38 T.C. 97">*98 In these consolidated proceedings the respondent determined deficiencies in income tax against Southwest 1962 U.S. Tax Ct. LEXIS 153">*155 Properties, Inc., and transferee liability against each of the other petitioners as transferees of the assets of Southwest Properties, Inc., for the taxable periods and in the amounts as follows:

The major issue is whether Southwest was a collapsible corporation within the meaning of section 341 of the Internal Revenue Code of 1954 and the gain realized from the sale of its property in October of 1956 is to be considered as gain from the sale or exchange of property which was not a capital asset, as determined by the respondent, it being the position of the petitioners that Southwest was not a collapsible corporation and that the provisions of section 337 apply. For all of the taxable periods, the amounts of allowable depreciation is in issue.

FINDINGS OF FACT.

Some of the facts and some evidence have been stipulated and the facts stipulated are found as stipulated.

Southwest 1962 U.S. Tax Ct. LEXIS 153">*156 was incorporated in California on October 11, 1954, with an authorized capital stock of 2,500 common shares, par value $ 100 per share. For the taxable periods here involved, Southwest filed its 38 T.C. 97">*99 income tax returns with the district director of internal revenue for the Los Angeles district of California.

W. H. Black, B. B. Margolis, and A. J. Sutherland are individual petitioners who reside in San Diego County, California. For the taxable periods here involved, their individual income tax returns were filed with the district director of internal revenue for the Los Angeles district.

Atlantic Life Insurance Company, hereafter referred to as Atlantic, is a life insurance company incorporated under the laws of Virginia. Its principal office is in Richmond, Virginia. For the taxable periods here involved, Atlantic filed its income tax returns with the district director of internal revenue for Virginia.

The Lamar Life Insurance Company, hereafter referred to as Lamar, is a life insurance company incorporated under the laws of Mississippi. Its principal office is in Jackson, Mississippi. For the taxable periods here involved, Lamar filed its income tax returns with the district director 1962 U.S. Tax Ct. LEXIS 153">*157 of internal revenue for Mississippi.

Ruth Black, sometimes known as Ruth F. Black, is the wife of W. H. Black, the petitioner in Docket No. 76037. Respondent determined transferee liability against W. H. Black but made no such determination against Ruth Black.

In or about September 1954, Margolis, Black, and Sutherland became interested in purchasing an office building at 233 A Street in San Diego, known as the Medico-Dental Building (also known as the Medical-Dental Building), together with the parking lots adjacent thereto. The office building and parking lots were owned by the Third Avenue Corporation. The land area involved consisted of lots A, B, C, D, I, J, K, and L, in block 12 of Horton's Addition in downtown San Diego. Block 12 was bounded by A Street on the north, Third Avenue on the east, B Street on the south, and Second Avenue on the west. The lots in question comprised the north two-thirds of block 12 and covered an area of approximately 40,000 square feet. Approximately 7,500 square feet of such land area, consisting of all of lot L and the east half of lot K, was improved by a 14-story and basement office building, located on the northeast corner of the block and 1962 U.S. Tax Ct. LEXIS 153">*158 having a frontage of 100 feet on both A street and Third Avenue. The building had been erected in 1927 and was of reinforced concrete construction. Except for the first floor its tenants for the most part were physicians, surgeons, and dentists and in the layout of the offices their needs had been taken into account. The first-floor space was rented primarily to businesses which served the other occupants of the building. The remaining land area was devoted to parking purposes, that comprising lots A, B, and C being operated by the building management. The area covering lots D, I, J, and the west half of lot K, was under 38 T.C. 97">*100 lease to 3rd Avenue Parking, a partnership of Sutherland and his son, whose lease dated from August 1, 1950.

Under date of September 1, 1954, Margolis, as "Buyer," and the Third Avenue Corporation, as "Seller," opened Escrow No. 3841 with Security Trust & Savings Bank of San Diego, sometimes referred to as Security Bank or Security, looking to the purchase by Margolis of the above-described property. In opening the escrow, Margolis made a cash deposit of $ 10,000 and agreed to make a further deposit of $ 850,000 and any additional funds necessary under the escrow, 1962 U.S. Tax Ct. LEXIS 153">*159 all of which funds Security was authorized to apply in carrying out the escrow instructions. At closing, the last date for which was December 1, 1954, Security was to have on hand a deed and bill of sale showing title to the property vested in Margolis or his nominee. Title to the property was conveyed from the Third Avenue Corporation to Margolis, "a married man," by grant deed dated September 13, 1954.

Southwest's articles of incorporation recited that it was formed for the purpose, among others, "of owning and operating an office building and adjacent parking lots." At the first meeting of its board of directors, held on October 15, 1954, Black, Margolis, and Sutherland were elected directors. Thereafter, at the same meeting, Black was elected president, Sutherland vice president, and Margolis secretary and treasurer.

For use in the purchase of the Medical-Dental property, including the area used for parking lots, Southwest on or about November 15, 1954, obtained loans of $ 22,000 from Margolis, $ 22,000 from Sutherland, $ 22,000 from Ruth Black, and $ 11,000 each from Atlantic and Lamar, making a total of $ 88,000. To each lender Southwest issued its unsecured note dated November 1962 U.S. Tax Ct. LEXIS 153">*160 1, 1954, due January 1, 1960, and bearing interest at 5 percent per annum from date, payable quarterly.

In addition, and on or about the same date, it borrowed $ 375,000 from Atlantic and $ 375,000 from Lamar. These amounts were evidenced by two promissory notes, each in the amount of $ 375,000. Both notes were secured by a deed of trust on the property being purchased. As further security for the notes, Southwest executed in favor of Atlantic and Lamar a blanket assignment of rentals due to accrue thereafter under existing leases or leases thereafter entered into covering any portion of the property, such assignments to become effective only in the event of a default by Southwest under the notes or deed of trust.

