52 T.C. 913">*913 The respondent determined deficiencies in the petitioners' income tax as follows: 52 T.C. 913">*914

The issue for decision is whether or not the petitioner Thomas E. Bone is entitled to deductions1969 U.S. Tax Ct. LEXIS 63">*65 for losses sustained in a farming enterprise. The answer depends on whether the enterprise was conducted by a corporation or a partnership and, if by a corporation, whether that corporation filed a valid election under section 1372 of the Internal Revenue Code of 1954. ¹

FINDINGS OF FACT

Some of the facts were stipulated, and those facts are so found.

Thomas E. Bone is an individual who resided in Terra Bella, Calif., at the time his petitions were filed in this case. Veronica S. Bone is an individual who resided at Camp Nelson, Tulare County, Calif., at the time her petition was filed in this case. Thomas E. Bone and Veronica S. Bone filed a joint individual income tax return for the taxable year 1964, and Thomas E. Bone, an individual income tax return for the taxable year 1965, with the district director of internal revenue, San Francisco, Calif. Thomas E. Bone will hereinafter be referred to as the petitioner.

1969 U.S. Tax Ct. LEXIS 63">*66 In 1959, the petitioner, with financial assistance from his father, Sidney W. Bone, acquired a 33.48-acre parcel of land located in Tulare County, Calif., for $ 25,127. Title to the land was taken in the name of the petitioner, who intended to develop it as a citrus grove. During 1962, the petitioner began to cultivate the property and to plant nursery stock thereon, which was to be used in establishing a citrus orchard. During 1962 and 1963, the petitioner furnished most of the labor for the enterprise, and Sidney provided most of the financial support. The petitioner and Sidney filed a partnership income tax return for the enterprise for the years 1962 and 1963.

In 1962, Sidney discussed the citrus grove enterprise with a friend of his, Russell E. Q. Johnson, an attorney. Mr. Johnson expressed concern over Sidney's exposure as a partner to unlimited liability for claims against the partnership and suggested the possibility that a "tax-option corporation" be formed to run the business, so that Sidney could have the benefits of limited liability, while being able to report his proportionate share of profits and losses on his personal return. Acting on this suggestion, Sidney1969 U.S. Tax Ct. LEXIS 63">*67 and the petitioners decided to form a corporation. On August 16, 1963, Tom Bone Citrus, Inc. 52 T.C. 913">*915 (TBC), filed its articles of incorporation in the office of the secretary of state of the State of California. On the same day, the secretary issued to TBC a certificate of incorporation, which stated: "That on the 16th day of August, 1963, Tom Bone Citrus, Inc. became incorporated under the laws of this State by filing its Articles of Incorporation in my office."

Also on the same day, a meeting of the original incorporators of TBC was duly held, and the following corporate business took place: (1) It was agreed that a certificate of incorporation should be filed in the office of the county clerk for Tulare County; (2) bylaws were adopted; (3) the resignations of the original incorporators were accepted; and (4) the petitioner, Sidney, and Veronica S. Bone were elected as directors.

On August 22, 1963, a special meeting of the board of directors of TBC was held. At that meeting -- (1) The petitioner was elected president and treasurer, Sidney, vice president, Mrs. Bone, secretary, and Mr. Johnson, assistant secretary and general counsel; (2) an executive committee, composed of1969 U.S. Tax Ct. LEXIS 63">*68 the petitioner and Sidney, was formed; (3) a corporate seal was adopted; (4) a specimen certificate for corporate shares of stock was approved; (5) the secretary was authorized to procure the proper corporate books; (6) the treasurer was authorized to open a corporate bank account, and the president was authorized to sign checks; (7) the fiscal year of the corporation was designated as September 1 to August 31; (8) the petitioner was designated as agent of the corporation for service of process; and (9) the corporate officers were authorized to apply to the commissioner of corporations of the State of California for a permit to sell and issue shares of capital stock.

At the same meeting, the petitioner as president recounted an offer by Sidney to purchase 100 shares of the corporation's $ 10 par common stock for $ 1,000, conditioned on the corporation's receipt from the commissioner of corporations of a permit to issue such shares; and the board authorized the officers to issue such shares, after receipt of the permit and receipt of the $ 1,000. The petitioner also informed the board of directors of the offer he had made to sell to the corporation the 33-acre parcel located in Tulare1969 U.S. Tax Ct. LEXIS 63">*69 County. This offer provided that the petitioner would transfer title to the property to the corporation "in consideration of the issuance to me of nineteen hundred (1,900) Common shares, having an aggregate par value of Nineteen Thousand Dollars ($ 19,000.00)." ² The offer further provided:

If this officer [sic] is accepted, the above mentioned nineteen hundred (1,900) Common shares are to be issued to me [the petitioner] or my nominee upon the 52 T.C. 913">*916 delivery to your corporation of the said property or of proper instruments of transfer and conveyance of the above described property.

