*23 Decision will be entered under Rule 50.
Petitioner was organized in April 1937 and thereafter received a conveyance of five oil leases which had been acquired by its three promoters and sole stockholders. In acquiring these leases petitioner adopted and assumed a mortgage which had been executed by the attorney of the promoters at the time the leases were acquired by him on February 12, 1937, for their benefit. Petitioner in the taxable year 1938 paid $ 95,000 on the indebtedness evidenced by this mortgage. Held, that when petitioner adopted the contract and mortgage of its promoters it in legal effect made them its own. Inasmuch as this date of adoption was April 15, 1937, the mortgage in question became one "issued by the corporation and in existence at the close of business on December 31, 1937," within the meaning of section 27 (a) (4), Revenue Act of 1938, and petitioner is entitled to the dividends paid credit which it claims.
*1039 The Commissioner has determined a deficiency of $ *24 4,355.79 in petitioner's income tax for the year 1938. Only a part of the deficiency is disputed. In his determination of the deficiency the Commissioner disallowed petitioner any dividends paid credit and in that connection stated in his deficiency notice as follows:
On February 12, 1937, Henry J. Coleman, as agent for three individuals, entered into an agreement with Sinclair-Wyoming Oil Company whereunder that corporation *1040 assigned to him certain oil and gas leases for a consideration of $ 400,000.00, $ 100,000.00 payable in cash and the balance payable in monthly installments, the unpaid balance being secured by a lien on said leases. On March 15, 1937 these individuals executed an indemnity agreement in favor of Henry J. Coleman. Subsequently, on or about March 17, 1937 these individuals caused the organization of the taxpayer. Pursuant to resolutions of the incorporators adopted at a meeting on April 15, 1937, the said leases were acquired by the taxpayer by assignment to it, and the taxpayer assumed the liabilities of Henry J. Coleman under said agreement of February 12, 1937. In the taxable year 1938 the taxpayer paid $ 95,000.00 on the obligations assumed.
*25 It is held that this payment does not constitute an amount used to pay indebtedness within the meaning of Section 27 (a) (4) of the Revenue Act of 1938, and therefore you are not entitled to a dividends-paid credit under Section 13 (c) (B) of that Act.
By an appropriate assignment of error the petitioner contests the above action of the Commissioner. This presents the only issue for our decision.
FINDINGS OF FACT.
Yale Petroleum Co., the petitioner, is a corporation organized under the laws of Wyoming and it filed its income tax return for the period here involved with the collector of internal revenue for the district of Wyoming.
In February 1937 L. B. Hancock of San Jose, California, P. N. Fortin of Billings, Montana, and Paul Stock of Cody, Wyoming, contemplated the purchase of five oil and gas leases on the lands in the Oregon Basin Field, a proven field in Park County, Wyoming, from the Sinclair-Wyoming Oil Co., a Delaware corporation, sometimes hereafter referred to as Sinclair-Wyoming, and the formation of a corporation for the purpose of accepting assignments of these leases directly from Sinclair-Wyoming and thereafter operating and producing the leases.
For the purpose *26 of negotiating with Sinclair-Wyoming for the purchase of the leases, Hancock, Fortin, and Stock, together with their attorney, Henry J. Coleman, of Billings, Montana, went to Tulsa, Oklahoma, where Sinclair-Wyoming maintained its office. In order to consummate the purchase it became necessary to do so immediately, while Hancock, Fortin, and Stock were still in Tulsa, and without the delay attendant upon organization of the contemplated corporation to accept assignments of the leases directly from Sinclair-Wyoming.
Consequently, Hancock, Fortin, and Stock authorized their attorney, Henry J. Coleman, to enter into, in his own name, an agreement to purchase the leases and to accept in his own name assignments of the leases from Sinclair-Wyoming, with the understanding, however, of which Sinclair-Wyoming was aware, that in so entering into the agreement and so accepting assignments of the leases Henry J. Coleman would be acting for and in behalf of Fortin, Hancock, and Stock *1041 and the proposed corporation, and would assign the leases to it as soon as its organization under the laws of the State of Wyoming could be completed.
