By September 5, 1969, BPC had acquired record ownership of 839,306 shares or 51 percent of the outstanding Piper common stock. In October 1969, demands were made upon BPC for the additional consideration provided for under section 2(E) of the May 8, 1969, agreement, but such demands were rejected.

BPC entered into an agreement on October 2, 1969, to sell the BAR to Amoskeag for $ 5 million, sustaining a $ 13.8-million book loss on such sale.

On September 7, 1970, the SEC brought an action alleging 69 T.C. 342">*349 1977 U.S. Tax Ct. LEXIS 16">*30 that the prospectus for BPC's July 1969 general exchange offer to the public had violated section 14(e) of the Securities Exchange Act of 1934 by failing to disclose an alleged agreement to sell BPC's investment in the BAR. In such action, the court ruled on November 17, 1971, that the failure to disclose the obsolete nature of the amount at which the BAR investment was carried on BPC's books was of such materiality as to require BPC to offer the Piper shareholders who accepted the general exchange offer an opportunity to rescind.

On November 18, 1969, petitioners sold 800 BPC warrants for $ 4,794.85, or approximately $ 6 per warrant. On December 30, 1969, petitioners sold 2,271 shares of BPC common for $ 32,755.58, or approximately $ 14.42 per share.

On July 30, 1970, petitioner Mary P. Bolles brought an action against BPC for declaratory relief alleging that BPC had acquired the requisite number of Piper shares and, therefore, was liable for payment of the additional consideration provided for in section 2(E) of the May 8, 1969, agreement. In such action, BPC took the position that it was not liable for payment of such additional consideration until it had unchallenged full legal1977 U.S. Tax Ct. LEXIS 16">*31 title to more than 50 percent of the outstanding Piper shares. On March 19, 1976, a settlement agreement was executed by BPC, by petitioner Mary Bolles, and by other members of the Piper family, under which the Piper family members would receive, as additional consideration under section 2(E) of the May 1969, agreement, $ 3.5746 in cash, $ 5.3619 in notes, and 0.2979 shares of BPC common stock for each share of Piper common that they had exchanged on August 7, 1969.

On January 31, 1973, the SEC staff issued a "no action letter" approving sale of the Piper family's BPC securities in accordance with Rule 144, 17 C.F.R. sec. 230.144 (1976). Such letter read in part as follows:

On the basis of the facts presented, it is the staff's opinion that the combined members of the Piper family would appear to form a control group, and, hence, individually, would be "affiliates" of the Company within the meaning of Rule 144(a)(1) enabling them to effect resales in the Company's securities pursuant to Rule 144. * * *

BPC was a conglomerate and the market price of conglomerates, in general, entered a period of steep decline in 1969. In particular, the market price of BPC common stock declined1977 U.S. Tax Ct. LEXIS 16">*32 sharply during 1969, commencing the year at 44 1/2, it dropped to 69 T.C. 342">*350 22 5/8 on August 7, 1969, and reached a low of 5 1/2 in August 1970. BPC's earnings per share flattened during 1968 and declined during 1969. BPC incurred a loss in the final quarter of fiscal 1969 (July 1, 1969, through September 30, 1969). The price volatility of conglomerates in general was substantially higher than the price volatility of the general industrials in 1969, and BPC's price volatility during that period was even greater than the price volatility of conglomerates in general.

Investment companies often purchase securities which are subject to resale restrictions at an average cost discount of 38 percent for common and convertible preferred stock, 22 percent for convertible debentures, and 67 percent for warrants.

The market prices, ¹ as of August 7, 1969, of the BPC securities received by the Piper family under the May 8, 1969, agreement were as follows:

1977 U.S. Tax Ct. LEXIS 16">*33 In his statutory notice, respondent valued the package of BPC securities and contract rights which petitioners received under the May 8, 1969, agreement as follows:

69 T.C. 342">*351 OPINION

In this case we are faced with the problem of valuing, for purposes of section 1001, ² certain common stock, warrants, and convertible debentures which petitioners received from BPC in return for their Piper common stock. We must also decide if the contract rights accorded to petitioners under section 2(E) of the May 8, 1969, agreement had an ascertainable fair market value during 1969 and, if so, we must determine it.

We first turn to the valuation of the BPC securities. The parties agree that the stock market quotations1977 U.S. Tax Ct. LEXIS 16">*34 of the BPC common stock and warrants should be discounted for the blockage factor and the overvaluation of the BAR assets on BPC's books, a fact which would have come to light prior to sale by private placement of a large block of securities such as petitioners'. Petitioners, however, contend that an additional discount should be allowed because, as of August 7, 1969, their stock was subject to restrictions on transferability pursuant to the Securities Act of 1933 (1933 Act) and further that respondent's valuation expert should have considered, but did not consider, the effect of these restrictions when valuing their BPC securities. We agree with petitioners.

