49 T.C. 663">*663 The respondent determined deficiencies in petitioners' income tax for the years and in the amounts as follows:

The issues for determination are as follows:

(1) Whether petitioners realized gain upon receipt of monthly principal payments on promissory notes issued to them in 1951, pursuant to a nontaxable exchange;

(2) If so, whether such gain constituted a proportionate share of each monthly note payment; and

(3) If so, whether the gain attributable to each 1968 U.S. Tax Ct. LEXIS 160">*161 monthly note payment was taxable as ordinary income or as capital gain.

FINDINGS OF FACT

All of the facts have been stipulated and are so found.

Petitioners, husband and wife, were residents of the State of Florida on the date the petition herein was filed. They filed joint income tax returns for 1958, 1959, and 1960 with the district director of internal revenue, Jacksonville, Fla. E. D. Rivers, the husband, will be referred to hereinafter as petitioner.

On April 1, 1951, petitioner transferred certain assets to WEAS, Inc. (hereinafter WEAS), in exchange for the corporation's capital stock and a note, in a transaction which was nontaxable under section 112(b)(5) of the Internal Revenue Code of 1939. ^{11968 U.S. Tax Ct. LEXIS 160">*162} The tangible or physical assets transferred were set up on the corporate books of 49 T.C. 663">*664 WEAS at a value of $ 90,154.73, which was the adjusted basis of those assets in the hands of petitioner. The corporation used that basis for the purpose of computing depreciation of those assets. The remaining assets, in which petitioner had a zero basis, were set up on the corporate books at their "stated value" of $ 159,845.27.

As security for the note received by petitioner from WEAS, petitioner received from that corporation a bill of sale to secure debt which covered all the personal property he had transferred and a "Deed to Secure Debt" which covered the real property transferred. Both security instruments secured an indebtedness of $ 240,000 as evidenced by the note. The note issued by WEAS was in the face amount of $ 240,000 and was payable at the rate of $ 1,000 per month, with interest at the rate of 6 percent per annum on the unpaid balance. It was not issued with interest coupons nor in registered form and was not put into registered form by March 1, 1954. The fair market value of the note on April 1, 1951, was equal to its face amount.

Petitioner's adjusted basis in the capital stock of WEAS was $ 10,000 on the date of the transfer. His adjusted basis in the note was $ 80,154.73 on the date of the transfer.

WEAS began making payments to petitioner on the note on May 1, 1951. Petitioner received 8 principal payments of $ 1,000 each in 1951 and 12 principal payments of $ 1,000 each in each month of the years 1952 through 1960, inclusive. In addition, in each of the years in 1968 U.S. Tax Ct. LEXIS 160">*163 which payments on the note were made, payments of interest were also made to petitioner.

On April 1, 1951, petitioner also transferred certain assets to WJIV, Inc. (hereinafter WJIV), in exchange for the corporation's capital stock and a note in a transaction which was nontaxable under section 112(b)(5). The tangible or physical assets transferred were set up on the corporate books of WJIV at a value of $ 53,075.48, which was the adjusted basis of those assets in the hands of petitioner. The corporation used that basis for the purpose of computing depreciation on those assets. The remaining assets, in which petitioner had a zero basis, were set up on the corporate books at their "stated value" of $ 76,924.52.

As security for the note received by petitioner from WJIV, petitioner received from that corporation a bill of sale to secure debt which covered all the personal property transferred and a "Deed to Secure Debt" which covered the real property transferred. Both security instruments secured an indebtedness of $ 120,000 as evidenced by the note. The note issued by WJIV was issued in the face amount of $ 120,000 ² and was payable at the rate of $ 500 per month, with interest at 1968 U.S. Tax Ct. LEXIS 160">*164 the rate of 4 percent per annum on the unpaid balance. It was not issued 49 T.C. 663">*665 with interest coupons nor in registered form and was not put into registered form by March 1, 1954. The fair market value of the note on April 1, 1951, was equal to its face amount.

Petitioner's adjusted basis in the capital stock of WJIV was $ 10,000 on the date of the transfer. His adjusted basis in the note issued by WJIV was $ 43,075.48 on the date of the transfer.

WJIV began making payments to petitioner on the note on May 1, 1951. Petitioner received 8 principal payments of $ 500 each in 1951 and 12 principal payments of $ 500 in each month of the years 1952 through 1960, inclusive. In addition, in each of the years in which payments on the note were made, payments of interest were also made to petitioner.

Petitioner and his wife did not include any portion of the principal payments received on the WEAS and WJIV notes on their income for Federal tax purposes for the taxable 1968 U.S. Tax Ct. LEXIS 160">*165 years 1951 through 1960.