The board accepted the offer by a resolution.

On October 7, 1963, the petitioner and Mrs. Bone delivered to TBC a deed covering the Tulare County parcel, and on the same day that deed1969 U.S. Tax Ct. LEXIS 63">*70 was recorded in the Tulare County recorder's office. At the time of the conveyance, the petitioner received no stock from TBC.

Also on October 7, 1963, TBC executed an "Application for Permit to Sell and Issue Stock." However, this application was not filed with the commissioner of corporations until March 12, 1964. This application stated: "Applicant at present has no assets or liabilities other than organization expenses and has conducted no business; therefore, no financial statement can be prepared or submitted at this time." It also provided that: "Upon issuance of a permit by the Commissioner of Corporations of the State of California, applicant proposes to issue Two Thousand (2,000) shares of its capital stock." One hundred shares were to be issued to Sidney, and 1,900 to the petitioner, in accordance with the offers accepted at the August 22, 1963, board meeting. On September 25, 1964, TBC executed an amendment to this application, and on October 22, 1964, such amendment was filed with the commissioner of corporations. The amendment provided in pertinent part:

That a certificate for 100 shares of said stock has been issued to Sidney W. Bone and certificates for 1900 1969 U.S. Tax Ct. LEXIS 63">*71 (600 and 1300) shares of said stock has [sic] been issued to Thomas E. Bone, both issued in cancellation of the indebtedness of the corporation to the extent of $ 1,000 to Sidney W. Bone and $ 19,000 to Thomas E. Bone. The certificate for 1300 shares was assigned to Sidney W. Bone and reissued in the latter's name.

On October 28, 1964, a permit to sell and issue stock was issued to TBC by the Division of Corporations of the State of California. This permit provided that TBC was authorized to sell and issue stock, not to exceed 2,000 shares, to Sidney and the petitioner, in consideration for the transfer to the corporation of the property and cash described in the application. On October 29, 1964, TBC issued to Sidney stock certificate No. 1, evidencing 100 shares, and to the petitioner certificate No. 2, evidencing 600 shares, and certificate No. 3, evidencing 1,300 shares. Sometime thereafter, certificate No. 3 was canceled, and on December 9, 1964, certificate No. 4, evidencing 1,300 shares, was issued to Sidney so that he owned 70 percent of TBC's stock and the petitioner owned 30 percent.

During the period from August 16, 1963, to October 28, 1964, TBC functioned as a corporation, 1969 U.S. Tax Ct. LEXIS 63">*72 although during that period it did not have a permit to issue and sell shares of stock. It held directors meetings and kept minutes thereof. On or about March 1, 1964, TBC 52 T.C. 913">*917 entered into four agreements with Carl Snyder for the purpose of raising capital to develop the citrus acreage. Under these agreements, TBC as seller, agreed to sell the parcel to Mr. Snyder, subject to an option to repurchase, and TBC then leased back the property for a nominal rental. Neither the petitioner nor Sidney was obligated as an individual under these agreements. The agreements were "subject to" TBC's receipt of a permit to issue stock.

On or about September 13, 1963, TBC opened a corporate bank account at the Anglo-Crocker Bank of California with a deposit by Sidney of $ 800. During the subsequent 13 months, the principal source of funds for the account was the arrangement with Mr. Snyder. However, TBC's books indicate that periodically the petitioner and Sidney also made deposits in that account. This account was used principally for paying bills of TBC; although the corporation received bills variously addressed, to the petitioner as an individual or TBC, they were, with few exceptions, 1969 U.S. Tax Ct. LEXIS 63">*73 paid by check drawn on the corporation's bank account. These bills included bills for expenses connected with the citrus operation, including labor, equipment, supplies, seeds, plants, and taxes.

TBC filed corporation franchise tax returns with the State of California, one for the stated fiscal period August 16, 1963, to August 31, 1963, and another for the stated fiscal period January 1, 1963 (sic), to August 31, 1964. The first of these returns stated that TBC began doing business on November 1, 1963; the second stated that the corporation started doing business on January 1, 1964. On both returns, TBC reported assets, including the Tulare County parcel, and liabilities; on the latter, it reported corporate business and a net corporate loss. Both returns admitted liability for the minimum corporate tax.

