18 T.C. 96">*96 The Commissioner determined a deficiency in the excess profits tax of the petitioner of $ 15,788.56 for its fiscal year ended July 31, 1943, and one of $ 10,665.66 for its fiscal year ended July 31, 1944. The only issue for decision is whether use of the excess profits credit based upon invested capital to which the petitioner is1952 U.S. Tax Ct. LEXIS 217">*218 entitled will result in lesser tax than if the credit based upon income is used.

FINDINGS OF FACT.

The petitioner was incorporated under the laws of the Territory of Alaska on January 19, 1921. It filed its returns for the taxable years with the collector of internal revenue for the district of Washington.

Evan Jones at some time prior to July 24, 1920, made application to the United States for a lease on coal lands in the Territory of Alaska. He and four associates entered into an agreement on July 24, 1920, reciting that he had made application for the lease in his own name but it was intended for the use and benefit of all of the parties to the agreement. They agreed that the parties would form a corporation to be known as Evan Jones Coal Company as soon as practicable after the granting of the lease and Jones would transfer the lease to the corporation; the four associates would deposit $ 500 apiece 18 T.C. 96">*97 in a local bank for the use of the company, and, upon the granting of the lease, would each deposit an additional $ 1,000 and 30 days thereafter an additional $ 1,000 each, for the development and improvement of the lease; one of the associates was to be treasurer of the1952 U.S. Tax Ct. LEXIS 217">*219 company and Jones was to be superintendent in charge of mining operations at a salary of $ 300 a month, plus traveling expenses; all parties to the agreement were to have equal rights under the lease, were to share equally in the profits derived from the operations of the property, and, upon the organization of the corporation, were to have equal amounts of its capital stock; upon expenditure of the $ 10,000 already mentioned, the four associates were each to advance $ 2,500 and Jones was to advance $ 1,200, pro rata, as the money might be needed by the company; the associates were to furnish a bond required by the United States upon the granting of the lease, provided that when the monies advanced by each should amount to $ 3,800 Jones was to assume an equal liability on the bond and be responsible for an equal portion of any monies due under the bond; and, if the lease was not granted, all the unexpended monies advanced by the associates were to be returned to them, and they were to pay Jones a total of $ 3,000 "in full compensation for all time, labor, and money expended" by him.

The lease, dated August 10, 1920, between Evan Jones and the Department of the Interior permitting 1952 U.S. Tax Ct. LEXIS 217">*220 the former to mine coal on a royalty basis was acknowledged by Jones on September 14, 1920.

The five individuals signed and acknowledged Articles of Incorporation of the Evan Jones Coal Company on September 4, 1920, but they did not file those Articles with the proper authorities of the Territory of Alaska until January 17, 1921.

The five individuals held a meeting on September 24, 1920, which they described as the first meeting of the incorporators of Evan Jones Coal Company. They purported to elect officers to act until such time as the incorporation of the company was completed. They adopted by-laws.

A corporate seal was obtained in 1920.

The board of directors of the petitioner held its first meeting on February 9, 1921. Officers were elected and the acts of the incorporators were ratified and approved. Jones submitted at that meeting a proposal that, in order to carry out the agreement of July 24, 1920, he would transfer the lease to the corporation "at a price of $ 128,800.00, such price to be given me in shares of stock of the Company at the par value of One Dollar per share" and he would purchase 1,200 additional shares from the company at $ 1 per share. The directors 1952 U.S. Tax Ct. LEXIS 217">*221 then adopted a resolution reciting that the lease had a reasonable value of $ 128,800 in their judgment and they accepted the proposal of Jones to 18 T.C. 96">*98 transfer the lease to the corporation in exchange for 128,800 shares of its stock and to issue an additional 1,200 shares to him for cash.

Minutes of a meeting of the board of directors of the petitioner held on March 5, 1921, indicate that up to that time one of the associates "was still $ 1,000.00 short of having completed his original stock subscription of $ 5,000.00, he having paid in only the sum of $ 4,000.00."

