. An additional 119 machines were in transit or in the process of installation. At the end of the year, something over 7,000,000 lines had been bowled on alleys equipped with Automatic Pinspotters. In addition to the assembly line at Buffalo, a second assembly line was established at Shelby, Ohio. Factory schedules are now planned for the production of 3,000 machines in 1954.

In December 1953 the company entered into an agreement to acquire all the stock of National Bowling and Billiard Corporation, Chicago, Ill., in exchange for 22,865 shares of AMF common stock. National is a manufacturer of bowling alleys, bowling pins, and other bowling supplies.

AMF's income from rentals has continued to grow and with the increase in production of automatic pinspotters for 1954, is expected to become a very important part of the company's business.

The 1954 annual report of AMF">*195 stated:

The AMFAutomatic Pinspotter has assumed an established position in the bowling industry. By the end of 1954, we had installed 4,400 Pinspotters, which exceeded our expectations. By the time this report reaches you, the 50 millionth game will have been bowled on alleys equipped with the AMF Pinspotter. We expect to install 5,500 additional machines during 1955. Some idea of the growth and income producing potential of this phase of our business is seen in the fact that there are 60,000 bowling alleys that have been certified by the American Bowling Congress and that AMF Pinspotters are only available on a rental basis and, thus, provide continuing income to the company.

">*621 The 1955 annual report of AMF set forth the following automatic bowling machine developments:

(1) The AMFAutomatic Pinspotter

AMF has attained a constantly expanding position in the bowling industry. We can now confidently state that we are the world's largest manufacturer of bowling equipment.

At the year's end 8,455 AMFAutomatic Pinspotters were producing revenue for the Company. We expect to install 6,000 to 7,500 additional machines in 1956. Unfilled orders are running at record levels. ">*196 December 1955, set a high for Pinspotter orders received in any month in our history. However, contracts received during February 1956 were almost double the December high. With increased production schedules, we expect to supply all customers who request delivery during the year.

The 100 millionth game with the Automatic Pinspotter was bowled on December 12, 1955. With the continuing growth in American interest in bowling, the future outlook is bright.

An article forecasting a bright future for AMF and its automatic pinspotter machine appeared in 1954 in Fortune Magazine.

Several advertisements were placed by AMF in bowling and sports magazines.

On June 7, 1955, an AMF prospectus filed with the SEC in regard to the offering of common stock contained the following statements with respect to the automatic pinspotter machine:

AMF Pinspotter and Other Bowling Products

The Company has developed and introduced a machine called the "AMF" Automatic Pinspotter designed to return the ball and set pins in the game of ten pin bowling. This is the only automatic ten pin setting machine presently on the market and is the product of many years of research, during which the machine initially">*197 developed by the Company was abandoned in favor of the present Automatic Pinspotter.

These machines, the first commercial installation of which occurred in 1951, are leased to customers by the Company's wholly-owned subsidiary, AMF Pinspotters Inc., for 10 year terms under lease agreements which provide for fixed installation payments and a rental based on the number of games bowled, with a minimum of $ 1,000 per machine per rental year. AMF Pinspotters Inc. borrows the cost of Pinspotters as they are installed pursuant to the credit agreement referred to under "Capitalization," against its notes (guaranteed by the Company) payable in equal quarterly installments over 5 years. Under these arrangements AMF Pinspotters Inc. borrowed $ 13,000,000 against machines installed at December 31, 1954 and has borrowed an additional $ 1,400,000 against additional machines installed at March 31, 1955. The cost of the Pinspotters is amortized over a period of 10 years (the term of the leases), and $ 912,000 was charged to income for amortization of such cost during 1954.

Pinspotters are now on lease in major cities in 20 States, as well as Honolulu, Hawaii. Among other advantages, the use of">*198 Pinspotters eliminates the need for pin-boys and enables bowling establishments to remain open for business twenty-four hours a day, seven days a week. It is also possible for a modern air conditioned establishment equipped with Pinspotters to extend the bowling season into the summer when most other establishments are closed.

">*622 In order that a bowler's score may make him eligible for competition in major tournaments it is required that his scores be achieved in bowling alleys (lanes) certified by the American Bowling Congress. The American Bowling Congress gave "formal approval" on April 26, 1952, of the AMF pinspotter machine as being acceptable for sanctioned league and tournament play. This approval was also adopted by Woman's International Bowling Congress.

The American Bowling Congress published the following data in its publication, Bowling, regarding the size and growth of bowling during the period from 1946 to July 31, 1954:

End of season	Teams	Leagues	City assn.	States	ABC	ABC alley
					establishments	beds
1946	184,000	20,130	1,220	44	4,874	40,146
1947	251,000	26,440	1,334	44	5,446	44,513
1948	286,000	30,073	1,457	45	5,747	46,004
1949	311,000	32,999	1,517	45	6,097	50,145
1950	322,000	34,485	1,585	45	6,415	53,243
1951	325,147	34,827	1,645	45	6,638	56,004
1952	336,990	36,365	1,651	45	6,615	56,287
1953	356,713	38,465	1,685	45	6,657	56,928
1954	375,377	39,374	1,734	45	6,911	58,982

">*199 AMF relied heavily on the data of the American Bowling Congress. During the development of the automatic pinspotter machine AMF made several forecasts and studies, based mostly on the American Bowling Congress figures.

