*147 Decision will be entered under Rule 50.
1. Held, under sections 113(a) and 113(a)(5), 1939 Code, petitioner's basis of property inherited under mother's will is value at date of her death, and petitioner's basis of other properties bequeathed by father to him and his mother as joint tenants with right of survivorship is value at date of father's death. Held, further, no deductions for depreciation are allowable.
2. Held, sale price of realty must be allocated to respective interests of petitioners and another person according to their agreement which was incorporated in contract of sale; that payments to petitioners in year of sale exceeded 30 per cent of selling price of their interest; and that income cannot be returned on installment basis under section 44(b).
*631 The respondent determined deficiencies in income tax for the taxable years 1950 and 1951 in the amounts of $ 46,106.49 and $ 5,927.58, respectively. The questions are as follows: (1) Whether the bases of three pieces of improved real estate were fully recovered through annual depreciation allowances prior to 1950 so that no depreciation deductions are allowable for 1950 and 1951. (2) Whether the initial payments received by petitioners in 1951 upon the sale in 1951 of a tract of unimproved real estate exceeded 30 per cent of the selling price so as to preclude making return of the gain realized on an installment basis under section 44(a) and (b) of the 1939 Code.
FINDINGS OF FACT.
Petitioners were residents of Queenstown, Maryland, during 1950 and 1951. They filed joint returns for the taxable years with*149 the collector of internal revenue for the district of Maryland. G. Loutrell Timanus is referred to hereinafter as the petitioner.
*632 Issue 1.
G. Loutrell Timanus is the son of Nettie May Timanus who died in 1934. Her husband, petitioner's father, died in 1920.
The father of Timanus acquired three adjoining leasehold properties not later than 1892 at 1307, 1309, and 1311 Maryland Avenue, Baltimore. The improvements on the properties are brick row houses. A 3-story house is located on 1307, and a 4-story house is located on each property at 1309 and 1311. Stores are on the ground floor of at least two properties. In 1934, all of the houses were at least 42 years old.
Upon the death of Timanus' father, the full title to 1307 passed to Timanus' mother. It passed to Timanus under his mother's will upon her death in 1934. The property at 1307 was appraised in July 1934 by duly appointed appraisers for the purpose of valuing the estate of Nettie May Timanus for the Maryland inheritance tax. The appraised value was $ 3,000.
Under the will of Timanus' father 1309 and 1311 were transmitted to Nettie May Timanus and G. Loutrell Timanus as joint tenants with the right of survivorship. *150 Upon the death of Nettie May Timanus title to the fee simple of 1309 and 1311 became vested in Timanus.
In the returns for 1950 and 1951, petitioner deducted $ 880 as the annual allowance for depreciation of the three properties as a unit. He did not compute separately depreciation on each property. The amount, $ 880, is 2 per cent of $ 44,000, which is the amount which petitioner assigned to the three properties as a unit as his basis before adjustment.
Respondent disallowed the depreciation deductions for the following reason: "The depreciation on rental properties claimed in the amount of $ 880.00 is disallowed since it has been established that the cost of such properties was recovered in prior years."
The basis before adjustment to petitioner of 1307 Maryland Avenue was not more than $ 3,000.
Issue 2.
Petitioner became interested in Florida real estate in 1944 when he acquired property which he sold at a profit in 1945. Thereafter, he looked for another investment. Through a real estate broker, George Stewart, petitioner learned of a tract of unimproved property within the city limits of Fort Lauderdale having a 3,000-foot frontage on the Atlantic Ocean. The boundary*151 of the tract commences at the entrance to Port Everglades and extends north to a point near the Holiday Hotel. The property is in an area called Harbor Beach. *633 In 1945, the property was in its native condition. There was no access to the property over any road. The property was within an area which had been zoned for multiple-family dwellings, which included hotels and apartments. Petitioner undertook finding out whether the property could be purchased, and he learned that it was owned by a Florida corporation which had been organized on June 14, 1938, Inlet Beach, Inc. The property is referred to hereinafter as the Inlet Beach property.
The outstanding stock of Inlet Beach, Inc., consisted of 100 shares of no-par-value common stock. In 1945, all of the stock was owned by R. R. Saunders and Byron F. Snyder, of Fort Lauderdale. Petitioner discussed the matter of purchasing the Inlet Beach property with Saunders and Snyder. They told him that the only way they would consider selling the property was through the sale of the stock of Inlet Beach, Inc. They told him also that although the corporation owned the entire tract according to the records of Broward County, *152 in fact it owned only an undivided two-thirds interest, and that Thomas Hall, whose whereabouts was then unknown, owned the other one-third interest, although his deed had never been recorded.