Incident to the obtaining of the loans from Atlantic and Lamar, Margolis had the property appraised by two appraisers. In one appraisal, dated September 9, 1954, the fair market value of the property was shown as $ 1,300,000, and in the other dated September 11, 1954, as $ 1,350,000. The building was 27 years old when appraised and both appraisers arrived at 50 percent as the proper allowance for 38 T.C. 97">*101 depreciation to date. In making their appraisals both appraisers expressed 1962 U.S. Tax Ct. LEXIS 153">*161 the view that the current rental rate per square foot for office space was quite low for the type of building. The percentage of occupancy was regarded as adequate and satisfactory, one of the appraisers being of the opinion that near capacity occupancy should be enjoyed for some years to come, notwithstanding the tendency of doctors and dentists to move further out on Third, Fourth, Fifth, and Sixth Avenues. Another factor, according to both appraisers, was that the building was well designed and modern in appearance, one appraiser stating that he was therefore giving little weight to obsolescence because of design. In his estimate of value he assumed that a change of type of tenancy was inevitable, even if not in the immediate future, but that did not mean loss of value, "but rather allowance to be made for transition period or change from a medical dental building to a conventional office building." He also was of the view that a change from the "present" restricted form of tenancy considered in relation to "continuous" parking would justify a conclusion of a considerably greater useful life for the building.

Under date of November 16, 1954, Southwest issued 480 shares of its 1962 U.S. Tax Ct. LEXIS 153">*162 capital stock for cash at par as follows:

The 120 shares issued to Black as the stockholder of record actually belonged to his wife, Ruth Black. She paid for the stock with funds left to her by her father. Black later transferred the shares to her.

On or about November 15, 1954, the date of the borrowing, Southwest paid the $ 750,000 borrowed from Atlantic and Lamar into Escrow No. 3841 for the account of Southwest. Under date of November 16, 1954, Southwest deposited an additional $ 114,511 in the escrow account. These payments brought the total deposits in the escrow account up to $ 874,511.

In the meantime Margolis and his wife had conveyed title to the property in question to Southwest by grant deed dated November 1, 1954. On November 17, 1954, the deed dated September 13, 1954, from the Third Avenue Corporation to Margolis, and the deed dated November 1, 1954, from Margolis and his wife to Southwest, were recorded. These deeds, as indicated, covered lots A, B, C, D, I, J, K, and L, in block 12 of Horton's Addition in downtown San Diego.

38 T.C. 97">*102 The cost basis to 1962 U.S. Tax Ct. LEXIS 153">*163 Southwest for the property acquired, inclusive of expenses of acquisition, was $ 876,596.61, of which $ 691,109.61 was allocable to the building and $ 185,487 was allocable to the land. At the time it was acquired by Southwest, the Medico-Dental Building was 27 years old.

At the time of the purchase of the Medico-Dental property by Southwest, the San Diego business district was primarily to the south, southeast, and east. Most of the leading banks and financial institutions were located along Broadway, formerly D Street, from Second Avenue on the west to Seventh Avenue on the east. The indicated growth of the downtown business district was to the north and west, however, and the Medico-Dental property was in line with such indicated growth. At the time the negotiations were under way for the purchase of the Medico-Dental property an election was pending for vote by the electors of San Diego County on an $ 8,400,000 bond issue for the construction of a courthouse and related facilities. This construction was to cover two blocks extending from B Street on the north to Broadway on the south. These two blocks were bounded on the east by Front Street, which was parallel to the numbered 1962 U.S. Tax Ct. LEXIS 153">*164 avenues and was the first street west of First Avenue and thus two blocks west of Southwest's property. The bond issue was approved at the election which was held November 2, 1954.

When the Medico-Dental Building was purchased by Southwest, Estella H. Jocelyn, who had been manager of the building for the Third Avenue Corporation, was approaching the age for retirement. The two corporations entered into an agreement to finance her retirement jointly, the Third Avenue Corporation agreeing to make a monthly payment of $ 100 to her during her lifetime and Southwest similarly agreeing to make a monthly payment of $ 50.

When the Medical-Dental Building was acquired by Southwest, supervision of its operations was placed under Margolis. He was not paid a salary and did not devote full time to that work. Shortly thereafter, Margolis, on behalf of Southwest, employed George Brush to make a survey of the operation of the properties Southwest had acquired and to make recommendations with respect thereto. Brush was manager of a large medical office building located presumably in Los Angeles.

Brush submitted his report under date of December 4, 1954. He found that the operation of the elevators 1962 U.S. Tax Ct. LEXIS 153">*165 was slow and made some recommendations with respect thereto. Noting that he had been advised that the ownership intended to make a study of improving the lobby, he likewise made recommendations in that respect. He also recommended some changes in the occupancy of the first floor, suggesting that the pharmacy be extended and that the restaurant be moved to a less dominant position in relation to the entrance to the building. 38 T.C. 97">*103 He made recommendations as to utilization of the top floor. He suggested that a survey be made among the tenants in the building with respect to parking facilities. He made other recommendations concerning the physical maintenance of the building, stressing in particular that a policy be adopted that doctors' suites would not be painted and decorated more than once in 5 years. In a case of vacancy he recommended that where the layout was unorthodox that it be put in top order with a view to increased rental. It was his opinion that the rental rates in the building were too low and should be increased to at least $ 3.25 per square foot per annum where nothing had to be done in the way of alterations, and to $ 3.50 per square foot where alterations were made. 1962 U.S. Tax Ct. LEXIS 153">*166 He commended the functioning of the engineer in charge of maintenance but suggested that most men engaged in such work needed more supervision than was generally appreciated. He found no fault with the current cost of operation at approximately $ 1.80 per square foot per year. He expressed the belief that the lease form in use was inadequate for the purpose it was supposed to serve and suggested that a more orthodox form be obtained.

