CASE Y22

Members:
KL Beddoe

Tribunal:
Administrative Appeals Tribunal

Decision date: 9 May 1991

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K L Beddoe (Senior Member)

The first question for decision is whether the applicant made a gift of cinematograph film to the National Film and Sound Archive (``the Archive'') within the terms of section 78 of the Income Tax Assessment Act 1936 (``the Act''). The gift was made during the year of income ended 30 June 1986.

2. If that question is decided in the affirmative then the second question arises as to the value of the gift and the amount allowable as a deduction for income tax purposes under paragraph 78(1)(aa) of the Act.

3. The relevant statutory provisions are to be found in section 78 of the Act. In general terms those provisions have the following effect. Paragraph 78(1)(aa) provides for an allowable deduction for gifts of the value of $2 and upwards made by the taxpayer and accepted for inclusion in the collection of, inter alia, a public museum. Such a gift is not an allowable deduction unless the donor includes with the relevant income tax return two valuations in writing stating the amount that, in the opinion of each valuer was (so far as is here relevant), the value of the property at the time the gift was made (or in certain circumstances) at the date of valuation. The valuations are required to be made by approved valuers in relation to the class of property in which the property is included (subsection 78(6B)). For the purposes of subsection 78(6B) a person shall be taken to be an approved valuer in relation to a particular class of property if there is in force an approval by the Secretary to the Department of Arts, Heritage and Environment of that person as a valuer in relation to that class of property (subsections 78(6D) and 78(6DA)).

4. In deciding whether to approve a person as a valuer in relation to a particular class of property the said Secretary is required by subsection 78(6B) to have regard to:

• (a) the qualifications, experience and knowledge of the person in relation to the valuation of property included in that class,
• (b) the knowledge of the person of current market values of property included in that class,
• (c) the standing of the person in the professional community, and

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• (d) any other matters that the Secretary considers relevant.

It will be apparent that approved valuers are persons who satisfy the tests imposed by the legislation to the satisfaction of the Secretary.

5. Subsection 78(6E) provides, in so far as is relevant, that if the Commissioner is of the opinion that the average of the valuations by the approved valuers fairly represents the value of the property at the time when the gift was made then that amount is the value of the gift. If the Commissioner is not of that opinion then the value of the gift is the amount that the Commissioner considers was the value of the property at the time the gift was made. No criteria are set out in the Act to assist the Commissioner in coming to that state of mind.

6. It is of course trite to say, but necessary to remember, that the onus of establishing that the assessment is excessive rests with the taxpayer (section 190).

7. The respondent filed documents pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 (``the AAT Act''). When the matter came on for hearing, counsel for the Commissioner objected to the Tribunal taking those documents into account. In the result the documents were taken as evidence of the existence of the documents but not as evidence of the facts asserted in the documents.

8. Document T3 is a copy of an income tax return for the year of income ended 30 June 1986 in the name of the applicant who is described therein as a ``Film Producer/Director''. Included with the returns were two schedules headed ``Taxation Incentives for the Arts'' setting out details of cinematograph film donated by the applicant to the Archive. Also attached were copies of two valuations made in respect of each gift. Those valuations are in the names of G. Eley and D.J. Case and the originals are in evidence before the Tribunal (Exhibits D and G).

9. Claims for deductions in respect of the gifts were disallowed by an assessment notified by notice dated 20 January 1988. That resulted in a notice of objection stamped as having been received in the Taxation Office on 3 March 1988. The claim made in the objection was for deductions amounting to $154,459 being described as the value of a donation made to the Archive. The notice of objection was fulsome in its statement of the facts and of the arguments for the applicant in support of the objection. No issue arose before me in terms of paragraph 190(a) of the Act which is fortunate because the copy document before the Tribunal is unreadable in parts. I have no doubt that the respondent received a readable original from the applicant.

10. By contrast the respondent's statement pursuant to section 37 of the AAT Act is readable in its entirety with the reasons for the decision being clearly stated in the last paragraph as follows:

``2. The material donated by the taxpayer was not owned by him. Additionally, the Commissioner formed a view that the valuations furnished to him did not fairly represent the value of the property at the time the gift was made. The Commissioner formed the opinion that the material had no value at the time it was donated. As a result of the foregoing the Commissioner disallowed in total the amount claimed by the taxpayer.''

