29 T.C. 754">*755 Respondent determined a deficiency in petitioner's income and excess profits tax for the taxable year January 4 to December 31, 1951, in the amount of $ 8,636.74. This deficiency results from respondent's determination that "pursuant to the provisions of sections 15 (c) and 129 of the Internal Revenue Code, [petitioner is] not entitled to the benefit of the $ 25,000.00 exemption from surtax provided in section 15 (b), or the $ 25,000.00 minimum excess profits credit provided in the last sentence of section 431, or the alternative amount provided in section 430 (e) (1) (A) of the Internal Revenue Code." The entire amount of the deficiency is here in issue.

FINDINGS OF FACT.

The parties have filed herein a partial stipulation of facts. We find the facts to be as stipulated.

Petitioner is a corporation organized under the laws of Florida, with its offices located in Lakeland, Florida, and its principal place of business in Tallahassee. It was incorporated on January 4, 1951. Its certificate of incorporation recites as a part of "[the] general nature of the business to be transacted" 1958 U.S. Tax Ct. LEXIS 263">*266 the following:

To operate theatre concessions, to buy, sell and deal in food products, confectioneries, soft drinks and other articles and products customarily dealt in by theatre concessions, and to carry on any trade or business incidental thereto or connected therewith; to take, acquire, purchase, hold, own, rent, lease, sell, exchange, mortgage, improve, cultivate, develop, and otherwise deal in and dispose of any and all property, real and personal, of every description, incidental to or capable of being used in connection with the aforesaid businesses, or any of them; * * *

Petitioner's authorized capital stock was $ 2,000, all of which was subscribed for and issued to Tallahassee Enterprises, Inc., a Florida corporation, which owned and operated 4 theaters in Tallahassee, and which had been engaged in business since at least 1936.

Under date of February 7, 1951, a lease agreement was executed by and between petitioner and Tallahassee Enterprises, Inc., which contained the following provisions:

That the Lessor does hereby demise and lease unto the Lessee the spaces and facilities now being used for the carrying on of the concession business by the Lessor in its theatres located1958 U.S. Tax Ct. LEXIS 263">*267 in Tallahassee, Florida, namely, Florida, State, Ritz and Tallahassee Drive-In Theatres, from the 22nd day of February, 1951 for the term of five (5) years, unless sooner terminated by the terms of this agreement, said lease to be upon the terms and conditions hereinafter set out: --

(1) The Lessor covenants for the Lessee the quiet enjoyment of said term, and that if the said buildings shall be so injured by fire as to render them untenantable for the operation of the concession business, this lease shall be terminated.

(2) The Lessee covenants and agrees to use the space covered by this lease for no other business or purpose other than the carrying on of the concession business, such as has been carried on by the Lessor in the past, and that it will 29 T.C. 754">*756 not assign this lease without the written permission from the Lessor, and will leave the premises in as good repair as they now are, ordinary wear and tear excepted, and that at the expiration of said term, it will deliver to Lessor, its successors or assigns, quiet and peaceful possession of the said premises, and that the Lessor may enter for default of ten (10) days in the payment of any installment of rent or for the breach1958 U.S. Tax Ct. LEXIS 263">*268 of any convenant herein contained.

(3) The Lessee further covenants and agrees to keep accurate records of all concession sales in each of the theatres aforesaid and to pay to Lessor as rental on the space and equipment used in such business covered by this lease, on or before ten (10) days following the close of each month during the term of this lease, percentages of such gross receipts in the respective theatres, as follows:

(4) At the close of business on February 21, 1951, an accurate inventory will be made of any and all merchandise and supplies on hand in the respective concession businesses, and the Lessee agrees to pay Lessor therefor a sum equal to its costs for such merchandise and supplies, the payment therefor to be made within ten (10) days from the effective date of this lease.

(5) It is understood and agreed by and between the parties that the use of the space and equipment aforesaid will include the necessary lights, water and heat needed in connection with the operation of the business.

(6) This lease shall not be recorded without the consent of the Lessor, and shall be1958 U.S. Tax Ct. LEXIS 263">*269 binding upon the parties hereto, and their successors and assigns.

The signatures on behalf of both parties to the lease were by the same individuals.

The officers and directors of petitioner are as follows: B. B. Garner, president; B. F. Hyde, vice president; F. L. Alig, treasurer; and Helen Forney, secretary. The officers and directors of Tallahassee Enterprises, Inc., are: B. B. Garner, president; G. W. Worm, treasurer; and Helen Forney, secretary. There were five stockholders of Tallahassee Enterprises, Inc.

On or shortly subsequent to February 7, 1951, petitioner began to conduct and carry on the same theater concession business at the theaters of Tallahassee Enterprises, Inc., as that carried on by the latter prior thereto, using the same space and equipment. There was no change in or expansion of the business.