Southwest thereafter made various changes with respect to its building and the operation thereof. It was decided to increase the rent and to undertake to secure tenants under term leases in place of month-to-month occupancy, which was the prevalent occupancy at the time the building was acquired. Under date of January 18, 1955, the tenants above the first floor were notified that their rent was to be increased, as of March 1, from 23.75 cents per square foot, the current monthly rate, to 25 cents, and that a 3-year lease at the increased rate might be had if entered into within the next 60 days. They were also advised of the survey that had been made and that as a result, the owners proposed to improve services and facilities and to upgrade the building 1962 U.S. Tax Ct. LEXIS 153">*167 and in so doing, to expend in excess of $ 10,000 in modernizing the lobby and in making other improvements. The tenants were further advised that the "new rent" was still substantially below that of comparable offices in San Diego. In furtherance of an improved and more effective operation, uniforms were provided for the elevator girls, the term of insurance coverage was increased from 3 to 5 years, and with respect to a number of items required for the maintenance and operation of the building the sources of supply were changed. Steps were also taken to accelerate elevator service.

At a meeting held on July 18, 1955, the board of directors approved the remodeling of three of the elevators and the entrances to the pharmacy and restaurant to harmonize with the remodeled lobby. They also approved increases in the limits of public liability and property damage coverage with respect to the operation of the building. At the same meeting, a motion was made and carried that "in view of the long range program to cater to lawyers as well as the 38 T.C. 97">*104 present tenants, * * * that concurrent with the removal of the Medical Society on or about January 2, 1956, that the Medical-Dental Building be 1962 U.S. Tax Ct. LEXIS 153">*168 re-named 'Professional Building.'" Thereafter the building was listed in the telephone book under both its old name and its new name. Lawyers, accountants, and engineers, among others, were sought as tenants.

By July of 1955, there was a noticeable trend among doctors to move into buildings of their own, and at July 18, 1955, a number of doctors were moving out of Southwest's building.

The plan to obtain leases for terms of 3 or more years met with little success. Only a few such leases were signed.

As of August 1955, Southwest had expended $ 10,639.90 on capital improvements to the lobby and its building. The parties have stipulated that these improvements had a useful life of 25 years.

The south one-third of block 12 of Horton's Addition was comprised of lots E, F, G, and H. Lots E and F had a frontage of 50 feet each on Second Avenue to the west, and lot F a frontage of 100 feet on B Street on the south. Lots G and H each had a frontage of 50 feet on Third Avenue to the east, and G had a frontage of 100 feet on B Street to the south. On March 31, 1955, Southwest purchased the west half of lots E and F at a total cost of $ 55,262.30, of which $ 18,422.30 was allocable to the building 1962 U.S. Tax Ct. LEXIS 153">*169 on the property and $ 36,840 to the land. The building was rental property and depreciation was claimed and allowed in the amount of $ 1,381.68. The building was demolished in February of 1956 at a cost of $ 3,493.53. After demolition, the adjusted basis for the property was $ 57,374.15.

On August 3, 1955, Southwest acquired the east half of lots E and F at a total cost of $ 75,101.12. A building on the premises was demolished. ²

In acquiring the west half of lots E and F, Southwest borrowed $ 40,000 from Atlantic, and in acquiring the east half of lots E and F, similarly borrowed $ 50,000 from Atlantic. In addition to the $ 50,000 loan from Atlantic for the purpose of acquiring the east half of the two lots, Southwest also borrowed $ 25,000 from Black. The loan from Black was repayable in monthly installments of $ 1,500, beginning November 1, 1955, and bore interest at the rate of 6 percent per annum.

After the buildings on lots E and F were demolished, the area was improved to provide additional parking facilities. Southwest expended a total of $ 5,493.53 for depreciable parking lot improvements on its properties, 1962 U.S. Tax Ct. LEXIS 153">*170 which improvements had a useful life of 10 years.

At some time prior to August 30, 1955, Southwest obtained an option to purchase lots G and H in block 12 at a price of $ 325,000, 38 T.C. 97">*105 the expiration date of the option being December 5, 1955. Southwest did not exercise its option on these lots. It considered the price too high.

During the taxable periods herein, and for an undisclosed period prior thereto, Sutherland was president and director of Security Bank. He was the owner of 4,000 shares of Security stock. He had been connected with Security in some capacity from 1928. He had from time to time acquired interests in real estate in the San Diego area, some of which were rental properties and were held for the production of rental income. In some of these properties, his interests were directly owned. In others, the property or properties were owned by corporations or trusts. Some of the properties acquired by Sutherland were not acquired and held for the production of rental income and some, if not all, of such properties were sold.

Black had spent most of his life in the oil business, but at and prior to the taxable periods herein, he had been devoting a considerable portion, 1962 U.S. Tax Ct. LEXIS 153">*171 if not most, of his time in the management of his estate, which included the buying of properties and securities. In or about 1947, he had become a director of Security Bank. He owned 12,000 shares of its stock. It had not been his practice to buy properties for resale, but for investment purposes. During the periods here pertinent he owned directly or had interests in a number of rental properties, and except for the properties of Southwest, he had made no sales of such properties or of his interests therein.