Through Stewart, petitioner consulted T. D. Ellis, Jr., a lawyer in Hollywood, Florida, who was a specialist in land titles and records in the area. Ellis was attorney for the Lauderdale Abstract and Title Company and for the Hollywood Federal Savings and Loan Association, he was a director of both, he appraised real estate, and he gave advice to prospective purchasers. Ellis assisted and advised petitioner. Ellis investigated the status of the title to the Inlet Beach property. He learned that the property had been deeded to Inlet Beach, Inc., in 1940, and, also, that an adverse claim to the entire tract was made by Clyde W. Fawcett who held a deed to the property. He advised petitioner not to purchase the stock of Inlet Beach, Inc., as long as Fawcett maintained his adverse interest.
Timanus told Saunders and Snyder that Fawcett's claim would have to be settled by them prior to the closing of any transaction. They agreed to purchase Fawcett's claim, which they did. Timanus decided to*153 purchase all of the stock of Inlet Beach, Inc., taking the risk of later settling with Hall, Hall's claim to ownership of a one-third interest.
On June 25, 1946, petitioner purchased from Saunders and Snyder 100 shares of stock in Inlet Beach, Inc., for $ 169,252.91. Fawcett and his wife executed a deed to the entire property to Timanus and his wife, Helen, dated June 25, 1946, the deed was delivered to Timanus, and it was recorded in the records of Broward County. The title to the entire property then stood recorded first in Inlet Beach, Inc., and also in the name of Timanus and his wife. Timanus *634 did not pay cash in the entire amount for the stock in Inlet Beach, Inc., but gave Saunders and Snyder his notes for the balance in the amount of $ 35,000. The notes were secured by a mortgage of Inlet Beach, Inc., for $ 35,000. This mortgage was paid on July 30, 1947, and the satisfaction of the mortgage was recorded.
Stewart was entitled to a broker's commission for his services. In payment thereof, Timanus transferred to Stewart on or about June 26, 1946, 5 shares of stock in Inlet Beach, Inc. Ellis' fee for his services was paid in cash. Ellis became interested in the*154 project. He paid $ 500 for 5 shares of stock in Inlet Beach, Inc., which were issued to him on June 26, 1946. Timanus then held 90 shares of the stock. Timanus purchased Stewart's stock on June 20, 1949, for $ 6,100.
After June 25, 1946, petitioner located Hall. Hall was in Mexico. Petitioner paid his expenses to come to Florida. On April 1, 1947, petitioner paid Hall $ 55,000 in cash for his one-third interest in the Inlet Beach property, and Hall delivered a deed made to petitioner alone, dated April 1, 1947. Hall's deed conveyed the title to the entire Inlet Beach property.
Petitioner discussed with Ellis his desire to sell the Inlet Beach property soon after he acquired the stock in Inlet Beach, Inc., and Ellis continued to advise him. Ellis was diligent in watching the status of the land records relating to ownership of the Inlet Beach property so that if and when the property was sold a good and clear title could be transferred. Having that objective in mind, Ellis advised petitioner not to record Hall's deed to him until such time as judgments against Hall, who had sustained financial reverses, would be outlawed. Accordingly, Hall's deed was not recorded until March*155 24, 1948.
It had been agreed that Ellis was to have a 5 per cent interest in all of the Inlet Beach property, represented by the 5 shares of stock in the corporation which he had purchased. After petitioner purchased Hall's interest, it was understood that Ellis had a 5 per cent interest in the Hall portion of the tract.
In 1949, petitioner borrowed $ 35,000 from Joseph Berlinger, at 6 per cent interest. Inlet Beach, Inc., executed and delivered a first mortgage to Berlinger dated November 20, 1949, which was recorded. This mortgage was outstanding as of July 12, 1951.
After June 20, 1949, when petitioner purchased the 5 shares of stock held by Stewart, petitioner transferred 14 shares of Inlet Beach, Inc., stock to his wife, Helen. The stock was then held as follows: G. L. Timanus, 81 shares; Helen Timanus, 14 shares; and T. D. Ellis, Jr., 5 shares. Thereafter, there were no changes in the ownership of the stock.
*635 After petitioner acquired the stock of Inlet Beach, Inc., he spent $ 25,288.35 for the following purposes: For taxes; for the construction of an access road to the property over a right-of-way; and for the expense of contesting a rezoning order of the City*156 of Fort Lauderdale and obtaining changes in such rezoning for the benefit of the Inlet Beach property. His expenses included payment of the capital stock tax on Inlet Beach, Inc., and other miscellaneous expenses.
