*313 Decision will be entered for the respondent.
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.
*87 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 is, whether an agreement between petitioner and Western-Knapp Engineering Co. of July 26, 1941, constitutes an outstanding indebtedness*314 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.
*88 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, Consolidatd 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 *315 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, *316 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 *89 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. *317 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*318 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*319 payments shall cover the amount so due to Contractor for the number of tons milled in said plant during the calendar month next preceding *90 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*320 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.
*321 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 additional security for performance. If by operation the contractor obtained sums sufficient to discharge the contract, any surplus from such operations was to belong to the owner, and the property was to be redelivered to it. The contractor could sublet, but could not assign the whole or any part of its obligation without petitioner's written consent.
Both the contract and supplemental *322 agreement were signed for the respective companies by their officials.
*91 The method of payment, as provided in the above contract and supplemental agreement was changed as is indicated in a memorandum dated December 10, 1942, which provides in material part as follows:
December 10, 1942.
RE: GOLDACRES OPERATIONS
Memorandum of discussion between Mr. Harby C. Bishop of Consolidated Goldacres Company and Messrs. Brown, Stewart, and Cooper of Willow Creek Mines, Inc., acting in their dual position as operators of the property and as partners of Western-Knapp Engineering Company.
1. Under date of December 4, 1942, Mr. Ernest C. Kanzeler, Director General of Operations, War Production Board, notified Consolidated Goldacres Company that permission was granted for the treatment of not to exceed 3,000 tons of ore monthly for a period of six months, beginning December 8, 1942.
* * * *
4. It was recognized that there would inevitably be some increase in the per ton operating costs because of the reduced scale of operations, and to enable both companies to participate in earnings, it was suggested that Mr. Bishop and accepted by Willow Creek Mines, Inc., representatives that the operating*323 profits be divided 40% to Consolidated Goldacres Company and 60% to Western-Knapp Engineering Company. Western-Knapp Engineering Company's share of operating profits would be applied to payment on the master contracts between Consolidated Goldacres Company and Western-Knapp Engineering Company, dated July 26, 1941.
It was further agreed that the management fee to Willow Creek Mines, Inc. would be increased to 15 cents per ton in lieu of the 10 cents, as provided for in the contract dated July 26, 1941.
5. The arrangements, as above, to continue during such period of reduced operations until such time, if any, when the tonnage milled is in excess of 6,000 tons per month. Should the relief granted by the War Production Board be increased to such a point that the tonnage milled would reach a figure in excess of 6,000 tons per month, then the basis of settlement would revert to that of the original contracts unless adjusted by mutual agreement.
Willow Creek Mines, Inc., and
Western-Knapp Engineering Co.
By [signed] Walter Lyman Brown
By [signed] Corwin A. Cooper
Consolidated Goldacres Company
By [signed] Harry C. Bishop
Up to July 31, 1945, the following payments were made by petitioner*324 to Western-Knapp pursuant to the contract of conditional sale, supplemental agreement on conditional sale, and the memorandum of December 10, 1942:
| During the year ended November 30, 1942 | $ 129,384.00 |
| During the year ended November 30, 1943 | 73,427.01 |
| During the year ended November 30, 1944 | 108,258.91 |
| From November 30, 1944 to July 31, 1945 | 53,057.30 |
| Total | 364,127.22 |
*92 No additional sums were paid by the petitioner over and above those required to be paid under said agreements and memorandum.
OPINION.
Under the facts above set forth, is the petitioner entitled to include $ 221,476.59 as borrowed invested capital, in computing excess profits, within the intendment of section 719 (a) (1) of the Internal Revenue Code? 2 That section, in short, provides for such inclusion if the amount is (1) indebtedness and (2) if it is evidenced by a bond, note, bill of exchange, debenture, certificate of indebtedness, mortgage, or deed of trust. Both elements must appear, that is, indebtedness, and the requisite form thereof. If either is lacking, obviously the amount is not borrowed capital, within the purview of the statute. We first consider whether the alleged indebtedness*325 was evidenced as by statute required.
The petitioner relies only upon the amount being evidenced by note, or, in substance, a mortgage, and does not contend that there was a bond, bill of exchange, debenture, certificate of indebtedness, or deed of trust. We agree that no claim could be well based that such forms were used, and proceed to consider the contentions as to note and mortgage.