11. The applicant and one of the valuers gave oral evidence before the Tribunal. No witnesses were called for the respondent. Evidence by way of an affidavit by Graham Hume Gilmour, the Director of the National Film and Sound Archive, was also led, subject to specific objections by the respondent. The respondent tendered copies of certain correspondence with the applicant's consent (Exhibits 1 and 2).

12. Section 14ZK of the Taxation Administration Act 1953 requires this Tribunal to prepare these reasons in such a way as to not disclose the identity of the applicant. Of necessity that means that certain findings of fact must be camouflaged or made in such a way as to be almost unintelligible. The statutory constraint imposed on the Tribunal becomes more relevant and difficult in a case such as the present where the applicant and the relevant film are well known in the Australian community. I have not been shown the film or the excess film footage in question.

13. The applicant is a film producer and director and has been making films for a considerable period of time as an independent producer. Since a time prior to the relevant dates in these proceedings the applicant has

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conducted such operations through a company which I will call Associates Pty Ltd.

14. The applicant wrote a script outline of the relevant film in 1985. I will call the film ``The Covert Volcano''. The script itself was written contemporaneously with the production of the film. By 30 June 1983, finance for the production had been arranged by the applicant's accountant. Apparently it was a private placement of interests in a syndicate formed amongst clients of the accountant. The applicant said in evidence that because of the accountant's involvement in raising the finance he was credited as associate producer of the film with the applicant credited as producer and director.

15. The arrangements for production of the film and financing the production are evidenced in writing by deeds dated 23 June 1983 and 15 June 1984. The 1983 deed states that the applicant's accountant is the producer of ``The Covert Volcano'' and further recites that the investors (the members of the syndicate) and the producer had agreed that the producer make the film with a co-producer on the terms and conditions set out in the deed. The deed also recites that the investors had agreed with the producer to appoint the producer their agent to market their interests in the copyright of the film on the terms and conditions contained in the deed. The deed makes it clear that it is the producer who has the right to exploit the film including the copyright. Although it is not clear as to whether the producer was owner or licensee it is clear that the copyright was to be exploited for the benefit of the producer and the investors but the residual rights in the copyright vested in Associates Pty Ltd.

16. Clause 3.1 of the deed provides that the producer covenants and agrees with the investors ``that neither he or persons delegated by him, in accordance with this Deed have employed or will employ suitably qualified persons as the crew for the Film''. Presumably an error has occurred as that does not seem to be the intention of the parties. In fact what happened is that the applicant and a crew employed by Associates Pty Ltd produced the film. The accountant was merely the person who organised the investors and indemnified them in matters relevant to the making and exploitation of the film.

17. Clause 9 of the deed makes it clear that on completion of the film the copyright of the film was to be owned by the investors as tenants-in-common as to 50% and by the producer as to 50% for a period of 10 years. After 10 years the copyright to vest in the producer only. So far as I can see the deed does not refer to copyright in relation to the excess film footage not used in making ``The Covert Volcano''.

18. The second schedule to the agreement sets out the production budget for ``The Covert Volcano''. That budget includes what might be thought to be all the budgeted amounts of outgoings to be incurred in making the film. The estimates include 75 rolls (30,000 feet) of negative film stock and processing and work prints of 30,000 feet of film. Provision has also been made for acquisition of stock shot film.

19. The third schedule to the agreement names the applicant as the producer and director of the film and his accountant as the Production Accountant and one of two associate producers. The applicant is also named as the Director of Photography and the script writer.

20. An agency agreement is exhibited in the fifth schedule to the deed. Also dated 23 June 1983, it is an agreement between the applicant's accountant as ``The Producer'' and Associates Pty Ltd as ``The Production Company''. The agency agreement refers to a deed dated 30 June 1983 between the Producer and certain investors whereby the parties agreed that the Producer would make and market a cinematographic film provisionally entitled ``The Covert Volcano''. I am prepared to infer that the deed referred to must be the deed dated 23 June 1983 already referred to. The effect of the agency agreement is to provide for the company to make and market the film on behalf of the Producer in accordance with the agency agreement. Clause 3.6 of that agreement has the effect of requiring the production company to maintain secure custody of the original negative of the film.