Harbor Beach Company executed an easement deed to Inlet Beach, Inc., on July 20, 1949, which was recorded, which gave Inlet Beach, Inc., a permanent easement to construct a roadway, sewerline, water and gas mains, and electric and telephone lines across lands owned by Harbor Beach Company. On July 22, 1949, Harbor Beach Company executed a quitclaim deed to Inlet Beach, Inc., which was recorded, conveying certain land and submerged land for the purpose of establishing a fixed boundary line between property owned by the respective corporations.
Prior to 1951, petitioner discussed selling the Inlet Beach property with various brokers and individuals. In January 1950, W. Bond Collins, a speculative promoter in the Fort Lauderdale area, approached petitioner and told him he could sell the property for $ 475,000. Ellis knew of Collins' general reputation and advised petitioner not to put faith in Collins' proposition, but petitioner wanted to pursue the matter. Ellis therefore, *157 advised petitioner, and petitioner agreed, to put a limit of 10 days within which Collins would be obliged to produce a purchaser, or, if not, petitioner would withdraw from all negotiations. Collins did not present a purchaser, and petitioner terminated negotiations in January 1950. However, at petitioner's request, Ellis prepared all of the papers and documents which would be used if Collins brought in a buyer, and some of the documents were delivered on January 18, 1950, by Ellis to the Florida National Bank and Trust Company in Miami to hold in escrow for 10 days, with instructions to the Trust Company to return all of the documents to Ellis at the end of the period if Collins did not make payment of the purchase price to the escrow agent. The proposed transaction was to be carried out by selling all of the stock of Inlet Beach, Inc., for $ 475,000, but Ellis, an expert in the conveyancing of real estate and in title work, believed that the conveyancing of the title to the Inlet Beach property would require a deed from the stockholders of the corporation to whoever bought the stock of the corporation. Therefore, he prepared a deed from Inlet Beach, Inc., to G. L. Timanus, *158 Helen Timanus, and T. D. Ellis, Jr., conveying the entire property to the individuals. The deed was dated January 18, 1950. Ellis prepared the deed because he regarded G. L. and Helen Timanus and *636 himself as the actual owners of the property, and, also, so that if the transaction with Collins was closed, the deed would be ready for delivery. Petitioner and Ellis agreed to execute such additional deeds as would be necessary to convey a perfect title. Ellis deposited in the escrow an abstract of title, the minute and stock certificate books of Inlet Beach, Inc., endorsed stock certificates, and other papers, but he retained the aforementioned deed in his office files. There was no sale. The escrow agent returned the documents to Ellis. The deed of the corporation dated January 18, 1950, remained in the office of Ellis, in his possession, undelivered and unrecorded. It was not used in any way during 1950. The Inlet Beach property was not conveyed to G. L. and Helen Timanus and T. D. Ellis, Jr., by the corporation in 1950.
In 1950, and thereafter, the officers and directors of Inlet Beach, Inc., were as follows: G. L. Timanus was president, T. D. Ellis, Jr., was secretary*159 and treasurer, and both were directors. Stewart had been vice president but had resigned. The corporation's only asset was the Inlet Beach property. The corporation received no income from the property or any other source during the years its stock was owned by petitioners and Ellis, and it did not engage in any business. The sole function of the corporation was to hold title to the property.
In the early part of 1951, petitioner and Ellis entered into negotiations with A. Dreier and K. B. Weissman of New York City for the sale of the Inlet Beach property. The negotiations were concluded for sale of the property for $ 600,000 on March 19, 1951. The transaction did not involve the sale of the stock of Inlet Beach, Inc. Dreier and Weissman organized a Florida corporation, Fort Lauderdale Beachfront Co., to take title to all of the Inlet Beach property.
The method used for effecting transfer of title from Inlet Beach, Inc., and the steps which were taken were as follows: Inlet Beach, Inc., conveyed title to the entire property (which is held of record) to G. L. Timanus, Helen Timanus, and T. D. Ellis, Jr. The warranty deed dated January 18, 1950, referred to above, which had *160 been prepared by Ellis in January 1950, and retained by him in his office at all times since then, was used for the first time on or shortly before March 19, 1951; it was then delivered to petitioners and Ellis; and it was recorded on March 28, 1951. On March 19, 1951, G. L. and Helen Timanus entered into a written agreement with A. Dreier and K. B. Weissman agreeing to sell to them the entire Inlet Beach property for $ 600,000, subject to the outstanding mortgage to Joseph Berlinger for $ 35,000. The closing date was to be July 20, 1951. In consideration for the execution of the agreement, Dreier and Weissman paid $ 55,000 in cash to Timanus as a deposit and to be applied to the purchase price. It was agreed that the $ 600,000 would be paid $ 300,000 in cash, and *637 that a purchase money mortgage would be given for the balance of $ 300,000, which amount would be amortized over 10 years at the rate of $ 30,000 per year, after the first 2 years.