On November 16, 1964, TBC mailed to the district director of internal revenue, San Francisco, a "Form 2553 -- Election by Small Business Corporation" together with consents to such an election signed by the petitioner and Sidney, and a "Form 1120-S -- U.S. Small Business Corporation Return of Income" for the fiscal period beginning January 1, 1964, and ending August 31, 1964. 1969 U.S. Tax Ct. LEXIS 63">*74 This return listed assets, including the Tulare County parcel, and liabilities, as of January 1, 1964, and showed a loss for the period of $ 6,452.55. On November 16, 1965, TBC filed with the San Francisco district director a Form 1120-S for the taxable year September 1, 1964, to August 31, 1965, reporting thereon a loss of $ 6,184.61. The losses for both years represented expenditures made by TBC for labor, supplies, rental of equipment, and other expenses, inasmuch as TBC had no gross income in either year.

On his income tax return for the calendar year 1964, the petitioner claimed a loss deduction equal to 30 percent of the loss reported by 52 T.C. 913">*918 TBC for its taxable period ended August 31, 1964. On his return for 1965, the petitioner claimed a loss deduction equal to 30 percent of the loss reported by TBC for its taxable year ended August 31, 1965.

OPINION

On his tax returns for 1964 and 1965, the petitioner claimed deductions for losses arising out of the development of citrus acreage on the theory that such losses were incurred by TBC as an "electing small business corporation" described in sections 1371-1378. Now, he contends that the losses arising out of the citrus1969 U.S. Tax Ct. LEXIS 63">*75 acreage operation which occurred prior to October 28, 1964, were incurred by a partnership of which he was a member, and that losses occurring thereafter were incurred by TBC and are deductible by him by reason of TBC's valid subchapter S election. His present position is based on the proposition that TBC could not and did not acquire its assets and begin business until it received permission to issue stock, and that it could not have filed a valid subchapter S election until its stock was issued.

Fundamental to the petitioner's various contentions is the question when did TBC acquire assets and begin doing business. There is no doubt that under California law TBC came into existence as a corporation on August 16, 1963, the day its articles of incorporation were filed with the California secretary of state, and thereafter functioned as such. Cal. Corp. Code secs. 300, 308, 313 (West 1955). It is not a prerequisite to corporate existence under California law that there be shares of stock issued or outstanding. Brodsky v. Seaboard Realty Co., 206 Cal. App. 2d 504">206 Cal. App. 2d 504, 24 Cal. Rptr. 61">24 Cal. Rptr. 61 (1962); J. W. Williams Co. v. Leong Sue Ah Quin, 44 Cal. App. 296">44 Cal. App. 296, 186 P. 401">186 P. 401 (1919).1969 U.S. Tax Ct. LEXIS 63">*76 The same conclusion obtains for tax purposes. TBC's failure to issue stock certificates until October 1964 does not affect the reality of its existence on and after August 16, 1963. Fleming G. Railey, 36 B.T.A. 543">36 B.T.A. 543 (1937). TBC was formed for a business purpose, and we are not justified in disregarding its existence. Moline Properties v. Commissioner, 319 U.S. 436">319 U.S. 436, 319 U.S. 436">438 (1943); Ernest L. Rink, 51 T.C. 746">51 T.C. 746 (1969).

The evidence clearly indicates that TBC acquired assets and was engaged in business long before the issuance of the stock of the petitioner and Sidney. The petitioner's principal argument on this point is that the land itself, the basis of the business operation, was not effectively transferred to TBC prior to October 28, 1964. He contends that his offer to transfer the land to the corporation was conditioned on the issuance to him of the agreed-upon amount of stock and that the transfer could not have taken place prior to such issuance or at least authorization therefor by the California commissioner of corporations. However, in point of fact, the petitioner did transfer 1969 U.S. Tax Ct. LEXIS 63">*77 the land to TBC on October 7, 1963, by a recorded deed, and thereafter the corporation, 52 T.C. 913">*919 with the petitioner's approval -- indeed, at his behest -- paid taxes thereon and made substantial expenditures with respect thereto. In the sale and leaseback arrangements with Mr. Snyder, TBC dealt with the citrus property as its own. Furthermore, although the petitioner now contends that the property was not transferred to TBC until October of 1964, he previously thought and acted differently. On the State tax return of TBC, signed by the petitioner, the property was treated as an asset of TBC. On the Federal tax return of TBC for the period January 1 through October 31, 1964, the property and the business were reported as belonging to TBC, and in the petitioner's individual Federal tax return for 1964, he treated the business as belonging to TBC. Under these circumstances, we need not consider whether the transfer was in pursuance of the petitioner's original contract with the corporation or in modification of it; the point is that the corporation acquired the property in October 1963.

