$2,467.23 and $4,887.24, respectively. All other issues having been settled, the only questions that remain for decision are:

(1) Whether Clifford A. Diecks, now deceased, should have reported gain on the sale of stock in an allegedly collapsible corporation as ordinary income rather than capital gain; and

(2) Whether petitioner, by virtue of Clifford A. Diecks' shareholder interest in Cable Vista, Inc., must recapture the investment credit, claimed by the decedent as a shareholder of a subchapter S corporation, in the year the corporation's shareholders terminated its subchapter S status and sold their stock.

FINDINGS OF FACT

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

Mrs. Moninda Diecks Coyle, executrix of the Estate of Clifford A. Diecks, resided in Elizabethtown, Ky., when she filed the petition on behalf of the estate.

In 1950 five businessmen, including Clifford A. Diecks (Diecks), began operating a radio station in Elizabethtown, Ky. Walter D. Huddleston (Huddleston) was hired as operations manager in 1952. In 1957 Huddleston joined the other five businessmen in acquiring a second radio station in Lebanon, Ky. All six individuals were unrelated to each other. Shortly thereafter one of the original investors in the Elizabethtown station died. In 1960 the remaining four original investors and Huddleston purchased an advertising company.

Huddleston was aware that cable television was a growing industry. He did some research in the area and then encouraged his four business associates to explore the possibility of introducing cable television to Elizabethtown.

After some investigation, the four business associates joined with Huddleston in incorporating Cable Vista, Inc. (Cable Vista), in May 1963 to operate a community antenna system. Its 500 outstanding shares were owned equally by the five individuals, and Huddleston undertook management of the Cable Vista operation. On June 18, 1963, the corporation duly elected to be taxed as a subchapter S corporation.

Diecks was primarily in the lumber business. He also was involved in other businesses but Cable Vista represented his only interest in television.

On June 3, 1963, Cable Vista entered into a 10-year agreement with the municipal government of Elizabethtown which entitled Cable Vista to operate a television system in Elizabethtown. Cable Vista was to pay $100 to the City annually for this right. The agreement permitted Cable Vista to mount its central antenna on the town's main water tower, to run coaxial cables down city streets, to run its wires on utility poles (apparently on city property), and to install its own poles where necessary. The system was designed to use a central antenna to receive signals from distant stations and relay the signals (which would be strengthened by amplifiers) through coaxial cables to tap wires into customers' homes. The system, as designed, would allow subscribers to receive nine channels instead of only two.

The June 3, 1963, agreement was replaced by a 20-year franchise agreement dated October 18, 1965. The latter agreement, which was obtained through competitive bidding, provided that the corporation was to pay Elizabethtown a onetime fee of $100, plus 2 percent of its annual gross subscription

revenues.

The corporation sold subscriptions to the system to individual customers. A customer could subscribe for periods of a month, 6 months, or a year. The installation charge was generally $25, which covered installation costs. On occasion there would be promotional "hook-ups" for as little as $5 to encourage customers to subscribe to the system. In addition to the connection charge, customers paid a subscription fee of $3.50 per month which entitled them to continued use of the system. The monthly fees determined whether Cable Vista was a profitable operation.

The fair market value of any subscription agreement was equal at most to 1 year's income therefrom. While the maximum length of a contract was 1 year, some contracts were for a month or 6 months. The contracts could be renewed, but such renewal was uncertain at best and represented no more than the expectation that a customer would return. The gross income of Cable Vista from subscriptions for the year ended November 30, 1965, was $27,785.34. The cost to produce this income was $39,718.30.1 Therefore, there was for that year an operating loss

of $11,932.96, and the value of that year's subscription contracts as distinguished from the value of the expectation of continued patronage, was zero. Since the basis for the contracts was also zero, there was on December 2, 1965, no unrealized appreciation or depreciation, hence no net unrealized appreciation in such contracts.

In addition to its Elizabethtown franchise, Cable Vista, through Huddleston's personal endeavors, obtained franchises for its cable television system in Vine Grove and Radcliff, Ky., on September 13, 1965, and September 21, 1965, respectively. These agreements were also for 20 years. Cable Vista paid Huddleston $10,000 for obtaining both franchises. Cable Vista then had 6,500 potential customers in the three areas.