The execution of the lease agreement by Tallahassee Enterprises, Inc., was authorized by its directors at a meeting recited to have been held on February 7, 1951. The pertinent part of the minutes of that meeting read as follows:

After considerable discussion, it was unanimously voted that it would be to the best interest of the corporation that the concession business1958 U.S. Tax Ct. LEXIS 263">*270 be separated from the theatre business proper, and that the same be operated by the wholly owned subsidiary.

It was further unanimously voted that the officers of the corporation be, and they are hereby, authorized and empowered to enter into a lease agreement with Theatre Concessions, Inc. for the lease of the concession business and of 29 T.C. 754">*757 the equipment now being used in connection therewith, said lease to cover the rental of the space now being used in connection with the carrying on of such concession business, the rental to be charged in this connection to be not less than 10% of the gross receipts in the Florida, Ritz and State Theatres and not less than 15% of the gross receipts in the Tallahassee Drive-In Theatre, which said rentals were considered and deemed by the Directors to be fair and reasonable both from the standpoint of Tallahassee Enterprises, Inc. and from Theatre Concessions, Inc.

The right to engage in the concession business in the theaters of Tallahassee Enterprises, Inc., was a valuable property right.

The reasons given by the president of petitioner and Tallahassee Enterprises, Inc., for the formation of petitioner and the execution of the lease were1958 U.S. Tax Ct. LEXIS 263">*271 as follows:

(1) To facilitate a possible sale of the theaters and of the concession business carried on therein as separate business properties; (2) to prevent theater managers from knowing the total theater profits and encouraging possible competition by talking about the large profits made by the theaters; (3) to discourage theater managers from asking for increases in salaries; and (4) to protect the assets represented by the theaters from possible judgments for damages arising from the sale of poisonous foodstuff.

Another reason for, and a major purpose of, the formation of petitioner, the execution of the lease agreement, and the transfers of property to petitioner pursuant thereto was to effect tax savings. Petitioner has failed to establish by the clear preponderance of the evidence that a major purpose of the transfers accomplished thereby was not to obtain the exemption from surtax provided in section 15 (b), I. R. C. 1939.

Petitioner computed its excess profits tax for the taxable year under section 430 (e) (1) (A) of the Internal Revenue Code of 1939. In the "Computation of Tax" set out in the statement attached to the statutory notice of deficiency, respondent computed1958 U.S. Tax Ct. LEXIS 263">*272 petitioner's excess profits net income "under the provisions of section 433 (a) (2) (A), I. R. C."

OPINION.

The first question to be considered is whether respondent properly determined under section 15 (c) of the Internal Revenue Code of 1939¹ that petitioner was "not entitled to the benefit 29 T.C. 754">*758 of the $ 25,000.00 exemption from surtax provided in section 15 (b), or the $ 25,000.00 minimum excess profits credit provided in the last sentence of section 431 * * *." Petitioner contends that respondent's determination as above stated was improper and erroneous because (1) the major purpose of any transfer here involved was not to secure the surtax exemption, and (2) there was no "transfer" within the meaning of section 15 (c).

1958 U.S. Tax Ct. LEXIS 263">*273 We have concluded and found as a fact from the entire record before us that a major purpose of the formation of petitioner, the execution of the lease agreement, and the transfers of property to petitioner pursuant thereto was to effect tax savings. Certainly we cannot find on the present record that petitioner has established by a clear preponderance of the evidence that the securing of the $ 25,000 surtax exemption was not a major purpose of the transaction here in question.

Petitioner's contention that there was here no "transfer" within the meaning of section 15 (c) is set forth in full, and without the citation of any authority, in its brief as follows:

There was no transfer of property, other than cash, to petitioner. All of its stock was issued for $ 2,000 cash paid by parent corporation. The respondent will, no doubt, argue that the concession space was "transferred", but we submit that the leasing of this space was not a "transfer" of property, as that term is used in Section 15 (c) of the 1939 Code. The consideration for the space was the rent to be paid under the lease which was entered into more than a month after petitioner was organized. If Congress had intended1958 U.S. Tax Ct. LEXIS 263">*274 that sales and leases of property were to be included in the term "transfer", it would have been easy enough for it to have said so. "Transfer", we submit, means an exchange of property for stock and not a sale or lease of property.

