*21 Decision will be entered for the respondent.
1. Excess Profits Tax -- Credit Based upon Invested Capital -- Borrowed Capital -- Deposits by State Treasurer -- Sec. 719 (a) (1). -- Deposits by the State of Illinois did not constitute borrowed capital within the meaning of section 719 (a) (1). Commissioner v. Ames Trust & Savings Bank, 185 F. 2d 47, reversing 12 T. C. 770; National Bank of Commerce, 16 T. C. 769; and Capital National Bank of Sacramento, 16 T. C. 1202, followed.
2. Excess Profits Tax -- Credit Based upon Invested Capital -- Borrowed Capital -- Cashier's Checks -- Sec. 719 (a) (1). -- Outstanding cashier's checks and bank money orders do not represent indebtedness of the kind which Congress intended to include in borrowed capital under section 719 (a) (1).
3. Excess Profits Tax -- Credit Based upon Invested Capital -- Borrowed Capital -- Amounts Due Securities Broker -- Sec. 719 (a) (1). -- Amounts due a broker on the purchase of Government securities were not evidenced by instruments of the kind required under section 719 (a) (1) and did*22 not constitute borrowed capital.
*479 The Commissioner determined a deficiency of $ 42,416.63 in excess profits tax for the year 1945. The issues for decision are whether deposits by the State of Illinois, outstanding cashier's checks and bank money orders, and amounts due a broker on the purchase of Government securities constituted borrowed capital within the meaning of section 719 (a) (1) of the Internal Revenue Code, in computing petitioner's excess profits credit for 1945 and unused excess profits credit carry-over from 1943 to 1945.
FINDINGS OF FACT.
The petitioner at all times material hereto was a national banking association organized under the laws of the United States with its principal office at Chicago, Illinois. It filed its excess profits tax return for 1945 with the collector of internal revenue for the first district of Illinois. The petitioner kept its books and filed its returns on a calendar year accrual basis.
Deposits by the State of Illinois.
The treasurer of the State of Illinois is required *23 by law to deposit all moneys received by him in banks located within the State which *480 are authorized to receive such deposits. At least 20 banks must be used as depositaries. The banks are required to pay interest to the State on both active and inactive accounts if members of the Federal Reserve System are permitted to pay interest on the particular class of deposits. The deposits must be in either active or inactive accounts, the former are subject to withdrawal upon demand and the latter require notice of withdrawal of stated periods, the least of which is 30 days. The State treasurer is required to send notices at least once a year to all regularly established national and State banks in Illinois indicating that he will receive sealed proposals for the deposit of public moneys. Each proposal by a bank must state whether it is for an active or an inactive deposit, the amount desired, and the rate of interest which the bank will pay on daily balances. The approval of any proposal does not confer a right upon the approved bank to receive deposits of State money. No moneys may be deposited in any approved bank until the bank has deposited approved securities with the*24 State treasurer equal in market value to the amount of money deposited. The State treasurer is prohibited from using money deposited in inactive accounts except when the money deposited in active accounts is insufficient.
The petitioner, in response to a notice, applied on August 6, 1945, for an inactive deposit in the amount of $ 500,000 with interest at 1/4 per cent. The State treasurer approved the petitioner's proposal for an amount of $ 250,000 on September 22, 1945, and sent to the petitioner a "contract agreement" in which he agreed to give 30 days' notice in advance of withdrawal.
The petitioner was an approved depositary for funds of the State of Illinois during the years 1943 and 1945. The funds deposited with the petitioner during those years were inactive deposits subject to withdrawal by the State treasurer after giving 30 days' notice to the petitioner. The average amount of State funds on deposit with and the amount of interest paid thereon by the petitioner were as follows:
| Average amount | ||
| Year | deposited | Interest |
| 1943 | $ 15,068.00 | $ 38.19 |
| 1945 | 452,054.00 | 1,131.81 |
The petitioner carried those funds in the name of the treasurer of the State of Illinois*25 as "Time Deposit-Open Accounts." The deposits were invested by the petitioner.
Cashier's Checks and Bank Money Orders.