Pursuant to this authorization and with this understanding, *27 Henry J. Coleman did on February 12, 1937, in his own name, but for and on behalf of Fortin, Hancock, and Stock and the proposed corporation, enter into the agreement with Sinclair-Wyoming to purchase the leases and accepted assignments of the leases from Sinclair-Wyoming. The agreement of February 12, 1937, between Sinclair-Wyoming and Henry J. Coleman, pursuant to which the $ 95,000 in question in this proceeding was paid by petitioner in 1938, recited that Sinclair-Wyoming, as first party:
* * * of even date herewith * * * has executed and delivered to Second Party and assignment and conveyance in writing of all its right, title and interest in and to * * *
five described oil and gas leases and that:
* * * the total purchase price to be paid by Second Party to First Party for said assignments and conveyances * * * is the sum of Four Hundred Thousand Dollars ($ 400,000.00), to be paid in the following manner, to-wit:
(a) One Hundred Thousand Dollars ($ 100,000.00) in cash upon the execution of this agreement;
(b) Three Hundred Thousand Dollars ($ 300,000.00) to be paid as hereinafter set forth;
Now, Therefore, in consideration of the sum of One Hundred Thousand Dollars ($ 100,000.00) *28 in lawful money of the United States of America, in hand paid by Second Party to First Party, the receipt of which is hereby acknowledged, and of the premises and mutual covenants and agreements as hereinafter contained, it is agreed by and between First Party and Second Party as follows:
First: Second Party agrees to pay to First Party as the balance of the consideration for said assignments the sum of Three Hundred Thousand Dollars ($ 300,000.00) in thirty (30) equal monthly installments of Ten Thousand Dollars ($ 10,000.00) each, the first installment of Ten Thousand Dollars ($ 10,000.00) to be paid on or before May 20, 1937 and the subsequent Ten Thousand Dollars ($ 10,000.00) installments to be paid on or before the twentieth day of each succeeding calendar month until the full sum of Three Hundred Thousand Dollars ($ 300,000.00) has been paid; the unpaid balance of said purchase price of Three Hundred Thousand Dollars ($ 300,000.00) to bear interest at the rate of five per cent (5%) per annum from the date of this agreement; the interest to be computed and paid on any unpaid balance of said sum of Three Hundred Thousand Dollars ($ 300,000.00) up to and inclusive of the date *29 of payment of each said monthly installments of Ten Thousand Dollars ($ 10,000.00): Provided, however, That Second Party may at any time pay all or any part of the remaining unpaid purchase price, or any installment or installments thereof, as hereinabove provided, together with accrued interest thereon.
The sixth paragraph provided that, if second party defaulted after having reduced the indebtedness to $ 200,000, then second party was to be released and discharged from any further liability under the agreement if he reconveyed and reassigned the leases to first party; *1042 but if second party failed to so reconvey and reassign, and required first party to enforce the lien given it in paragraph five, then second party was not to be released or discharged from his liability under the agreement. As security for the payment of the balance of the purchase price, paragraph five of the agreement provided:
During the life of this agreement and until the full payment of the deferred purchase price for said assignments as hereinabove set forth has been completed, First Party shall have, and Second Party does hereby grant to First Party, a continuing lien upon the interests of Second*30 Party in and to said oil and gas mining leases so assigned * * *, together with all physical and personal property located thereon and therein, to secure the payment to First Party of any sum or sums due from time to time by Second Party to First Party, plus accrued interest, as hereinabove provided.
This section also provided that in event of default second party was to reconvey and reassign the leases, forfeiting payments theretofore made as liquidated damages for the breach, and, upon failure of second party to reconvey, first party could foreclose its lien by public sale in accordance with the provisions of the Wyoming statutes relating to real estate mortgages. In the event of foreclosure and sale, second party agreed to pay costs and expenses, including attorney's fees, plus the unpaid balance of the purchase price.
At the time Henry J. Coleman entered into the above described agreement and accepted the assignments of leases, Fortin, Hancock, and Stock paid to Sinclair-Wyoming the sum of $ 100,000 cash. This sum was, by an agreement between Fortin, Hancock, and Stock, to be a part of their contribution to the capital stock of the proposed corporation.
Upon execution of the*31 agreement to purchase dated February 12, 1937, and the assignments of the leases by Sinclair-Wyoming to Henry J. Coleman, the Stock Oil Co., in which Fortin, Hancock, and Stock held interests, went into possession of and began operating the leases on behalf of and for the benefit of the proposed corporation, pending assignment of the leases to the proposed corporation by Henry J. Coleman.