When the above agreement to sell the property for $ 600,000 was entered into, Timanus and Ellis entered into an oral agreement that Ellis would receive $ 40,000 for his interest in the Inlet Beach property. He was, and had been throughout, *161 a coowner of the property and a participant in all matters relating to the property from the time petitioner acquired the stock in Inlet Beach, Inc., until the property was sold in 1951. Ellis handled the sale transaction and the closing thereof. Timanus had agreed with Ellis in 1946, and again in 1947, that Ellis had a 5 per cent interest in all of the Inlet Beach property. Therefore, in the deed of Inlet Beach, Inc., dated January 18, 1950, Ellis was included as one of the parties to whom the formal conveyance of the property was made. Under the oral agreement between Timanus and Ellis in March 1951, Timanus and his wife were to receive out of the entire proceeds of the sale $ 560,000 for their combined interests in the property, and Ellis was to receive $ 40,000 for his 5 per cent interest in the property.
Between March 19, 1951, and July 20, 1951, Dreier and Weissman informed Timanus and Ellis that they wanted to obtain possession of the property as soon as possible in order to start building an apartment hotel thereon. They requested revisions in the original agreement dealing with cash payments and mortgage payments and asked for delivery of the deed to their corporation*162 before substantial cash payments would be made. Petitioner and Ellis agreed to the proposals and the following steps were taken: On April 5, 1951, a warranty deed bearing the same date from Timanus and his wife, and Ellis and his wife, to the Fort Lauderdale Beachfront Co. was executed conveying all of the property. In exchange for the deed, Fort Lauderdale Beachfront Co. executed a mortgage to petitioners and Ellis (which was recorded) securing two notes for $ 245,000 and $ 300,000, both dated April 5, 1951. The deed was recorded on April 6, 1951. On June 13, 1951, Fort Lauderdale Beachfront Co. conveyed the property to Dreier, Weissman, and their associates by warranty deed which was recorded June 21, 1951.
On July 12, 1951, Fort Lauderdale Beachfront Co., Dreier, Weissman, and their associates entered into a written agreement with G. L. and Helen Timanus and Ellis to modify the terms of payment contained in the two mortgage notes of the purchasers for the balance of $ 545,000. This agreement was recorded. The agreement recited that two notes, described above, had been given, and with respect to these notes the following agreement was made:
*638 1. * * *
The respective*163 ownership interest of second parties in said mortgage indebtedness is as follows:
1. T. D. Ellis, Jr., owns and holds the sum of $ 40,000.00 of said mortgage indebtedness.
2. G. L. Timanus owns and holds an interest in said mortgage indebtedness of 86.32% of the amount of $ 505,000.00, and said G. L. Timanus has been prepaid, since the date of execution of said notes, the sum of $ 17,500.00.
3. Helen M. Timanus owns and holds an interest in said mortgage indebtedness of 13.68% of the amount of $ 505,000.00.
* * * *
3. The amount of Forty Thousand Dollars ($ 40,000.00), payable to T. D. Ellis, Jr., of said mortgage indebtedness, shall be paid Four Thousand Dollars ($ 4,000.00) on July 20, 1951 on the principal thereof, and Four Thousand Dollars ($ 4,000.00) upon the principal thereof each year on the 20th day of July for nine (9) successive years, with interest at 6% per annum, payable upon said principal payment dates.
4. The amount of Five Hundred Five Thousand Dollars ($ 505,000.00), payable to G. L. Timanus and Helen M. Timanus of said mortgage indebtedness shall be paid as follows:
1. The sum of $ 17,500.00 has been prepaid to G. L. Timanus.
2. The sum of $ 101,500.00 *164 shall be paid on July 20, 1951.
3. Payment of the present existing mortgage executed to Joseph Berlinger in the amount of $ 35,000.00 has been assumed by first parties.
4. Said G. L. Timanus and Helen M. Timanus shall be paid such amount as they request each year on the 20th day of July of each year, not exceeding $ 20,000.00 per annum, upon the principal of the remaining mortgage indebtedness of $ 351,000.00, and the remaining principal shall be due in ten (10) years, and interest at 6% per annum upon unpaid balances of principal upon said principal payment dates.