21. If it is thought that these documents are somewhat confused that confusion escalated in the deed dated 15 June 1984 between the investors on the one hand and the applicant and Associates Pty Ltd on the other hand. The deed recites, in part, that Associates Pty Ltd had agreed by the deed dated 23 June 1983 to

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produce ``The Covert Volcano''. That can hardly be a correct interpretation of the earlier deed between the investors and the accountant when read in conjunction with the agency agreement. The deed of 15 June 1984 was concerned to deal with a cash shortfall caused by over budget outgoings. It is of relevance to note, however, that notwithstanding a general increase in costs budgeted the amount of negative film stock to be used was reduced from 30,000 feet to 24,000 in the revised budget. The deed makes no mention of any alteration regarding the copyright of the film.

22. The explanation for the apparent confusion as to who was the producer of the film is in the evidence of the applicant at page 11 of the transcript. The problem arose out of legal advice to the effect that Associates Pty Ltd could not make a public offer (there were more than 20 investors) and therefore the offer should be made by the accountant who knew the investors; they being clients of his practice.

23. The applicant also stated in evidence that he had adopted the practice of donating excess footage from earlier films before making ``The Covert Volcano''. In each case the donation was made by him personally rather than Associates Pty Ltd because it was the excess footage and not the film itself that was the subject of the gift. It was always his understanding that the excess footage belonged to him personally unless there was a provision in the contract to the contrary. There was no discussion with the investors in ``The Covert Volcano'' regarding ownership of the excess footage until after the event when the issue had been raised by the respondent. That apparently resulted in the applicant's accountant discussing the question with the investors. The accountant was not called to give evidence. Although the evidence was vague on the point I think I should infer that the applicant retained ownership of the excess footage on the basis that he did not exploit or use it to the detriment of the investors. In coming to that view I have taken into account the fact that the applicant is the controlling mind of the company (
Tikva Investments Pty Ltd v. F.C. of T. 72 ATC 4231; (1972) 128 CLR 158). I have also taken into account the difficulty which the applicant had in the course of his evidence in acknowledging that the company is a separate legal entity (
Lee v. Lee's Air Farming Ltd (1961) AC 12). However the position is reached, it seems to me to have been well accepted that the excess footage left on the cutting room floor belonged to the applicant.

24. That conclusion is also consistent with ownership of the copyright. The question is who owned the copyright in the excess footage - not who owned the copyright in ``The Covert Volcano''.

25. Section 98 of the Copyright Act 1968 provides that the maker of a cinematograph film is the owner of any copyright subsisting in the film. Where a person makes a film in pursuance of an agreement with another person for the making of a film then the person for whom the film is made will own the copyright unless there is agreement to the contrary.

26. Applying the law to the present case the excess footage does not form part of ``The Covert Volcano'' and must therefore be considered separately. The applicant made the film itself for Associates Pty Ltd. Prima facie, therefore, given that the excess footage stock is not the subject of the agreements with the investors the result must be that the copyright in the excess footage vests in Associates Pty Ltd unless there was an agreement between the company and the applicant to the contrary. As I have already found, the applicant has difficulty distinguishing the company as a separate entity and the applicant is the controlling mind of Associates Pty Ltd. The applicant's state of mind as evidenced by his actions prior to and at the time of making ``The Covert Volcano'' must be the determining factors. On the evidence before me it must be inferred that the applicant and Associates Pty Ltd had an agreement at all relevant times to the effect that the applicant was the owner of the copyright in the excess footage. In any event, for the purposes of the Copyright Act the applicant was the producer. I am therefore satisfied that the applicant owned the proprietary rights in respect to this excess footage film shot in the course of making ``The Covert Volcano''.

27. There is, of course, the further question of the applicant owning copyright in stock shot material used by permission in the course of making ``The Covert Volcano''. That stock shot material which became excess footage on the cutting room floor was merely a copy of film taken from a stock shot library owned by third parties such as the Archive.

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28. Mr Gilmour's affidavit (Exhibit A) is silent as to the stock shot material which I will describe as the non-copyright material. No doubt artistic skill was involved in the use made of the non-copyright material but as the copyright vests in others it cannot be said to be material belonging to or vesting in the applicant. The non-copyright material was acquired by Associates Pty Ltd for production of ``The Covert Volcano''. I did not understand the evidence to establish that ownership of the excess non-copyright material passed from the company to the applicant. In the circumstances I am not satisfied that the non-copyright material was the subject of a gift of property by the applicant. If there was a passing of property then it passed from Associates Pty Ltd to the Archive. In my view there is no basis for saying that the property in the non-copyright material passed from the applicant to the Archive. I am therefore not satisfied that it was the applicant, as opposed to the company, who made the gift to the Archive (if any gift was made at all) of the non-copyright excess footage stock.

