*18 Decision will be entered for the respondent.
Petitioner, in his return for 1947, claimed a bad debt deduction of $ 7,000 against a corporation of which petitioner and his wife were the sole stockholders. The $ 7,000 in question represented cash which petitioner had advanced the corporation in 1937 to assist it in the purchase of some real estate in Jersey City, New Jersey, against which there were heavy tax encumbrances. In 1941, the corporation's charter was forfeited for nonpayment of taxes. The only property which it owned at the time its charter was forfeited was real estate heavily encumbered with delinquent taxes. There was no evidence to show that the real estate had a fair market value greater than the tax encumbrances. In 1947, the real estate was conveyed by the corporation for $ 250 after its charter had been revived for the purpose of executing a quitclaim deed to Jersey City to which the delinquent taxes were due. Held, petitioner's debt of $ 7,000 against the corporation did not become worthless in 1947. It had become worthless in a year prior thereto. The Commissioner's disallowance of the claimed deduction is sustained.
*534 The Commissioner has determined a deficiency in petitioner's income tax of $ 3,554.98 for 1947. The deficiency is due to one adjustment to the net income as reported by petitioner on his return for 1947. That adjustment is "(a) Deduction for loan to Warmont Holding Co. Inc. disallowed $ 7,000.00." The adjustment is explained in the deficiency notice as follows:
(a) It has been determined that an amount of $ 7,000.00 claimed in your return as a loan to Warmont Holding Co., Inc., which allegedly became worthless in 1947, is not deductible by you in that year because of lack of substantiation and further, if substantiated, said amount has been determined to represent additional invested capital in the aforementioned corporation rather than a bona fide*20 loan.
In any event, if the transaction could be construed to be a loan, the worthlessness thereof is governed by the provisions of Section 23 (k) (4) of the Internal Revenue Code relating to non-business debts.
Petitioner contests the correctness of this adjustment by an appropriate assignment of error.
FINDINGS OF FACT.
The petitioner resides at Englewood, New Jersey. He filed his income tax return with the collector of internal revenue for the fifth district of New Jersey. Petitioner's return was filed on a cash basis. Petitioner's reported adjusted gross income for the taxable year 1947 *535 was $ 26,216.41. On page 3 of his return for the taxable year petitioner claimed, among other deductions from adjusted gross income, a deduction in the amount of $ 7,000 which was described as follows:
Bad Debt -- Loan to Warmont Holding Co. Inc. Company worthless -- its properties foreclosed by the City of Jersey City.
This claimed deduction the Commissioner disallowed for reasons stated in the deficiency notice.
Warmont Holding Co., Inc., hereinafter sometimes called Warmont, a corporation of the State of New Jersey, was organized by petitioner in 1937 for the purpose of taking*21 title to certain real estate which was to be purchased from Jessica H. Green and Benjamin T. McGill in 1937. Warmont was created by petitioner for the purpose of avoiding any personal liability on his part. Petitioner's business purpose in taking title to the real estate in the name of Warmont was to eliminate the need for liability insurance. Some of the property was rental property.
Petitioner and his wife, Anne R. Greenberg, each owned 50 per cent of the capital stock of Warmont, for which $ 1,000 had been paid in. Petitioner paid for all of the stock of Warmont which was issued and outstanding. At the time of the purchase of the real estate in 1937 in the name of Warmont the total amount of the liens of Jersey City against the property, including water rents, was $ 25,579. Warmont itself paid only $ 1,000 toward the purchase of the property -- this amount represented the total capital which had been paid into Warmont.
Prior to the deed of conveyance to Warmont which was dated August 30, 1937, a resolution was adopted at a meeting of the stockholders of Warmont which reads, in part, as follows:
It Is Therefore Unanimously Resolved, that the said corporation proceed toward*22 the purchase of this property; and
It Is Further Resolved, that the corporation to effectuate the said purchase, borrow from William Greenberg the sum of Seven thousand ($ 7,000.00) dollars, to be loaned to the corporation until such time as the corporation shall be able to repay the loan, the said loan shall not carry any interest, except that in the discretion of the corporation it deems it possible and proper to pay interest; then and in that event, interest shall be paid.
And It Is Further Resolved, that the Officers and Directors, be and they are hereby authorized to borrow the sum of Seven thousand ($ 7,000.00) from William Greenberg, the same to be repayable as soon as corporate funds are available, so that the complete Eight thousand ($ 8,000.00) dollars is available to complete the purchase.
Petitioner paid on behalf of Warmont $ 7,000 toward the purchase of the property out of his individual funds.
Warmont never maintained any cash books, journals, or bookkeeping records.
*536 Although petitioner advanced the $ 7,000 on behalf of Warmont there was never any evidence of indebtedness set up, aside from the corporate resolution above referred to, to establish a debtor-creditor*23 relationship between Warmont and petitioner. There was never any note executed by Warmont to petitioner.
The corporate charter of Warmont was forfeited in the year 1941 by the State of New Jersey by gubernatorial decree because of its failure to pay taxes.