Margolis had been engaged in the real estate business in San Diego from 1926, both as a broker and as a building contractor. He had engaged extensively in subdividing and selling real estate. Beginning in 1941, he had acquired several properties which he still owned at the time of the trial herein for the production of rental income. He did not make it a practice to dispose of such properties.

Margolis was the owner of 1,700 shares of stock in Security Bank, but was neither an officer nor director. He had had extensive business relations with the bank and its officers, which he had regarded as being both pleasant and profitable.

During 1954 and 1955 Southwest and its stockholders 1962 U.S. Tax Ct. LEXIS 153">*172 received several feelers looking to the purchase of the Southwest properties, all of which were rejected. One party previously interested in the properties made an offer of $ 935,000 before the escrow had been closed and ownership had actually vested in Southwest.

In June or July of 1955, an attorney, who was also a real estate broker, directed a written inquiry to Margolis as to whether the properties were for sale. Answering the inquiry, Margolis replied that he had been instructed by the directors to advise that the building was not for sale.

Late in 1955, after the purchase of lots E and F, an offer was received 38 T.C. 97">*106 for the purchase of the properties for a price to yield Southwest a profit of $ 325,000. The offer was received from an associate of Black on the board of directors of the San Diego Transit System. He made the offer for himself and others. He was advised that the property was not for sale.

In September or October of 1955, one of the individuals who had appraised the Medical-Dental properties incident to the purchase by Southwest, advised Sutherland that he represented some people who were willing to buy the properties for a price which would result in a profit for Southwest. 1962 U.S. Tax Ct. LEXIS 153">*173 He was informed that Southwest was not interested in selling.

At all times pertinent herein, Security Bank was a major bank and trust company of San Diego. From the date of its organization its business had multiplied many times, particularly during the period from 1940 through March of 1956. Its deposits at its main office were $ 6,423,328 at December 31, 1940, and $ 48,851,653.04 at March 30, 1956. Its deposits, including the deposits at its branches, were $ 10,847,398.56 at December 31, 1940, and $ 114,382,243.01 at March 30, 1956. The fiduciary assets in its trust department were $ 7,460,000 on December 31, 1952, and $ 15,249,000 at December 31, 1955.

The main office of Security Bank was located at the intersection of E Street and Fifth Avenue, and was spread among three buildings. E Street is parallel to and one block south of Broadway. With relation to the Medico-Dental Building, Security Bank was four blocks south and two blocks to the east.

In its main building the bank occupied 19,300 square feet on four levels. The main building was owned by Security and was located on the northwest corner of the intersection. Also occupied was 5,760 square feet covering one floor 1962 U.S. Tax Ct. LEXIS 153">*174 of an adjacent building, which was connected with the main building by a bridge. The third building, and in which the bank occupied 4,025 square feet, was located diagonally across the intersection from the main building. The entire area along the south side of E Street from Fifth Avenue to Sixth Avenue, which included the building in question, was held by Security under a long-term lease. It was on this property that the bank opened its automobile deposit facility, the first such facility in San Diego. The property was also used to house the automobile loan department which was moved from across the street.

The three areas so occupied were neither satisfactory nor adequate for the needs of Security and would not have been so even if located in one building. As a consequence, Fred E. Lindley, chairman of the board of directors, on September 14, 1955, appointed a committee of three directors to investigate and recommend a location for a new main office which would not only provide for existing needs but for future growth, an important consideration being ample parking space.

38 T.C. 97">*107 The Broadway area had been and was generally regarded as the logical and accepted area for banks and financial 1962 U.S. Tax Ct. LEXIS 153">*175 institutions and one of the locations considered by the committee appointed by Lindley was the Granger Building, located on the southwest corner of the intersection of Broadway and Fifth Avenue. ^{31962 U.S. Tax Ct. LEXIS 153">*176} It was north of Security's main building and in the same block. One thought with respect to the Granger Building was that the banking rooms might be located on the second floor, with an escalator from the ground floor. The committee was aware that such an arrangement was in use in several instances by banks in other cities. The Granger Building could not be purchased, but could be had only under lease, and for that reason its consideration was abandoned. The site of the bank's main building at E Street and Fifth Avenue was studied, the conclusion being that it was inadequate. The committee also studied and considered the property extending along E Street from Fifth Avenue to Sixth Avenue. This was the property on which the bank's automobile deposit facility and its automobile loan department were located and already held by Security under a long-term lease. It was decided that the property was not suitable.

The site for the new courthouse, five blocks west and extending from one to three blocks north of Security's main building, had been approved in the election on November 2, 1954, and beginning in August of 1955, there were other developments which further indicated that the future expansion of the San Diego business district would be primarily to the west and northwest. The Stanford Research Organization had been employed by the City of San Diego to make a study and recommendations for the location of a municipal auditorium, convention hall, and related facilities. In its report, made on or about August 16, 1955, it recommended as the location for the development four blocks between First and Third Avenues on the west and east, and between Cedar and Ash Streets on the north and south, Ash Street being parallel to and one block north of A Street. ⁴ The area recommended was one block north of the Medical-Dental Building.

On or about August 20, 1955, plans for the Crosstown Highway were approved by the 1962 U.S. Tax Ct. LEXIS 153">*177 California Highway Commission. According to the plans, the highway would cross Second and Third Avenues approximately four blocks north of the Medical-Dental property.

On or about August 24, 1955, the county supervisors authorized the purchase of a site for a county law library. The site in question was to the east across Front Street from the new courthouse site. It also had frontage on C Street on the south. This property was two blocks 38 T.C. 97">*108 west and one block south of the Medico-Dental property. Purchase of the property was completed on or about December 30, 1955.