29. I turn now to the question of value. Mr Gilmour was not called for cross-examination. His affidavit establishes that the applicant is one of the most acclaimed and significant Australian film-makers and that his material is being collected by the Archive for future film-makers, students of film-making and historical researchers. That seems to me to be consistent with the general understanding of the function of the Archive as the body responsible for collecting, preserving and providing access to Australia's film heritage. Mr Gilmour also stated that the collection of the applicant's material represents some of the finest examples of Australian film-making.

30. Given the evidence from the Director of the Archive, this Tribunal must find that the original excess footage stock - i.e. the film actually shot by the applicant, but not used in ``The Covert Volcano'' was of value. To decide otherwise would be contrary to the uncontested evidence. Clearly the Archive regards the excess film as a valuable addition to its collection and it would not therefore be correct to attribute to the film stock the value of trash.

31. I turn now to the question of quantifying the value. Unlike the valuation of shares, land, old books, paintings and even ``a gaggle of second grade opals'' (Case X12,
90 ATC 162 at 165), the valuation of film stock of cultural significance raises problems that most experienced valuers and accountants would seldom encounter. The first principle is that old film is unusable and virtually worthless unless it can be restored. Value is to be found in modern copies and modern original material.

32. The only evidence as to actual value before the Tribunal is that of the valuers who were approved valuers within the terms of subsection 78(6D)(Exhibits D and G). Having satisfied myself on the evidence that the excess footage shot by the applicant is of value to the Archive in particular, and other film-makers in general, there being no other evidence as to the value of the excess footage, then prima facie I should adopt the average of the two valuations (subsection 78(6E)(a) of the Act). There is however the evidence of Mr Case.

33. I am required to be satisfied that the average of the two valuations fairly represents the value of the property as at the time when the gift was made (subsection 78(6E)(a)(i) of the Act and subsection 43(1) Administrative Appeals Tribunal Act 1975 (``AAT Act''). I am unable to be so satisfied and the reason for this lack of satisfaction has its genesis in the following exchange between the valuer, Mr Case, and the Tribunal upon the completion of cross-examination of Mr Case (at page 56 of the transcript):

``Tribunal: What do you understand by the meaning of the word `value'?

A. How long have I got?

Q. As long as you like.

A. Most of the documents I have written have addressed this very question. The word `value' in itself would have to be qualified as to whether we are talking about a market value or a replacement value or possibly a cultural value.

Q. Given that the word is not qualified in the Act, what do you understand the ordinary meaning of the word `value'?

A. A figure which can be placed on the film. With it being not qualified, it's very difficult to give a single definition of how I understand the word. I would say it is depending on different types of material. It

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is either a replacement value or a possible commercial value. Perhaps a commercial value is the amount of money that could potentially be earned either from sale or renting out or whatever of the material.

Q. Surely that wouldn't be the case. I mean if there was potential for deriving income from the property which is being valued, it wouldn't be the amount of the income flow, would it? It would be some figure which takes the income or the expected income flow into account?

A. Yes.

Q. Yes?

A. Yes, my whole difficulty is, as I said before, that just as... (inaudible)... term value is by the whole device of this tax incentive scheme seeks to equate the cultural value of the goods being donated to some dollar value, and I think the whole issue that we're discussing here is perhaps the mechanism by which we can place a dollar value on a cultural item of some sort.''

34. The exchange reflects some confusion as to the conceptual basis to be adopted in making the valuation. The Tribunal is again confronted by the dilemma noted by Dr Gerber in Case X12, 90 ATC 162 at page 163 where he noted that no authorities were cited to him which bore on the mechanics of calculating value for the purposes of paragraph 78(1)(aa).

35. It is not appropriate for this Tribunal to speculate as to facts relevant to showing that an assessment is excessive. However, the evidence of Mr Gilmour has established that the copyright excess footage does have a real value. It follows, because the respondent has attributed a ``nil'' value to the footage, that the assessment must be accepted as being excessive.