Following the consummation of the purchase from Sinclair-Wyoming, Hancock, Fortin, and Stock immediately undertook the organization of a corporation under the laws of the State of Wyoming, and in consequence thereof petitioner's certificate of incorporation was filed with the County Clerk of Park County, Wyoming, on March 29, 1937, and with the Secretary of State of Wyoming on April 5, 1937.
Hancock, Fortin, and Stock were petitioner's sole incorporators.
On March 15, 1937, Hancock, Fortin, and Stock executed an indemnity agreement in favor of Henry J. Coleman.
On April 15, 1937, at the first meeting of petitioner's incorporators, who were also the then sole subscribers to petitioner's stock, a resolution *1043 was adopted authorizing petitioner's acquisition of the leases from Henry J. Coleman*32 and assumption of his liabilities under the agreement of February 12, 1937. This resolution reads in part as follows:
Now, Therefore, Be It Resolved that this corporation acquire all of the properties above described and assume all of the liabilities of the said interested persons and the said Henry J. Coleman, under and by virtue of the agreement with Sinclair Wyoming Oil Company above referred to, including the obligation to pay the balance of the purchase price of $ 300,000.00 for said properties, with interest thereon in accordance with the terms of said agreement, and that the acquisition of said properties be dated and considered as of the 12th day of February, 1937, so that all expenditures and debts made or assumed by Stock Oil Company in connection with said properties since that date be assumed by this company, and all receipts from the sale of oil produced by the Stock Oil Company from said properties enure to the benefit of this company, and that in return therefor and as consideration for such assignment or assignments and transfers by the said Henry J. Coleman to this company, the capital stock of this company to the extent of $ 125,000.00 par value thereof, be issued*33 to the following named persons in the amounts set forth after their respective names, to-wit:
[Here is set out a list of the three incorporators and their associates with the number of shares of stock issued to each. No stock was issued to Henry J. Coleman.]
On April 15, 1937, at the first meeting of petitioner's board of directors, composed solely of the three incorporators, Hancock, Fortin, and Stock, a motion was adopted that petitioner, through its officers, proceed at once to carry into effect the provisions of the resolution referred to above.
On April 19, 1937, pursuant to the above resolution and the understanding between Hancock, Fortin, and Stock and Henry J. Coleman, referred to above, the latter executed and delivered to petitioner, without consideration, assignments of the leases. These assignments included the following paragraph:
It is understood that this assignment is made subject to a certain "Agreement" made and entered into February 12, 1937, by and between Sinclair-Wyoming Oil Company and Henry J. Coleman, assignor herein, and subject to the terms and conditions thereof having reference to the payment of the deferred portion of the purchase price for said *34 lease and to all the terms, covenants, reservations, stipulations and conditions in said instrument set forth.
Upon assignment of the leases to it, petitioner went into possession of and began operating the leases, and still continues in such possession and operation.
By check dated April 30, 1937, petitioner reimbursed the Stock Oil Co. for expenses incurred by it during the period of operations prior to assignment of leases to petitioner.
At no time has Henry J. Coleman ever received or accepted any benefits under the agreement of February 12, 1937, but all benefits from the agreement have been received and accepted by petitioner. Henry J. Coleman is not and never has been a stockholder of nor has *1044 he held any interest in petitioner. All obligations and duties imposed upon Henry J. Coleman by the agreement of February 12, 1937, and the assignments to him of the leases have been at all times satisfied and discharged by petitioner since its organization, and prior thereto they were satisfied and discharged by Hancock, Fortin, and Stock.
At the close of its business on December 31, 1937, petitioner had paid the Sinclair-Wyoming Oil Co. $ 190,000, including the $ 100,000*35 advanced by Hancock, Fortin, and Stock, in discharge of the indebtedness created under the agreement of February 12, 1937, and as of December 31, 1937, the balance due from petitioner to Sinclair-Wyoming under the agreement which it had assumed was $ 210,000. In discharge of this balance petitioner paid $ 95,000 to Sinclair-Wyoming in 1938, $ 80,000 in 1939, and the remainder in 1940.
When the assignments from Sinclair-Wyoming to Henry J. Coleman and from Henry J. Coleman to petitioner were presented to the Department of Interior for approval, the Department treated the assignments as though made directly from Sinclair-Wyoming to petitioner, and did not require Henry J. Coleman to qualify under Department rules and regulations as a holder of the leases.
OPINION.