First, as to note: Extended discussion is not necessary to state our view that a note is not shown. Recognizing fully that no particular form of note is required, nevertheless, we consider that we are presented here*326 with no form of note, in any ordinary and accepted sense. The instruments here involved and relied on are not notes, but bilateral contracts; not a unilateral promise to pay, for a previous consideration recognized, but executory contracts carrying obligations on both parties. The petitioner cites and relies on Aetna Oil Co. v. Glenn, 53 Fed. Supp. 961, but that case not only involved a clear, absolute promise to pay $ 120,000, subject to no contractual obligation on the part of the payee, but in the opinion the court expressly, and in our view soundly, points out the essential nature of a note, as follows:
* * * It is also distinguished from the usual type of bilateral executory contract in that it is executory on one side only, with the entire consideration having been passed and executed by the party who is entitled to call for the performance. * * *
Such is not the nature of the "Contract of Conditional Sale," "Supplemental *93 Agreement on Conditional Sale," and "Memorandum" herein before us, for various and sundry mutual obligations of the parties are set forth therein and the consideration was performance by both. There was no "written*327 promise to pay a certain sum of money at a future time unconditionally," within the definitions from Black's Law Dictionary and that of Bouvier, quoted by us on this point in Journal Publishing Co., 3 T. C. 518 (523), in holding that the word "note" in the section here being construed was not satisfied by a bilateral contract. We conclude and hold that the amount here involved was not represented by a note, within the meaning of section 719 (a) (1).
Do the contracts compromise "in substance" a "mortgage," as petitioner contends, within the intendment of that section? The original and supplemental contracts are denominated "Contracts of Conditional Sale," and later "Memorandum" effects no modification in that regard. The terminology is, of course, not conclusive, but is to be given consideration with all other terms of the instruments. Petitioner recognzes that the form is not that of mortgage, the expression used by the statute, but contends that there was, in effect, a mortgage, retention of title being by way of security only. We said in Journal Publishing Co., supra, that borrowed capital must be evidenced by the*328 specific types of instruments set forth in section 719 (a) (1); and in Economy Savings & Loan Co., 543">5 T. C. 543, that section 719 is to be given strict construction.
Though in some states there are decisions, in effect, erasing to some degree the distinction between conditional sales, or title retention contracts, and mortgages, the petitioner argues, and the respondent appears to agree, that the only state law here applicable is that of Nevada, the situs of the property involved and the state of petitioner's incorporation. Nothing of record indicates applicability of the law of any other state. The contracts here presented very carefully provided for retention of title by the seller until performance by the buyer, the petitioner. Section 6735, Nevada Compiled Laws 1929, provides: "A contract to sell or a sale may be absolute or conditional." And section 6752 provides:
Property in Specific Goods Passes When Parties So Intend. § 18. (1) Where there is a contract to sell specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred.
(2) For the purpose of ascertaining*329 the intention of the parties, regard shall be had to the terms of the contract, the conduct of the parties, usages of trade and the circumstances of the case.
Reading the above provisions, it would appear that the statutes recognize that the parties could enter into conditional sales contracts and that they could provide in the contract when title to the property *94 should pass. This viewpoint was announced in Studebaker Bros. Co. v. Witcher (1921), 44 Nev. 442">44 Nev. 442; 195 Pac. 334, where the court states, at page 338:
There seems to be little difficulty in determining from the terms of the contract that the parties intended it to operate as a conditional sales contract and not by way of mortgage. Its distinguishing feature in this respect is the retention of the title to the property in the seller until the full payment of the price is made by the buyer. This condition precedent to the transfer of title is contemplated by the Uniform Sales Act. Subdivision 1 of section 20 of this act reads:
"Where there is a contract to sell specific goods, or where goods are subsequently appropriated to the contract, the seller*330 may, by the terms of the contract or appropriation, reserve the right of possession or property in the goods until certain conditions have been fulfilled. The right of possession or property may be thus reserved notwithstanding the delivery of the goods to the buyer or to a carrier or other bailee for the purpose of transmission to the buyer." [Italics supplied.]
Petitioner contends that this case has been overruled by Nevada Motor Co. v. Bream (1928), 51 Nev. 89">51 Nev. 89; 269 Pac. 602, and that the law in Nevada now recognizes that the transactions, usually called conditional sales contracts, are in their essence a mortgage.
We do not share this view. The Nevada Motor Co. case does hold that the vendee, under a conditional sales contract, has an equitable ownership of the article specified in the contract and that the creditor of the vendee may be placed in the "shoes" of the vendee upon tendering performance of all obligations existing against the vendee. This case appears to be decided on its particular facts and would have no bearing on a case where the facts were substantially different. The facts in the Nevada*331 Motor Co. case were substantially as follows: Vendee had entered into a conditional sales contract and had not defaulted in any payments; the creditors of the vendee tendered the remaining payments plus interest to the vendor, thereby, at least in substance, making the conditional sales contract a completed contract. Under such circumstances it appears that it would have been inequitable for the court to have reached any other result, but we think the conclusion not helpful here.
