Camp Wolters Land Co. v. Comm'r of Internal Revenue

• Decision Date: 28 June 1945
• Docket Number: Docket No. 4709.
• Parties: CAMP WOLTERS LAND COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

5 T.C. 336

CAMP WOLTERS LAND COMPANY, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 4709.

Tax Court of the United States.

Promulgated June 28, 1945.

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 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 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 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.

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 $263.26, together with a penalty of $65.82 for failure to file an excess profits tax 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 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.¹

(d) However, if the Commissioner's determination is found to be in error the question of whether either $1,000, representing the proceeds of the sale in 1941, or $1,600, received by petitioner in 1941 from the United States Government in connection 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 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 1941.²

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 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 there 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, 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 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 businessmen³ $9,741.04 and the Southwestern Bell Telephone Co. donated $750.

Negotiations between these businessmen and the owners of these tracts of land began early in January 1941 and it was understood that the sale and purchase of these tract would be entered into by the owners with the businessmen and not with the city. The businessmen had an oral understanding with the city with respect 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 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...