In 1953, AMF negotiated a $ 15 million loan commitment from a group of banks in order to finance its pinspotter operation. AMF made forecasts, estimates, and projections in this connection which were prepared by the financial division of the company based on information they received from employees in their bowling division.

The history of the loans negotiated by AMF with respect to the automatic pinspotter machine was as follows:

a. The AMF Annual Report for 1952 states:

The company had entered into a loan agreement with certain banks to finance the manufacture of automatic pinspotters. Under the agreement a maximum of $ 6,000,000 may be borrowed at 4 percent on or before December 31, 1954. * * *

b. The AMF Annual Report for 1953 states:

The company has entered into a loan agreement with certain banks to finance the automatic pinspotters. Under the agreement a maximum of $ 15,000,000 may be borrowed at 4 percent interest on or before December 31, 1954. * * *

c. ">*200 The AMF Annual Report for 1954 states:

Under a $ 30,000,000 credit agreement with certain banks, extending until December 31, 1956, AMF pinspotters, Inc., had borrowed $ 13,000,000 at December 31, 1954. * * *

">*623 Subsequently on September 1, 1956, the credit agreement was increased to $ 40 million and on December 17, 1957, it was increased to $ 60 million.

On September 2, 1954, F. M. Feigl of AMF comptroller's department made the following profit and loss forecast of the "Pinspotter Machine Operations" for the years 1954-62:

AMF Pinspotter Machine Operations
Profit and Loss Forecast 1954-62
September 2, 1954
	1954	1955	1956	1957	1958
[$ 000 Omitted]
Number of machines installed	3,219	3,500	3,600	3,600	3,600
Number of machines in service --
end of yr	4,215	7,715	11,315	14,915	18,515
Billings (parts and installation)	$ 2,668	$ 2,907	$ 3,507	$ 3,733	$ 4,273
Mfg. cost	2,149	2,025	2,444	2,602	2,980
Gross profit	519	882	1,063	1,131	1,293
Rentals (including service charge)	3,848	8,800	14,220	17,576	21,709
Depreciation of machines	793	1,915	3,085	4,273	5,461
Gross profit on rentals	3,055	6,885	11,135	13,303	16,248
Total gross profit	3,574	7,767	12,198	14,434	17,541
Deductions:
Selling expense	265	300	400	500	500
Service expense (incl. parts)	1,321	2,404	3,548	4,837	5,972
Amortization -- patent and dev	157	158	158	151	142
Engineering -- experimental	311	300	300	300	300
Patent	30	30	30	30	30
Royalty expense	95	283	457	565	698
Tool depreciation	267	336	371	341	183
Tool alterations and repairs	135	176	178	178	178
Inventory obsolescence	142	498	398	488	605
Improvement parts	93	252	311	365	419
Other direct	110	173	220	252	299
State and other taxes	3	95	222	238	318
Administration and general	223	264	427	527	651
Total deductions	3,152	5,269	7,020	8,772	10,295
Pre-tax profit on billings	422	2,498	5,178	5,662	7,246
Other financial inc. and (exp.)	(329)	(636)	(857)	(1,003)	(1,067)
Nonrecurring inc. and (exp.)	72
Pre-tax net income	165	1,862	4,321	4,659	6,179
Federal income taxes (52%)	86	968	2,247	2,423	3,213
Net income	79	894	2,074	2,236	2,966
Cumulative net income	79	973	3,047	5,283	8,249

">*201

AMF Pinspotter Machine Operations
Profit and Loss Forecast 1954-62
September 2, 1954
	1959	1960	1961	1962
[$ 000 Omitted]
Number of machines installed	3,600
Number of machines in service --
end of yr	22,115	22,115	22,115	22,115
Billings (parts and installation)	$ 4,813	$ 3,277	$ 3,317	$ 3,317
Mfg. cost	3,358	2,112	2,322	2,322
Gross profit	1,455	1,165	995	995
Rentals (including service charge)	25,311	27,365	27,365	27,365
Depreciation of machines	6,649	7,325	7,325	7,128
Gross profit on rentals	18,662	20,040	20,040	20,237
Total gross profit	20,117	21,205	21,035	21,232
Deductions;
Selling expense	500	500	500	500
Service expense (incl. parts)	6,330	6,157	6,157	6,157
Amortization -- patent and dev	107	72	23	5
Engineering -- experimental	300	300	300	300
Patent	30	30	30	30
Royalty expense	814	880	880	872
Tool depreciation	142	106	70	35
Tool alterations and repairs	178
Inventory obsolescence	708	766	767	767
Improvement parts	473	437	338	338
Other direct	321	321	321	321
State and other taxes	411	490	510	538
Administration and general	759	821	821	821
Total deductions	11,073	10,880	10,717	10,684
Pre-tax profit on billings	9,044	10,325	10,318	10,548
Other financial inc. and (exp.)	(1,075)	(880)	(542)	(287)
Nonrecurring inc. and (exp.)
Pre-tax net income	7,969	9,445	9,776	10,261
Federal income taxes (52%)	4,144	4,911	5,084	5,336
Net income	3,825	4,534	4,692	4,925
Cumulative net income	12,074	16,608	21,300	26,225

">*202 ">*624 By 1954, AMF had acquired patents and the use of patents for development of its pinspotter bowling machine from others. The acquisitions resulted in "certain royalty obligations in connection" therewith amounting to 4 1/4 percent of the receipts from rentals, 3 1/4 percent of the receipts of sales and $ 30 per machine sold.

