Camp Wolters Land Co. v. Commissioner ( 1945 )

Camp Wolters Land Company, Petitioner, v. Commissioner of Internal Revenue, Respondent

Camp Wolters Land Co. v. Commissioner

Docket No. 4709

United States Tax Court

5 T.C. 336; 1945 U.S. Tax Ct. LEXIS 134;

June 28, 1945, Promulgated

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">*134 Decision will be entered under Rule 50.

1. Petitioner, a corporation organized under the laws of the State of Texas, held to have come into existence as a separate taxable entity on the date of the filing of its charter (Apr. 25, 1941), and in the application of section 711 (a) (3), I. R. C., the period to be considered is the period from that date to December 31, 1941.

2. The Commissioner's determination in connection with lease rentals for the period March 1 to April 25, 1941, received by petitioner and reported by it in its income, held, sustained where the issue pertaining thereto was not raised by the pleadings and was advanced by petitioner on brief for the first time.

3. Petitioner's promoters purchased in March 1941 the improvements on three small tracts of land at a cost of $ 9,250. The United States Army, in connection with its military training program, was the sublessee of certain tracts of land used as a firing range, which tracts were contiguous to the land on which these improvements were located. The improvements, being in the direct line of fire, were sold and removed in April 1941, and petitioner, which was the original lessor of the tracts of land ">*135 used as a firing range, received in 1941 $ 1,000 realized upon such sale, and $ 1,600 from the United States Government, representing the normal cost of removing these improvements. Held, (a) the net cost, viz., $ 6,650, of acquiring these improvements is neither an expense of obtaining a tenant under a one-year lease and therefore deductible in full from petitioner's 1941 income, nor an expenditure amortizable over the life of the original lease and any reasonably foreseeable renewals thereof, for the reason that petitioner has not established that it acquired such improvements; (b) petitioner is not entitled to any deduction from its gross income for 1941 under section 23 (q), I. R. C., on the theory that the net cost of acquiring the above tracts constituted a gift from it to the United States Government.

4. Petitioner acquired certain tracts of land on which there were various improvements for the purpose of leasing the land to the city of Mineral Wells, Texas, to be sublet to the United States Army for the purpose of bivouac, training area, and target range. Held, (a) petitioner is not entitled to an allowance for depreciation in 1941 and 1942 on these improvements as">*136 it has failed to establish the cost of these improvements; (b) petitioner is not entitled to any deduction for 1942 under section 23 (f), I. R. C., on account of loss from destruction by fire, because of failure of proof of the amount of the loss.

5. Held, petitioner is liable for a 25 percent penalty, under section 291, I. R. C., upon any excess profits taxes due from it.

R. B. Cannon, Esq., for the petitioner.

Homer J. Fisher, Esq., for the respondent.

Disney, Judge. Murdock, J., dissenting. Mellott and Opper, JJ., agree with this dissent.

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DISNEY

">*336 This case involves a deficiency for the calendar year 1941 in income tax in the sum of $ 1,470.21, and in excess profits tax in the sum of ">*337 $ 263.26, together with a penalty of $ 65.82 for failure to file an excess profits tax ">*138 return (Form 1121). It also involves a deficiency for the calendar year 1942 in income tax in the sum of $ 1,572.91.

The following questions are presented for determination:

1. (a) Whether the Commissioner erred in disallowing a deduction of $ 8,250 claimed by petitioner in its 1941 return as a loss resulting from the sale and demolition of certain improvements in April 1941. These improvements were on land contiguous to other land leased by petitioner to the city of Mineral Wells, Texas, and sublet by it to the United States Army for use as a firing range in connection with its military training program. Being in the direct line of fire, they were purchased by petitioner's promoters in March 1941 at a cost of $ 9,250 and removed in April 1941. Petitioner received during 1941 the sum of $ 1,000 realized upon the sale and demolition of these improvements; also the sum of $ 1,600 from the United States Government representing the normal cost of removing these improvements.

(b) If the Commissioner's determination is sustained, petitioner asserts alternatively that that transaction gives rise to an allowable deduction from lease rentals. If this contention is upheld, the further question">*139 arises as to whether it is deductible in full in 1941 or allocable over a period of years; and, if allocable, what amount is properly deductible in 1941 and 1942.

(c) Also, if the Commissioner's determination is sustained, the further question is presented of whether any amount of the net cost of this transaction is deductible by petitioner in its 1941 return under section 23 (q) of the Internal Revenue Code. ^{1945 U.S. Tax Ct. LEXIS 134">*140 with this transaction, is includible in petitioner's gross income for 1941 arises by virtue of the affirmative allegations made by the respondent in his amended answer.}

2. Whether and in what amount petitioner is entitled to an allowance for depreciation in 1941 and 1942 on buildings and improvements on certain tracts of land acquired on May 8, 1941, by petitioner and leased by it to the city of Mineral Wells, Texas, which sublet them to the United States Army for use by the latter for military training purposes.