130,000 shares of the stock of the petitioner were issued to Jones on March 5, 1921, and the certificate was immediately canceled, after which the shares were issued in equal portions to the five associates. The record does not show whether or not any other stock was issued or how much cash was paid in for shares.

The fair market value of the lease at the time it was acquired by the corporation was less than $ 20,000.

OPINION.

The petitioner is entitled to the excess profits credit based upon income or to one based upon invested capital whichever is more beneficial. Section 712. The Commissioner has allowed the proper1952 U.S. Tax Ct. LEXIS 217">*222 credit based upon income. The petitioner claims that the credit to which it is entitled based upon invested capital is larger since its equity invested capital includes $ 128,800 representing the value of the lease paid in for stock, and that event took place in 1920. The Commissioner agrees that the credit based upon invested capital will result in the lesser tax if, but only if, the acquisition of the lease is reflected in equity invested capital at approximately $ 128,800. Section 718 (a) (2), as it applied to the taxable years, provided that property paid in for stock should be included in the computation of equity invested capital "in an amount equal to its basis (unadjusted) for determining loss upon sale or exchange."

The general rule is that the basis of property for determining loss upon a sale or exchange is the cost of the property, but section 113 (a) (8), as it applied to the taxable years, provided that if the property was acquired after December 31, 1920, by a corporation by the issuance of its stock or securities in connection with a transaction described in section 112 (b) (5) then the basis shall be the same as it would be in the hands of the transferor adjusted1952 U.S. Tax Ct. LEXIS 217">*223 for any gain or loss recognized to the transferor upon the transfer under the law applicable to the year in which the transfer was made. Section 112 (b) (5) provided that no gain or loss should be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, immediately after the exchange such person or persons are in control of the corporation, and the amount of stock received by each is substantially in proportion to his interest in the property prior to the exchange. Section 202 (c) (3) of the 18 T.C. 96">*99 Revenue Act of 1921 contained a similar provision. The five associates had equal interests in the lease prior to the transfer and each received and owned one-fifth of the stock of the petitioner as a result of the transfer. Thus, the transaction whereby the petitioner acquired this lease comes precisely within those provisions and no gain or loss was recognizable on that transaction. The basis of the lease to the petitioner for loss is thus the transferor's basis.

The petitioner tries to escape that result by arguing that the property was acquired prior to December 31, 1920. Section 113 (a) (8) 1952 U.S. Tax Ct. LEXIS 217">*224 provides "If the property was acquired after December 31, 1920, by a corporation -- (A) by the issuance of its stock or securities in connection with a transaction described in section 112 (b) (5) * * *." The lease was acquired solely by the issuance of stock. Obviously the acquisition was not completed within the meaning of section 113 (a) (8) (A) until the issuance of the stock which necessarily took place after December 31, 1920, since there was no corporation and there was no stock until after that date.

The above conclusion is fatal to the petitioner's contention. It has never addressed itself to the question of the basis of the transferors, does not claim that that basis was substantial, and the record does not show what that basis was. However, it does show that it was relatively small, for example, less than one-fifth of the $ 128,800, and such a basis would do the petitioner no good.

Even if the transaction of acquisition took place prior to December 31, 1920, the petitioner would still fail to make a case. The basis of the lease would then be its cost. Its cost was in shares of stock of the petitioner. The only asset back of those shares so far as this record shows 1952 U.S. Tax Ct. LEXIS 217">*225 was the lease. See Regulations 112, section 35.718-1. The petitioner contends, but has failed to prove, that the value of the lease at that time was $ 128,800. It must rely entirely upon the minutes of the meeting of the board of directors for February 9, 1921, in which it is recited that the property offered by Jones in exchange for the 128,800 shares of the petitioner "is adjudged by this board to be of the reasonable value of $ 128,800.00." However, the evidence as a whole shows that the value of the lease was not more than a small part of that amount.

Decision will be entered for the respondent.