In the taxable year 1947, the attorney for the city of Jersey City insisted when petitioner was negotiating with Jersey City for the delivery of a deed to the property held in the name of Warmont that the corporate charter of Warmont be reinstated or that it be reincorporated so that the deed from Warmont to the city would be valid. The reincorporation of Warmont was carried out by petitioner at a cost of $ 27.50, which amount petitioner deducted on his 1947 tax return as an office expense.
Petitioner received a check for $ 250 in the taxable year from the City of Jersey City for the delivery of a quitclaim deed from Warmont to the city. This check was made payable to petitioner, as attorney for Warmont. Petitioner deposited the check in his personal account and treated it as a fee.
The $ 7,000 in cash which petitioner advanced to Warmont in 1937 was a loan from petitioner to Warmont. It was not a capital contribution by petitioner*24 to Warmont. Petitioner's debt of $ 7,000 against Warmont incurred in 1937 did not become worthless in 1947. It became worthless in some year prior to 1947.
OPINION.
It is clear that petitioner's assignment of error against the Commissioner's determination of the deficiency, assigned error to the determination of the Commissioner in disallowing the bad debt deduction of $ 7,000 which petitioner had claimed on his return for 1947. Petitioner, in his statement of facts upon which he relied in support of his assignment of error, stated, among other things, as follows:
That there was no corporate banking account created at that time, but the necessary One Thousand Dollars ($ 1,000.00) was held by him until title time and then that One Thousand Dollars ($ 1,000.00) plus the sum of Seven Thousand Dollars ($ 7,000.00) was paid by him to McGill and Green at the closing less some legal charges incurred by McGill at that time. That the One Thousand Dollars ($ 1,000.00) represented the capital investment and the Seven Thousand Dollars ($ 7,000.00) was a direct loan to the Corporation payable as soon as they could get hold of the money. * * *
Notwithstanding petitioner's assignment of error*25 and his statement of facts in support thereof, petitioner now argues in his brief that the *537 corporation never owed him any debt at all because there was really no corporation in fact but that Warmont was a mere sham and petitioner was the real owner of the real estate and petitioner suffered his loss on the sale of the real estate in 1947, when it was finally disposed of to Jersey City for $ 250 by a quitclaim deed from Warmont to Jersey City. Petitioner's contention relied upon in his brief is stated in the closing part thereof as follows:
In the present case, the petitioner, Greenberg, had organized the corporation, never with a business purpose and never with any transactions except the payment for stock and purchase of the property.
Section 23 (a) of the Internal Revenue Code is the prevailing section under which the present case falls. This was a loss by an individual, engaged in the real estate business at the time petitioner purchased the property. The testimony that petitioner was so engaged is uncontradicted by the Respondent. The corporation is a sham and should be ignored and the properties treated as belonging to the petitioner himself. The loss is evident*26 in 1947, and is deductible in full in that year.
This contention, it seems to us, is an afterthought by petitioner. It was not raised in any manner by his assignment of error. As has already been stated, petitioner's assignment of error, as we construe it, is to the effect that the Commissioner erred in refusing to allow petitioner a $ 7,000 bad debt deduction which was claimed in his return. Petitioner had no alternative assignment of error in his petition undertaking to raise the issue which he now argues in his brief. Issues which we are called upon to decide in tax cases are those which are raised by the pleadings and not those raised for the first time in briefs. Cf. Cedar Valley Distillery, Inc., 16 T. C. 870. But even if it should be considered that the pleadings are sufficient to raise the issue argued in petitioner's brief, we would decide against petitioner on such issue. We think the facts show that the $ 7,000 advanced by petitioner in 1937 to Warmont was a loan and did not represent an investment by petitioner in real estate.
It seems clear that petitioner's debt against Warmont did not become worthless in 1947. The uncontradicted*27 facts show that the corporate charter of Warmont was forfeited in the year 1941 by the State of New Jersey by gubernatorial decree because of its failure to pay taxes. The only property which Warmont owned at the time of the forfeiture of its charter was the real estate which was conveyed to it at the time of its organization in 1937. This real estate was heavily encumbered by taxes which were due Jersey City and there is no evidence whatever that this real estate had any greater fair market value in 1941, the time of the forfeiture of the charter of Warmont, than the tax encumbrances which were against it. In other words, there is nothing to show that Warmont had any equity in the property over and above the taxes due on it at the time its charter was forfeited. The fact that Jersey City paid $ 250 in 1947 to get a quitclaim deed *538 from Warmont is no evidence that the real estate had any fair market value in 1941, when Warmont's charter was forfeited, greater than the tax encumbrances which were against it.
On the evidence in the record, we hold that petitioner's debt of $ 7,000 against Warmont did not become worthless in 1947. It had become worthless in a year prior*28 thereto. Having decided that petitioner is not entitled to a deduction of $ 7,000 in 1947 because of the worthlessness of a bad debt against Warmont, it becomes unnecessary to decide respondent's alternative contentions which were stated in his deficiency notice and reiterated in his brief.
Decision will be entered for the respondent.