3. Whether petitioner is entitled to a deduction where the alleged loss resulted from the destruction by fire of buildings on land (involved 5 T.C. 336">*338 in question No. 2 above (owned by it and leased to the city of Mineral Wells, Texas, and sublet to the United States Army for use by the latter for military training purposes.

4. Whether respondent erred in determining that petitioner is liable for a deficiency in excess profits taxes for the year 1941 and for penalty for failure to file an excess profits tax return for 1941. ^{1945 U.S. Tax Ct. LEXIS 134">*141 Effect will be given to certain other uncontested adjustments made by the Commissioner to petitioner's net income for 1941 and 1942 in the decision to be entered under Rule 50.}

FINDINGS OF FACT.

Camp Wolters Land Co. (hereinafter referred to as petitioner) is a corporation duly organized and existing under the laws of the State of Texas, with its principal place of business at Mineral Wells, Texas. The corporation's charter recites that it was formed "to grow, sell and purchase seeds, plants, trees, etc., for agricultural, horticultural and ornamental purposes, and to purchase and lease all lands necessary for that purpose * * *." Its capital stock consisted of 600 shares, each of the par value of $ 100. Its charter was signed and acknowledged before a notary public by its incorporators on March 16, 1941, and was filed with and approved by the Secretary of State of Texas on April 25, 1941. Petitioner's corporate existence began on April 25, 1941. Its organization was not completed in detail until May 8, 1941.

The circumstances surrounding the formation of petitioner were as follows:

Prior to January 1, 1941, the city of Mineral Wells (hereinafter referred to as the city) had leased">*142 to the United States Government between six and seven thousand acres of land situated in the vicinity of the city, to be used as an Army camp, which was established about the end of 1940. In December 1940, when construction of this camp was nearing completion, it was discovered that approximately 8,000 acres more would be required for a firing range and that unless the city could secure this additional land the whole project would be abandoned. The city was unsuccessful in its attempt to lease these additional 8,000 acres, as the owners of several pieces of property included therein refused to lease their property. It thus became apparent early in January 1941 that those tracts would have to be purchased. The city was not in a financial position to purchase the land; in fact, it was bankrupt and was operating under conditions imposed upon it by order of the Federal court which prevented it from raising the necessary money to purchase these properties. Consequently, 5 T.C. 336">*339 a group of businessmen in the city agreed to organize a corporation which would purchase these tracts of land with funds obtained from stock subscriptions. The corporation would then lease these tracts of">*143 land to the city, which in turn could sublet them to the Government. By the middle of February 1941 all of petitioner's capital stock had been subscribed for and $ 40,500 thereof paid for in cash. A bank account was opened in petitioner's name on or about February 15, 1941. The City National Bank and the State National Bank each loaned these businessmen ^{1945 U.S. Tax Ct. LEXIS 134">*144 to the leasing of these tracts. No purchase contracts were actually executed before payment was made in connection with the acquisition of the land.}

The businessmen referred to above purchased a tract consisting of 957.1 acres from Forest Windham for $ 23,877.60. Payment was made by two checks, both dated March 29, 1941, and signed as follows: "Camp Wolters Land Co., by H. E. Dennis, Chairman." They also purchased a tract consisting of 100 acres from C. C. Lamkin for $ 10,325; a tract consisting of 260 acres from W. H. Keener for $ 9,750; a tract consisting of 160 acres from Johnson and Watson for $ 4,000; and a tract consisting of 80 acres from Mary Alice Brock for $ 4,000. Payment for these other tracts was made by checks dated between March 17 and March 21, 1941.

The purchase of the five tracts of land referred to in the preceding paragraph consummated the oral agreements reached in January 1941 between the landowners and the city's businessmen, who later organized petitioner. A lease dated March 1, 1941, from petitioner to the city, the provisions of which are incorporated herein by reference in their entirety, which contained a description of nine tracts of land, including">*145 the above mentioned five tracts, was signed on behalf of petitioner by "A. H. Guinn, President" and for the city by "John C. Miller, Mayor Lessee," and was acknowledged before a notary public by A. H. Guinn on May 8, 1941, and by John C. Miller on May 9, 1941. The lease was filed for record with the county clerk of Parker County, Texas, on May 15, 1941. The term of the lease was from March 1, 1941, to February 28, 1942, and was renewable yearly at the city's option at 5 T.C. 336">*340 stated rentals, but not beyond October 1966. The rental was $ 10,901.02 a year for the first three years, payable in installments of $ 2,725.25 at the end of each three months, and thereafter $ 12,501.02 a year, payable in installments of $ 3,125.25 at the end of every three months. The lease provided that the premises were to be used exclusively for the purpose of bivouac, training area and target range; that the city should have the right to assign the lease to the United States and to sublet the premises for a similar purpose; that the premises were not to be used by anyone other than the United States; and:

* * * that the City shall require the Government, before the expiration of this lease or the ">*146 expiration of any renewal thereof, to restore the premises to the same condition as that existing at the time of entering upon the same under this lease, reasonable and ordinary wear and tear and damages by the elements or by circumstances over which the Government has no control, excepted.

