APPEALS FROM DECISIONS OF THE UNITED STATES TAX COURT
Before VAN DUSEN, GIBBONS and HUNTER, Circuit Judges
VAN DUSEN, Circuit Judge.
On this appeal, Amerada Hess Corporation*fn1 challenges the Tax Court's determination of a deficiency in Hess' income tax payments for 1964 and 1965;*fn2 the Commissioner appeals the same court's decision*fn3 that White Farm Equipment Company*fn4 had overpaid taxes in the years 1960, 1961 and 1962.*fn5
The case has its genesis in a routinely complex corporate acquisition. In March 1960, Oliver Corporation,*fn6 Hess' predecessor,*fn7 and White Motor Company,*fn8 which owns White Farm,*fn9 entered into negotiations aimed at the sale of Oliver's farm equipment business*fn10 to White. The negotiations with White constituted Oliver's third attempt in two years to dispose of its farm equipment business.*fn11 Oliver originally sought a cash deal, but when it became apparent that White would not be able to raise enough cash, it was agreed that the bulk of the acquisition price would be paid in White common stock.*fn12 In order to establish the number of shares which Oliver would receive, the parties had to assign the stock a value. An initial figure of $50.00 per share was adjusted to $48.50 per share. This latter figure represented the closing price of White common quoted by the New York Stock Exchange on June 23, 1960, the date on which the adjustment in assigned value was proposed.
After several months' negotiations,*fn13 an agreement setting out the terms for White's acquisition of the Oliver assets was executed on October 3, 1960, subject to approval by shareholders of both corporations.*fn14 White was to acquire substantially all the working assets of Oliver's farm equipment business*fn15 in exchange for 655,000 shares of White common stock, plus an amount of cash to be determined as of the closing date. The agreement contained a formula, based on the book value of Oliver's assets, for ascertaining the total dollar price which White was to pay Oliver.*fn16 The 655,000 shares of stock, at the assigned value of $48.50 per share, represented $31,767,500.00 of the purchase price. If the value of Oliver's assets on the closing date, October 31, 1960, exceeded $31,767,500.00, White would pay Oliver the difference in cash. Conversely, if the value of the assets was less than $31,767,500.00, Oliver would pay White the difference in cash. N.T. 84; White Motor Company Proxy Statement, Exhibit 19-O, at p.3, [*] (c). Despite the slide in the stock's quoted price between June 23 and October 3, the parties made no attempt to renegotiate the $48.50 per share figure. The assigned value continued to fix the portion of the purchase price Oliver would receive in stock and, thereby, to determine the amount of cash that would change hands. However, neither the written agreement nor any negotiations predating that agreement indicated that the assigned value had any tax or accounting significance.*fn17
Besides terms relating to the purchase price, the agreement included a Trust Agreement. The White shares were to be held in trust until they were either distributed pro rata to Oliver shareholders, in exchange for Oliver common stock, or sold.*fn18 Should the shares be sold, no more than 10,000 shares could be acquired by any one purchaser.*fn19
At special shareholders' meeting held on October 31, 1960, the shareholders of both White and Oliver approved the agreement. On that date, Oliver transferred its assets to White; in return, White delivered the 655,000 shares to the trustee, paid Oliver $1,508,550.00 in cash, and assumed $281,396.00 of Oliver's liabilities.*fn20 White common traded on the New York Stock Exchange at an average price of $36.3125 on October 31. White initially recorded the Oliver assets on its books in an amount which reflected a per share valuation of $36.3125. However, before closing its books for 1960, White was advised by its accountants*fn21 to carry the assets at a figure reflecting the assigned valuation of $48.50 per share. White accordingly adjusted the entries to correspond with the higher, assigned value. Oliver*fn22 entered the White common on its books at an aggregate value of $23,784,688.00, which represented a per share price of $36.3125. No alterations were made in this entry.
26 U.S.C. § 1001(b) provides, inter alia, that the "amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of property (other than money) received." The amount realized by both parties to the acquisition was thus determined by the fair market value of the White common stock. Since the amount realized in turn determined the taxes which each party owed on the transaction, the fair market value was the factor controlling the parties' tax liability. White's*fn23 federal income tax returns for 1960, 1961, and 1962 reported income from the Oliver acquisition on the basis of the $48.50 per share valuation. Oliver employed the October 31 average market price of $36.3125 per share in reporting a loss from the sale of its farm equipment business on its 1960 federal income tax return. Subsequently, the Commissioner determined that both parties had underpaid their taxes on income attributable to the transaction. The fact and amount of underpayment by each party hinged on the fair market value of the White shares. See 26 U.S.C. § 1001(b). Assessing a deficiency against both White Farm,*fn24 White's successor, and Hess, Oliver's successor,*fn25 required the Commissioner to take inconsistent positions concerning the correct valuation of the shares. Thus the Commissioner maintained in one case that White Farm had erred in pricing the White common at $48.50 per share, while arguing in the second case that Hess had erred in failing to assign the stock the same value. Since prosecuting both cases separately*fn26 might well have resulted in contradictory valuations of the shares, the cases were consolidated for trial in the Tax Court.*fn27 The Commissioner's position was essentially that of a stakeholder whose "primary concern" was that the shares be valued consistently as to each party. 61 T.C. at 206. However, in his briefs in the Tax Court and this court, as well as at oral argument before this court, the Commissioner adopted Hess' position, urging that "the best evidence of the fair market value of the White stock is its mean trading price on the New York Stock Exchange on the closing date, October 31, 1960." 61 T.C. at 214. The Tax Court rejected this argument in holding that the value of the shares was that assigned by the parties in their October 3 agreement, i.e., $48.50 per share. Both the Commissioner and Hess appeal from that holding. We reverse.