The petitioner, in the course of its business, issued cashier's checks and bank money orders under the following general categories:
*481 Trust division
Premium finance
Personal credit department (excluding auto loans)
Personal credit department (auto loans only)
Bank money orders
Cashier's checks for all other purposes
Separate ledger sheets were maintained for each category and the amounts outstanding in each category were separately stated on the petitioner's daily balance sheets.
Trust department cashier's checks were drawn to disburse income, to purchase trust investments, and to pay bills connected with the various trusts administered by the trust department. "Checks of Trust Division," a liability account, would be increased and a corresponding decrease would be made in "Secured Demand Deposits, Trust Division," also a liability account, when a trust department cashier's check was drawn. "Secured Demand Deposits, Trust Division" represented the uninvested funds of the trust department acquired from various trusts. There was no segregation of the*26 uninvested funds of various trusts but all uninvested funds of all trusts were lumped together and were treated by the bank as one deposit fund administered by the trust department. The uninvested trust funds could be used by the bank in its own business provided securities of a like amount, preferably Government bonds, were delivered to the trust department as collateral security in accordance with Federal Reserve Board Regulations. The petitioner, during 1943 and 1945, used all of the uninvested trust funds in its business.
Premium finance cashier's checks were used for the disbursal of loan proceeds obtained for the sole purpose of financing premiums on casualty insurance. Such checks were not issued until a signed note of the borrower was received.
Personal credit department (excluding auto loans) cashier's checks were used for the disbursal of small loans. These checks were issued upon receipt of a signed note and a net worth statement or collateral as appropriate.
Personal credit department (auto loans only) cashier's checks were used to disburse the proceeds on loans secured by automobiles. The checks were issued upon receipt of a signed note and either a chattel mortgage*27 or a conditional sale contract.
Bank money orders were issued in amounts not in excess of $ 100 to purchasers for cash who used the money orders to pay small utility and household bills. The purchaser paid cash or equivalent in check in the amount of the bill and the money order was made out payable to the purchaser's creditor in that same amount. The petitioner charged 10 cents each for bank money orders.
*482 Cashier's checks for all other purposes were used for the following purposes: Disbursal of proceeds of commercial loans; purchase of bonds for petitioner's investment portfolio; payment of petitioner's bills and for issuance to persons who purchased cashier's checks. The petitioner received a signed note and either collateral or a net worth statement in the case of commercial loans. Cashier's checks were usually used for non-customer borrowers since customer borrowers had their accounts credited with the proceeds of the loan. Cashier's checks for the purchase of bonds would be issued upon the receipt by the petitioner of the bonds. Cashier's checks were not used for the purchase of Government bonds as those purchases were handled by a direct charge to the petitioner's*28 account with the Federal Reserve Bank. The petitioner's bills which were paid by cashier's checks were those incurred for merchandise received, services rendered to the petitioner, and other similar items. Cashier's checks were also issued to purchasers who desired, for some personal reason, to have the bank's official check rather than a personal check, in which case the petitioner either received cash or charged the account of the purchaser.
All cashier's checks except trust department cashier's checks were entered on the books of the petitioner by increasing one or another of several "cashier's checks" or related liability accounts and making a corresponding increase in the appropriate asset account.
The average daily outstanding balance of cashier's checks in each of the categories during the years 1943 and 1945 was as follows:
| 1943 | 1945 | |
| 1. Trust division cashier's checks | $ 77,262.70 | $ 107,310.88 |
| 2. Premium finance cashier's checks | 8,294.31 | 7,981.95 |
| 3. (a) Personal credit department cashier's checks | ||
| (excluding auto loans) | 3,851.94 | 2,771.02 |
| (b) Personal credit department cashier's checks | ||
| (auto loans only) | 529.62 | 234.99 |
| 4. Bank money orders | 13,339.42 | 8,980.90 |
| 5. Cashier's checks issued for all other purposes | 239,741.74 | 436,401. 07 |
| Total average daily outstanding balances | $ 343,019.73 | $ 563,680.81 |
*29 There was an outstanding balance in each of the categories on each day of the years 1943 and 1945 except that at times there was no outstanding balance in personal credit department (auto loans only) because of the scarcity of automobiles during World War II.
Amounts Due on Government Securities.