The Government went into possession of this property in March 1941 and petitioner received rent from the city from March 1, 1941. The city has renewed the lease yearly through the renewal date in 1944. In its income tax returns for 1941 and 1942 petitioner included in gross income rents of $ 8,175.72 and $ 10,901.

Prior to March 1, 1941, the city had sublet other tracts of land to the Government. The owners of three of these tracts of land, L. E. Deakins, F. T. Maddux, and Mrs. J. M. Sullivan, had each reserved in their leases to the city a small tract of land of 5 or 10 acres each which included their home, barns, and other improvements. These tracts were located between the lands comprising the original Army camp and the lands leased to the city by petitioner. About the latter part of February 1941 it was discovered that the small tracts reserved by Deakins, Maddux, and Sullivan were in">*147 the direct line of fire. It was necessary to purchase these improvements, tear them down, and move them away; otherwise, the Army would not continue with the construction of the firing range. The city had no money to make the necessary purchases and so these improvements were purchased by the same group of businessmen who purchased the Windham, Lamkin, Keener, Johnson and Watson, and Brock tracts. Payment for the improvements on the Deakins tract was made by a check in the amount of $ 3,500 dated March 18, 1941, and signed, "Camp Wolters Land Co. by H. E. Dennis, Chairman"; payment to Maddux was by a check in the amount of $ 1,750, also dated March 18, 1941, and bearing the notation "Improvements on 5 acre tract," which was dated and signed in the same manner as the Deakins check; and payment to Sullivan, in the amount of $ 4,000, was made by a check dated March 19, 1941, bearing the notation "Improvements on 10 acre tract home place", and signed, "Camp Wolters Land Co. by H. E. Dennis." These improvements were sold and removed in April 1941. The $ 1,000 cash realized upon the sale of the improvements was turned over to petitioner in ">*341 1941. Petitioner also received $ ">*148 1,600 in 1941 from the United States Government, representing the normal cost of removing these improvements from the tracts. In its tax return for the calendar year 1941 petitioner reported this $ 1,600 as gross income, and in connection with the disposition of these improvements it claimed a net loss from the sale of property other than capital assets in the sum of $ 8,250.

Petitioner's accountant, attorney, and assistant secretary prepared the following schedule at the end of 1941, showing portion of the cost allocated to the improvements on the Lamkin, Windham, Johnson and Watson, Brock, and Keener tracts, for the purpose of determining depreciation for income tax purposes:

	Tract
Improvement
			Johnson
	Lamkin	Windham	and	Brock	Keener
			Watson
Orchard	$ 5,750
House	1,250	$ 2,000	$ 1,750	$ 1,000
Barns	250	1,000
Well and windmill	200	200
Fences	125	3,200	250	150
Granaries	250
Corrals		500
Tanks		250
Total	7,825	7,150	2,000	1,150

In 1942 a fire partially destroyed some of the improvements on the Windham tract. Petitioner carried no insurance on these improvements. It claimed a deduction for a loss by fire of a two-story">*149 ranch house, garage, barns, and corrals in its tax return for the calendar year 1942 in the net amount of $ 2,187.50 ($ 2,500 less $ 312.50 for depreciation). Petitioner has not waived any claim it might have against the United States Government in this respect.

The Lamkin tract had on it an orchard consisting of approximately 3,180 peach trees, which were coming into their fourth productive year. In 1940 the owner of these trees realized about $ 2,200 from them. Due to the difficulty of gaining access to the orchard, which was upon permission of the lessee, the orchard was in 1941 plowed only twice, for which work petitioner paid $ 25, and, although the trees produced a good crop, it was possible to gather only a small portion of the peaches to be marketed. In its 1941 return petitioner included in gross income $ 221.12 derived from the sale of peaches. Subsequently, it was impossible to care for and cultivate the orchard properly, and by 1944 it had lost all value.

When the lease covering the Windham, Lamkin, Keener, Johnson and Watson, and Brock tracts was negotiated, no discussion was had about the improvements on these tracts. The Army never requested the use of any of ">*150 these improvements and the lease contains no reference to them. When the Army took possession, it was thought ">*342 that no damage from direct hits would occur to the houses on these tracts. It was believed that the Lamkin tract would fall within a safety zone. It was further believed that the house on the Windham tract could be used on Saturday afternoons and Sundays as a clubhouse. However, no one was permitted to live in the houses and permission of the lessee was required to gain access to the properties. After December 7, 1941, the Army engaged in a much heavier and almost constant training program and it was impossible for petitioner to gain access to the property. In 1943 petitioner permitted the Army, at its request, to use houses on the Windham and Brock properties in connection with its street-fighting training program. Such permission was given to the Army after an inspection revealed that all the houses on the tracts were, due to the constant firing of heavy guns, in such bad condition that they had no salvage value.