Under the sale agreement of March 19, 1951, as modified by the agreement of July 12, 1951, the Inlet Beach property was sold for a downpayment on March 19 in cash of $ 55,000, and payments were made in 1951 on the mortgage note for $ 245,000 dated April 5. Ellis received a payment of $ 4,000 on July 20, 1951, which reduced the $ 40,000 due him to $ 36,000. Timanus received the amounts set forth below which reduced the amount of $ 560,000 due to him and his wife to $ 351,000. The purchase money mortgage given by Fort Lauderdale Beachfront Co. in the amount of $ 545,000 secured the unpaid balances due to both Ellis and*165 petitioners which at the end of 1951 aggregated $ 387,000. Included as part of the payments to Timanus in 1951 was the assumption by the purchasers of the mortgage note for $ 35,000 held by Joseph Berlinger. The purchasers paid that note on October 8, 1951, in discharge of the mortgage given by Inlet Beach, Inc., which has been referred to above. The payments received by Timanus in 1951 for himself and his wife were as follows: *639
| Cash downpayment, Mar. 19, 1951 | $ 55,000 |
| Payment on note (date not shown) | 17,500 |
| Payment on note, July 20, 1951 | 101,500 |
| 174,000 | |
| Berlinger mortgage assumed | 35,000 |
| 209,000 |
The following schedule is a summary of the entire transaction, of payments in 1951, and of the balance due on notes at the end of 1951:
| 1. Selling price | $ 600,000 | |
| Downpayment to Timanus | 55,000 | |
| Balance due secured by mortgage | 545,000 | |
| 2. Balance due on notes July 1951 | 545,000 | |
| Paid 1951 to Timanus | $ 154,000 | |
| Paid 1951 to Ellis | 4,000 | 158,000 |
| Balance due on notes end of 1951 | 387,000 | |
| 3. Balance due on notes end of 1951 | 387,000 | |
| Balance due Ellis | 36,000 | |
| Balance due Timanus | 351,000 | 387,000 |
After the sale of the *166 Inlet Beach property, Inlet Beach, Inc., retained no assets and it was a hollow shell. Instead of filing a certificate of dissolution, petitioner and Ellis refrained from paying the Florida capital stock tax and thereby did not keep the corporation in existence. It was dissolved as a defunct corporation by operation of law on May 15, 1953.
Among the costs of petitioner and Ellis incident to the sale were brokers' commissions of $ 30,000.
Upon the sale of their interest in the Inlet Beach property, petitioners realized capital gain in 1951, no part of which was realized in 1950, in the amount of $ 274,358.74, one-half of which, $ 137,179.37, is to be taken into account. The gain is computed as follows:
| Sales price of petitioners' interest | $ 560,000.00 | |
| Less: | ||
| Cost Inlet Beach, Inc., stock | $ 175,352.91 | |
| Cost Hall's interest | 55,000.00 | |
| Expenditures on property | 25,288.35 | 255,641.26 |
| Profit before commissions | 304,358.74 | |
| Less commissions | 30,000.00 | |
| Net capital gain | 274,358.74 | |
| 50 per cent of gain | 137,179.37 |
*640 The payments received by petitioners in 1951, exclusive of the amount of the mortgage assumed by the purchasers, $ 174,000, was 31 per*167 cent of the selling price, $ 560,000, of their interest in the Inlet Beach property.
OPINION.
Issue 1.
Petitioner's computation of annual depreciation of three properties in Baltimore in the amount of $ 880 has been made on the basis of assigning a value of $ 44,000 to the three properties as a unit. His explanation is that after his father died, he and his mother determined the above value. The time of the father's death was in 1920. Petitioner takes the position that his adjusted basis at the end of 1949 for all of the properties is to be determined with reference to $ 44,000 as the fair market value of the properties at the time of his father's death. He has assumed a useful life for 50 years for the buildings from the time of his father's death, or a rate of depreciation of 2 per cent.
Respondent does not question the rate of depreciation, but he contends that petitioner errs in the assumption that the basis to himself of each property is the same. We agree with that contention. Respondent contends, also, that petitioner has failed to establish by competent proof the amount of his adjusted basis for each property. With that we also agree.
Petitioner has not cited any*168 authority for his position.
With respect to proving the value of each piece for the purpose of arriving at his basis, petitioner relies solely upon his own testimony that he and his mother assigned a value of $ 44,000 to the three properties at the time of his father's death. Respondent, on the other hand, has introduced evidence about the value of one property at the time of the death of petitioner's mother and such evidence can be considered with reference to the value at the critical date of the other properties. Respondent's evidence was not rebutted. Under the circumstances of this case, little weight can be given to the opinion of value of the petitioner and his mother (as the owners of the property), although under different conditions an owner's opinion of value can be given considerable weight.