As of 1954 these AMF "royalty obligations" were payable to the following at the indicated rates and periods:

DATE OF AGREEMENT
Payable to	From	To	Rate
Bowling Patents Management (BPM)	12/12/44	11/27/62	2 1/4 percent of rentals
			and sales.
Wolab (later L. L. LeVeque Co.)	10/28/46	12/31/64	1 percent of rentals and
			$ 30 per machine sold.
Automatic Pinsetter Co., Inc	2/4/46	12/31/66	1 percent of rentals
			and sales.

The Bowling Patents Management (BPM) contract had the following history:

a. The original contract states:

(1) 5% of all payments actually made by owners or operators of bowling alleys in connection with the lease, sale or other disposition of each machine as contemplated by this agreement.

b. This BPM contract was amended on October 3, 1947, royalty rate to 3%, and the following minimum royalties were">*203 guaranteed:

$ 50,000	to January 31, 1948
50,000	to July 31, 1948
50,000	to July 31, 1949
50,000	to July 31, 1950
50,000	to July 31, 1951
$ 50,000	to July 31, 1952
50,000	to July 31, 1953
50,000	to July 31, 1954
400,000

c. On November 17, 1947, AMF bought one-third of Schmidt's 50% interest in BPM royalties over and above the guaranteed minimum.

d. On June 25, 1948, AMF bought for $ 40,000, one-third of Kennedy's 25% interest in BPM's royalties over and above the minimum.

e. The result of these latter purchases was to reduce the net royalties payable to BPM from 3% to 2 1/4%.

AMF attempted to purchase the remaining BPM royalty payments through negotiations during most of 1954. By November of that year the BPM royalty interest had passed to the Estate of Seigfried Hartman, Estate of Gottfried J. Schmidt, R. E. Kennedy, and Alex Craven.

On April 20, 1956, AMF paid $ 1 million plus $ 30,000 interest (3 3/8 percent from June 1, 1955) for the 2 1/4-percent royalty interest then possessed by the Estates of Schmidt, Kennedy, and Hartman, and by Alex Craven, distributed as follows: ">*625

Payee	Purchase	Interest
	price
Fred J. Schmidt and Marian Edith Covey as exectors	$ 444,444.45	$ 13,333.33
of the Estate of Gottfried John Schmidt, deceased
Margaret Kennedy as executrix of the Estate of
Robert E. Kennedy, deceased	222,222.22	6,666.67
Stanley H. Fuld and Vera J. Hartman as executors of
the Estate of Seigfried F. Hartman, deceased	250,000.00	7,500.00
Alex Craven	83,333.33	2,500.00
Total	1,000.000.00	30,000.00

">*204 AMF negotiated to purchase the Wolab Corp. (L. L. LeVeque Co.) royalty interest for $ 400,000 in July 1955 from the Estate of L. L. LeVeque. In AMF's computations to arrive at a fair market price for 1 percent of the L. L. LeVeque royalty interest, AMF used the following formulas: "2 1/4 percent is to $ 1 million (BPM payment) as 1% is to $ 444,000 (the approximate offer to L. L. LeVeque)."

In 1953, AMF offered $ 150,000 or $ 2 per share for the 75,000 outstanding shares of Pinsetter Company for the entire interests held by Pinsetter. This offer was personally made by Jerry Vaden, an employee of AMF, at the home of Clark, who in turn called Walter Oler, the president of Pinsetter. The offer was not accepted. The minutes of a special stockholders meeting on January 15, 1954, state the following with respect to this offer:

Following the report of Mr. Clark, the meeting went on to consider the offer of American Machine and Foundry to purchase the stock of the Automatic Pinsetter Corporation now issued and outstanding. Mr. Clark pointed out that the offer made to the corporation to purchase the stock for $ 2 per share was unacceptable, and that a counter offer was made to A.M. & ">*205 F., following a directors meeting of the Pinsetter Corporation at which it was agreed that the Pinsetter Corporation would be amenable to negotiating a contract with A.M. & F. on the basis of two shares of Automatic Pinsetter Stock for one share of A.M. & F. stock. Up until the present time there has been no response to the counter offer made by the Pinsetter Corporation.

During the week of January 11-15, 1954, AMF stock was quoted on the exchange from 22 1/2 to 23 3/8.

In 1955, the directors of AMF authorized the company to offer up to $ 5 per certificate share for the Pinsetter agreement. However, Hastings and Downey, officers of AMF, decided to offer $ 3.50 per certificate share (or $ 262,500). This offer was made on September 6, 1955, by Hastings to Oler. The offer was never accepted.

On April 3, 1956, AMF offered $ 7 per certificate share (or $ 525,000) for Pinsetter's interests in the February 1947 agreement. Clark responded to this offer in a letter to Hastings dated May 21, 1956, as follows:

">*626 We have contacted representatives of all groups in the company and many having no direct connection with any group. In all, the total number of shares in interest thus">*206 contacted totals over 45,000. We have explained the situation exactly as we see it and without expressing our own viewpoints. The result of our inquiry is that almost all have decided not to accept your offer on the basis of their own calculation. The few exceptions to this have said that they will do whatever Mr. Oler does. I believe that is tantamount to rejection.