In schedule J of its 1941 tax return petitioner claimed depreciation in the net amount of $ 2,353.41. This figure was arrived at by totaling the">*151 cost of the various improvements ($ 18,125), dividing that sum by five (i. e., applying an annual rate of depreciation of 20 percent), and then averaging that figure ($ 3,625) over the period from May 8 to December 31, 1941 (on the theory that petitioner was organized on May 8, 1941, and these properties acquired on that date). The deduction was disallowed by the Commissioner.

In schedule J of its 1942 tax return petitioner claimed depreciation in the net amount of $ 3,906.25. This figure was arrived at by totaling the cost of the various improvements ($ 15,625), ^{1945 U.S. Tax Ct. LEXIS 134">*152 and dividing that by four. This schedule also shows the amount of depreciation allowed in 1941 to be $ 2,040.91, 5 T.C. 336">*343 of incorporation were duly executed on March 16, 1941; that $ 40,500 out of a total of $ 60,000 subscribed was paid in for its capital stock before February 15, 1941; that it had borrowed money and commenced the active operation of business not later than March 16, 1941. Nevertheless, petitioner's contention must be rejected. Article 1313, Vernon's Annotated Texas Statutes, as amended by Acts 1929, 41 Leg., p. 530, ch. 255, sec. 1, provides in part as follows: ">*153 "The existence of the corporation shall date from the filing of the charter in the office of the Secretary of State." The Court of Civil Appeals of Texas in an early decision, Bank of De Soto v. Reed, 50 Tex. Civ. App. 102">50 Tex. Civ. App. 102; 109 S.W. 256, 259 (1908), stated that, "When the articles of incorporation have been filed in the office of the Secretary of State, then the association becomes a corporation * * * and, while the filing of the charter makes it a corporation, the failure to comply with some one or more of the prerequisites makes it a corporation de facto, but the filing of the charter is essential to the creation of the corporation as either the one [de jure] or the other [de facto]. [Citations]." (Parenthetical material and italics supplied.) This rule of law had been set forth in an earlier opinion, Weatherford, M. W. & N. W. Ry. Co. v. Granger, 86 Tex. 350">86 Tex. 350; 24 S.W. 795, 796, and was adopted by the Supreme Court of Texas in the more recent case of Payne v. Bracken, 131 Tex. 394">131 Tex. 394; 115 S. W. (2d) 903 (1938).">*154}

The Supreme Court has said that "Congress cannot convert into a corporation an organization which by the law of its state is deemed to be a partnership," Burk-Waggoner Oil Assn. v. Hopkins, 269 U.S. 110">269 U.S. 110, and no more have the courts the power to give life to a corporation prior to the date its existence begins under the laws of the state of its origin. Under the law of Texas the incorporators prior to the date of the coming into existence of the corporation are liable as partners. Smith v. First Nat. Bank, 43 Tex. Civ. App. 495">43 Tex. Civ. App. 495; 95 S.W. 1111; 50 Tex. Civ. App. 102">Bank of De Soto v. Reed, supra;William Cameron & Co. v. Trueheart, 165 S.W. 58.

In 86 Tex. 350">Weatherford, M. W. & N. W. Ry. Co. v. Granger, supra, it is stated:

* * * A promoter, though he purport to act on behalf of the projected corporation, and not for himself, cannot be treated as agent, because the nominal principal is not then in existence; and hence, where there is nothing more than a contract by a promoter, in which he undertakes to">*155 bind the future corporation, it is generally conceded that it cannot be enforced. * * * The promoters themselves are liable upon the contract, unless the person with whom they engage agrees to look to some other fund for payment. * * * It is also generally held that contracts by promoters, made on behalf of the corporation within the scope of its general authority, may be adopted by the latter after its organization. Some of the courts say they may be ratified, but ratification presupposes a principal existing at the time of the agent's action, and it seems to us, therefore, that the term is not applicable in its technical sense. * * * A ">*344 contract made by promoters may be adopted by a corporation expressly or impliedly by exercising rights under it; but otherwise it is not binding upon such corporations. * * *

Again, in Byerly v. Camey, 161 S. W. (2d) 1105, 1110, it is stated;

* * * The promoters are not regarded as agents of the corporation later to be formed, nor are their contracts binding upon the corporation, unless made so by charter or statute, or unless assumed by the corporation. 18 C. J. S. Corporations, § 120, p. 522; Weatherford, M. W. & N. W. Ry. Co. v. Granger, 86 Tex. 350">86 Tex. 350, 24 S.W. 795">*156 * * *

It is stated in 18 C. J. S. § 122 b, p. 525:

While it is often said, and has sometimes been held, that a corporation may ratify contracts made by its promoters before incorporation, by the great weight of authority the act of the corporation in adopting contracts entered into by promoters is not a ratification of such contracts in the proper sense, as the term is used in the law of agency, since the promoters could not be its agents prior to its creation, but it is in legal effect a novation or the making of a contract by the corporation as of the date of the adoption. * * * [Italics supplied.]