The three properties on Maryland Avenue were owned by petitioner's father. Upon the death of the father, 1309 and 1311 passed to petitioner and his mother as joint tenants with a right of survivorship. The basis of these properties was their fair market value at the time of the father's death in 1920 under section 113(a)(5) of the *641 1939 Code. 1 That basis (whatever *169 the amount was), adjusted for annual depreciation from the time of the father's death, was the basis of the two properties to petitioner as the survivor of the joint tenants, under section 113(a), because the property did not acquire a new basis in 1934 upon the death of petitioner's mother. Under the 1939 Code, the basis of property to the survivor of joint tenants is the "cost" basis thereof under section 113(a), since nothing passes to the survivor of joint tenants by bequest, devise, or inheritance, and upon the death of one of the joint tenants, the property does not acquire a new basis under section 113(a)(5). 3A Mertens, Law of Federal Income Taxation, par. 21.81 (1958 rev.); I.T. 3743, 1945 C.B. 143">1945 C.B. 143; G.C.M. 6677, VIII-2 C.B. 172, 178; Helen G. Carpenter, 27 B.T.A. 282">27 B.T.A. 282; Edward W. Schiesser, 28 B.T.A. 640">28 B.T.A. 640.
*170 With respect to the other property, 1307, it acquired a new basis upon the death of petitioner's mother in 1934 under section 113(a)(5) because it passed to petitioner under his mother's will.
Under the circumstances described above, the basis of 1309 and 1311 had depreciated annually from the time of the death of petitioner's father, who predeceased his mother, whereas, the basis of 1307 had depreciated from the time of the death of petitioner's mother in 1934. Petitioner was in error in assigning the same basis to 1307 as he assigned to 1309 and 1311.
Respondent produced evidence showing that 1307 was appraised for the purpose of determining the value of the estate of petitioner's mother for Maryland inheritance tax, and that the appraised value in 1934 of that property was $ 3,000. Petitioner did not offer any evidence to rebut respondent's proof. It is found, therefore, that the basis to petitioner of 1307 is $ 3,000, less annual depreciation.
The improvements on the three adjoining properties are similar, and they are about the same age. Absent competent proof to the contrary, it is reasonable to assume that the fair market value at the time of the death of petitioner's father*171 of 1309 and 1311 was not greatly in excess of $ 3,000, each, or $ 6,000, which basis must be adjusted for annual depreciation from the death of petitioner's father. It is concluded that the basis to petitioner of 1309 and 1311 is $ 6,000, less annual depreciation.
Whether petitioner is entitled to a deduction in any amount for 1950 and 1951 for annual depreciation of each property depends upon not only the correct basis to petitioner of each property at the time title thereto vested in him, but also whether he had recovered his *642 basis of each property before 1950 through annual depreciation deductions. In his returns for 1950 and 1951, petitioner assigned a basis of $ 44,000 to the three properties as a unit, and computed the annual depreciation to be $ 880. Absent proof to the contrary, it is reasonable to assume, and it must be assumed, that for the 15 years 1935 through 1949, petitioner took annual depreciation deductions in the amount of $ 880, or total depreciation deductions of $ 13,200. Upon the conclusions reached above relating to the adjusted basis to petitioner of each property, it is clear that the properties were fully depreciated before 1950.
If we were *172 to accept as the fair market value of 1309 and 1311 at the time of the death of petitioner's father in 1920 the value which petitioner says he and his mother adopted at that time, $ 29,333 (two-thirds of $ 44,000), such amount would be the basis to petitioner of 1309 and 1311. But the contention that the fair market value of 1309 and 1311 was $ 29,333 in 1920 is greatly weakened by respondent's evidence that the value of 1307 in 1934 was only $ 3,000. We think that lacking competent proof through disinterested, expert testimony of the fair market value of 1309 and 1311 in 1920, at the time of the death of petitioner's father, it is not likely that their fair market value then was $ 29,333.
It is concluded that respondent properly disallowed the annual depreciation deduction for 1950 and 1951 of $ 880.
Issue 2.
Petitioners reported gain from the sale of the Inlet Beach property on the installment basis in their return for 1951. The question for decision is whether the initial payments received by petitioners in 1951 did not exceed 30 per cent of the selling price. 2
*173 Respondent determined that the gain could not be returned on the installment basis because the selling price of petitioners' interest was $ 560,000 and the 1951 payments received by them exceeded 30 per cent thereof. The dispute relates to both the amount of the "selling price," which petitioners contend was $ 600,000, and the total amount of the initial payments received in 1951. Respondent contends on brief that $ 35,000 should be added to the amount of the initial payments, *643 which is the amount of the Berlinger mortgage which the purchasers assumed and paid in 1951.