On or about November 15, 1955, the county supervisors authorized the purchase of the entire block immediately north of the new courthouse site as a proposed parking area to serve the personnel in the public offices to be located in the area. The block in question was two blocks immediately west of the Medico-Dental properties.

On or about December 28, 1955, the State Board of Public Works approved the block immediately north of the proposed parking area as the site for a State office building. This block was 2 1/2 blocks from the Medico-Dental Building along A Street to the west.

Influenced by these developments and the lack 1962 U.S. Tax Ct. LEXIS 153">*178 of suitable property in the Broadway area, the Security Bank building committee included in their studies various properties north of Broadway and to the northwest of its main office. One property considered was located at Fourth Avenue on C Street, one block above Broadway. This property could be leased but could not be bought. Another property was on the east side of Third Avenue and north of Broadway, presumably opposite lots G and H of block 12, in which the Medico-Dental property was located. Neither of these sites was found to be satisfactory.

On November 9, 1955, Security's board of directors authorized the purchase of lots G and H in block 12, provided the lots could be purchased for $ 225,000 to $ 250,000 and lots E and F, which were then owned by Southwest, could also be purchased. At that time Southwest held its option to purchase lots G and H for $ 325,000, which option it later allowed to expire because of the price. Lots G and H were not purchased by the Security Bank because the price was regarded as being too high.

D. C. Dickinson was secretary, vice president, and a director of Security Bank. His duties included the planning for and acquisition of properties for 1962 U.S. Tax Ct. LEXIS 153">*179 Security. One day in late 1955 or early 1956, he suggested the Medico-Dental Building to Sutherland as the site for Security's main office. Pointing out that the ground level of lots G and H at the south end of block 12 was approximately 17 feet lower than the level at the north end of the block, where the Medico-Dental Building was located, he expressed the view that when compared with the Medico-Dental Building, "a beautiful landmark for San Diego," lots G and H should not be considered for the location for the bank's main office. He was told by Sutherland that the Medico-Dental property was not for sale. Even so, Dickinson called the property to the attention of the committee which had been appointed by Lindley. After investigation and consideration, the committee unanimously recommended the property to the board of directors as an ideal site for Security's main office. The factors stressed 38 T.C. 97">*109 were its location, the size and quality of the building, the land available for additional buildings and parking facilities, and the recent development trends in the area.

Both Black and Sutherland voiced strong opposition to the sale of the property by Southwest to the bank. Such opposition 1962 U.S. Tax Ct. LEXIS 153">*180 was indicated to the directors individually and in meetings of the board. Margolis, when approached on the matter, likewise opposed the sale of the property to the bank. At one point Black suggested a long-term lease as an alternative. The bank was not interested in leasing but in owning its property and the offer was rejected.

The directors of Security continued in their efforts to obtain the consent of Sutherland, Black, and Margolis to the purchase and on April 4, 1956, Southwest, in consideration of a payment of $ 5,000 granted to Security an option until August 4, 1956, to purchase all of its properties in block 12 for $ 1,320,000. The price was arrived at through comparison with the offer which had been received late in 1955 for the purchase of the properties at a price to yield Southwest a profit of $ 325,000, the reasoning being that since such a profit could have been realized through acceptance of the 1955 offer, Southwest should not be called on to sell its properties for a price not comparable to the price it would have received if the offer had been accepted.

On some undisclosed date, but prior to April 18, 1956, Security made a request of the Federal Reserve Bank of 1962 U.S. Tax Ct. LEXIS 153">*181 San Francisco for regulations and forms dealing with the acquisition by a bank of property where directors and officers of the bank were interested on the seller's side. On April 18, 1956, the Federal Reserve Bank replied that the Board of Governors of the Federal Reserve System had not issued regulations or prescribed forms. It expressed the opinion that in such a situation that if "the transaction is authorized or ratified by a resolution of your Board of Directors duly adopted by a majority of the members of the Board not interested therein, that is all that is necessary."

When Security's board of directors took action looking to the acquiring of the option for the purchase of the properties of Southwest, Sutherland and Black refrained from voting.

The plans for utilizing the Southwest properties for the bank's main office included a two-story with basement structure to adjoin the Medico-Dental Building on the west and to be erected at a cost of approximately $ 450,000, plus fixtures costing approximately $ 35,000. The new structure combined with portions of the basement, 1st, 2d, and 14th floors of the existing building was to constitute the new main office of the bank.

As further 1962 U.S. Tax Ct. LEXIS 153">*182 indication that Security's new location would be in an area of substantial development, Union Title Insurance & Trust Company, 38 T.C. 97">*110 the oldest and largest title and trust company in San Diego, announced on or about April 29, 1956, that it would construct a new five-story building, costing more than $ 2 million, on the property across A Street immediately north of the Medico-Dental Building.

Under date of May 2, 1956, Security transmitted to the superintendent of banks of California and to the Federal Reserve Bank of San Francisco a document entitled "1956 Plan for Increase of Capital Funds, New Main Office, and Expansion and Application for Approval." In the letter of transmittal, the interests of Sutherland and of Black's wife in the property to be acquired were specified. It was also stated that the board had already taken steps toward the acquisition of the property and that the action was unanimous "except that the interested directors did not vote." At all times material hereto, the board of directors of Security Bank consisted of 13 members, including Sutherland and Black.