In this proceeding there is no controversy as to the amounts which petitioner paid on indebtedness which it owed Sinclair-Wyoming by reason of its assumption of the obligations which had been created when Sinclair-Wyoming conveyed five oil leases to Henry J. Coleman, who was acting for Hancock, Fortin, and Stock, who purchased the leases for the purpose of conveying them to a corporation shortly to be organized. The amount*36 so paid in 1938 was $ 95,000.
The Commissioner in his determination of the deficiency has denied petitioner any dividends paid credit under the provisions of the Revenue Act of 1938 because, he contends, the obligation upon which petitioner made the payments in 1938 was not one "issued by the corporation and in existence at the close of business on December 31, 1937."
The Commissioner concedes that the obligation itself upon which the payments were made in 1938 was one which was in existence at the close of business on December 31, 1937, but he contends that the obligation was not one which had been "issued" by the corporation within the meaning of the statute. The applicable statute is section 27 (a) (4), Revenue Act of 1938, and is printed in the margin. 1
*37 *1045 The amendment to section 27 (a) (4) of the Revenue Act of 1938 which is carried in section 222 of the Revenue Act of 1939 and is made applicable to taxable years beginning after December 31, 1937, has no application to this proceeding.
The applicable Treasury regulation is article 27 (a)-3 of Regulations 101, printed in the margin. 2
*38 We have no doubt that the obligation created by the agreement of February 12, 1937, created an "indebtedness" as that term is usually and ordinarily understood, and that this indebtedness was secured by a mortgage in Sinclair-Wyoming's favor on the five leases which they conveyed to Coleman. We also have no doubt that petitioner legally assumed and agreed to pay this indebtedness when the leases were transferred by Coleman to petitioner. We do not understand that the Commissioner contests the foregoing propositions. But was this indebtedness upon which petitioner made the $ 95,000 payments in 1938 an indebtedness of the corporation, "evidenced * * * by a bond, note, debenture, certificate of indebtedness, mortgage, or deed of trust, issued by the corporation and in existence on December 31, 1937"? The Commissioner contends that the mortgage, which admittedly was in existence on December 31, 1937, and upon which the $ 95,000 here involved was paid, was not a mortgage "issued" by petitioner. That is the pivotal question we have to decide.
It is undoubtedly true that the agreement of February 12, 1937, was adopted by petitioner after its organization was completed in April 1937. *39 This adoption and assumption by petitioner of the obligations and benefits of the agreement made the contract that of petitioner after its adoption. (Supreme Court of Wyoming). In that case the court said:
*1046 A contract made by the promoters of a corporation, as were Hay & Kinney in this case, for and on behalf of respondent, before it is formed, becomes the contract of the corporation, so that it is both entitled to the benefit thereof and liable thereon, if it adopts it after it comes into existence.
This is a familiar rule of law and many cases could be cited in support of it. See 1 Fletcher Cyclopedia Corporations (Perm. Ed.) 681.
In , the Supreme Court of Minnesota said:
* * * Although the acts of a corporation with reference to the contracts made by promoters in its behalf before its organization are frequently loosely termed "ratification," yet a "ratification," properly so called, implies an existing person, on whose behalf the contract might have been made at the time. *40 There cannot, in law, be a ratification of a contract which could not have been made binding on the ratifier at the time it was made, because the ratifier was not then in existence. [Citing authorities.] What is called "adoption," in such cases, is, in legal effect, the making of a contract of the date of the adoption, and not as of some former date. * * * [Italics supplied.]
If , states the correct rule, and we think it does, then when petitioner on April 15, 1937, adopted the contract and mortgage executed by Coleman on behalf of Hancock, Fortin, and Stock, promoters of petitioner, it, in legal effect, made a contract with Sinclair-Wyoming carrying all the rights and obligations carried in the contract signed by Coleman and dated February 12, 1937. But the date of petitioner's contract thus made by adoption is April 15, 1937, and not February 12, 1937. Up to the date of April 15, 1937, the contract was that of Hancock, Fortin, and Stock. After that date it was the contract of petitioner, although Hancock, Fortin, and Stock may still have been liable under it. This latter question we need not decide, *41 because it is not involved.