We still favor a settlement of the whole matter and feel that the only limiting factor is price. [Emphasis added.]

On June 6, 1956, Hastings sent a letter to Clark in which he said:

I appreciate your having obtained this reaction from the Automatic Pinsetter stockholders. I do, however, wish to ask one further question, and that is -- how much per share would be satisfactory to the large majority of Automatic Pinsetter stockholders? [Emphasis added.]

Clark replied by letter dated June 12, 1956, in which he said:

Speaking for myself, I wish to say that I have been asked my opinion as to the total receipts probably over the life of the agreement on more than one occasion. I have always answered the question on the basis of published or directly spoken information by AMF, without speculation on my part. ">*207 On this basis, I have been obliged to say that I believe the minimum expectancy to be $ 25 per share.

Surely you realize that we have a group of intelligent calculating people. Each of them will make his own calculation as to the value of present money opposed to long range money. My opinion is that they would come up with at least $ 15 per share.

[Emphasis added.]

Hastings thought at that time that something around $ 12 a share might result in a partial buy out. However, no agreement was reached.

On April 12, 1959, W. B. Dorsey, one of the petitioners herein, bought 100 participation certificates in the agreement for $ 2,000 (or $ 20 per certificate). He recovered his basis in the certificates by 1961 by virtue of three distributions made by Camden Trust Co. of AMF payments.

In an estate tax return filed on May 23, 1960, the Estate of Walter V. Oler reported the fair market value of 4,456 Pinsetter certificate shares at $ 18.90 per share as of March 16, 1959. When the return was audited, a value of $ 30 per share was agreed to.

In the initial audit of Pinsetter Co.'s 1947 income tax return, respondent determined that the contingent installment payments which Pinsetter">*208 would receive under the February 1947 contract with AMF had no ascertainable fair market value.

None of the shareholders of Pinsetter or their successors treated the September 1954 liquidation as a "closed transaction." All of them reported in their income tax returns all sums received as shareholders or as holders of participation certificates. From 1954 to 1964 petitioners treated the payments received from AMF as receipts from ">*627 the sale of capital assets in an "open transaction." In an audit in 1964 it was determined by respondent that the September 1954 liquidation was a "closed transaction" and deficiencies were asserted for all years not then barred by the statute of limitations. In respondent's notices of deficiencies it was determined that all income realized by petitioners on the participation certificates during the years here involved is taxable as ordinary income rather than as long-term capital gains.

Harman E. Baugh died on July 28, 1963. On its Federal estate tax return, his estate showed a "587/75000 Interest in Automatic Pinsetter Co., Inc. Participating Certificate No. 237" with a value, as of the date of Baugh's death, of $ 20 per interest share or ">*209 a total of $ 11,740. Receipts received by the estate on this interest for the taxable period July 25 through December 31, 1963, totaled $ 2,721.36. These were not reported on the fiduciary return filed for that period. Amounts received by the estate for the taxable year 1964 totaled $ 5,124.32. This amount was reported as long-term capital gain in the fiduciary return filed for that year.

Walter V. Oler died on March 16, 1959. On its Federal estate tax return, his estate showed "4456/75000 shs. or interests in a certain agreement dated February 4, 1947, between Automatic Pinsetter Co., Inc. and American Machine and Foundry Company * * * which stock is in the name of Walter V. Oler and Mrs. Myrtle Y [sic] Oler joint tenants with right of survivorship not as tenants in common." This interest was valued at $ 30 per interest share or $ 133,680 at the date of Oler's death.

Myrtle M. Oler, now deceased, was married to Walter V. Oler until the time of his death. She filed separate Federal income tax returns for the years 1960, 1961, and 1964. After her subsequent marriage to Harry M. Teichmann, she filed joint Federal income tax returns with Teichmann for the years 1962 and 1963, the">*210 return for 1963 showing that Harry Teichmann was deceased as of March 14, 1963. Amounts received by Myrtle on this 4456/75000 interest in the participating certificate for the years 1959 through 1964 were as follows:

1959	$ 26,966.47
1960	32,653.85
1961	38,756.16
1962	$ 44,986.92
1963	44,555.45
1964	41,343.76

Myrtle reported the amounts received in the years 1960 through 1964 as long-term capital gains on the respective income tax returns, but only in the following amounts:

1960	$ 595.90
1961	19,290.36
1962	21,706.92
1963	20,476.75
1964	18,733.56

">*628 ULTIMATE FINDINGS

1. The liquidation of Pinsetter Co. in September and October 1954 in which its stockholders received participating certificates in the rights under the contract of February 4, 1947, between AMF and Pinsetter Co. was not a "closed" transaction.

2. The participating certificates received by the stockholders of Pinsetter Co. upon liquidation had no ascertainable fair market value on September 16, 1954.

