14 T.C. 892 (1950), 18375, Fraser-Smith Co. v. C.I.R.

Docket Nº:18375.
Citation:14 T.C. 892
Opinion Judge:HARRON, Judge:
Party Name:FRASER-SMITH COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Attorney:George Maloney, Esq., for the petitioner. Thomas A. Steele, Jr., Esq., for the respondent.
Case Date:May 19, 1950
Court:United States Tax Court
 
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Page 892

14 T.C. 892 (1950)

FRASER-SMITH COMPANY, PETITIONER,

v.

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

No. 18375.

United States Tax Court.

May 19, 1950

Petitioner drew sight drafts on its customers, payable to its bank, to which it attached bills of lading endorsed in blank. The instruments were delivered to the bank, which credited petitioner's account with the face amount of the drafts allowed it to draw immediately against that credit. Held, the amounts credited are not borrowed capital within the meaning of section 719(a)(1) of the Internal Revenue Code.

George Maloney, Esq., for the petitioner.

Thomas A. Steele, Jr., Esq., for the respondent.

The Commissioner has determined deficiencies in petitioner's excess profits tax for the fiscal years ended June 30, 1943 and 1944, in the respective amounts of $1,752.55 and $1,996.84. The only tax liability involved in this proceeding is the Federal excess profits tax liability of the petitioner.

The issue in this proceeding is whether the face amounts of certain drafts credited to petitioner's account by the Northwestern National Bank before collection were borrowed capital, as defined by section 719(a)(1) of the Internal Revenue Code.

Petitioner concedes that there is a deficiency in its declared value excess profits tax for the fiscal year ended June 30, 1944, in the amount of $4.77.

Petitioner filed its returns for the years herein involved with the collector for the district of Minnesota.

The record consists of a stipulation of certain facts, oral testimony, and various exhibits.

FINDINGS OF FACT.

The facts which have been stipulated are found as facts and adopted as part of the findings of fact.

Petitioner, a corporation, was organized under the laws of Minnesota in 1924 to engage in the merchandising of bulk grains, such as wheat, corn, barley, and oats. Its principal place of business is in Minneapolis, Minnesota. Petitioner kept its books and filed its returns under the accrual method of accounting during the taxable years in question. Its fiscal year ended on June 30 of each year.

During the taxable years involved, it was petitioner's practice to market grain in carload lots. Most of its customers placed their orders by telephone. In connection with each such marketing, petitioner

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drew a sight draft on its customers, payable to the bank,[1] to which it attached a bill of lading endorsed in blank. Both instruments were then delivered to the Northwestern National Bank & Trust Co. of Minneapolis (hereinafter called the bank), with which petitioner's banking was done during the period in question. The bank thereupon credited petitioner's account with the face amount of the draft and allowed petitioner immediately to draw against the credits.

The bank then transmitted the draft and attached bill of lading to a correspondent bank at the customer's place of business. Petitioner's customers paid for the grain shipped to them by honoring the drafts drawn upon them. They knew that they had to honor the draft in order to get possession of the bill of lading, which was necessary to get possession of the grain. Unless the drafts and the bills of lading were turned over to the customers simultaneously, they would not honor the drafts. The bills of lading were always endorsed in blank by petitioner. After honoring and paying the drafts and receiving the related bills of lading, petitioner's customers had absolute title to the grain.

During the taxable years involved in this proceeding, there was no single instance where a drawee failed to honor and pay a draft drawn by the petitioner; it was never necessary for the bank to charge back the amount of any draft to petitioner's account.

When petitioner delivered a draft to the bank, petitioner immediately debited cash for the full amount of the credit made to its account by the bank; and, in each instance where the customer was required to receive, weigh, and accept the grain, which was the usual procedure, the customer's account was credited with a like amount. The draft in such case was drawn for 90 per cent of the estimated market value of the grain, in accordance with trade custom. After the grain was received, weighed, and accepted by the customer, petitioner debited the customer's account for the full sale proceeds and credited the income account for a like amount. The customer remitted the full amount of the instrument to the Bank and, if necessary, remitted to check to the petitioner for any balance remaining due on the purchase of the grain covered by the instrument. Petitioner debited this last mentioned amount to cash and credited the customer's

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account on petitioner's books with a like amount. The customer's account would then be in balance.

If the petitioner weighed the grain, the draft would be drawn for the full amount of the anticipated proceeds of the sale. Petitioner would then debit cash for the face amount of such instrument and credit an income account for a like amount, with no entries being made in a customer's account.

All drafts drawn were recorded in petitioner's draft register and delivered to the bank. The bank made a charge for collection of one-tenth of 1 per cent of the face amount of each draft. It also charged petitioner's account 4 per cent per annum for each draft deposited, based upon the lapse of time between the crediting of petitioner's account and the date that the draft was paid. This lapse of time usually ranged from one to three days.

At no time during the taxable years in question did petitioner's journal or general ledger reflect any liability to the bank for the credits placed to its...

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