Consol. Goldacres Co. v. Comm'r of Internal Revenue

• Decision Date: 21 January 1947
• Docket Number: Docket No. 9248.
• Citation: 8 T.C. 87
• Parties: CONSOLIDATED GOLDACRES COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

8 T.C. 87

CONSOLIDATED GOLDACRES COMPANY, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 9248.

Tax Court of the United States.

Promulgated January 21, 1947.

Petitioner, a Nevada corporation, entered into contracts for erection of mining machinery and plant. Title was retained by the seller until payment, in general dependent upon the amount of ore processed. Held, the contracts did not comprise a ‘note‘ or ‘mortgage‘ within the intendment of section 719(a)(1), Internal Revenue Code, as to definition of borrowed invested capital. Frazer Arnold, Esq., for the petitioner.

Felix Atwood, Esq., for the respondent.

This proceeding involves a deficiency in excess profits tax liability for the taxable year ended November 30, 1942, in the amount of $9,038.13.

The issue presented id, whether an agreement between petitioner Western-Knapp Engineering Co. of July 26, 1941, constitutes an outstanding indebtedness as is intended by section 719(a)(1) of the Internal Revenue Code.

Respondent concedes that if the agreement does come within the ambit of section 719(a)(1), then the average balance due on the agreement for the year ended November 30, 1942, would be $221,476.59.

FINDINGS OF FACT.

A stipulation of all facts involved was filed. We adopt same by reference and find the facts therein set forth. Such parts as are considered necessary are here set forth.

The petitioner, Consolidated Goldacres Co., is a Nevada corporation, with its principal office located in Denver, Colorado. The tax returns for the period involved herein were filed with the collector of internal revenue for the district of Colorado on an accrual basis.

On or about July 26, 1941, petitioner entered into a contract entitled ‘CONTRACT OF CONDITIONAL SALE‘ with the Western-Knapp Engineering Co. (referred to hereinafter as Western-Knapp, or seller) and under the same date petitioner and seller entered into an agreement entitled ‘SUPPLEMENTAL AGREEMENT ON CONDITIONAL SALE‘ which was made a part of the above mentioned contract by reference.

The contract provided that Western-Knapp agreed to sell and petitioner agreed to buy certain listed personal property; that the seller would construct and/or install the property, pursuant to the terms of the supplemental agreement, on the premises of the petitioner located in Lander County, Nevada; that in consideration of the performance by the seller under the contract and supplemental agreement, the petitioner would pay the seller the sums at the time and in the manner specified in the supplemental agreement; that petitioner, at its option, might pay sums in addition to the monthly installments provided in the supplemental agreements. It was further provided in the contract that all cost of collecting any amount or enforcing any of the seller's rights should be paid by petitioner; that title to and ownership in each and all of the personal property ‘are, and shall continue to be vested in seller,‘ until payment of the purchase price and the performance of all the covenants and conditions on the part of petitioner, and after payment in full of the purchase price and the performance of all the conditions by the petitioner, the seller agreed to execute and deliver to petitioner a bill of sale to all the personal property. If the petitioner's indebtedness, including any of the installments of the purchase price, or interest due thereon, or any insurance premium, or any other indebtedness which might be payable by petitioner to the seller, should become due and remain unpaid or if there should be a default by the petitioner in the performance of the terms and conditions of the agreement, then the full amount unpaid on all indebtedness should become due and payable by the petitioner unless the petitioner in 90 days corrected the default; and the seller might take possession and dispose of the personal property and all payments theretofore made by the petitioner should be retained by the seller in consideration of the use of the personal property while in the petitioner's possession and not as a penalty; or the personal property might be sold without notice at public or private sale and the proceeds credited upon the amount unpaid. Buyer was to pay forthwith any balance unpaid. All equipment and other things which were placed on any of the personal property, described in the agreement, should at once become a component part thereof and belong to the seller. The seller might inspect the personal property at any reasonable time. The seller should be relieved from all damages, from whatever cause, arising from the personal property. The personal property, while in the buyer's possession, or under its control, was to be held at the risk of the buyer (except for insurance to be carried by the seller, as set forth in the supplemental agreement, as hereinafter stated), and its loss destruction or injury should not release the buyer from the agreement. Time was of the essence of the agreement, both to the petitioner and the seller.