OPINION

The deficiencies determined in these cases stem from a dispute as to whether amounts received by the petitioners during the years in question should be taxed as long-term capital ">*211 gains or as ordinary income. The controversy arises from the fact that the petitioners were stockholders of the Pinsetter Co. which liquidated and distributed its assets in kind to them. The distribution was in the form of participating certificates in the right to receive for a period of 20 years from February 4, 1947, 1 percent of all receipts by AMF from the sale or lease of automatic pinsetting machines. Petitioners contend that the participating certificates they received had no acertainable fair market value on September 16, 1954, the date of liquidation. Therefore, the liquidation was an "open transaction" 1968 U.S. Tax Ct. LEXIS 163">*212 in the certificates, the amounts received should be taxed as ordinary income.

The open transaction approach is desirable from the petitioners' viewpoint since it permits them to report the amounts when received as capital gains and permits them to avoid immediate recognition of that gain. The Commissioner, on the other hand, has sought to limit the operation of the open transaction doctrine by maintaining that almost every obligation can and should be valued upon receipt, so that the original sale or exchange transaction can be "closed" at that point. Indeed, the Commissioner insists on valuing "contracts and claims to receive indefinite">*213 amounts of income, such as those acquired with respect ">*629 to stock in liquidation of a corporation, except in rare and extraordinary cases." See Rev. Rul. 58-402, 1958-2 C.B. 15. Burnet v. Logan, 283 U.S. 404">283 U.S. 404 (1931), narrowly to its facts, by treating it not as laying down any general rule that contracts for indefinite payments have no ascertainable value, but rather as holding that due to the particular uncertainties in that situation the taxpayer was entitled to recover his entire basis before having to recognize any gain.

">*214 Despite respondent's contention that this is not a "rare" situation, we begin with the premise that where, in rare circumstances, a contract right received in a sale or exchange does not have an ascertainable fair market value at the time it is received, special treatment is necessary. Ayrton Metal Co. v. Commissioner, 299 F.2d 741 (C.A. 2, 1962). Gain or loss cannot be computed at the time of the sale or exchange, so the transaction is not considered closed. 283 U.S. 404">Burnet v. Logan, supra;Susan J. Carter, 9 T.C. 364">9 T.C. 364 (1947), affd. 170 F.2d 911 (C.A. 2, 1948). We think the instant cases require such special treatment because the value of the rights received by petitioners on September 16, 1954, depended upon numerous uncertainties of such a character as to make any estimate of the fair market value of those rights on that date sheer surmise and speculation. See and compare Ayrton Metal Co. v. Commissioner, supra;United States v. Yerger, 55 F. Supp. 521">55 F. Supp. 521 (E.D. Pa. 1944); Frank H. Hoy, T.C. Memo. 1958-28;">*215 John H. Altorfer, T.C. Memo. 1961-48; George J. Lentz, 28 T.C. 1157">28 T.C. 1157 (1957); J. C. Bradford, 22 T.C. 1057">22 T.C. 1057 (1954); and Jones v. Squire, an unreported case (W.D. Wash. 1956), 51 A.F.T.R. (RIA) 1195, 56-2U.S.T.C. par. 9669.

Here, as in 283 U.S. 404">Burnet v. Logan, supra, the petitioners received a "promise of future money payments wholly contingent upon facts and circumstances not possible to foretell with anything like fair certainty." A fair preponderence of the evidence in this record supports the position of petitioners that their contract rights with AMF had no ascertainable fair market value on September 16, 1954. Among the principal uncertainties and contingencies which existed on September 16, 1954, were:

1. Conditions prevalent in the bowling industry, particularly the unsavory past reputation of bowling and its unknown future potential.

">*630 2. Obstacles to the success of automatic pinsetters within the bowling industry, including the uncertainty as to their acceptance by the public and by bowling proprietors, ">*216 their unproven status as a unique new product, and marketing problems.

3. Problems facing the AMF pinsetter, such as patent infringement suits, the quantity and quality of competition, especially from Brunswick Corp., the fact that AMF was a newcomer to the bowling industry in 1954, and the pinsetter's unproven character.

4. Difficulties of ascertaining how much of any success would actually redound to the participating certificate holders, this being a consequence of AMF's control and constant changing of pinsetter prices, AMF's control of all marketing and management decisions, and the possibility that AMF could have operated its own pinsetting machines rather than sell or lease them, in which event the petitioners would have received no payments.

In short, without relying solely on any specific factor, we believe that the participating certificates had no ascertainable fair market value on September 16, 1954, and that the transaction before us must be treated as an "open" transaction. Our position is buttressed by four expert witnesses who testified that, in their respective opinions, it was impossible on September 16, 1954, to ascertain a fair market value of the contract">*217 rights received by petitioners upon the final liquidation of Pinsetter Co. This was also the opinion of Hastings and Downey, officers of AMF who were thoroughly familiar with the pinspotters and with the AMF-Pinsetter contract. Hastings was an employee of the company for many years prior to 1948 and was vice president and director of patents from 1948 to 1964. Downey was formerly a vice president in charge of the bowling division of the company and is now a consultant and a director of AMF.

The evidence of "offers" for the stock of Pinsetter before liquidation and for the participating certificates after liquidation, as stressed by respondent, is not helpful. Such "offers" were mere talk and far from actual sales. In addition, the few sales of stock or participating certificates which were made occurred at unrelated times and were unusual and atypical.