The primary question on appeal concerns the proper method for measuring the fair market value of shares traded on a stock exchange. Both appellants contend that the average exchange quotation on the valuation date - in this case, $36.3125 per share - is the best evidence of fair market value. Hess further argues, as a secondary issue, that the market price on October 31, 1960, should be discounted to compensate for a blockage factor. We consider these assertions seriatim.
As a threshold matter, we must determine the scope of review open to us on this appeal. White Farm, claiming that the Tax Court's determination of fair market value is "purely one of fact," Brief of Petitioner-Appellee at 14, would have us limit our inquiry to whether that determination is "clearly erroneous." The computation of the actual dollar worth of the stock is concededly a question of fact. The question for decision, however, is whether the Tax Court "failed to use correct standards of valuation applicable to the [factual] situation which it found." Richardson v. Commissioner, 151 F.2d 102, 103 (2d Cir. 1945). In choosing one method of valuation, the Tax Court set a legal standard, which is to be reviewed as such. See Churma v. United States Steel, 514 F.2d 589 (3d Cir., 1975); Katz v. Carte Blanche, 496 F.2d 747, 756-57 (3d Cir. 1974). As this court observed in Publicker v. Commissioner of Internal Revenue, 206 F.2d 250, 252 (3d Cir. 1953), cert. denied, 346 U.S. 924, 74 S. Ct. 312, 98 L. Ed. 418 (1954),
"The criteria to be employed in determining 'value' necessarily must differ somewhat in respect to the kinds of property to be valued under the statute. A question of law is presented therefore as to the standard to be applied. See Powers v. C.I.R., 1941, 312 U.S. 259, 260, 61 S. Ct. 509, 85 L. Ed. 817. But the Tax Court's determination of value, the proper standard having been applied by it, is a finding of fact. This finding, based upon the resolution of conflicting evidence, may not be disturbed unless clearly erroneous."*fn28
B. The General Rule and Its Exceptions
There is no real dispute as to the definition of "fair market value." N.T. 448; 493-94, 501. According to the classic formulation, "[fair] market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts." United States v. Cartwright, 411 U.S. 546, 551, 36 L. Ed. 2d 528, 93 S. Ct. 1713 (1973), quoting Treas. Reg. § 20.2031-1(b). S. Alfred, Fair Market Value Concept: General Considerations, 14 W. Res. L. Rev. 173, 175 (1963). The dispute in this case is over the application of the definition and, more specifically, over the proper method by which that ideal price can be measured under less than ideal conditions. Since "the word 'value' almost always 'involves a conjecture, a guess, a prediction, a prophecy,'" Andrews v. Commissioner, 135 F.2d 314, 317 (2d Cir.), cert. denied, 320 U.S. 748, 88 L. Ed. 444, 64 S. Ct. 51 (1943), quoting Commissioner v. Marshall, 125 F.2d 943, 946 (2d Cir. 1942), there is no universally infallible index of fair market value. All valuation is necessarily an approximation. Where, however, the property to be valued consists of securities traded on a stock exchange, the general rule is that the average exchange price quoted on the valuation date*fn29 furnishes the most accurate, as well as the most readily ascertainable, measure of fair market value. United States v. Cartwright, 411 U.S. 546, 551, 36 L. Ed. 2d 528, 93 S. Ct. 1713 (1973); Hazeltine Corp. v. Commissioner, 89 F.2d 513, 519 (3d Cir. 1937); Richardson v. Commissioner, 151 F.2d 102, 103 (2d Cir. 1945), cert. denied, 326 U.S. 796, 90 L. Ed. 485, 66 S. Ct. 490 (1946); Andrews v. Commissioner, 135 F.2d 314, 318 (2d Cir.), cert. denied, 320 U.S. 748, 88 L. Ed. 444, 64 S. Ct. 51 (1943); Rogers v. Helvering, 107 F.2d 394, 396 ...