This contention is without merit. The statute uses the words "transfers * * * all or part of its property" without limitations of any kind. It seems obvious to us that the congressional intent was to include any transfer of any property. It requires no citation of authority to establish the proposition that a leasehold interest in real and personal property constitutes "property." Here Tallahassee Enterprises, Inc., effected by the lease agreement a transfer of a leasehold interest in certain theaters and equipment to petitioner, which was 29 T.C. 754">*759 "another corporation * * * created for the purpose of acquiring such property * * *." The statute does not limit "property" to "a fee simple title to property." Neither does it limit the word "transfer" to a transfer "solely in exchange for stock or securities" (cf. sec. 112 (b) (5)), or to a transfer without "adequate and full consideration" (cf. sec. 811 (c)). The fact that the transfer of the leasehold1958 U.S. Tax Ct. LEXIS 263">*275 interest called for the payment of rental is irrelevant, and the adequacy of the rentals paid is not a problem which we need to decide.

We conclude that respondent properly denied to petitioner, pursuant to section 15 (c), the benefit of the $ 25,000 exemption from surtax provided in section 15 (b). It is our understanding that petitioner has not taken, and is not asking, the $ 25,000 minimum excess profits credit provided in the last sentence of section 431. If it has taken such credit, its disallowance would also be justified pursuant to section 15 (c).

In view of this conclusion it is unnecessary for us to consider whether respondent's action with regard to the $ 25,000 exemption from surtax is justified under section 129.

We turn now to a consideration of respondent's determination that petitioner is not entitled to compute its excess profits tax as a new corporation under section 430 (e) (1) (A). ²

1958 U.S. Tax Ct. LEXIS 263">*276 Respondent makes two contentions with regard to this issue.

First, he argues that by reason of paragraph (4) of the lease agreement, wherein petitioner agreed to pay Tallahassee Enterprises, Inc., for merchandise and supplies on hand a sum equal to the latter's costs therefor, the petitioner's basis as to the property thus acquired "is determined by reference to the basis of such [property] to the transferor" within the meaning of section 445 (g) (2) (A), and therefore by virtue of section 430 (e) (2) (B) (i)³ the method of computing excess profits taxes provided by section 430 (e) (1) (A) is not available to petitioner.

1958 U.S. Tax Ct. LEXIS 263">*277 29 T.C. 754">*760 Second, respondent argues that such a computation is not available to petitioner because of the provisions of section 430 (e) (2) (B) (ii)⁴ "inasmuch as a group of not more than four persons who controlled the petitioner also controlled Tallahassee Enterprises, Inc. during the 12-month period preceding their acquisition of control of the petitioner and that Tallahassee Enterprises, Inc. had been in business for more than five years and was engaged in a trade or business substantially similar to that of the petitioner."

1958 U.S. Tax Ct. LEXIS 263">*278 With regard to this second argument of respondent on this issue, there is no reference to it in the pleadings and it was not mentioned in the opening statement of respondent's counsel at the trial herein. The only evidence as to "control" of Tallahassee Enterprises, Inc., is the undisputed testimony that there were five stockholders of that corporation.

If respondent is to prevail on this argument, it must be for the reason that there is a failure of proof.

This theory was advanced by respondent for the first time in his brief filed long after the trial of this case and at a time when petitioner was helpless to remedy its position.

We think that rudimentary principles of equity and justice forbid our consideration of a theory advanced by the respondent in such a way and at such a time. Petitioner was not apprised of the necessity of evidence with which to meet this contention at the time of the hearing. The fundamental purpose of pleadings is to inform the parties, and the Court, of the issues involved, and certainly the taxpayer is entitled to know, at least by the date of the hearing, the ground upon which the Commissioner has acted and the contention which he is required to 1958 U.S. Tax Ct. LEXIS 263">*279 meet in order to establish the error of the determination. The respondent cannot be allowed to profit by a contention, made long after the testimony has been heard, based upon a failure of proof of a fact which was not, in any practical sense, put in issue by the pleadings, and which was not germane to any theory 29 T.C. 754">*761 theretofore advanced by respondent or even mentioned by respondent's counsel at the trial herein.

With regard to respondent's first argument on this issue, we are of the opinion that the transaction here involved is not one described in section 445 (g) (2) (A). Petitioner's basis as to the merchandise and supplies purchased from Tallahassee Enterprises, Inc., was its cost. It is true that its cost was to be "a sum equal to [the vendor's] costs for such merchandise and supplies," but the fact that the price paid for merchandise is to be calculated with reference to the vendor's cost does not warrant a conclusion that its basis "is determined by reference to the basis of such properties to the transferor." We consider that the transactions referred to in section 445 (g) (2) (A) are among those particularized as exceptions to section 113 (a), and do not include1958 U.S. Tax Ct. LEXIS 263">*280 a transaction in which the basis of the property is the cost to the acquiring corporation pursuant to section 113 (a), even though that cost is calculated by reference to the cost to the vendor.

On this issue we decide in favor of petitioner.

Decision will be entered under Rule 50.