Webster's New International Dictionary, unabridged, second edition, defines the word "issue" as carrying among other things the following meaning: "To send out officially; to deliver by authority; to publish or utter; to emit; as to issue an order, a writ." Was the mortgage upon which the petitioner made the payment in 1938 of $ 95,000 one "issued" by petitioner within the meaning of that word as used in section 27 (a) (4) of the Revenue Act of 1938? We think it was. Once petitioner adopted the contract and mortgage of February 12, 1937, as its own, as it clearly did on April 15, 1937, petitioner was as firmly bound thereby as though it had signed the original contract and mortgage. The signing of a new contract and the issuing of a new mortgage by petitioner would have been a useless gesture under the authorities we have cited. Therefore, we think it is correct to hold that, by virtue of petitioner's adoption on April 15, 1937, of the contract and mortgage of its promoters, the mortgage became one "issued" by petitioner on April 15, 1937, within the intendment of the statute. The statute says that in order to get the *1047 dividends paid *42 credit the mortgage must have been one "issued by the corporation and in existence at the close of business on December 31, 1937." Under our interpretation as above set out, the mortgage involved in the instant case meets the above test.
The Commissioner relies strongly upon . In that case the contention was made by the taxpayer that where the promoters of a corporation entered into a contract for its benefit the contract when adopted by the corporation became its contract and that it was therefore executed by the taxpayer prior to May 1, 1936. The provision of the statute involved in that case was section 26 (a) (2) of the Revenue Act of 1936, which allowed a taxpayer corporation a dividends paid credit of:
An amount equal to the portion of earnings and profits of the taxable year which is required (by a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the disposition of earnings and profits of the taxable year) to be paid within the taxable year in discharge of a debt * * *
The credit was disallowed, however, because the contract*43 was not executed by the taxpayer prior to May 1, 1936, as provided by the statute. It should be pointed out that the taxpayer in that case, Little John Coal Co., was not incorporated until June 16, 1936, which was one month and 16 days after the pivotal date fixed by section 26 (a) (2), to wit, May 1, 1936. This, we think, makes , distinguishable from the instant case on its facts.
Another case cited by the Commissioner in support of his contention is . That case involved the construction of section 26 (c) (1) of the Revenue Act of 1936, and we held that the contract entered into by the promoters of the taxpayer was not executed by the taxpayer within the meaning of section 26 (c) (1) of the Revenue Act of 1936 and that the taxpayer was not entitled to the dividends credit provided for in that section. Whereas section 26 (c) (1) of the Revenue Act of 1936 was involved in the Kolor-Thru Corporation case, section 27 (a) (4) of the Revenue Act of 1938 is involved in the instant case and the language of the two statutes is different. *44 However, if it is thought that this fact is insufficient to distinguish the two cases, then we think our holding in the Kolor-Thru Corporation case was wrong and should not be followed in the instant case.
For the reasons above stated we think petitioner is entitled to the dividends paid credit which it claims, and on this issue the Commissioner is reversed.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 27. CORPORATION DIVIDENDS PAID CREDIT.
(a) Definition in General. -- As used in this title with respect to any taxable year the term "dividends paid credit" means the sum of:
* * * *
(4) Amounts used or irrevocably set aside to pay or to retire indebtedness of any kind, if such amounts are reasonable with respect to the size and terms of such indebtedness. As used in this paragraph the term "indebtedness" means only an indebtedness of the corporation existing at the close of business on December 31, 1937, and evidenced by a bond, note, debenture, certificate of indebtedness, mortgage, or deed of trust, issued by the corporation and in existence at the close of business on December 31, 1937, or by a bill of exchange accepted by the corporation prior to, and in existence at, the close of business on such date. Where the indebtedness is for a principal sum, with interest, no credit shall be allowed under this paragraph for amounts used or set aside to pay such interest.↩
2. Art. 27 (a)-3. Amounts used or irrevocably set aside to pay or to retire indebtedness. -- (a) Indebtedness. -- The term "indebtedness" means an obligation of the corporation, absolute and not contingent, to pay, on demand or within a given time, in cash or other medium, a fixed amount, existing at the close of business on December 31, 1937, and evidenced at the time payment is made * * * by a bond, note, debenture, certificate of indebtedness, mortgage, or deed of trust, issued by the corporation and in existence at the close of business on December 31, 1937, * * *.
* * * *
Indebtedness incurred through the assumption of the liabilities of another is not indebtedness within the meaning of section 27 (a) (4), even though such assumption took place prior to January 1, 1938, unless evidenced by one or more of the instruments enumerated in such section, issued by the taxpayer prior to, and in existence at, the close of business on December 31, 1937. Similarly, indebtedness represented by a renewal obligation issued after December 31, 1937, will not be classed as indebtedness for the purposes of section 27 (a) (4).↩