There is a further contention of the respondent which is disposed of briefly. On brief, he argues that this issue is not covered by the pleadings. Our conclusion is that the issue is raised by the pleadings. See Dixie Manufacturing Co., 1 B.T.A. 641">1 B.T.A. 641, 666. The issue was tried; respondent introduced Exhibit Q which relates to this issue; and he examined petitioner about the question. He is not taken by surprise in any way and his contention is without merit.
It is concluded that for the purpose of determining whether petitioners are entitled to the benefit of section 44(b) *174 "the selling price" referred to therein is, under the facts here, $ 560,000, the amount for which petitioners agreed to sell their entire interest in the Inlet Beach property, as is set forth in the agreement of July 12, 1951; and that under Regs. 111, sec. 29.44-2, $ 35,000, the sum of the mortgage assumed by the buyers is not to be considered part of "initial payments." The latter point is immaterial because the 1951 initial payments, $ 174,000, without the $ 35,000, represented 31 per cent of the selling price, $ 560,000. Since the initial payments exceeded 30 per cent of the selling price, petitioners are not entitled to report their long-term capital gain on the installment basis. Respondent's determination to that effect is sustained.
The purchasers of the property agreed in the purchase agreement, as amended, to pay petitioners $ 560,000 for their interest. They paid $ 55,000 as a downpayment and gave mortgage notes for the balance of $ 505,000, some of which was paid in 1951 and the rest was to be paid in deferred payments. The purchasers also agreed to pay Ellis $ 40,000 for his interest in annual installments. Since by the terms of the purchase agreement the purchasers*175 paid petitioners $ 560,000 for their undivided interest, petitioners are obliged to use that amount as their selling price for the purposes of section 44(b).
This case is distinguishable from Walter E. Kramer, 27 B.T.A. 1043">27 B.T.A. 1043, 1051-1053. The facts here present the kind of situation which is referred to at page 1053 of the Kramer case where it was indicated that given such facts as are before us, the amounts specified in a purchase contract as the amounts to be paid to owners of undivided interests in realty constitute the selling prices for the respective undivided interests for the purposes of section 44(b).
Petitioners admit in their reply to the respondent's amended answer that their long-term capital gain from the sale of their interest is $ 274,358.74. That amount is the difference between the selling price of $ 560,000 and total costs of $ 255,641.26. The obvious inconsistency of using a selling price of $ 560,000 for computing capital gain, and claiming $ 600,000 as the selling price for the purpose of *644 making the computation under section 44(b) is not explained by petitioners. Their error lies in ignoring the contract provisions*176 whereby the purchasers specified that $ 40,000 would be paid to Ellis for his interest and $ 560,000 would be paid to petitioners for their interest. There is no other possible construction of the contract of sale, as amended.
The evidence is clear that Ellis had a 5 per cent interest in the property held by Inlet Beach, Inc., by virtue of his ownership of stock, and Timanus testified that he gave Ellis a 5 per cent interest in the one-third interest purchased by himself from Hall. Timanus testified, also, that when the entire property was sold, $ 40,000 of the consideration was alloted to Ellis. Moreover, it was agreed in the agreement of July 12, 1951, that Ellis owned $ 40,000 of the mortgage indebtedness, to be paid to him in installments of $ 4,000 per year. There is nothing ambiguous about the provisions of the agreement of July 12, 1951. Under the agreement, Ellis was not to receive any part of the $ 55,000 downpayment. Therefore, he owned $ 40,000 of the mortgage indebtedness, as is stated in the amendment to the contract of sale.
In Walter E. Kramer, supra, it was pointed out that in the contract of sale there involved the purchasers did*177 not agree to pay a specific amount to each individual owner of an undivided interest in realty. In contrast, that is precisely what was done in the contract of sale before us, and, therefore, the Kramer case is not controlling.
There is another question under this issue, whether the disposition of the realty involved two steps, each one of which resulted in taxable gain; first, a liquidating distribution in 1951 to its stockholders of the two-thirds interest by Inlet Beach, Inc., resulting in long-term capital gain to petitioners in the amount of $ 179,358.74, as respondent has determined; and second, a sale in 1951 of the entire realty in which petitioners received a stepped-up basis and realized long-term capital gain of $ 95,000. The total amount of the long-term capital gain from two steps is $ 274,358.74, which is the same amount as the capital gain if the transaction is regarded as having been carried out in one step, a sale by Ellis and Timanus and his wife, as the real owners, ignoring the entity and distribution of the Inlet Beach corporation.