No reliance is placed upon any contention that section 3797 (a) (3) of the code, providing that the term "corporation" includes associations, has any application to the instant case. It is to be noted also that even if there was, prior to April 25, 1941, some association taxable as a corporation, it would not be the same taxable entity as the petitioner here. In West Point Marion Coal Co., 19 B. T. A. 945, we considered a situation where a corporation was formed in December 1921 to take over the business of an association operating under a Massachusetts">*157 deed of trust, one of the three members of which association died in August 1921. The corporation continued the business effective January 1, 1922, and sought in 1922 to deduct the net loss sustained in 1921 by the association. The stockholders of the corporation, including the estate of the associate who died in 1921, were the same and held the stock in the same proportion as the shareholders of the association had held its shares. We held that the corporation was a taxable entity separate and distinct from its predecessor and was not entitled to the deduction, saying that the corporation sustained no net loss in the year 1921. We hold that petitioner became a corporation on April 25, 1941, when its charter was filed with, and approved by, the Secretary of State of Texas. ^{New Colonial Ice Co. v. Helvering, 292 U.S. 435">292 U.S. 435.}

">*158 Respondent contends that petitioner did not become a separate taxable entity until May 8, 1941. We do not think that respondent's contention that petitioner did not become a taxable entity until May 8, ">*345 1941, should be sustained either because petitioner stated in both its 1941 and 1942 tax returns that its date of incorporation was May 8, 1941, or because the lease from petitioner to the city was executed on behalf of the former on May 8, 1941. Respondent agrees that the general rule is that the date of the granting of the charter by the Secretary of State of Texas is the beginning date of the existence of a corporation for Federal income tax liability of the corporation. See Board of Trade Bldg. v. United States, 1 Fed. Supp. 862; Athol Mfg. Co., 22 B. T. A. 105; affd., 54 Fed. (2d) 230. He contends, however, that there is an exception to this rule where the corporation was not organized until some time after the granting of the charter. The evidence on the question of fact involved in this respect is sleazy, ^{1945 U.S. Tax Ct. LEXIS 134">*163 and any deficiency therein must be resolved against petitioner, ">*159 whose burden it is to overcome the presumption of correctness which attaches to respondent's determination. Therefore, we have found as a fact that petitioner's organization was not completed in detail until May 8, 1941. However, we are of the opinion it does not follow, as a matter of law, that petitioner's existence as a taxable entity did not begin until May 8, 1941. Respondent cites in support of his contention one case only, Florida Grocery Co., 1 B. T. A. 412. In that case the principal stockholder of a Georgia corporation and two of its employees determined to organize a corporation under the laws of Florida. It was agreed that the interested parties would be these three individuals and the Georgia corporation, and that the business would be conducted under the name of the Florida Grocery Co. Business was begun under that name about October 1, 1916. Florida Grocery Co. was chartered on April 17, 1917, and it held its organization meeting, elected officers, and issued its certificates of stock on May 28, 1917. Also on May 28, 1917, a bill of sale was executed by the interested parties "as copartners doing business under the firm ">*160 name and style of the Florida Grocery Co.," by which all of the assets of the alleged partnership were transferred to the taxpayer, and the latter continued business from that date. The Commissioner held that the Florida Grocery Co. was an association within the provisions of section 10 (a) of the Revenue Act of 1917, from January 1 to April 17, 1917, and that the taxpayer was taxable as a corporation for the entire year 1917. The Board of Tax Appeals 5 T.C. 336">*346 held that from January 1 to May 28, 1917, the Florida Grocery Co. was a joint venture and should be taxed as a corporation from May 28, 1917. From the finding that the Florida Grocery Co. was a joint venture and not a corporation for that part of 1917 prior to the acquisition by the Florida Grocery Co. (the corporation) of the assets of its predecessor, it followed that the Florida Grocery Co. could not be taxed as a corporation for the entire calendar year 1917. It thus became immaterial whether the existence of the Florida Grocery Co. (the corporation) as a separate taxable entity began on April 17 or May 28, 1917, because it acquired no assets and had no income until May 28, 1917. The joint venture continued ">*161 to function until May 28, 1917, and the tax liability of the Florida Grocery Co. as a corporation would be the same for 1917 whether it was taxed as such from April 17, 1917, or from May 28, 1917. Therefore, we do not regard the case of Florida Grocery Co., supra, as authority for the proposition that where a corporation, as in the instant case, is chartered on April 25, 1941, and is itself engaged in business and has income from that date, but the details of whose organization are not completed until May 8, 1941, the existence of that corporation as a taxable entity does not begin until May 8, 1941. We are of the opinion that the better view is that under the circumstances present in the instant case petitioner's existence as a taxable entity began on April 25, 1941. This view alone is in accord with the sound administration of section 711 (a) (3) (A) of the code, providing for the annualization of excess profits net income where petitioner's taxable year is a period of less than 12 months. Florida Grocery Co. case, supra, and that affords another ground for distinction between that">*162 case and this. In Kamin Chevrolet Co., 3 T.C. 1076, in applying section 711 (a) (3) (A), we held that a de facto dissolution was effective to measure the number of days in petitioner's short taxable year. So, we are here of the opinion that the beginning of petitioner's existence as a de facto corporation on April 25, 1941, determines the beginning of its existence as a taxable entity for the purpose of the income and excess profits tax. Nothing in the law of Texas is inconsistent with this conclusion. Bank of De Soto v. Reed, 50 Tex. Civ. App. 102">50 Tex. Civ. App. 102; 109 S.W. 256, 259; Roaring Springs Townsite Co. v. Paducah Co. (Texas), 164 S.W. 50. Not only does the respondent, as above seen, agree that the general rule is that the date of filing of a charter is the date of inception of a corporation, but the rule is followed in S. M. 3136, C. B. IV-1, p. 205, quoting and construing the Texas statute above referred to and holding that a Texas corporation had corporate existence from the date of record of its charter with the Secretary of State of Texas.}