OPINION

The first question presented is whether petitioner received taxable income during the years in question upon receipt of the payments on the notes issued in 1951. The parties concede that the 1951 transactions, from which the promissory notes arose, were nontaxable transfers pursuant to section 112(b)(5) of the 1939 Code, ^{31968 U.S. Tax Ct. LEXIS 160">*168} the statutory predecessor to section 351 of the 1954 Code. Pursuant to section 113(a)(6), petitioner's basis in the stock and notes received from the transferee corporations, WEAS and WJIV, was the same as the basis of petitioner's property transferred to those corporations, i.e., $ 90,154.73 as to WEAS and $ 53,075.48 as to WJIV. After allocating $ 10,000 to the stock of each corporation, petitioner's basis in the WEAS note was $ 80,154.73 and his basis in the WJIV note was $ 43,075.48, although the face amount of the WEAS note was $ 240,000 and the face amount of the WJIV note was $ 120,000. ⁴ Although petitioner's basis in each note was less than its fair market value, petitioner reported no income from the monthly note payments and now contends, without recitation of any judicial authority, that he derived no taxable income 1968 U.S. Tax Ct. LEXIS 160">*166 upon the receipt of the note payments because the nontaxable transfer, pursuant to which the notes were acquired, did not permit the transferee corporation to take a stepped-up basis. We agree with petitioner that where property is acquired by a corporation in a transaction to which section 112(b)(5) applies, the basis of the property in the hands of the corporation is the same as it was in the hands of the transferor. Sec. 113(a) 49 T.C. 663">*666 (8). However, to conclude from that fact that petitioner will never receive taxable income upon payment of the notes received in such a transaction is without legal foundation. Under both the 1939 and 1954 Codes, gain is defined as the excess of the amount realized from the sale or other disposition of property over its adjusted basis. Sec. 111(a), I.R.C. 1939; sec. 1001(a), I.R.C. 1954. The "amount realized," where no money is received, is by definition the fair market value of the property received, sec. 111(b), I.R.C. 1939; sec. 1001(b), I.R.C. 1954, and since in this case no money was received by petitioner at the time of the transfer in 1951, the "amount realized" was the fair market value of the stock and notes received, i.e., their face amount. 1968 U.S. Tax Ct. LEXIS 160">*167 ⁵ Inasmuch as the fair market value of the notes exceeded petitioner's basis therein, petitioner realized a gain to the extent of the difference. Section 112(b)(5) reflects the well-established intent of Congress to foster tax-free business reorganizations of the very type which occurred in this case by postponing recognition of gain. However, there is no suggestion in that Code section, or any other, that Congress intended to thereby eliminate all tax to a transferor in such a transaction. The fact that section 113(a)(6) specifically provided a basis for the property received by the transferor in such a transaction convinces us of the error in petitioner's argument. It follows that since the bases of petitioner's notes were less than their fair market value, petitioner derived taxable income on the receipt of the note payments. We must therefore decide whether petitioner was required to pay a tax on the gain only after he had fully recovered his basis or, on the other hand, whether some portion of each monthly payment was taxable as gain.

Respondent contends, as he has in the past, Victor B. Gilbert, 6 T.C. 10">6 T.C. 10, 6 T.C. 10">13 (1946), that receipt by petitioner of the monthly note payments, beginning in May 1951, was attributable entirely to recovery of petitioner's basis in the notes, with the result that by sometime in 1958, the first tax year in question, petitioner had recovered the entire basis in each note. From this respondent contends that the entire portion of all subsequent note payments were attributable solely to income. In Darby Investment Corporation, 37 T.C. 839">37 T.C. 839 (1962), affd. 315 F.2d 551">315 F.2d 551 (C.A. 6, 1963), we recognized the long-standing principle that:

where evidences of indebtedness such as negotiable bonds, notes, and mortgages payable in installments with interest are purchased at discount, and where when purchased 1968 U.S. Tax Ct. LEXIS 160">*169 they have an ascertainable fair market value less than the amount due and payable thereon, the payments each include, after deduction of interest, realized discount income in proportion to the difference between the taxpayer's cost and the principal balance due upon the face of such instruments at the date of taxpayer's purchase thereof. William A. Tombari, 35 T.C. 250">35 T.C. 250; Phillips v. Frank, 185 F. Supp. 349">185 F. Supp. 349 (W.D. Wash.); Victor B. Gilbert, 6 T.C. 10">6 T.C. 10; Vancoh Realty Co., 33 B.T.A. 918">33 B.T.A. 918; Shafpa Realty Corporation, 8 B.T.A. 283">8 B.T.A. 283; Florence L. Klein, et al., 6 B.T.A. 617">6 B.T.A. 617.