Under date of June 19, 1956, the superintendent of banks of California informed Security that the purchase of 1962 U.S. Tax Ct. LEXIS 153">*183 the Medico-Dental properties might be consummated. Under date of July 24, 1956, Security was advised that the Board of Governors of the Federal Reserve System would interpose no objections "to the proposed acquisition of additional properties for bank premises, which it is understood has the approval of the State banking authorities." Atlantic and Lamar, each of which owned 12 1/2 percent of Southwest's outstanding stock, advised Black and Sutherland that if the other stockholders of Southwest decided to sell the properties to Security they would go along with the sale.

Under date of July 23, 1956, Sutherland, Margolis, and Ruth Black, the stockholders of record of 360 of the 480 outstanding shares of Southwest, constituting more than 50 percent of all voting shares, signed an agreement wherein they declared their election to wind up and dissolve Southwest and recited therein a plan for its liquidation. The election and plan was filed at the meeting of the board of directors on July 25, 1956. Having been signed by shareholders representing 75 percent of the voting stock of the corporation, it was considered effective, and the president and the secretary were authorized to prepare 1962 U.S. Tax Ct. LEXIS 153">*184 the certificate of election and to file it with the secretary of state as soon as possible. The action taken was unanimous.

On August 3, 1956, Security exercised its option to purchase the properties of Southwest, transferring its rights thereunder to its wholly owned affiliate, Sectras Corporation. The business of Sectras was limited to the holding of property for bank premises which could include space which might be a source of income.

On October 1, 1956, Southwest sold and conveyed to Sectras Corporation the properties covered by the option. The adjusted basis of the properties so sold by Southwest was $ 964,953.98. The costs 38 T.C. 97">*111 of the sale were $ 4,499.20. The price received was $ 1,320,000, and the gain realized was $ 350,546.82. In so acquiring the properties, Sectras Corporation paid in cash the excess of the purchase price over the unpaid balance on principal under the trust deeds held by Atlantic and Lamar.

On May 28, 1956, Southwest had paid $ 10,000 on the $ 88,000 borrowed from its stockholders on November 15, 1954. On August 8, 1956, it made a further payment of $ 20,000. On October 1, 1956, it paid the $ 58,000 balance due thereon.

On or about October 18, 1956, and 1962 U.S. Tax Ct. LEXIS 153">*185 November 13, 1956, distributions were made by Southwest to its stockholders of all of its assets, which then consisted of cash. These distributions were made pursuant to the plan of liquidation which had been adopted under date of July 23, 1956. Each of the stockholders received cash distributions in redemption of the shares owned by them as follows:

Southwest was dissolved on November 14, 1956. It filed its certificate of dissolution with the secretary of state of California on that date and a copy thereof in the office of the county clerk of San Diego County on November 19, 1956. For the purposes of prosecuting this case, its existence has been continued pursuant to section 5400 of the California Corporation Code.

Petitioners Margolis, Sutherland, Atlantic, and Lamar are transferees of Southwest to the extent of the assets received by each of them in the liquidation of Southwest. Petitioner Black received none of the assets and is not a transferee of Southwest.

Southwest kept its books and reported its income on an accrual basis 1962 U.S. Tax Ct. LEXIS 153">*186 of accounting. It elected to compute its depreciation allowance by the declining balance method "at rates one and one-half the straight line rates." The depreciation allowances claimed by Southwest on its returns were based on a useful life of 25 years from November 17, 1954, the date the building was acquired.

During its first taxable period, October 11, 1954, to September 30, 1955, Southwest's only income was derived from the rentals on its properties. Its gross income from rents was $ 192,991.78. It claimed deductions in a total amount of $ 186,136.92, and reported its net income as $ 6,854.86. Included in the $ 186,136.92 of deductions claimed, were $ 11,796.53 claimed as repairs to the lobby of the office building and to the parking lot, and $ 36,283.27 for depreciation.

38 T.C. 97">*112 The respondent in his determination of deficiency determined that the expenditures for the lobby and parking lot were capital expenditures and were not deductible. He determined that the useful life of the building was 35 years from the date of acquisition, and disallowed $ 7,903.27 of the depreciation allowance claimed thereon. The net amount disallowed for depreciation was $ 7,767.97. The difference between 1962 U.S. Tax Ct. LEXIS 153">*187 that amount and the $ 7,903.27 disallowed in respect of the building represented depreciation allowed with respect to the capital outlay for the lobby and parking lot.

During the taxable year ended September 30, 1956, Southwest's only income was from the rental of its properties and the sale of obsolete electrical fixtures. Its gross income from rents was $ 248,074.65, and from the sale of the fixtures was $ 100. Total deductions were claimed in the amount of $ 196,149.36, and net income was reported as $ 52,025.29. Of the deductions so claimed, $ 39,289.56 was for depreciation.

In his determination of deficiency, the respondent disallowed $ 10,891.60 of the depreciation claimed. The net amount disallowed however, was $ 10,664.67, the difference being the allowance for depreciation on the capital improvements made in 1955 to the lobby of the office building and the parking lot.

During the final taxable period from October 1, 1956, to November 14, 1956, Southwest had no receipts other than the payments made to it by Sectras Corporation in the purchase of the Southwest properties. It reported no income on its income tax return for the said period, claiming that it had distributed all 1962 U.S. Tax Ct. LEXIS 153">*188 of its assets within 12 months after the adoption of a plan of complete liquidation on July 23, 1956, and under section 337 of the Internal Revenue Code of 1954, no gain was to be recognized from the sale of its properties. On its return, it claimed deductions of $ 323.09, consisting of $ 174.57 for California franchise tax and $ 148.52 listed as other deductions under Schedule K on the return.