">*347 Therefore, we hold that petitioner shall be considered as having come into existence as a separate taxable entity on April 25, 1941, and that such date shall be used for the purpose of determining whether petitioner is liable for an excess profits tax for 1941.

The petitioner raises the question, on brief, whether lease rentals for the period March 1 to April 25, 1941, when petitioner's charter was approved, are properly includible in petitioner's income for 1941. This issue was not raised by the pleadings. It was raised by petitioner (in the alternative, in case we should hold that the petitioner's corporate existence did not begin on March 16, 1941) and was suggested for the first time on brief. This Court, therefore, will not disturb the Commissioner's determination in this respect. Louis Wellhouse, Jr., 3 T.C. 363, 371, and cases cited therein. Though the petitioner also contends in the alternative that the rentals constitute an asset of the incorporators contributing">*164 to the petitioner's capital, and did not come to the petitioner as its own income, no facts appear to show that stock was issued for the amount of rentals. We accordingly hold that the lease rentals received by petitioner for the period March 1 to April 25, 1941, are includible in petitioner's income for 1941.

Our next question is whether petitioner is entitled to deduct from its gross income for 1941 any amount as a result of the transaction by which the promoters purchased in March 1941 the improvements on the Deakins, Maddux, and Sullivan tracts, which improvements were sold and removed in April 1941. The burden on this issue is upon petitioner to establish that it sustained a loss or a deductible expense as a result of this transaction. In its 1941 tax return petitioner claimed it sustained a loss of $ 8,250 "from the sale or exchange of property other than capital assets." However, on brief, it has abandoned that contention and now urges that, "The net cost to petitioner, viz., $ 6,650.00, ^{1945 U.S. Tax Ct. LEXIS 134">*165 an expenditure amortizable over the life of the original lease and any reasonably foreseeable renewals thereof, which together did not exceed a period of five years." Petitioner, to sustain its contentions on this issue, must establish that it acquired, sold, and removed the improvements after it came into existence, that is, after April 25, 1941. It has failed to so establish. The only evidence is that the improvements were acquired in March and sold and removed in April 1941. Plainly then, all this may have transpired before April 25, the inception of petitioner's existence. We must and do conclude, therefore, that petitioner has not shown that it received the improvements as part payment for the subscription of its shares or otherwise, because the improvements 5 T.C. 336">*348 may have been sold and removed by the promoters prior to April 25, 1941. When petitioner executed the lease of the five tracts of land (Brock, Lamkin, Keener, Johnson and Watson, and Windham), the transaction by which the improvements on the Deakins, Maddux, and Sullivan tracts had been purchased, sold, and removed may have been completed in all its phases by the promoters and not by the petitioner, and petitioner">*166 could not have sustained a deductible expense.}

We hold, therefore, that petitioner is not shown to be entitled to deduction from its gross income for 1941 on account of the transactions by which the improvements on the Deakins, Maddux, and Sullivan tracts were purchased, sold, and removed, and that the Commissioner did not err in disallowing the deduction of $ 8,250 claimed by petitioner in its 1941 return.