In all other respects, the corporation functioned as any other corporation does: It maintained1969 U.S. Tax Ct. LEXIS 63">*78 a bank account and books and records separate from those of the petitioner and Sidney; it hired labor, paid taxes and expenses, made improvements to its property, arranged financing, and, generally, directed its efforts toward the development of a profit-making capability.

On the basis of these facts, we find and hold that from at least October 7, 1963, the citrus acreage business was the business of the corporation and not of the petitioner and Sidney as a partnership. Accordingly, the petitioner is not entitled to deduct as partnership losses any losses incurred in the citrus business after that date. Ernest H. Weigman, 47 T.C. 596">47 T.C. 596 (1967), affirmed per curiam 400 F.2d 584 (C.A. 9, 1968).

The next question is whether TBC's election under section 1372 was valid. Section 1372(c)(1) provides:

An election under subsection (a) may be made by a small business corporation for any taxable year at any time during the first month of such taxable year, or at any time during the month preceding such first month. * * *

As we said in William Pestcoe, 40 T.C. 195">40 T.C. 195, 40 T.C. 195">198 (1963): "sections 1372(c)(1) and1969 U.S. Tax Ct. LEXIS 63">*79 1372(c)(2) are both demanding and explicit. There is no * * * provision for leniency with respect to the filing of elections under subchapter S." See also Joseph W. Feldman, 47 T.C. 329">47 T.C. 329 (1966); Simons v. United States, 208 F. Supp. 744">208 F. Supp. 744 (D. Conn. 1962). However, in applying this requirement, it is necessary to determine when the taxable year of TBC began and when, therefore, the time for making the election began to run. In this connection, the Income Tax Regulations provide:

Sec. 1.1372-2 Manner and time for making election and filing shareholders' consent.

52 T.C. 913">*920 (b) Time of making election -- (1) Taxable years beginning on or after September 3, 1958. * * * For purposes of this subparagraph [explaining the operation of sec. 1372(c)(1)], the first month of the taxable year of a new corporation does not begin until the corporation has shareholders or acquires assets or begins doing business, whichever is the first to occur.

We think such rule is reasonable as applied to the facts of this case. Since we have found that TBC acquired assets and began business no later than October 7, 1963, its first taxable1969 U.S. Tax Ct. LEXIS 63">*80 year began no later than such date, and therefore, its election, filed on November 16, 1964, is clearly untimely with respect to its first taxable period ending August 31, 1964. Similarly, such election is untimely with respect to TBC's taxable year beginning September 1, 1964, and ending August 31, 1965. Accordingly, the petitioner may not deduct any part of the losses in question incurred by TBC in the operation of the citrus acreage business.

The petitioner appears to argue that a valid election could not have been filed prior to October 28, 1964, because until then TBC had no shareholders to make the consents required by section 1372(a). However, the petitioner and Sidney were shareholders prior to October 1964, because they had agreed to take stock in TBC. Their agreements constituted "subscriptions" to stock under California law (Eckert v. Schaal, 251 Cal. App. 2d 1">251 Cal. App. 2d 1, 58 Cal. Rptr. 817">58 Cal. Rptr. 817 (1967)); and where no stock shares are outstanding, a subscriber to stock is a shareholder. Cal. Corp. Code sec. 103 (West 1955); Brown v. North Ventura Road Development Co., 216 Cal. App. 2d 227">216 Cal. App. 2d 227, 30 Cal. Rptr. 568">30 Cal. Rptr. 568 (1963).1969 U.S. Tax Ct. LEXIS 63">*81 Consequently, the petitioner and Sidney were capable of filing effective consents to TBC's election prior to October 1964. Cf. Alfred N. Hoffman, 47 T.C. 218">47 T.C. 218 (1966), affirmed per curiam 391 F.2d 930 (C.A. 5, 1968).

The respondent advances a different reason why the petitioner's argument must fail. He observes that section 1.1372-3(c), Income Tax Regs., as amended March 9, 1964, provides a procedure whereby, if a corporation makes a timely election, an extension of time may be obtained for a shareholder to file his consent. A similar procedure was provided in Rev. Proc. 61-30, 1961-2 C.B. 568. Thus, even if there were some reason why the petitioner and Sidney could not file their consents prior to October 1964, such reason does not excuse the failure to file timely the election by TBC.

Accordingly,

Decisions will be entered for the respondent.