The petitioner made purchases on March 22, 1945, and October 16, 1945, each of $ 3,000,000 par value of United States Government bearer *483 securities from a dealer specializing in Government securities. The petitioner did not pay for the securities at the time of purchase, but instead the amount was carried on open account with the broker. The petitioner paid interest at the rate of one-half of 1 per cent per annum on the balance due. The petitioner, at various times after the dates of purchase, paid for the securities by directing the Federal Reserve Bank of Chicago to pay the broker a portion of the purchase price. The broker delivered securities in an equal amount to the Federal Reserve Bank which held them in safekeeping for the petitioner. No promissory notes were ever issued by the petitioner to the broker for the amount due.
A confirmation of each purchase was sent to*30 the petitioner by the broker at the time of purchase and corrected confirmations were sent at the time of each payment. Each confirmation summarized the transaction which had just taken place. The petitioner, at the time of each payment, wrote to the Federal Reserve Bank instructing it to accept the bonds to be delivered and hold for safekeeping and "pay therefor" the amount due on that payment. The broker, at the time of each payment, delivered to the Federal Reserve Bank bonds for which payment was made and by letter requested the Federal Reserve Bank to accept the bonds for the account of the petitioner and to credit the broker's account at a local bank with the amount of the payment.
The petitioner recorded these transactions in two accounts, "U. S. Securities Purchased for Future Delivery," an asset account, and "Due for U. S. Securities Purchased," a liability account.
It was originally intended that the petitioner would not pay for the securities until maturity at which time the petitioner anticipated an increase in deposits. The petitioner's purpose in anticipating these deposits was to be able to subscribe at par to the bond issue which refunded the issue purchased rather*31 than have to pay the usual premium. This right was accorded to holders of the old issue. The broker exchanged the old issue for the new issue prior to payment by the petitioner on the first purchase but the petitioner paid for the second purchase before refunding. Securities were not delivered to the petitioner until payment was made and if the petitioner defaulted on payment, the broker would have sold the securities on the open market, the petitioner being liable for any loss.
The petitioner owed the broker during the year 1945 an average daily balance resulting from these transactions of $ 1,036,404.88. The petitioner paid interest of $ 5,470.49 on these amounts during the year 1945.
The various transactions entered into by the petitioner were for bona fide business purposes and not for the purpose of increasing petitioner's excess profits credit.
*484 The deposits by the State of Illinois, the outstanding cashier's checks and bank money orders, and the amounts due on the purchase of Government securities did not constitute borrowed capital within the meaning of section 719 (a) (1).
The stipulation of facts and exhibits attached thereto are incorporated herein by this *32 reference.
OPINION.
The petitioner used and is entitled to use an excess profits credit based upon invested capital as prescribed by section 714 of the Internal Revenue Code for the years 1943 and 1945 and is entitled to carry its unused excess profits credit for 1943 over to 1945 pursuant to section 710 of the Internal Revenue Code. The only issues are whether deposits by the State of Illinois, outstanding cashier's checks and bank money orders, and amounts due on purchase of Government securities constituted borrowed capital within the meaning of section 719 (a) (1) in computing the petitioner's excess profits credit and unused excess profits credit carry-over. That section includes in borrowed capital "the amount of the outstanding indebtedness (not including interest) of the taxpayer which is evidenced by bond, note, bill of exchange, debenture, certificate of indebtedness, mortgage or deed of trust."
The petitioner contends that the deposits by the State of Illinois constituted "outstanding indebtedness" evidenced by a "mortgage" or "certificate of indebtedness" within the meaning of section 719 (a) (1). The deposit liability of a bank has been held not to constitute "borrowed*33 capital" or "outstanding indebtedness" under section 719 (a) (1) on the ground that a deposit is a transaction peculiar to the banking business which does not have the characteristics of money borrowing. Commissioner v. Ames Trust & Savings Bank, 185 F. 2d 47, reversing 12 T. C. 770. The decision of the Court of Appeals was expressly followed in National Bank of Commerce, 16 T. C. 769, and was cited with approval in Capital National Bank of Sacramento, 16 T. C. 1202. The petitioner apparently concedes that ordinary deposits with it do not constitute "borrowed capital." The petitioner pledged collateral security for the deposits with the State and the State treasurer agreed to give notice of 30 days prior to his withdrawal of any of those funds. The difference between such deposits and those made with the petitioner by an ordinary depositor, as to which no special provisions apply, do not serve to distinguish the two classes of deposits for present purposes. Following the cases above cited, it is held that the State deposits do not constitute borrowed capital*34 within the meaning of section 719 (a) (1).