In his deficiency notice the Commissioner allowed petitioner a deduction from its gross income for 1941 in the amount of $ 359.32, under section 23 (q) of the Internal Revenue Code, holding that the net cost of the transaction by which the improvements on the Deakins, Maddux, and Sullivan tracts were purchased, sold, and removed, constituted a gift to the United States Government. In his amended answer, however, respondent alleged that no deduction was allowable. We note that section 23 (q) of the code, as amended by section">*167 224 (b) and section 229 of the Revenue Act of 1939, even if otherwise applicable, could not result in an allowable deduction to petitioner and that the conclusion reached in the preceding paragraph is not to be altered, because the Internal Revenue Code did not provide for the allowance of a deduction for gifts by a corporation to the United States Government until section 23 (q) was amended by section 125 of the Revenue Act of 1942, which is applicable only with respect to taxable years beginning after December 31, 1941.

In his deficiency notice the Commissioner eliminated from petitioner's gross income the $ 1,600 paid by the United States Government. He now asserts in his amended answer that, if he erred in disallowing the $ 8,250 deduction claimed by petitioner, then the $ 1,600 should be restored to income for 1941. The Commissioner also asserts in his amended answer that if the $ 8,250 or the $ 9,250 (the gross cost of the Deakins, Maddux, and Sullivan tracts) is deductible by petitioner in 1941, then the $ 1,000 received upon the sale of the improvements should be added to petitioner's income for 1941. Having found that the Commissioner did not err in disallowing the deduction">*168 of $ 8,250 claimed by petitioner on its 1941 return, we have no occasion to consider these alternative contentions of respondent. Therefore, we hold that neither the $ 1,600 nor the $ 1,000 is includible in petitioner's income for 1941.

">*349 Our next question is whether and in what amounts petitioner is entitled to an allowance for depreciation in 1941 and 1942 on the buildings and improvements on the following tracts: Windham, Lamkin, Johnson and Watson, and Brock. Section 23 (l) of the code, as amended by section 121 of the Revenue Act of 1942, provides as follows:

In computing net income there shall be allowed as deductions:

* * * *

(1) Depreciation. -- A reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) --

(1) of property used in the trade or business, or

(2) of property held for the production of income. * * *

However, even assuming that petitioner is in all respects otherwise entitled to an allowance for depreciation on these buildings and improvements for the taxable periods here involved, nevertheless such an allowance can not be permitted in the absence of proof of the cost of these improvements on the date">*169 of their acquisition by petitioner. Petitioner offered in evidence Exhibit 8, which was admitted without objection. However, it is merely a worksheet prepared at the end of 1941 by petitioner's attorney, accountant, and assistant secretary for the purpose of arriving at a proper depreciation schedule. This is not proof of cost of the improvements, for it was necessary to allocate the original lump sum cost of land and improvements between such land and improvements in proportion to the values of each; and there is no proof as to the qualifications of the authors of the exhibit to determine such values. Exhibit 9 also purports to allocate the purchase price between land and improvements, but there is no proof even as to who prepared it. Exhibits 2 and 3, the income tax returns of petitioner, contain statements (in claiming depreciation) as to the allocated values, but those are of course self-serving and may not be given weight. The only other evidence of the cost of these improvements was the oral testimony of one Lamkin, who was not qualified to testify with respect to improvements on tracts other than that which formerly belonged to him. As to the improvements on his own ">*170 tract which he sold to the promoters, he testified as to certain named improvements, and his investment therein, and that a peach orchard on the land was worth about $ 6,360 at the time of purchase by petitioner, but the record contains no evidence of cost to petitioner of those improvements on the date it acquired them. There is no evidence as to how purchaser and seller allocated between land and improvements in transacting the matter. It is entirely consistent with the state of the record in this case (particularly considering the purpose of the purchaser as to use of the land "to be used exclusively for the purpose of bivouac training area and target range") that the entire cost to petitioner went to the purchase of the land. We are of ">*350 the opinion that petitioner has failed to sustain its burden of proving the cost to it at the time of acquisition by it of the various improvements on the Brock, Lamkin, Johnson and Watson, and Windham tracts.

We hold, therefore, that petitioner is not entitled to a deduction for depreciation in 1941 or in 1942.

The next question is whether petitioner is entitled to a deduction under section 23 (f) of the code ^{1945 U.S. Tax Ct. LEXIS 134">*171 return for 1942 for a loss allegedly resulting from the destruction by fire of "2 Story RanchHouse, Garage, Barns, Corrals" on the Windham tract, one of those as to which we have just considered the question of depreciation. Loss is claimed in the net amount of $ 2,187.50 ($ 2,500 less depreciation previously allowed in the amount of $ 312.50). There being, as above concluded, no proof of the value of the improvements destroyed by the fire, the Commissioner's disallowance of this deduction must be sustained.}

The computation under Rule 50 pursuant to our determination of the issues above will resolve the question whether respondent erred in determining that petitioner is liable for a deficiency in excess profits taxes for 1941. We further hold that, if">*172 excess profits taxes are due from petitioner for 1941, petitioner is liable for a 25 percent penalty thereon, pursuant to section 291 of the code, Burford Oil Co., 4 T.C. 613.

