                        T.C. Memo. 1995-606



                      UNITED STATES TAX COURT



     LIQUID AIR CORPORATION AND SUBSIDIARIES, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14574-93.                  Filed December 26, 1995.


     Emilio A. Dominianni and Edmund S. Cohen, for petitioner.

     Gail A. Campbell, Diane P. Thaler, and Kevin C. Reilly, for

respondent.



                        MEMORANDUM OPINION


     RUWE, Judge:   Respondent determined a deficiency of $93,767

in petitioner's 1979 Federal income tax.     The sole issue for

decision is whether petitioner overstated the basis of assets

acquired from Chemetron Corp. in 1979 by $3,081,584.

     Some of the facts have been stipulated and are so found.
                               - 2 -

The stipulation of facts and attached exhibits are incorporated

herein by this reference.   At the time the petition was filed in

this case, petitioner's principal place of business and principal

office were located in Walnut Creek, California.


                            Background


     During the relevant years, petitioner, Liquid Air Corp., was

the common parent of an affiliated group of corporations.

Petitioner was, at all relevant times, engaged principally in the

business of producing, selling, and distributing industrial gases

and welding products in the United States and various foreign

countries.

     On June 5, 1978, petitioner entered into a written executory

contract (Contract) with the Chemetron Corp. (Chemetron) to

purchase certain assets of the Industrial Gases Division (IGD) of

Chemetron.   At the time of the Contract, Chemetron was a wholly

owned subsidiary of Allegheny Ludlum Industries, Inc.

(Allegheny).   The Contract was the result of an arm's-length

negotiation among representatives of petitioner, Chemetron, and

Allegheny.   Michael V. Breber, petitioner's executive vice

president and chief operating officer, was in charge of

negotiating the purchase of the assets of the IGD on petitioner's

behalf.   Before the transaction could close, however, approval of

the transaction by the Federal Trade Commission (FTC) was

necessary.
                              - 3 -

     The purchase price to be paid by petitioner was set forth in

paragraph 2 of the Contract as follows:


     (i) $60,030,000 to be paid by the delivery to the
     Seller [Chemetron] of 3,335,000 original issue shares
     of the Buyer's [petitioner's] Common Stock, no par
     value, which shares have been valued by the parties at
     a fair market value of $60,030,000 based upon recent
     market values of the Buyer's Common Stock in the over-
     the-counter market, the present book value of the
     Buyer's Common Stock, the size of the block of shares
     to be issued to the Seller, the restrictions upon
     transfer of such shares and the limited size of the
     public market for the Buyer's shares, and (ii) the
     Buyer's assumption and agreement to pay or discharge
     the Seller's liabilities and obligations to the extent
     provided in Paragraph 4(a) hereof; the foregoing
     purchase price reflecting the fair market value of the
     assets of the Business as set forth in the report of
     Valuation Research Corporation, dated March 1, 1978,
     containing, among other things, an appraisal of the
     industrial gas assets of the Seller which are used in
     the Business, a copy of which has previously been
     delivered to the Buyer.


     The parties to the Contract obtained two outside appraisals

in connection with the transaction.   First, in a letter dated

June 2, 1978, addressed to the board of directors of Allegheny,

Smith Barney, Harris Upham & Co. (Smith Barney) concluded that

the fair market value of 3,335,000 shares of petitioner's common

stock was approximately $60,000,000 as of May 18, 1978.   In so

concluding, Smith Barney considered the effect of the following

factors on the value of petitioner's common stock:   (1) The

shares to be received by Allegheny in the transaction would be

restricted stock; (2) upon receipt of the stock, Allegheny would

hold a minority interest in petitioner equal to approximately 32
                                    - 4 -

percent; and (3) the volume of trading in petitioner's stock on

the over-the-counter market is very thin.1           Next, in a letter

dated September 18, 1978, addressed to Mr. Breber, Goldman, Sachs

& Co. (Goldman Sachs) concluded that the fair market value of

3,335,000 shares of petitioner's common stock was $60,697,000 as

of April 27, 1978.      Goldman Sachs started with the last bid price

on the over-the-counter market on April 27, 1978, of $26 per

share,2 and applied a block discount of 30 percent to account for

the thin public market and the restricted nature of the stock to

be transferred.      The parties to the Contract did not obtain an

appraisal of petitioner's shares as of the closing date of the

transaction.3

         The closing of the transaction contemplated in the Contract

occurred on March 28, 1979, approximately 10 months after the

signing of the Contract.       Paragraph 22(m) of the Contract

provided that certain adjustments were to be made upon the

closing of the transaction:


     1
       The average annual trading volume of petitioner's shares from November
1975 through March 1978 was approximately 630,000 shares. Thus, the 3,335,000
shares to be issued pursuant to the terms of the Contract represented more
than five times the annual trading volume of petitioner's shares.
     2
       We note that the bid price on the over-the-counter market on Mar. 29,
1979, the day after the closing, was also $26 per share.
     3
      There is some evidence that the IRS conducted an appraisal of
petitioner's stock as of the closing date in connection with its audit of
Allegheny. The IRS agent proposed an increase in Allegheny's gain on the sale
of the IGD's assets in the amount of $16,675,000 to account for an increase in
the fair market value of petitioner's stock. However, the appraisal is not in
the record, nor is there any evidence to explain the procedures and
conclusions of the appraiser. Moreover, the adjustment proposed by the IRS
agent was subsequently reversed by the Appeals Division of the IRS.
                              - 5 -


           (m) Post-Closing Adjustment. The parties
     acknowledge that the Buyer [petitioner] shall be
     entitled to (i) 25% of the pre-tax earnings of the
     Business (after the charges set forth on Schedule Q)
     from January 1, 1978 to July 2, 1978 and (ii) 50% of
     the pre-tax earnings of the Business (after the charges
     set forth in Schedule Q) from July 3, 1978 to the day
     immediately preceding the Closing Date. Within 60 days
     after the Closing Date, the parties shall determine the
     amount of any adjustment required to enable the Buyer
     to receive the benefit of its share of the profits as
     set forth above. In the event the Seller [Chemetron],
     as of the Closing Date, has withdrawn less than the
     amount to which it is entitled, the Buyer shall pay to
     the Seller the amount of such deficiency. In the event
     the Seller, as of the Closing Date, has withdrawn more
     than the amount to which it is entitled, the Seller
     shall pay to the Buyer the amount of such excess.
     * * *


The final settlement adjustments made after closing in accordance

with the above provision were calculated by Allegheny and set

forth in a letter dated June 21, 1979:


December 31, 1977 equity                          $69,285,404.00
1978 earnings $10,028,071.48 x 25% = 2,507,017.87
1979 earnings $ 2,298,266.00 x 25% =   574,566.50   3,081,584.37
Total equity required                              72,366,988.37
Equity at 3/31/79                                  72,045,669.78
  Amount due from Chemetron                          $321,318.59


The $321,318.59 net amount due from Chemetron was paid to

petitioner by means of a wire transfer to the IGD's account.    The

remainder of the $3,081,584.37 that was determined to be owed to

petitioner was paid in the form of a higher net asset value that
                                      - 6 -

was delivered to petitioner at closing.4

         Prior to the closing, approximately 80 percent of

petitioner's stock was beneficially owned, assuming conversion of

certain preferred stock, by L'Air Liquide S.A. (L'Air Liquide), a

French corporation.         Approximately 2 percent of petitioner's

stock was owned by officers and directors of petitioner.                The

remaining 18 percent of petitioner's stock was publicly owned and

was traded on the over-the-counter market.             After the closing,



     4
      We note that the percentage of post-July 1978 earnings provision of the
Contract was not literally followed. On brief, petitioner explains this as
follows:


               We point out, for purposes of completeness, that Chemetron's
         contractual obligation to deliver 50 percent of the pre-tax
         earnings of the IGD Division from July 3, 1978 to the day
         immediately preceding the closing merely reflected the parties'
         initial expectation (ultimately unrealized) that the closing would
         take place in the third quarter of 1978, but before the record
         date for the third quarter LAC dividend. That is, the parties
         expected that Chemetron would be receiving the full third quarter
         dividend from LAC even though it would only have owned the LAC
         stock for a portion of the third quarter. Thus, the "50 percent
         of pre-tax earnings" amount referred to in the Contract merely
         refers to (i) the 25 percent of pre-tax earnings balancing, or
         mirror, amount negotiated by the parties, plus (ii) an additional
         25 percent of pre-tax earnings from the beginning of the third
         quarter dividend period to the anticipated closing date,
         representing the portion of the third quarter LAC earnings that
         would be paid as a dividend to Chemetron after the (originally
         anticipated) closing date even though allocable to a period prior
         to which Chemetron would actually own the relevant LAC shares. It
         is apparent that the parties sought carefully and minutely to
         negotiate the economics of the transaction. However, the closing
         of the transaction ultimately did not take place prior to the
         record date for the third quarter dividend for 1978, as the
         parties had initially expected. Rather, as a result of the
         protracted FTC investigation, the closing actually took place on
         March 28, 1979--i.e., at the close of the first quarter of 1979,
         but after the record date for the first quarter dividend.
         Therefore, Chemetron never had to "disgorge" a portion of a
         dividend allocable to a period during which it did not actually
         own the LAC stock, and no "50% of pre-tax earnings" amount ever
         had to be calculated or paid.
                               - 7 -

L'Air Liquide's beneficial ownership of petitioner's stock fell

to approximately 55 percent.   Approximately 32 percent was owned

by Chemetron, leaving maximum public ownership at approximately

13 percent.


                           Discussion


     The issue we must decide is whether petitioner overstated

the basis of the assets acquired from Chemetron by $3,081,584.

The $3,081,584 represents the amount of the post-closing

adjustment provided for in paragraph 22(m) of the Contract.

Respondent argues that petitioner's basis in the property for

depreciation purposes is the cost of such property, and that the

cost of the property was clearly set forth in paragraph 2 of the

Contract as $60,030,000 (the fair market value of 3,335,000

original issue shares of petitioner).   Petitioner, on the other

hand, argues that the post-closing adjustment was intended to

equate any increase in the fair market value of petitioner's

stock between the Contract date and the closing date with the IGD

assets to be delivered to petitioner.   Because the adjustment

mechanism was bargained for at arm's length, petitioner argues

that the additional value transferred after closing should be

reflected in petitioner's cost basis of the assets.   Petitioner

bears the burden of proving that it is entitled to the additional
                                    - 8 -

$3,081,584 in basis.      Rule 142(a);5 Welch v. Helvering, 290 U.S.

111, 115 (1933).

         The basis upon which depreciation deductions are allowed is

the basis determined under section 1012.          Secs. 167(g), 1011(a).

Section 1012 provides in pertinent part:          "The basis of property

shall be the cost of such property".         Generally, the cost basis

of property purchased with other property is the fair market

value of the property received in the exchange.            Philadelphia

Park Amusement Co. v. United States, 130 Ct. Cl. 166, 171, 126 F.

Supp. 184, 188 (1954); Williams v. Commissioner, 37 T.C. 1099,

1106 (1962).      On the other hand, where a corporation acquires

property in exchange for its own stock, the cost basis of such

property is the fair market value of the stock given up in the

exchange.6     FX Sys. Corp. v. Commissioner, 79 T.C. 957, 963

(1982); Pittsburgh Terminal Corp. v. Commissioner, 60 T.C. 80, 87

(1973), affd. without published opinion 500 F.2d 1400 (3d Cir.

1974).

         Fair market value has been defined as "the price at which

the property would change hands between a willing buyer and a



     5
      Unless otherwise indicated, all Rule references are to the Tax Court
Rules of Practice and Procedure, and all section references are to the
Internal Revenue Code in effect for the taxable year in issue.
     6
      This departure from the general rule is due to the fact that under sec.
1032, a corporation does not recognize any gain or loss when it receives
property in exchange for its own stock. FX Sys. Corp. v. Commissioner, 79
T.C. 957, 963 n.4 (1982); Pittsburgh Terminal Corp. v. Commissioner, 60 T.C.
80, 87-88 (1973), affd. without published opinion 500 F.2d 1400 (3d Cir.
1974).
                                 - 9 -

willing seller, neither being under any compulsion to buy or to

sell and both having reasonable knowledge of relevant facts."