*485 The petitioner in the ordinary course of its business frequently drew and issued cashier's checks and money orders for various purposes as set forth in the Findings of Fact. The petitioner contends that its average daily balances of outstanding cashier's checks and bank money orders constituted borrowed capital within the meaning of section 719 (a) (1). The Commissioner concedes that the cashier's checks are bills of exchange but argues that they do not represent the type of outstanding indebtedness which Congress intended to include in borrowed capital under section 719 (a) (1).
The type of indebtedness involved in any particular case must be tested against the intention of Congress in enacting this provision for not all indebtedness evidenced by the enumerated instruments qualifies. Player Realty Co., 9 T. C. 215; Hart-Bartlett-Sturtevant Grain Co., 12 T. C. 760, 769, affd. 182 F. 2d 153. The Commissioner in Regulations 112, section 35.719-1, provided:
The term "certificate of indebtedness" includes only instruments having the general character*35 of investment securities issued by a corporation as distinguishable from instruments evidencing debts arising in ordinary transactions between individuals. Borrowed capital does not include indebtedness incurred by a bank arising out of the receipt of a deposit and evidenced, for example, by a certificate of deposit, a passbook, a cashier's check, or a certified check.
The court, in Commissioner v. Ames Trust & Savings Bank, supra, approved that regulation and held that time deposits evidenced by certificates of deposit were not borrowed capital because of the inherent and established distinction between deposit liability and commercial indebtedness which was properly carried into the regulation. The reasoning of that case applies to the cashier's checks and bank money orders here in controversy. Those checks and orders were not used by the bank to borrow money in the ordinary sense or in any way that Congress had in mind in enacting section 719 (a) (1). The bank used the checks and orders as a convenience for itself and its customers. Not only did it not pay any interest in connection with them but it actually made charges for issuing the*36 orders. The checks and orders were merely used to carry on the day-to-day business of the bank. Many of the checks were used by the bank, as a taxpayer other than a bank would draw and use a check. For example, the bank used them to pay its current bills, to disburse funds to non-depositors, and to purchase securities. If a depositor asked for a cashier's check or a bank money order for his convenience, it was merely charged against his deposit account. A customer who was not a depositor, desiring to obtain a cashier's check or a bank money order for his use, was generally required to deposit an equivalent amount of cash or collateral with the bank. None of the uses of these checks and orders would be deemed a borrowing by the bank as borrowing is commonly understood. *486 This case on this issue is not distinguishable in principle from Commissioner v. Ames Trust & Savings Bank, supra,National Bank of Commerce, supra, and Capital National Bank of Sacramento, supra, and it is held that the checks and orders did not give rise to any excess profits credit based upon invested capital. *37 The case of S. Lowenstein & Son, 21 T. C. 648, cited by the petitioner does not involve a bank or a set of facts comparable to those here present.
The petitioner purchased Government securities from a broker on credit and paid interest to the broker on the amount due it. The Commissioner contends that the amount due the broker was never evidenced by an instrument of the kind required in section 719 (a) (1). The evidence does not show that the petitioner ever issued any instrument of the required kind in connection with these transactions. The broker sent a confirmation of each purchase to the petitioner and later sent corrected confirmations to him when a payment was made. The petitioner directed the Federal Reserve Bank by letters to accept the securities and to make payments to the broker upon receipt of the securities. The indebtedness to the broker was paid at the time the corrected confirmation and the letter from the petitioner to the Federal Reserve Bank were received. Those corrected confirmations and letters were not in existence while the indebtedness to which they referred was outstanding. The letters directing payment upon delivery*38 of the securities to the Federal Reserve Bank were not negotiable instruments under the law of Illinois. The original confirmations were certainly not mortgages or bills of exchange. They did not even represent the agreement in regard to payment for the securities being purchased. The petitioner cannot rely upon any oral agreements or custom or practice since section 719 (a) (1) requires that the amounts be evidenced by a written instrument. It cites no cases in point. Indebtedness evidenced in this way is not included in borrowed money under section 719 (a) (1).
Decision will be entered for the respondent.