In Hirsch v. Commissioner, 51 T.C. 121">51 T.C. 121, 51 T.C. 121">135 (1968), we held that the value of Hirsch's shares was significantly affected by the possibility that a sale of his shares, other than by a private or intrastate offering at any time during the period in issue, would have been in violation of the 1933 Act. In Hirsch, the taxpayer had twice attempted from January 2, 1962, to July 27, 1965, to obtain a favorable ruling from the SEC but had been refused, and the SEC reply of February 1, 1962, specifically1977 U.S. Tax Ct. LEXIS 16">*35 stated that a sale by Hirsch of his shares would be in violation of the 1933 Act. We stated (51 T.C. 121">51 T.C. 135):

69 T.C. 342">*352 Since neither Ira's circumstances nor the Securities Act of 1933 changed materially if at all from July 3, 1961, the date he exercised the options, to February 1, 1962, or thereafter, we conclude that the SEC would have issued a similar ruling if the request had been made on July 3, 1961, when the option was first exercised.

Even if we were to assume that a sale of Ira's shares would not have violated the 1933 Act, the SEC's position that it would consider any sale without prior registration as a violation is a restriction which has a significant effect on the value of the stock.

The facts in the instant case are similar to those of Hirsch. On January 31, 1973, the SEC staff issued a "no action letter" allowing sale in accordance with rule 144, 17 C.F.R. sec. 230.144 (1976). ³ Such letter stated that the Piper family "would appear to form a control group." Neither petitioners' nor the Piper family's relationship to BPC or to one another changed materially nor did the 1933 Act change materially between August 7, 1969, and January1977 U.S. Tax Ct. LEXIS 16">*36 31, 1973. Consequently, we conclude that the SEC would have issued a similar ruling that the Piper family formed a control group of BPC if a similar request had been made on August 7, 1969.

The ways in which petitioners, as members of a control group, could sell their stock without violating the 1933 Act were limited. If petitioners sold to a person who took with a view to distribution then such person would be considered an "underwriter" under section 2(11) ⁴ of the 1933 Act (15 U.S.C. sec. 77(b)(11)) and the section 4(1) exemption of the 1933 Act for "transactions by any person other than an issuer, underwriter, or dealer" (15 U.S.C. sec. 77(d)(1)) would be lost. I L. Loss, Securities Regulation 665-666 (2d ed. 1961). Therefore, petitioners could have sold their BPC securities without violating the 69 T.C. 342">*353 19331977 U.S. Tax Ct. LEXIS 16">*37 Act only by a registered offering or a sale to private persons who took for investment. ⁵

1977 U.S. Tax Ct. LEXIS 16">*38 The BPC securities which petitioners received on August 7, 1969, were registered in July 1969, but petitioners had no right to amend such registration statement or to require BPC to amend it in order to keep it current. The registration statement relating to the BPC securities was later found to contain a material misrepresentation as to a matter which had to be contained in the prospectus under section 10(a)(1) of the 1933 Act (15 U.S.C. sec. 77(j)(a)(1)) until such registration statement was amended to correct such material misrepresentation. I L. Loss, Securities Regulation 293-294 (2d ed. 1961). Therefore, any sales made by means of such prospectus could possibly have been rescinded by the buyer. 15 U.S.C. sec. 77(1)(2).

The price at which property changes hands in a transaction which is subject to rescission by the buyer is not indicative of its fair market value. ⁶ Therefore, we conclude that petitioners could have sold their BPC securities without violating the 1933 Act only by a sale to persons who took for investment.

1977 U.S. Tax Ct. LEXIS 16">*39 A buyer who took petitioners' BPC securities for investment would take those securities subject to restrictions on their transfer:

The concept of taking for investment does not impose an indefinite restraint on alienation. Of course, a distribution within a relatively short period after acquisition would be evidence of an original intent to distribute. And a 69 T.C. 342">*354 preconceived intention to distribute at a determinable time is inconsistent with the concept of buying for investment. [I L. Loss, Securities Regulation 552 (2d ed. 1961).]

The value of stock which may be sold only to persons who take for investment is significantly decreased by such restriction. Le Vant v. Commissioner, 376 F.2d 434">376 F.2d 434 (7th Cir. 1967); 51 T.C. 121">Hirsch v. Commissioner, supra at 135-136; Husted v. Commissioner, 47 T.C. 664">47 T.C. 664, 47 T.C. 664">678-679 (1967).

Although respondent's expert considered that petitioners' stock would have to be privately placed, he did not consider the significant fact that any purchaser of such stock would take it subject to restrictions on its transferability. Therefore, the values which respondent's expert1977 U.S. Tax Ct. LEXIS 16">*40 has assigned to petitioners' BPC securities bear little weight.

Petitioners introduced credible evidence that the average discount for restricted securities was 38 percent for common stock and convertible preferred stock, 22 percent for convertible debentures, and 67 percent for warrants. Respondent incorrectly insisted that the securities law restrictions were irrelevant so that he offered no evidence of the proper discount for such restrictions.