Sec. 20.2031-1(b), Estate Tax Regs.; see also Bankers Trust Co.

v. United States, 207 Ct. Cl. 422, 437, 518 F.2d 1210, 1219

(1975).   Where the property to be valued consists of corporate

stock that is listed on an established securities market, the

average exchange price quoted on the valuation date generally

provides the most accurate measure of fair market value.     Bankers

Trust Co. v. United States, 207 Ct. Cl. at 437, 518 F.2d at 1219;

Amerada Hess Corp. v. Commissioner, 517 F.2d 75, 83 (3d Cir.

1975), revg. White Farm Equip. Co. v. Commissioner, 61 T.C. 189

(1973); sec. 20.2031-2(b)(1), Estate Tax Regs.    However, where

stock is exchanged for property pursuant to an arm's-length

transaction, the courts have, in certain instances, presumed that

the value of such stock equals the value of the property received

in exchange therefor, a method often referred to as the "barter-

equation method" of valuation.     Southern Natural Gas Co. v.

United States, 188 Ct. Cl. 302, 352-353, 412 F.2d 1222, 1252

(1969); Pittsburgh Terminal Corp. v. Commissioner, supra at 88;

Moore-McCormack Lines, Inc. v. Commissioner, 44 T.C. 745, 757

(1965).   Regardless of the precise rule of valuation that we are

attempting to apply, this Court has always followed the evidence

of value on either side of a transaction that we consider to be

the most reliable.   Pittsburgh Terminal Corp. v. Commissioner,

supra at 88; Amerex Holding Corp. v. Commissioner, 37 B.T.A.
                              - 10 -

1169, 1190 (1938), affd. per curiam 117 F.2d 1009 (2d Cir. 1941).

We see no reason to depart from that approach here.

     In the present case, the only appraisals of petitioner's

stock were made as of dates before the Contract date.   The

parties to the Contract did not seek an appraisal of the stock as

of the date of the closing.   However, where experienced

businessmen or women with adverse interests are negotiating at

arm's length, and they agree upon the value of property to be

exchanged, the agreement is very persuasive evidence of value.

Southern Natural Gas Co. v. United States, 188 Ct. Cl. at 358,

412 F.2d at 1251, 1255-1256; Seas Shipping Co. v. Commissioner,

371 F.2d 528, 532 (2d Cir. 1967), affg. T.C. Memo. 1965-240.

     In the instant case, the parties do not dispute that the

Contract was the result of an arm's-length negotiation among

representatives of petitioner, Chemetron, and Allegheny.   The

Contract provided for a purchase price of 3,335,000 shares of

petitioner's common stock, which had been valued by the parties

at $60,030,000.   In addition, the Contract provided that certain

adjustments were to be made upon the closing of the transaction.

Pursuant to the adjustment provision, petitioner was entitled to

receive (i) 25 percent of the pre-tax earnings of the IGD from

January 1, 1978 to July 2, 1978, and (ii) 50 percent of the pre-

tax earnings of the IGD from July 3, 1978, to the day immediately

preceding the closing date.   Petitioner received a total of

$3,081,584 in additional IGD assets pursuant to this provision.
                                   - 11 -

     Respondent argues that because the Contract states that the

purchase price is $60,030,000 to be satisfied by the delivery of

3,335,000 shares of petitioner's stock, petitioner is bound by

such stated price.     We have consistently held that where

taxpayers have executed a written agreement that provides for

specific terms of a transaction in which the tax consequences are

at issue, they must adduce "strong proof" to establish a position

at variance with the clear language of their written agreement.

Peterson Mach. Tool, Inc. v. Commissioner, 79 T.C. 72, 81 (1982),

affd. per curiam by order (10th Cir., Apr. 2, 1984); Lucas v.

Commissioner, 58 T.C. 1022, 1032 (1972).          However, petitioner is

not seeking to vary the terms of its agreement.           The Contract

clearly provides for an adjustment in the value of the assets to

be received from Chemetron.       Rather, petitioner is attempting to

show that the post-closing adjustment reflects the parties'

estimation of the anticipated increase in the purchase price.