In 1965, Huddleston, while on some personal business, passed through Horse Cave, Ky. He saw a construction crew on the side of the road installing a community antenna system and he stopped to talk to them. He spoke to a Rex Walters, representative of the Ameco Co. of Phoenix, Ariz., who expressed an interest in acquiring Cable Vista. Huddleston suggested Mr. Walker visit him. Approximately 2 months later Huddleston received a telephone call from Ameco Co. representatives who asked to be quoted a sales price for Cable Vista.

Huddleston thereafter met with the other shareholders of Cable Vista regarding selling Cable Vista. At the outset, three of the five were not interested in selling. Over a period of time, however, four did agree to sell, and the fifth, while not eager to sell, agreed to go along with the group.

At the time these sales discussions began, Huddleston realized there was a national movement toward cable television. Changes in technology were occurring, and if Cable Vista were to remain in business, it would have to engage in expensive improvements, possibly even rebuild the system completely. Huddleston also had just entered public office as a State senator and was extremely

busy. In addition, Huddleston was having employment problems with the engineer who worked with the television system.

Sales discussions were initiated by the buyers. At no time did any shareholder of Cable Vista advertise his stock for sale.

On or about November 19, 1965, the shareholders agreed to sell their stock for $152,500, payable in two annual installments, the first in the amount of $45,750 and the second in the amount of $106,750. The sales agreement also provided that the officers of the purchasing company would pay Cable Vista's debts to its shareholders of $37,500 ($7,500 per shareholder). The sales agreement allocated $5 of the purchase price to a covenant by the five sellers not to compete in "Hardin County, Ky. and Ft. Knox." Diecks collected one-fifth of the sales proceeds, namely, $9,150 in 1965 and $21,350 in 1966. His gain was $8,935.89 in 1965 and $20,850 in 1966. He reported his gain as long-term capital gain, including the $1 allocated to his covenant not to compete. No issue has been raised as to the allocation to his covenant nor as to the proper treatment of the $1.

The sales contract noted that Cable Vista had at least 647 customers on the date the agreement was signed. However, the record does not classify them based on the length of their subscriptions.

Cable Vista's income and cash flow for the years in which Diecks owned stock were as follows:

As a shareholder in a subchapter S corporation, decedent Diecks claimed the benefit of his share of the corporation's investment credits on his individual income tax return as follows:

Cable Vista revoked its subchapter S election for its taxable year beginning December 1, 1965. In accordance with the November 19, 1965, agreement, Diecks and the other shareholders transferred their stock to Ameco Co., which duly made the agreed payments therefor.

OPINION

1. Collapsible Corporation Issue

Respondent contends that Cable Vista was a collapsible corporation within the meaning of section 341,2 and therefore that Diecks' gain on the sale of the Cable Vista stock is taxable as ordinary income rather than long-term capital gain. Petitioner argues that Cable Vista was not a collapsible corporation when Diecks sold his stock therein, and that if it were, the corporation came within the exception from application of the collapsible provisions provided in section 341(e)(1).

Section 341(a) provides that gain from the sale of stock of a collapsible corporation shall be considered as gain from the sale of property which is not a capital asset. Section 341(b) to the extent here relevant generally defines a collapsible corporation to mean a corporation that is formed or availed of principally for the production of property with a view to a sale or exchange of stock before it has realized a substantial part of the taxable income to be derived from that property, and a realization by the shareholders of the gain attributable to that property.3 To be

2 All section references are to the Internal Revenue Code of 1954, as in effect during the years in issue.

3 Sec. 341 provides in relevant part:

(b) DEFINITIONS.—

(1) COLLAPSIBLE CORPORATION.-For purposes of this section, the term "collapsible corporation" means a corporation formed or availed of principally for the manufacture, construction, or production of property * with a view to

(A) the sale or exchange of stock by its shareholders (whether in liquidation or otherwise), or a distribution to its shareholders, before the realization by the corporation manufacturing, constructing, [or] producing *** the property of a substantial part of the taxable income to be derived from such property, and

(B) the realization by such shareholders of gain attributable to such property. (2) PRODUCTION OR PURCHASE OF PROPERTY.-For purposes of paragraph (1), a corporation shall be deemed to have manufactured, constructed, produced, or purchased