Decision will be entered under Rule 50.

MURDOCK

Murdock, J., dissenting: I disagree with the holding that the taxable period of this taxable entity began on April 25, 1941, when the application for the charter was filed with the Secretary of State of Texas. The charter wasn't actually issued until May 8, yet the opinion points out that the corporation could be a taxable entity, for Federal income tax purposes, before it became a complete legal entity under the laws of the state. The laws of Texas are not controlling in deciding this question. I think it became a taxable entity for Federal income tax purposes even before it filed its application for the charter.

This case is distinguishable from others in which one corporation succeeded to the business of another or in which the incorporators carried on a business for their own benefit prior to turning it over to a corporation. Here the incorporators actually started the business on behalf of the corporation then being">*173 organized, income was received from that business prior to the application for the charter, and the 5 T.C. 336">*351 receipts were retained for the benefit of the corporation and not by or for the benefit of the promoters. There would have been a taxable entity for Federal income tax purposes and its period would have begun before April 25 if no application for a charter had been made during 1941.

Leases were entered into in the name of the corporation and on its behalf, and it received the rents from those leases for a period prior to April 25. If this taxable entity is not taxable with that income, then who is? Furthermore, the petitioner should not be taxed with the income for the long period, while at the same time it is held that the short period is the taxable period. To do so would result in distortion when we come to the problem of annualizing the income for the purpose of the excess profits tax. I think we should take the full income for the full period.

The petitioner is not entitled to any depreciation on the improvements on the land for an additional reason not stated in the majority opinion, and that is because the improvements were never used and were never intended to">*174 be used in the business of the petitioner. It acquired the land for the purpose of leasing it to the United States Government for a camp site. The Government had no interest in the improvements and the petitioner knew that. Therefore, the cost of any improvements under such circumstances should go into the cost of the land and should not be recovered through a deduction either for depreciation or loss from destruction. Cf. Regulations 111, § 29.23 (e)-2; Robert B. Griffin, 17 B. T. A. 255; Lansburgh & Brother, Inc., 23 B. T. A. 66; Liberty Baking Co. v. Heiner, 37 Fed. (2d) 703.

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Footnotes

• 1. In his deficiency notice, respondent allowed petitioner a deduction of $ 359.32 (5 percent of the net cost of this transaction, i. e., 5 percent of $ 7,186.30) under section 23 (q), I. R. C. However, in his amended answer, respondent affirmatively alleges that petitioner is not entitled under section 23 (q)↩ to deduct any amount on account of this transaction.

• 2. In connection with this question the parties have stipulated that if petitioner actually came into existence on or before March 16, 1941, there will be neither excess profits tax nor penalty for 1941.↩

• 3. The inference that the loan was made to the businessmen and not to petitioner is required by the fact that without the use of part of that money the purchases totaling $ 58,582.19 made prior to April 25, 1941, when petitioner's charter was granted, could not have been paid for.↩

• 4. The difference of $ 2,500 between the cost of these improvements in the 1941 and 1942 returns is explained by the $ 2,500 loss due to fire claimed in the 1942 return.↩

• 5. The difference of $ 312.50 between the amount of depreciation claimed in the 1941 return and the amount shown in the 1942 return as having been allowed in 1941 is explained by the fact that the amount of the loss due to fire claimed in the 1942 return ($ 2,500) was reduced by $ 312.50, which was the amount allowed for depreciation in 1941 on the property destroyed.↩

• 6. Cf. In re Johnson-Hart Co↩. (Dist. Ct. Minn.), 34 Fed. (2d) 183.

• 7. One of the petitioner's directors testified as follows in response to a question requesting him to explain why the lease from petitioner to the city was not acknowledged until May 8, 1941:

  "A Well, I presume at that time the organization of the land company was complete, I suppose it was then that we received the charter; we had made an application for a charter before that time and we had all signed up for it, and our attorney was handling that part of it.

  "I just assume that that was the date that we got our charter.

  "Q But the signatures were not acknowledged until May 8th.

  "A I don't know about that, I don't recall exactly the circumstances about that, but I do know that the agreement was made back in January with reference to the lease." [Italics supplied.]↩

• 8. See General Aniline & Film Corporation, 3 T.C. 1070↩.

• 9. The $ 1,600 difference is made up of $ 1,600 received by petitioner from the Government↩

• 10. SEC. 23. DEDUCTIONS FROM GROSS INCOME.

  In computing net income there shall be allowed as deductions.

  * * * *

  (f) Losses by Corporations. -- In the case of a corporation, losses sustained during the taxable year and not compensated for by insurance or otherwise.↩