Petitioners do not cite any authority in support of their contention that the corporation and the distribution by it of its *178 two-thirds interest should be ignored, and that they and the corporation should be treated as one. Of course, under some circumstances and facts, exceptions are made to the rule ( Estate of L. B. Whitfield, 14 T.C. 776">14 T.C. 776) that "a corporation may not be disregarded in respect to taxation." Examples of exceptions which have been made are found in State-Adams Corporation, 32 T.C. 365">32 T.C. 365; Bartell Hotel Co., 32 T.C. 311">32 T.C. 311; *645 John A. Mulligan, 16 T.C. 1489">16 T.C. 1489; and Paymer v. Commissioner, 150 F.2d 334">150 F. 2d 334. But here such exception should not be made. The corporation, Inlet Beach, Inc., had issued and outstanding certificates of stock, all of which Timanus purchased in the first instance. Ellis purchased 5 shares. Helen Timanus later received 14 shares, and Timanus held only 81 shares. The corporation owned only an undivided two-thirds interest in the realty. The respective interests of G. L. Timanus, Helen, and Ellis in the two-thirds interest in the property was determined through the respective stockholding of each. The only way that*179 Ellis became an owner of record of an interest in the two-thirds interest held by the corporation was through the deed of the corporation given in the distribution to the stockholders. Prior to the sale, the corporation received an easement deed, it gave a mortgage to Berlinger, and in these respects, if not in others, it was recognized as the legal owner of part of the property. When purchasers for the entire property were found, they did not desire to purchase stock in Inlet Beach, Inc.The corporation could have given them a deed for its undivided interest, but if that procedure had been followed Ellis would not have had an interest to sell to the purchasers. Also, petitioners and Ellis believed a less complicated transfer would result if the corporation gave them a deed and they gave one deed for the entire realty to the purchasers. Under all of the circumstances of this case, our conclusion is that the corporation and the petitioners cannot be treated as one, and the liquidation distribution by the corporation ignored. Harry F. Shannon, 29 T.C. 702">29 T.C. 702, 721.
In view of the holding with respect to the applicability of section 44(b), supra, *180 we are unable to see that there is any real difference taxwise whether or not the corporation's deed and distribution to petitioners and Ellis is ignored. However, since respondent has conceded error in his having determined that the corporation made the distribution in 1950 rather than in 1951, and since the rule 50 computation must involve correction of the error, we may not have been fully apprised of the significance of this question, and, therefore, it is held that in 1951, upon the deeding of a two-thirds interest by the corporation to petitioners and Ellis, petitioners realized long-term capital gain of $ 179,358.74, of which $ 89,679.37 is to be taken into account.
By amended answer, the respondent concedes that in 1950, Inlet Beach, Inc., did not deliver a deed to petitioners and Ellis; that, therefore, no distribution was made by the corporation, and a long-term capital gain of $ 179,358.74 was not realized by petitioners in 1950; and that the deficiency determined for 1950 is to be reduced in the Rule 50 computation. In the amended answer, also, respondent has made claim for an increased deficiency for 1951, under section 272(e), which is based upon the allegation that*181 in 1951 the *646 total amount of the long-term capital gain realized by petitioners upon the sale of the entire Inlet Beach property amounted to $ 274,358.72. Capital gain in that amount was realized in 1951, rather than only $ 95,000, as was originally determined. Effect will be given by the parties under Rule 50 to the increase of the gain in 1951 and the resulting increase in the deficiency.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.
(a) Basis (Unadjusted) of Property. -- The basis of property shall be the cost of such property; except that --
* * * *
(5) Property transmitted at death. -- If the property was acquired by bequest, devise, or inheritance, or by the decedent's estate from the decedent, the basis shall be the fair market value of such property at the time of such acquisition. * * *↩
2. SEC. 44. INSTALLMENT BASIS.
(b) Sales of Realty and Casual Sales of Personality [Personalty]. -- In the case (1) of a casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year), for a price exceeding $ 1,000, or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed 30 per centum of the selling price (or, in case the sale or other disposition was in a taxable year beginning prior to January 1, 1934, the percentage of the selling price prescribed in the law applicable to such year), the income may, under regulations prescribed by the Commissioner with the approval of the Secretary, be returned on the basis and in the manner above prescribed in this section. As used in this section the term "initial payments" means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made.↩