49 T.C. 663">*667 It is therefore established in the discount note cases that where the cost basis of a note is less than the amount due and payable thereon, the difference, or discount, is to be allocated to each installment payment reported as discount income. In the instant case, while the notes were not purchased at a discount, there also exists a disparity between the holder's basis and the amounts to be received on the note. For this reason, we think it follows that each principal payment in retirement of the notes, after deduction of interest, must be allocated in part to return of petitioner's basis and in part to the receipt of income. 1968 U.S. Tax Ct. LEXIS 160">*170 ⁶

Respondent strongly contends, however, that since petitioner never reported any income from the notes, excepting interest income, we must invoke a doctrine of quasi-estoppel, and hold that as to each note, the entire monthly payment, beginning with the May 1951 payment, was attributable solely to the recovery of petitioner's basis. Thus, when the entire basis in each note was recovered sometime during 1958, all subsequent principal payments would be taxable, in their entirety, as income. In support of his position, respondent cites the cases of Alderson v. Healy, an unreported case ( D. Mont. 1965, 15 A.F.T.R.2d (RIA) 536; 65-1 U.S.T.C. par. 9239), and Orange Securities Corp. v. Commissioner, 131 F.2d 662">131 F.2d 662 (C.A. 5, 1942), affirming 45 B.T.A. 24">45 B.T.A. 24 (1941).

While we agree with respondent that such treatment of the note payments would best protect the Federal revenue, we do not think a doctrine of quasi-estoppel is applicable 1968 U.S. Tax Ct. LEXIS 160">*171 here. That doctrine, as relied upon in the cited cases, merely imposes upon the taxpayer the duty of taking a consistent position with regard to similar facts and transactions in different years where inconsistency would work to the benefit of the taxpayer and to the detriment of the tax revenue. In the instant case, however, petitioner has taken consistent positions. While he has never reported as income any portion of the monthly note payments, excepting interest, he continues to take the position that because of the nonrecognition provisions of section 112(b)(5) and the transferred, rather than stepped-up, basis required to be taken by the transferee corporation under section 113(a)(8), he has derived no income from the receipt of the monthly payments on the notes. While we consider petitioner's arguments on this point frivolous and completely lacking in judicial authority, we think it clear that his position has at all times been consistent and therefore application of a doctrine of quasi-estoppel is not warranted.

There remains for our determination the question whether the income portion of each monthly note payment received by petitioner during the years in question, 1958 1968 U.S. Tax Ct. LEXIS 160">*172 through 1960, constituted ordinary 49 T.C. 663">*668 income or capital gain. Assuming, without deciding, that the notes constituted capital assets in the hands of petitioner, it was still necessary that the collections thereon constituted a "sale or exchange" in order for petitioner to be entitled to capital gains treatment on the gain portion thereof. Sec. 117(a), I.R.C. 1939; sec. 1222, I.R.C. 1954. It is now well settled that if gain arises from the sale or exchange of a claim or chose in action, capital gains treatment results, whereas if the gain arises from the mere collection of a claim or chose in action, the gain is taxed as ordinary income. Fairbanks v. United States, 306 U.S. 436">306 U.S. 436 (1939); Mace Osenbach, 17 T.C. 797">17 T.C. 797 (1951), affd. 198 F.2d 235">198 F.2d 235 (C.A. 4, 1952); John H. S. Lee, 42 B.T.A. 920">42 B.T.A. 920 (1940), affd. 119 F.2d 946">119 F.2d 946 (C.A. 7, 1940); R. W. Hale, 32 B.T.A. 356">32 B.T.A. 356. (1935), affd. 85 F.2d 819">85 F.2d 819 (C.A. D.C. 1936); John H. Watson, Jr., 27 B.T.A. 463">27 B.T.A. 463 (1932). In spite of the foregoing authority, petitioner contends that if gain resulted from the collection on the notes, that gain must be taxed at capital gains rates, relying on section 117(o). That section, as added to the 1939 Code by section 328(a) 1968 U.S. Tax Ct. LEXIS 160">*173 of the Revenue Act of 1951, ch. 521, 65 Stat. 452, provided as follows:

SEC. 117(o). Gain From Sale of Certain Property Between Spouses or Between an Individual and a Controlled Corporation. --

(1) Treatment of gain as ordinary income. -- In the case of a sale or exchange, directly or indirectly, of property described in paragraph (2) --

* * * *

(B) between an individual and a corporation more than 80 per centum in value of the outstanding stock of which is owned by such individual, his spouse, and his minor children and minor grandchildren;