The cases cited and relied upon by respondent are distinguishable. We think they fall into four major categories. In the first category are those in which there was an established industry with sufficient criteria for ascertaining fair market value. Among these are the motion picture cases in which a corporation owning a motion">*218 picture dissolved and transferred to its stockholders the right to receive "royalties" from the production of the picture. See, e.g., Pat O'Brien, 25 T.C. 376">25 T.C. 376 (1955); and Grill v. United States, 303 F.2d 922 (Ct. Cl. 1962). ">*631 In such cases the motion-picture industry has developed a formula through years of experience by which it can estimate the royalties to be expected from a motion picture. Of the same ilk are cases involving the transfers of the rights to renewal commissions of insurance agents. See Estate of Abraham Goldstein, 33 T.C. 1032">33 T.C. 1032 (1960). Moreover, the motion-picture cases dealt with true royalty contracts which would produce ordinary income in the hands of the corporation. We view this as quite different from the instant cases in which the receipt of money is not a royalty but rather a part of the purchase price of the asset.

In the second category are cases in which the courts simply concluded that insufficient proof was presented. See, e.g., Chamberlin v. Commissioner, 286 F.2d 850 (C.A. 7, 1960), affirming 32 T.C. 1098">32 T.C. 1098 (1959);">*219 Slater v. Commissioner, 356 F.2d 668 (C.A. 10, 1966), affirming a Memorandum Opinion of this Court; and Boudreau v. Commissioner, 134 F.2d 360 (C.A. 5, 1943), affirming 45 B.T.A. 390">45 B.T.A. 390 (1941). In the Chamberlin case, the taxpayer contended that contracts to receive installment payments from an invention, by their very nature, had no ascertainable fair market value. He offered no other evidence. This Court disagreed, holding that ascertainable fair market value was a question of fact with the taxpayer having the burden of proof, a burden which he failed to carry. Even if the taxpayer had offered more evidence, he was confronted with facts that do not exist in the present cases, namely: (1) That the product involved was not unique; (2) that there was a considerable history of almost level annual receipts both before and after the date of liquidation; and (3) that there had been sales of the same asset at times and under circumstances comparable to those present in that liquidation. The Slater and Boudreau cases also turned on their particular facts and in each case there ">*220 was a failure of proof.

In cases falling in the third category, the taxpayer initially took a position that his rights had an ascertainable fair market value, but later tried to reverse himself. See 25 T.C. 376">Pat O'Brien, supra;Slater v. Commissioner, supra;Campagna v. United States, 290 F.2d 682 (C.A. 2, 1961); and Marsack's Estate v. Commissioner, 288 F.2d 533 (C.A. 7, 1961), affirming a Memorandum Opinion of this Court. For example, in the Marsack case, since the earnings had been stable for 6 years preceding the date of liquidation and for 7 years subsequent thereto, and since it was known when the patents would expire, this Court found it was possible to calculate the future income as of the date of liquidation. In affirming our decision, the Court of Appeals emphasized the fact that the taxpayer himself had set a fair market value at the date of liquidation. It said:

">*632 This was at a time which predates the present tax controversy. It is true that three years later, in filing a claim for tax refund, he claimed he made a mistake. Nevertheless, ">*221 Marsack who knew the value of the licensing agreements better, perhaps, than anyone else, voluntarily fixed the value of the licensing agreements at $ 22,500. This was a statement against interest and the Tax Court was entitled to give it weight.

Furthermore, we think it is significant that the Court of Appeals in Marsack was careful to note that --

our decision herein, as well as our decision in Chamberlin, does not mean that speculative contracts which contain highly contingent possibilities of future realization of income, can and must be valued for income tax purposes as a matter of law. The question is one of fact and not of law. We recognize there have been cases where courts have properly considered a contract so speculative and contingent as to make impossible the ascertainment of market value. But that is not the case here. [Emphasis added.]

In the fourth and last category are the cases which involve March 1, 1913, values or estate tax valuations where the problem was such that there had to be an immediate determination of value without awaiting future experience. See, e.g., Burnet v. Houston, 283 U.S. 223">283 U.S. 223 (1931); and">*222 Commissioner v. Sternberger's Estate, 348 U.S. 187">348 U.S. 187 (1955).

All in all, it is our view that the best solution in these cases is to allow the amounts actually received by petitioners in years after September 16, 1954, to be taxed as part of their long-term capital gains from the liquidation of their shares in Pinsetter Co. stock. We so hold.

We turn next to the subsidiary issue relating to income in respect of a decedent. The Estate of Harman E. Baugh contends that it was correct in not treating the amounts received during the taxable period from July 25 through December 31, 1963, under the participating certificates as capital gains, apparently on the theory that those amounts were a partial recovery of its "bases" in the participating certificates as established by their valuation on decedent's Federal estate tax return. Respondent, on the other hand, contends that such amounts were income in respect of a decedent under section 691(a)(1). ^{49 T.C. 606">*633 concedes that the estate is entitled to an allocable deduction under section 691(c) for any estate tax paid on these rights. There is no dispute as to the taxable year 1964 because, ">*223 under our disposition of the main issue, income received by the petitioners through the participating certificates is entitled to capital gains treatment.}