Attached to the contract was a list of items which the seller agreed to furnish.

The supplemental agreement,¹ which was executed the same day as the contract and made a part of the contract, stated that the parties had entered into a contract of conditional sale covering the complete erection of a cyanide plant and a diesel electric plant on certain property owned by petitioner in the State of Nevada. The contractor agreed to furnish all labor, materials, and equipment necessary to construct and install the plant on petitioner's property. Contractor was given five months from date of the agreement to complete, in every detail, the construction, erection, and installation of the equipment. The supplemental agreement contained the following conditions pertaining to ‘payments‘:

PAYMENTS: As consideration for the performance by the Contractor of the terms of this Agreement and of said Contract of Conditional Sale between the respective parties hereto, and of even date herewith, Owner agrees to pay to Contractor the total sum of Four Hundred Seventy-five Thousand Dollars ($475,000.00) lawful money of the United States, which said sum is to be paid by Owner to Contractor in the following manner, viz: A sum in cash equal to One and 50/100 Dollars ($1.50) per ton for all ore and/or concentrates milled in said plant, until an aggregate of one hundred fifty thousand (150,000) tons shall have been so milled in said plant, and thereafter, at the rate of One and 00/100 ($1.00) in cash for each such ton so milled in said plant, and, at all times, as much additional in cash as owner will then be able to pay to Contractor; said payments by Owner to Contractor shall be made monthly on or before the 15th day of each and every month, commencing on the 15th day of the month next following the date of the completion and acceptance of said plant by Owner, and such monthly payments shall cover the amount so due to Contractor for the number of tons milled in said plant during the calendar month next preceding the said due date of said installment; said monthly payments to continue until the total purchase price above specified shall have been paid by Owner to Contractor, without interest, except that any installments of said purchase price which shall become delinquent hereunder shall bear interest at the rate of six per cent per annum from and after the due date thereof, if not so paid, and until paid.

Until all obligations of Owner to Contractor hereunder and under said Contract of Conditional Sale shall have been fully paid, the operations of said properties and plant of Owner shall be under the direct personal management of a managing operator to be employed by Owner but selected by Contractor, and who shall remain so in charge only so long as his said employment shall continue to be approved by Contractor, and to which such managing operator Owner shall pay compensation (or salary) amount to at least Five Hundred Dollars ($500.00) per month; and

Likewise, until all such obligations of Owner to Contractor shall have been fully paid, Owner undertakes that all ore taken from the lode mining claims of Owner above-described, shall be delivered to and milled in said cyanide plant, and the above-mentioned payments shall be measured upon all tonnage milled in said plant, whether or not such ore and/or concentrates so milled in said plant shall be taken and/or mined from the premises of Owner and/or of other persons; and until such full payment of said Owner's obligations to Contractor, Owner will, from and after the date possession of said plant is turned over to Owner, continuously and without interruption, mine said properties, and will operate said plant to the maximum possible operating capacity of said plant; and until such full payment of said Owner's obligations to Contractor, Contractor shall have access to the mill and/or office records, books and accounts of Owner is (sic) so far as they relate to and/or for the purposes of verifying the tonnage milled in said plant during any calendar month after the completion and acceptance of said plant and equipment, as hereinabove provided.

The contractor made certain warranties as to the work and material. Petitioner agreed to continue to maintain clear and merchantable title to the lode mining claims and properties on which the plant was to be built. The contractor agreed to carry and pay for fire insurance upon the building and equipment in an amount equivalent to the full insurance value thereof and not less than one-third of the outstanding and unpaid balance owing to the contractor. The contractor agreed to pay all personal property taxes assessed or levied by Lander County for the taxable year of 1942. In the event of default by petitioner, the contractor had the right to take possession of the properties and claims of the petitioner and the right, at its option, to exclusive management and control of said properties, as...