In his determination of deficiency for the period, the respondent determined that net gain had been realized by Southwest from the sale of its properties in the amount of $ 350,546.82, and that its adjusted taxable income was $ 350,223.73. He further determined that Southwest was a collapsible corporation under section 341 of the Code, and by reason of the provisions of subsection (c)(1)(A) of section 337, the nonrecognition provisions of section 337 were not applicable.

Southwest filed a timely claim for a net operating loss carryback of $ 448.22 to its taxable period October 11, 1954, to September 30, 1955, from its taxable period October 1, 1956, to November 14, 1956.

The Medico-Dental properties were purchased by Southwest from the Third Avenue Corporation as income-producing properties and 1962 U.S. Tax Ct. LEXIS 153">*189 38 T.C. 97">*113 the purchase was made by Southwest for the principal purpose of realizing rental income from the ownership and operation thereof. Lots E and F were likewise acquired as income-producing properties and they were so utilized first by way of rent from the building on the west half of the lots and thereafter as part of the space operated as a parking lot. One possible utilization considered in their purchase was the providing, in conjunction with the owners of the property directly across Second Avenue, of locations for major tenants, together with parking therefor. Southwest was not formed or availed of principally for the purchase of the properties acquired, with a view to the sale or exchange of its stock by its shareholders, or a distribution to its shareholders before realization by Southwest of a substantial part of the taxable income to be derived from the properties.

The useful life of the Medico-Dental Building on November 17, 1954, the date it was acquired, was 30 years.

OPINION.

Under section 337 of the Internal Revenue Code of 1954, ^{51962 U.S. Tax Ct. LEXIS 153">*191} no gain or loss is to be recognized from the sale or exchange of property by a corporation, if on or after June 22, 1954, it adopts a plan of 1962 U.S. Tax Ct. LEXIS 153">*190 complete liquidation and all of the assets of the corporation are distributed in complete liquidation within the 12 months' period beginning on the date of the adoption of the plan, provided that the property is not stock in trade or of a kind which would properly be included in the inventory of the corporation, or installment obligations acquired on the sale of such stock in trade or property subject to inventory. In subsection (c)(1)(A) 5 of section 337, it is provided, 38 T.C. 97">*114 however, that section 337 shall not apply to any sale or exchange made by a collapsible corporation as defined in section 341(b) of the Code.

Based upon the plan of complete liquidation adopted on July 23, 1956, and the distribution by Southwest of all its assets by November 13, 1956, Southwest, claiming that the provisions of section 337 were applicable to the sale of its properties on October 1, 1956, reported no gain from such 1962 U.S. Tax Ct. LEXIS 153">*192 sale in its return for its final taxable period ended November 14, 1956. The respondent in his determination of deficiency determined that Southwest was a collapsible corporation within the meaning of section 341(b) of the Code and that the gain realized on the sale of the corporate properties is to be recognized as taxable income for such period.

According to section 341(b), ^{61962 U.S. Tax Ct. LEXIS 153">*194} a collapsible corporation means a corporation formed or availed of principally for the manufacture, construction, or production of property, or for the purchase of property, with a view to the sale or exchange of the stock of the corporation by its shareholders, or a distribution by the corporation to its shareholders, before realization by the corporation of a substantial part of the taxable income to be derived from the property manufactured, constructed, or purchased, and with a view to the realization by the shareholders of gain attributable to such property. For the purposes of section 341, property covered by the said section means property held for less than 3 years which is property used in the corporation's trade or business, as defined in section 1231(b) of the Code, but without regard to any holding 1962 U.S. Tax Ct. LEXIS 153">*193 period therein provided. By subsection (d)(3) of section 341, it is provided that section 341 does not apply to gain realized by a shareholder with respect to his stock 38 T.C. 97">*115 in a collapsible corporation if realized after the expiration of 3 years following the completion of such manufacture, construction, production, or purchase of the property.

It is the position of the petitioners that Southwest was not a collapsible corporation within the meaning of section 341(b), and that the provisions of section 337 apply. The respondent did not determine and he makes no claim here that section 337 is not applicable, provided Southwest was not a collapsible corporation within the meaning of section 341(b).

For determining whether Southwest was a collapsible corporation under section 341(b), the question, of course, is whether it was formed or availed of for the purchase of the properties later sold by it to Security, with a view to 1962 U.S. Tax Ct. LEXIS 153">*195 a distribution to its shareholders before Southwest realized a substantial part of the taxable income to be derived from the properties purchased and with a view to the realization by the shareholders of gain attributable to the properties.

The respondent based his determination, and now rests his contention on the proposition that Southwest was formed and availed of for the purchase and resale of the Medico-Dental properties, and not for the purpose of owning and holding the properties for the production of income therefrom. In support of this contention, he argues that the need of Security Bank for a new main office was fully known to Sutherland, Black, and Margolis at the time Southwest was organized and the property was purchased; that the resale of the property by Southwest, if not the motivating factor in the organization of Southwest and its purchase of the properties, was contemplated unconditionally, conditionally, or as a recognized possibility, which fact brings Southwest within the meaning of the income tax regulations and the provisions of section 341(b).

Section 1.341-2(a)(2) of the Income Tax Regulations does carry the provision recited. In section 1.341-2(a)(3), however, 1962 U.S. Tax Ct. LEXIS 153">*196 it is provided that a corporation is "formed or availed of with a view to the action described in section 341(b) if the requisite view existed at any time during the * * * purchase referred to in that section." The provision is followed, however, by the further provision that "if the sale, exchange, or distribution is attributable solely to circumstances which arose after the * * * purchase (other than circumstances which reasonably could be anticipated at the time of such * * * purchase), the corporation shall, in the absence of compelling facts to the contrary, be considered not to have been so formed or availed of." On the other hand, if the sale, exchange, or distribution is attributable to circumstances present at the time of purchase, the corporation absent compelling facts to the contrary is, according to the regulations, considered to have been so formed or availed of.