Because petitioner is merely attempting to construe an ambiguous

term of the agreement, the "strong proof" rule does not apply.

Peterson Mach. Tool, Inc. v. Commissioner, supra at 82.7             Thus,



     7
       Respondent urges us to apply the standard of proof adopted by the Court
of Appeals for the Third Circuit in Commissioner v. Danielson, 378 F.2d 771
(3d Cir. 1967), vacating and remanding 44 T.C. 549 (1965). Under the
Danielson rule, "a party can challenge the tax consequences of his agreement
as construed by the Commissioner only by adducing proof which in an action
between the parties to the agreement would be admissible to alter that
construction or to show its unenforceability because of mistake, undue
influence, fraud, duress, etc." Id. at 775. We note that the stricter
Danielson rule is also inapplicable when the agreement is ambiguous. Smith v.
Commissioner, 82 T.C. 705, 713-714 (1984).
                                   - 12 -

we need only determine whether petitioner has met its usual

burden of proof with respect to the purchase price of the assets

of the IGD.      Rule 142(a).

         Mr. Breber, who was in charge of negotiating the purchase of

the assets of the IGD on petitioner's behalf, testified8 that the

purpose behind the post-closing adjustment provision in the

Contract was to balance the anticipated increase in the value of

petitioner's shares from the Contract date until the closing date

with additional assets of the IGD to be delivered at closing.

         According to Mr. Breber, the industrial gas industry, of

which petitioner and Chemetron were a part, is a capital

intensive industry.      In order to maintain profitability, a

certain percentage of annual earnings must be reinvested in fixed

assets.      Petitioner's policy was to retain approximately 25

percent of its pre-tax earnings, which was generally in

accordance with the industry norm.          An additional 25 percent of

petitioner's pre-tax earnings was generally paid out to the

shareholders as dividends.       Because the transaction required the

approval of the FTC before it could close, the parties

anticipated a delay between the signing of the Contract and the

closing of the transaction.       During the course of such delay, Mr.



     8
      Because Mr. Breber would be unavailable to testify at trial, the parties
examined him under oath before an independent stenographer. The examination
was recorded, and a transcript thereof was admitted in evidence. The parties
stipulated that if Mr. Breber were called to testify at trial, his testimony
would be as set forth in the admitted transcript.
                                   - 13 -

Breber anticipated that both petitioner and Chemetron would

continue to produce net positive earnings and reinvest them in

accordance with the industry norm, thus increasing the value of

both the stock and the assets to be exchanged.           According to Mr.

Breber, the post-closing adjustment was intended to reflect this

anticipated increase.

        We find Mr. Breber's explanation of the purpose of the post-

closing adjustment to be credible and consistent with the

language of the provision itself and with the other evidence in

the record.9    Moreover, the fact that Chemetron actually

transferred an additional $3,081,584 in value after the closing

provides strong support for Mr. Breber's explanation.            The only

natural conclusion is that Allegheny and Chemetron considered the

stock to have equivalent value, for it is difficult to imagine

that sophisticated businessmen were "either in effect duped into

giving * * * [an additional $3,081,584 in assets], or were

indulging in some kind of charitable exercise."           Southern Natural

Gas Co. v. United States, 188 Ct. Cl. at 351, 412 F.2d at 1251.

        Upon consideration of all the evidence in the record, we

conclude that the value of assets transferred by Chemetron upon

closing, including the additional $3,081,584 transferred pursuant


    9
      We note that the acquisition of the IGD from Chemetron would make
petitioner a national, as opposed to a regional, supplier of industrial gases.
Such acquisition could not take place without FTC approval. As of the closing
date, FTC approval had been obtained, which removed this contingency. We
believe that these factors would have a positive effect on the fair market
value of petitioner's stock.
                                - 14 -

to the post-closing adjustment provision, is the best evidence of

the fair market value of petitioner's stock at the time of issue.

Accordingly, we hold that petitioner properly included the

$3,081,584 in its cost basis.



                                              Decision will be entered

                                         for petitioner.