In the case of the debentures, petitioners' expert believed that a greater discount than the average for restricted convertible debentures would be required to induce a purchase of them because of the nature of the restrictions, the size of the holding, and the fact that professional investors capable of absorbing such a large offering would have been primarily interested in capital growth rather than current income. However, we believe that all of these factors are likely to be present in the average transactions in which a 22-percent discount is required. We note that respondent's expert, while allowing substantial discounts from the market price of the BPC common stock and warrants because of the blockage factor, overvaluation of the1977 U.S. Tax Ct. LEXIS 16">*41 BAR assets, and uncertainty stemming from BPC's takeover attempt of Piper, allowed only a nominal discount, representing handling costs, from the market price of the debenture. We find that the market value of the debenture which petitioners received in exchange for one share of Piper common is $ 9.83. ⁷

1977 U.S. Tax Ct. LEXIS 16">*42 69 T.C. 342">*355 Petitioners' expert believed that a discount greater than the average from the market price of unrestricted BPC common stock would be required in order to sell petitioners' BPC common stock because there was evidence that BPC's profits were declining, the market popularity of shares in conglomerates was waning, petitioners' block of shares was large, and there had already been a substantial reduction in the market price of BPC common shares which made them a less attractive vehicle with which to pursue a conglomerate's acquisition program. In addition, we note that the market price of the BPC common stock was more volatile than the average stock, that restrictions against resale fully expose the holder to the risk of a price decline, and that the outlook for BPC was not bright. We believe that such factors justify a larger discount from market price for BPC common than the average discount, and we find that the fair market value, as of August 7, 1969, of the BPC common stock which petitioners received in exchange for 1 share of Piper common is $ 12.44.

Petitioners' expert believed that their BPC warrants would have to be discounted by more than the average discount from1977 U.S. Tax Ct. LEXIS 16">*43 the market price of unrestricted BPC warrants in order to induce a purchase because the exercise price of the warrants (55) was well above the market price of BPC common stock (22 5/8), the outlook for BPC was not bright, and market interest in BPC, and conglomerates as a group, was waning. We believe that such factors do require a greater than average discount for the BPC warrants and we find that the value of the warrants which petitioners received in exchange for 1 share of Piper common is $ 1.43.

We now turn to the question of whether petitioners' rights under section 2(E) of the May 8, 1969, agreement had an ascertainable value during 1969. Under section 2(E) of the May 69 T.C. 342">*356 8, 1969, agreement petitioners were entitled to additional consideration for their exchanged Piper shares only if BPC succeeded in "acquiring" more than 50 percent of the Piper outstanding shares. Such additional consideration was to be computed as the difference between $ 80 and the value, in the written opinion of the First Boston Corp., of the BPC securities received by petitioners on August 7, 1969, and it was to be paid in cash and/or BPC securities as valued by the First Boston Corp.

On July1977 U.S. Tax Ct. LEXIS 16">*44 22, 1969, before BPC had acquired 50 percent of the Piper stock, CCI brought suit seeking a preliminary injunction ordering BPC to offer the right to rescind to all persons who had tendered Piper shares to BPC, to refrain from acquiring more Piper shares, to refrain from effecting a merger of Piper and BPC, and to refrain from voting the 120,000 Piper shares acquired for cash between May 16, 1969, and May 23, 1969. Such preliminary injunction was denied but CCI sought and received an expedited appeal to the Second Circuit Court of Appeals and the right of BPC in such stock was not resolved during 1969. BPC had not acquired more than 50 percent of the outstanding Piper stock by August 7, 1969. These facts led respondent's expert to state in his valuation report that the future of petitioners' right to the additional consideration as of August 7, 1969, "was predicated on contingencies and shrouded in uncertainty," and that the present value of their right to such additional consideration was "hardly a toss-up, hardly a 50-50 gamble on the exchange date." Moreover, payment of the additional consideration was to be made in cash and/or securities which were to be valued by the First1977 U.S. Tax Ct. LEXIS 16">*45 Boston Corp., but the date of valuation was not specified so that the actual amount of consideration which petitioners would eventually receive, as well as their right to any consideration at all, was subject to contingencies during 1969. Petitioners' demands for payment which were made in October 1969 were rejected. Therefore, we conclude that petitioners' right to additional consideration under section 2(E) of the May 8, 1969, agreement was "wholly contingent upon facts and circumstances not possible to foretell with anything like fair certainty" during 1969 so that such right had no ascertainable fair market value during 1969 and petitioner need not recognize any gain for the taxable year 1969 from receipt of rights under section 2(E) of the May 8, 1969, 69 T.C. 342">*357 agreement. Burnet v. Logan, 283 U.S. 404">283 U.S. 404 (1931); In re Steen, 509 F.2d 1398">509 F.2d 1398, 509 F.2d 1398">1403 (9th Cir. 1975).

Petitioners' request for an award of reasonable attorneys' fees must be denied in accordance with Key Buick Co. v. Commissioner, 68 T.C. 178">68 T.C. 178 (1977).

Decision will be entered under Rule 155.