38 T.C. 97">*116 While it is true that Security Bank had, at the time Southwest was organized and purchased the Medico-Dental properties, outgrown its existing facilities for its main office and the acquisition of suitable property therefor in the near future was a recognized necessity, we are wholly satisfied from the evidence 1962 U.S. Tax Ct. LEXIS 153">*197 that, insofar as Security Bank was concerned, it had no thought or intention of locating in or near the site of the Medico-Dental properties. Testifying to that effect were various officers and directors of Security Bank, who unlike Sutherland and Black had no connection with or interest in Southwest. Their testimony in that respect was definite and quite convincing.

It was not until a year or more after the organization of Southwest and the purchase by it of the Medico-Dental properties that Security Bank began to give any thought or consideration to a location beyond the Broadway area. Furthermore, there is no question that the sale by Southwest of its properties to the bank when the matter was finally brought up early in 1956, was met with strong resistance on the part of Black, Margolis, and Sutherland.

Sutherland, Black, and Margolis all three testified categorically that the organization of Southwest and its purchase of the Medico-Dental properties was with a view to the continued ownership of the properties by Southwest for the production of operating income therefrom and there was no thought, purpose, or intent to resell. There is no claim on the part of the respondent that 1962 U.S. Tax Ct. LEXIS 153">*198 the corporation was thinly capitalized and it was the thought of Black in particular and Margolis that the properties could be operated after their purchase so as to produce sufficient income from rents to liquidate over a long term the indebtedness placed against it in connection with the purchase and thus result in unencumbered ownership of the property by Southwest. We found the testimony of Black and Margolis persuasive and convincing, and we are fully satisfied that in the organization of Southwest and its purchase of the Medico-Dental properties, there was no purpose or intention of resale under any circumstances then existing, and that when the property was sold, it was because of circumstances which arose more than a year after the purchase, which circumstances were not within reasonable anticipation at the time of the purchase. It is accordingly our conclusion that Southwest was not organized or availed of for the purchase of the Medico-Dental properties with the view proscribed by section 341, and was not a collapsible corporation within the meaning of subsection (b) thereof.

The parties, on brief, have cited numerous cases and have made arguments therefrom in support of 1962 U.S. Tax Ct. LEXIS 153">*199 their positions. The respondent, in his opening brief, cited Elizabeth M. August, 30 T.C. 969">30 T.C. 969, affd. 267 F.2d 829, and Jacobson v. Commissioner, 281 F.2d 703, 38 T.C. 97">*117 reversing 32 T.C. 893">32 T.C. 893. In citing the Jacobson case, he argues that the testimony of petitioners' witnesses was tailored to fit the holding of the reversing court, and must be heavily discounted. The petitioners also cited and do heavily rely on Jacobson v. Commissioner, and seek to distinguish such cases as Burge v. Commissioner, 253 F.2d 765, affirming 28 T.C. 246">28 T.C. 246, and Glickman v. Commissioner, 256 F.2d 108, affirming a Memorandum Opinion of this Court. They also cite a number of other cases, as did the respondent in his reply brief.

When the facts as found are considered, none of the cases cited call for or require a conclusion other than that stated above. In the cases cited, the corporation had been organized for the construction of income-producing property, and not for the purchase of an income-producing property already in existence. And in the cases cited the troublesome question was whether the intent on the part of the stockholders to sell the stock or to cause the corporation to make the distribution or distributions 1962 U.S. Tax Ct. LEXIS 153">*200 had existed at or prior to completion of construction, or whether the sale or distribution was attributable solely to circumstances which arose after construction and not due to circumstances present at and during construction. In each instance, the cases were resolved upon a determination of fact as to whether or not the view to such sale or distribution existed at or prior to completion of construction, or arose thereafter. We have applied the same principle here, and, as indicated above, have concluded on the evidence that the view to the sale by Southwest of its properties and the distribution of the proceeds to the stockholders did not exist at the time of purchase, but arose a year or more thereafter. See and compare Charles J. Riley, 35 T.C. 848">35 T.C. 848.

A determination of the depreciation issue remains to be dealt with, and the question there is as to the useful life of the Medico-Dental Building at the time it was acquired by Southwest. Southwest based its computation of depreciation on an assumed 25-year useful life. The respondent in his determination of deficiency determined that the useful life of the building was 35 years from the date of purchase. His determination is presumptively 1962 U.S. Tax Ct. LEXIS 153">*201 correct, and the burden is on the petitioners to show that the useful life of the building was less than 35 years.

Both parties called one witness to support the position taken, the witness called by petitioners being one of the individuals who appraised the properties incident to the obtaining of the loans from Atlantic and Lamar at the time of purchase by Southwest. We listened to the witnesses. We have considered their testimony. We have also taken into account other facts relating to the useful life of the building as shown by other evidence of record. We are fully convinced that the positions taken by the parties represent the 38 T.C. 97">*118 extremes as to the useful life of the building as of the date of acquisition, and that the true useful life lies between those two extremes.

Considering the evidence and exercising our best judgment as to the facts shown, we have concluded that the useful life of the Medico-Dental Building at the time of its purchase by Southwest was 30 years. We have so found as a fact, and so hold.

The facts show that petitioners Sutherland, Margolis, Atlantic, and Lamar were transferees of Southwest under section 6901 of the 1954 Code and that petitioner Black was 1962 U.S. Tax Ct. LEXIS 153">*202 not. We so hold.

Decisions will be entered under Rule 50.