">*224 We find that the amounts received by Baugh's estate in the taxable year 1963 constituted income in respect of a decedent within the ambit of section 691(a)(1). There was clearly a sale of the "Pinsetter" patents and other assets on February 4, 1947, in exchange for cash, stock in AMF, and a percentage of profits from the sale or lease of automatic pinsetting machines, and a subsequent liquidation of Pinsetter Co. in September and October 1954 by which its shareholders received participating certificates. The executor of Baugh's estate performed no activities with respect to the rights held under the participating certificates; and Baugh's right to these amounts as of the dates of sale and liquidation was contingent only upon the activities of the buyer, not the activities of Pinsetter Co., Baugh, or subsequent holders of the participating certificates. This is in sharp contrast to Rev. Rul. 60-227, 1960-1 C.B. 262, relied on by Baugh's estate where the decedent never sold the patent in question but merely granted to his licensees certain nonexclusive rights thereto. In that factual situation, "There was neither a transfer of all of">*225 the substantial rights to the patent nor a transfer of an undivided interest therein." Here, however, the amounts in question were not only attributable to Pinsetter Co.'s economic activity prior to the date of sale, as passed through to Baugh upon its liquidation in 1954, see George W. Keck, 49 T.C. 313">49 T.C. 313 (1968), and Davison's Estate v. United States, 292 F.2d 937 (Ct. Cl. 1961); but its activities and efforts gave rise to a right to receive such income. See Trust Co. of Georgia v. Ross, 392 F.2d 672">392 F.2d 672 (C.A. 5, 1967). (Consequently, the amounts received by Baugh's estate are income in respect of a decedent.

Myrtle M. Oler Teichmann, deceased, claims that deficiencies against her for the years 1960 through 1964 were incorrectly determined because all amounts received were receipts of capital; and respondent's deficiency notices with respect to her were based on a determination that the receipts were ordinary income. Careful examination of the notices of deficiencies in docket Nos. 1317-66 and 1319-66 convinces us Myrtle was on notice that the deficiencies were based on the theory that">*226 it was income in respect of a decedent and that such income had the same character it had in the hands of the decedent. See sec. 691 (a)(3). Moreover, the wording of a notice of deficiency does not have to frame the issues precisely, and the Commissioner's method or reasoning in determining the deficiency is not the critical factor. Our responsibility is to redetermine the deficiency upon the basis of the ">*634 Commissioner's adjustment, not upon the reasoning assigned to the adjustment. Cf. Brook v. Commissioner, 360 F.2d 1011 (C.A. 2, 1966); Wilkes-Barre Carriage Co., Inc., 39 T.C. 839">39 T.C. 839 (1963), affirmed per curiam 332 F.2d 421 (C.A. 2, 1964); Estate of Grace M. Scharf, 38 T.C. 15">38 T.C. 15 (1962), affd. 316 F.2d 625 (C.A. 7, 1963); and Edgar M. Carnrick, 21 B.T.A. 12">21 B.T.A. 12, 21 B.T.A. 12">21 (1930). Therefore, we think the issue has been properly raised; and, as in the Estate of Harman E. Baugh, we hold that the amounts received through the Estate of Walter Oler must be treated as income in respect of a decedent.

Decisions">*227 in all dockets will be entered under Rule 50.

SIMPSON

Simpson, J., dissenting: I must dissent from the opinion of the majority. If the proper test for deciding this case is whether the fair market value of the right to the future payments can be ascertained with reasonable certainty, I would have no quarrel with the decision, but I believe that a different test should be applied.

It is time for us to revisit Burnet v. Logan, 283 U.S. 404">283 U.S. 404 (1931), and look carefully at the premises upon which that decision was based. In that case, the taxpayer was the seller of stock for which she received some cash and a right to future payments based on the amount of coal mined. The Court had to decide when the gain, if any, on this sale was to be reported. The Commissioner argued that a value of the right to future payments should be predicted, and that amount should be treated as received in the year of the sale. However, because of the uncertainty as to whether the seller would receive a return of her basis or how much gain, if any, she would realize, the Court concluded that the tax should not be imposed until she received payments in excess of her">*228 basis. For the years involved in the Logan case, capital gains were not treated differently than other types of income. Thus, the only question before the Court was one of timing -- when should the income be reported. The Court merely held that when there is no necessity for predicting a value of a right to future payments, the transaction will not be closed and the gain will not be measured if the fair market value of the right cannot be ascertained with reasonable certainty.

In view of the intervening development of the different method for taxing capital gains, there is a need for determining a value in the situation before us. If the transaction is closed in 1954 and the value of the right to future payments is computed as of that time, such value, to the extent it exceeds the taxpayers' basis, will be treated as a capital gain; such value then becomes the taxpayers' basis in the right ">*635 to future payments, and if such payments turn out to be more than the anticipated value, the excess will be treated as ordinary income. Hence, the issue before us is more than one of merely determining when the income is to be reported. The decision also affects the amount to">*229 be treated as capital gains and the amount to be reported as ordinary income. Under the decision of the majority, the entire receipts are treated as capital gains; whereas if the 1954 value is determined, the excess is treated as ordinary income.

