Consolidated Goldacres Co. v. Commissioner of Int. Rev.

• Decision Date: 14 January 1948
• Docket Number: No. 3511.,3511.
• Citation: 165 F.2d 542
• Parties: CONSOLIDATED GOLDACRES CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Tenth Circuit

165 F.2d 542 (1947)

CONSOLIDATED GOLDACRES CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 3511.

Circuit Court of Appeals, Tenth Circuit.

December 12, 1947.

Rehearing Denied January 14, 1948.

Frazer Arnold, of Denver, Colo. (Arnold Weinberger, of Denver Colo., on the brief), for petitioner.

Hilbert P. Zarkey, of Washington, D. C. (Sewall Key, Acting Asst. Atty. Gen., Robert N. Anderson and Irving I. Axelrod, Sp. Assts. on the brief), for respondent.

Before BRATTON, HUXMAN, and MURRAH, Circuit Judges.

MURRAH, Circuit Judge.

By the Second Revenue Act of 1940, § 201, Sec. 710 et seq. Internal Revenue Code, 26 U.S.C.A.Int.Rev.Code, § 710 et seq., Congress imposed a graduated tax upon excess corporate profits as therein defined. Section 712 provided for an excess profits credit against such income, to be computed under Sections 713 or 714. The credit computed under Section 714 was based on average invested capital, including borrowed invested capital defined in Section 719(a) (1), (b) as 50 per cent of the average daily "outstanding indebtedness (not including interest) of the taxpayer which is evidenced by a bond, note, bill of exchange, debenture, certificate of indebtedness, mortgage, or deed of trust."

In its excess profits tax return for the year ended November 30, 1942, Petitioner, Consolidated Goldacres Company (herein called Consolidated), computed its excess profits credit on its average invested capital under Section 714, and included therein as average borrowed invested capital $221,476.59, representing 50 per cent of its average daily obligations to WesternKnapp Engineering Company (herein called Western) under a "Contract of Conditional Sale" and "Supplemental Contract of Conditional Sale". The item was excluded by the Commissioner and the Tax Court affirmed, holding that the contract was not an "outstanding indebtedness" evidenced by a "note", "mortgage", or any other type of instrument enumerated in Section 719(a) (1). 8 T.C. 87. Consolidated has appealed, and the sole question presented is whether the Tax Court's judgment, based upon agreed facts, is warranted in law. John Kelley Co. v. Commissioner, 326 U.S. 521, 66 S.Ct. 299, 90 L.Ed. 278; Dobson v. Commissioner, 320 U.S. 489, 64 S.Ct. 239, 88 L.Ed. 248.

Under the terms of the written "Contract of Conditional Sale" and a "Supplemental Agreement on Conditional Sale", both dated July 26, 1941, Western agreed to sell and Consolidated agreed to buy certain listed personal property, to be used in the operation of a cyanide and diesel electric plant. The plant was to be installed complete by Western on Consolidated's property, Western furnishing all labor, material, and equipment necessary for such installation. In consideration of the personal property and the installation of the plant, Consolidated agreed to pay Western $475,000 in monthly cash payments equal to $1.50 per ton for the first 150,000 tons of ore and concentrates milled at the plant, and thereafter $1 per ton, with the option of paying any additional amounts. The monthly payments were to continue until the total purchase price was paid, without interest, except delinquent installments were to bear interest at the rate of 6 per cent per annum until paid. The tonnage, upon which the amount of the installments were to be based, was to be measured by the total amount of ore and concentrates milled at the plant, whether from the mining claims of Consolidated or other property. Consolidated's claims were to be mined continuously, and the plant operated at its maximum capacity, under the supervision of a manager to be selected by Western and employed by Consolidated, at a minimum salary of $500 per month until full payment of the purchase price under the agreement. During this time, Western was to have access to Consolidated's office records and books relating to the tonnage account. Title to all of the property installed on the premises was to remain in Western until the full purchase price was paid, at which time Western agreed to execute a bill of sale for the same, and Western agreed to carry and pay for fire insurance coverage on the equipment and building until the full purchase price was paid. In the event of default by Consolidated, Western had the right to retain all payments theretofore made in consideration of the use of the personal property, and to sell the property without notice at public or private sale and credit the proceeds upon the unpaid purchase price, Western agreeing to pay any balance thereafter remaining unpaid under the contract; or, at its option, Western could take exclusive possession, control and management of the plant and mining claims of Consolidated, provided that if, upon the operation of the mines and plant, Western obtained sufficient funds to discharge the obligations under the contract, any surplus would become the property of Consolidated, and the property forthwith redelivered to it.

As a result of the decrease in production at the plant under orders of the War Production Board, the parties agreed in December 1942 that in lieu of the monthly payments stipulated in the contract, the operating profits would be divided 40 per cent to Consolidated and 60 per cent to Western until such time as the tonnage milled was in excess of 6,000 tons per month. As of July 31, 1945, Consolidated had paid to Western under the contract $129,384 in 1942, $73,427.01 in 1943, $108,258.91 in 1944 and $53,057.30 in 1945.

Following its decisions in Journal Publishing Co. v. Commissioner, 3 T.C. 518; Wm. A. Higgins & Co., Inc., v. Commissioner, 4 T.C. 1033, and Flint Nortown Theatre Co. v. Commissioner, 4 T.C. 536, the Tax Court proceeded upon the premise that "borrowed invested capital" must be evidenced by one of the specific types of instruments enumerated in Section 719(a) (1).

In Journal Publishing Co. v. Commissioner, supra, it was argued that the enumeration of various types of instruments in Section 719(a) (1) was not necessarily intended to limit borrowed capital to indebtedness evidenced by such instruments. Referring to the legislative history of the Section, the Court there observed that the Congress had deliberately deleted from the original draft the words "or any other written evidence of indebtedness" following the specific terms used, thus evidencing a legislative intention to restrict the meaning of the term "outstanding indebtedness" to the enumerated definitive types of instruments. See H.R. 2894 accompanying H.R. 10413; Senate Report No. 2112, p. 14; H. R. 3002, p. 12, 76th Congress 3rd Session. As further evidence of the legislative intent, the Court in the Journal Publishing Company case called attention to other tax legislation in which the Congress had either added the words "or other evidence of indebtedness" to specific terminology, or had left the definition of the word "indebtedness" to administrative regulations without defining the term. The Court finally concluded that since Section 719(a) (1) contained its own definition of "outstanding indebtedness", it was not for the Commissioner or the courts to add to or enlarge upon the statutory definition, citing Koshland v. Helvering, 298 U.S. 441, 56 S.Ct. 767, 80 L.Ed. 1268, 105 A.L.R. 756, and Deputy v. DuPont, 308 U.S. 488, 60 S.Ct. 363, 84 L.Ed. 416. With that reasoning and conclusion we agree, but it is contended here that in any event, the instruments involved qualify as a "note" or in substance and effect a "mortgage" under Section 719 (a) (1).

In considering whether the instruments qualified as a "note", the Tax Court again relied upon its reasoning in the Journal Publishing Company case, where it was pointed out that since the definitive statute contained no definition of the word "note", the administrative regulations had construed the term as a "promissory note". Accepting that definition, the Tax Court in both the Journal Publishing Company case and here adopted the ordinary legal definition of the word "note" as "a written promise to pay a certain sum of money at a future time unconditionally". While recognizing that a note need not be in any particular form, the Court was nevertheless of the...