As we view the problem, our main consideration is whether or not the courts of Nevada recognize a conditional sales contract as distinguished from a mortgage, and we consider the Studebaker Bros. Co. case as affirming such distinction, especially in view of the case of Sellai v. Lemmon (1944), 62 Nev. 330">62 Nev. 330; 151 Pac. (2d) 95, which considers as valid a conditional sales contract, and says:
The conditions of the contract whereby plaintiff, on default of defendant repossessed the subject thereof, sold it at private sale and brought suit for the deficiency, were terms which could be validly imposed in the contract. They are not inconsistent with*332 the retention of title in the seller, nor restricted by law, *95 nor are they contrary to public policy. Such terms have been recognized as valid in this and other jurisdictions. [Citing the Studebaker Bros. Co. case.]
The above language, in our view, recognizes conditional sales contracts as effective in Nevada. See also Southern Pacific Co. v. Miller, 154 Pac. 929.
Studebaker Bros. Co. v. Witcher, supra, is cited in the case of In re Halferty, 136 Fed. (2d) 640 (643), where the question was whether a contract was of conditional sale or of mortgage. The court, holding that it was not a mortgage, says:
In all jurisdictions, where litigated, such contracts as the one now in issue have been construed to be conditional sale contracts rather than mortgages, and effective to postpone the transfer of title, regardless of whether the action was based on the Uniform Sales Act, or the Uniform Conditional Sales Act, or both, or neither, or regardless of whether there were one or more valid conditions precedent. See Faisst v. Waldo, 57 Ark. 270">57 Ark. 270, 21 S. W. 436;*333 * * * [Citing many cases, including the Studebaker case, as above stated.]
Though in matters of equitable cognizance the right to redeem has been recognized in matters of conditional sale and retention of title, nevertheless the distinction between the "mortgage" required by section 719 (a) (1) and conditional sale is deeply grounded. In re Lakes Laundry, Inc., 79 Fed. (2d) 326, involved section 77B of the Bankruptcy Act and a conditional sales contract under the Uniform Conditional Sales Act. The court held that property of one whose rights were only those of a conditional vendee was not covered by a reorganization petition, but was that of the conditional vendor until payment, and subject to repossession by the vendor; and that the vendor was not a mortgagee. The court said:
But, even though section 77B is a remedial statute to be construed liberally, we think Congress did not intend to ignore the distinction between property mortgaged by a debtor and property held by a debtor as conditional vendee. The distinction has been recognized in legislation from early times, and was a part of the common law. The fact that Congress expressly included*334 the words "conditional sale agreement" in subdivision (o) (6) of section 75 of the act, 11 USCA § 203 (o) (6), and omitted any reference to conditional sales in subdivision (c) (10) of section 77B of the act, 11 USCA § 207 (c) (10), is significant and points to the conclusion that it meant in this instance to exclude property in the possession of the debtor whose rights therein were only those of a conditional vendee.
So here we think it is significant that Congress omitted any reference to "conditional sales contract" along with "mortgage" in section 719 (a) (1), and that we should not consider the conditional sales agreement here presented as within the ambit of that section. The petitioner seeks to demonstrate borrowed capital. We do not think that a mortgage "in effect" is shown in the instant case, within the intendment of the statute here to be construed. In truth, it shows the erection of a *96 plant by Western-Knapp Engineering Co., with title expressly and specifically retained by that company until it had received payment, in a certain manner, but in general according to the amount of ore or *335 concentrates milled in the plant. Then, and only then, would a bill of sale be executed, under the agreement, and until that time the seller could select the managing operator of the plant, to be paid $ 500 per month by the petitioner. To us such an arrangement appears to come neither within the letter nor the spirit of the statute as to considering "borrowed capital" in the computation of excess profits tax. The contract was, in our view, under Nevada law and general principles, neither in form nor in substance, the mortgage required by section 719 (a) (1). In the light of such conclusion, it is needless to consider whether "indebtedness" was created by the contracts.
We hold that the Commissioner did not err in denying consideration of the amount involved as borrowed invested capital.
Decision will be entered for the respondent.
Footnotes
1. The supplemental agreement referred to petitioner as "owner" and Western-Knapp as "contractor."↩
2. SEC. 719. BORROWED INVESTED CAPITAL.
(a) Borrowed Capital. -- The borrowed capital for any day of any taxable year shall be determined as of the beginning of such day and shall be the sum of the following:
(1) The amount of the 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, * * *↩