The issue before us is like the estate tax question in the Logan situation. Mrs. Logan inherited some of her rights, and for estate tax purposes, the value of those rights had been determined. Although that issue was not before the Court, it recognized that for estate tax purposes, there was a necessity for determining a value of the rights and implicitly approved of doing so when necessary. Just as there was a necessity to determine a value of the rights inherited by Mrs. Logan in order to determine the proper estate tax attributable to them, so there is a similar necessity for determining the value of the rights distributed to the shareholders in the situation before us. An attempt should be made to find the 1954 value of those rights, and that amount should be treated as a distribution at that time. Although any value so determined may be arguable, it is better to place some value on the rights than to treat the entire amounts">*230 received as capital gains. At least, placing a 1954 value on the rights achieves some allocation of the income between capital gains and ordinary income.

In the years that have passed since the Logan decision, there have been many cases decided on the basis of whether the rights to future income had an ascertainable fair market value. However, some courts have recognized that there was no capital gains tax for the years involved in the Logan decision ( John W. Chamberlin, 32 T.C. 1098">32 T.C. 1098 (1959)) and that the existence of such a tax is a reason for finding a value of rights to future income. Chamberlin v. Commissioner, 286 F.2d 850 (C.A. 7, 1960). Such reason may have encouraged other courts to conclude that the rights had an ascertainable value. Yet, rather than strain to find that the fair market value of rights to future income can be ascertained with reasonable certainty, it seems preferable to me to recognize that the Logan test is not to be applied in situations like the case before us. I would continue to apply Logan when only a question of timing is involved, or when the income is all of the">*231 same type, whether received now or in the future, but I would not apply it in the case before us.

---

Footnotes

• 1. Consolidated herewith for trial, briefing, and opinion are: Leonard R. Oler and Ida Oler, docket No. 6569-65; Stanley E. Oler and Florence Oler, docket No. 6594-65; Helen G. Winchester and Edgar T. Winchester, docket No. 6809-65; William B. Dorsey, Jr., docket No. 6994-65; William B. Dorsey and Ida S. Dorsey, docket No. 7061-65; Helen S. Hammell, docket No. 206-66; W. Ernest Flemming and Aileen Flemming, docket No. 274-66; Paul Hollingsworth and Elizabeth Hollingsworth, docket No. 314-66; Edward W. Howe and Blanche G. Howe, docket No. 439-66; Alwyn L. Newman and Lillian R. Newman, docket No. 444-66; Ruth Hollingsworth, docket No. 532-66; Elsie H. Luethy, docket No. 570-66; Estate of Myrtle M. Oler Teichmann, deceased (Edward I. Berry, Executor), docket No. 1317-66; Estate of Myrtle M. Oler (Edward I. Berry, Executor), docket No. 1319-66; Estate of Harman E. Baugh, deceased (Olga G. Baugh, Executrix), docket No. 1440-66; Estate of Harman E. Baugh, deceased (Olga G. Baugh, Executrix) and Olga G. Baugh, as survivor, docket No. 1441-66; William R. Stover and Anna M. Stover, docket No. 1787-66; Joseph C. Clark and Margaret R. Clark, docket No. 1872-66; Bruno Gallia and Frances Gallia, docket No. 5878-66; Helen G. Winchester and Edgar T. Winchester, docket No. 5879-66; Mary E. Levis, docket No. 5887-66; Matthew Hollingsworth, Jr., docket No. 6164-66.↩

• 1. The parties have stipulated that the determined deficiencies for 1963 should be $ 75.76 in docket No. 532-66 and $ 16,301.63 in docket No. 1317-66.↩

• 2. Where the fair market value of an obligation received upon a sale or exchange cannot be ascertained, the original sale or exchange transaction remains open, and payments ultimately received under the obligation are treated exactly as they would have been if received at the time of the sale or exchange. Westover v. Smith, 173 F.2d 90↩ (C.A. 9, 1949).

• 3. The general thrust of the revenue ruling is echoed in sec. 1.1001-1(a), Income Tax Regs., which states that "only in rare and extraordinary cases will property be considered to have no fair market value." This statement seems to impose an even more stringent limitation upon the use of the open transaction doctrine because, if read literally, it appears to require the taxpayer to prove that the obligation received had no value at all, rather than merely that its value cannot be ascertained. However, we think it more reasonable to construe the regulation by emphasizing the word "fair" in the phrase "no fair market value," so that an obligation need not be valued where there is no rational basis for determining what its fair value is. Cf. Slater v. Commissioner, 356 F.2d 668↩ (C.A. 10, 1966).

• 4. SEC. 691. RECIPIENTS OF INCOME IN RESPECT OF DECEDENTS.

  (a) Inclusion in Gross Income. --

  (1) General Rule. -- The amount of all items of gross income in respect of a decedent which are not properly includible in respect of the taxable period in which falls the date of his death or a prior period (including the amount of all items of gross income in respect of a prior decedent, if the right to receive such amount was acquired by reason of the death of the prior decedent or by bequest, devise, or inheritance from the prior decedent) shall be included in the gross income, for the taxable year when received, of:

  (A) the estate of the decedent, if the right to receive the amount is acquired by the decedent's estate from the decedent;

  (B) the person who, by reason of the death of the decedent, acquires the right to receive the amount, if the right to receive the amount is not acquired by the decedent's estate from the decedent; or

  (C) the person who acquires from the decedent the right to receive the amount by bequest, devise, or inheritance, if the amount is received after a distribution by the decedent's estate of such right.↩