36. The value of the copyright excess footage is to be found in the valuations made by the two approved valuers and the evidence of Mr Case before the Tribunal. It is undoubtedly difficult to fix a value for cultural materials such as the copyright excess footage because of the lack of guidance from a market in such goods. That the valuing of such material is difficult was recognised in Mr Case's evidence. Notwithstanding that difficulty the Act requires that the value of the gift be determined by approved valuers. If the Commissioner is of the opinion that the average of the values of the approved valuers fairly represents the value of the property as at the time the gift was made then that average is the value of the gift. In this case the Commissioner decided the film had no value but there is nothing before the Tribunal to support this view.

37. It is open to the Tribunal, standing in the shoes of the Commissioner, to decide that the average of the values fixed by the approved valuers is not the fair value of the copyright excess footage. In the light of the evidence of Mr Case I do not propose to adopt the average of the values for the copyright excess footage. An alternative basis of valuation can be extracted from the evidence given by Mr Case before the Tribunal.

38. At the outset I should say that Mr Case was quite frank in his evidence. He moved away from his written valuation because he has changed his view on certain matters in the time between 1986 when he made the valuations and 1991 when he gave evidence before this Tribunal. There is no suggestion, and it should not be inferred, that he deliberately fell into error in expressing his opinion in 1986. As this Tribunal well knows expert opinion changes from time to time in various fields because of changes in understanding which occur in all aspects of life. In his evidence the witness identified these changes as ``slight changes of heart''. In particular he is no longer convinced that a laboratory cost basis was appropriate for the non-copyright material. He seems to have come to a position of compromise between a system of valuation adopted by Professor Julie James Bailey and the laboratory cost basis adopted by the original valuations. Professor Bailey's basis apparently gives more weight to the intrinsic cultural value of the film. Mr Case now recognises this cultural value by having regard to the expected future income to be derived by the film stock.

39. Mr Case's revision of his valuation resulted in a total valuation for the copyright and non-copyright material of $113,000.

40. The new basis of valuation is set out in Exhibit F although that document does not quantify the values in the present case. It is clear to the Tribunal that Mr Case no longer supports his initial valuations made on a laboratory (or replacement) cost basis. In the

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result he said in evidence that he now thought the total value of the film stock donated was $113,000 in lieu of his earlier valuations totalling $156,433. No evidence was led to explain how the witness arrived at the actual valuation of $113,000.

41. Although the respondent's counsel submitted that it was not open to this Tribunal to form its own opinion of the value I think that submission overlooks the effects of subparagraph 78(6E)(a)(ii) when read in conjunction with subsection 43(1) of the Administrative Appeals Tribunal Act 1975. I have formed the opinion, based on Mr Case's evidence, that the average of the two valuations furnished by the applicant (Exhibits D and G) does not fairly represent the value of the film stock, the subject of the gift. It is therefore open to the Tribunal, standing in the shoes of the Commissioner, to fix the amount which the Tribunal considers was the value of the property at the time of making the gift.

42. In determining the value I have adopted a base rate of $1.25 per foot as the value of copyright (see Exhibits D and E) in respect of the original negative. I do not attribute any value to the film stock insofar as the negative is concerned. The reason for this is that the gift is of film stock which is excess footage. In other words the film stock left on the cutting room floor after making the film. In that situation the value of the negative film stock is in the finished film, not in the excess footage. The original negative material is itself unusable except for making a work print. The only inherent value, in my opinion, is the copyright value.

43. Different considerations apply with the work print. The material value only of a work print has been determined by Mr Case at O.275c per foot. The copyright value of $1.25 per foot must be added to that to give a value of $1.52.5 per foot - say $1.50 per foot - in respect of the work print.

44. Mr Case has estimated that 90% of the film stock donated is in fact usable. I can see no basis for departing from his opinion. I also accept that the value should be discounted to acknowledge that a complete shot list was not supplied and once again I can see no basis for departing from his figure of 60% being the appropriate factor for film stock accompanied by a synopsis but not a complete shot list.

45. It was not disputed that the original negative copyright material donated to the Archive was made up of three lots totalling 67,245 feet. The work print donated was made up of 42,095 feet of print stock including 4,070 feet of silent stock. There was also some additional stock amounting to 17,425 feet about which I can only speculate and will not therefore assign a value.

46. In the result the amount which I consider to be the value of the copyright material has been calculated as follows:

     Original negative
        67,245 X $1.25                     = $ 84,056

     Work Print
        42,095 X $1.50                        $63,142
                                             --------
                                             $147,198
                                             --------
     Value of usable proportion being
        $147,198 X 90%                     = $132,478

     Discounted for lack of complete
        shot list being
         $133,426 X 60%                    =  $79,486
      

The figure of $79,486 is the amount which the Tribunal considers was the value of the copyright film stock at the time of the gift to the Archive. In coming to this conclusion I have taken the following into account.

47. The process of valuation necessitates converting the intrinsic qualities of property to an amount in monetary terms. The concept of value in relation to chattels was discussed by Griffith CJ in
Spencer v. Commonwealth of Australia (1907) 5 CLR 418 at 431 where his Honour said:

``In the case of chattels it is often, though not always, easy to ascertain the value. In order that any article may have an exchange value, there must be presupposed a person willing to give the article in exchange for money and another willing to give money in exchange for the article. When there is a large or considerable number of articles of the same kind which are the subject of daily or frequent sale and purchase, the value of the articles is taken to be their current price. Thus, in the Sale of Goods Act, the measure of damages for wrongful refusal to deliver goods is to be ascertained with reference to `the market or current price of the goods'. The foundation of this doctrine is that a man

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desiring to sell such articles can readily find a purchaser at a price which is fairly certain, and conversely that a man desiring to buy can find a seller at about the same price.''

The decision of the Court concerned a compulsory acquisition of land so that the reference to valuation of chattels was by way of obiter dicta. It was in the context of the case that Barton J had this to say at pages 436-437:

``And I should say, in view of the many authorities cited and upon the sense of the matter, that a claimant is entitled to have for his land what it is worth to a man of ordinary prudence and foresight, not holding his land for merely speculative purposes, nor, on the other hand, anxious to sell for any compelling or private reason, but willing to sell as a business man would be to another such person, both of them alike uninfluenced by any consideration of sentiment or need.''

I have considered the dicta of Barton J in the context of the Archive's specific policy of collecting the applicant's material. While there is obviously a ``need'' on the part of the Archive if it is to establish a comprehensive collection of the applicant's work I do not think that it is likely that the Archive was motivated by sentiment when it accepted the gift. Mr Gilmour said in his affidavit that the material is being acquired for future film-makers, students and historical researchers. Each of those purposes is consistent with the functions of the Archive and not caused by sentiment.

48. The more general concepts of value expressed in Spencer's case were altered slightly by the series of decisions of the High Court in relation to the valuation of shares of which
Abrahams v. F.C. of T (1944) 70 CLR 23,
McCathie and Ors. v. FC of T (1944) 69 CLR 1 and
Commissioner of Succession Duties (SA) v. Executor Trustee and Agency Company of South Australia Ltd and Ors (Clifford's case) (1947) 74 CLR 358, are examples. The relevance of these cases is that each was concerned with the valuation for revenue purposes of property for which there was no market (unlisted private company shares). In each case the Court had to consider conflicting valuations made by expert accountants adopting valuation practices used in commercial transactions but arriving at differing valuations.

49. In Clifford's case the majority held that there was no special value attributable to shares holding a controlling interest in a company which should be taken into account in fixing the value of that parcel of shares. Dixon J also drew attention to the difference in purpose between valuing for revenue purposes and valuing for compensation purposes. As his Honour said, this difference of purpose cannot change the test of value but only as to how doubtful issues in the course of valuation are to be resolved. In revenue cases such doubts are to be resolved on a conservative basis.

50. It is not unknown for this Tribunal to be confronted with conflicting expert opinion. Where, however, as in the present case, the Tribunal has expert valuation opinion from two valuers which arrives a similar valuations and there is no other valuation evidence then the Tribunal should be slow to substitute its own opinion as to value unless it is shown that the expert valuations have been improperly made or made on an unsound basis. The latter was established before me in that Mr Case has revised his basis of valuation. It has therefore been necessary for the Tribunal to substitute its own opinion as to the value of the copyright material in this case.

51. The objection decision under review will be set aside and there will be substituted therefor a decision to allow the objection in part by allowing a deduction amounting to $79,486.