S. Loewenstein & Son v. Commissioner

S. Loewenstein & Son, a Michigan Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent S. Loewenstein & Son v. Commissioner Docket No. 40607 United States Tax Court 21 T.C. 648; 1954 U.S. Tax Ct. LEXIS 305; January 29, 1954, Promulgated *305 Decision will be entered under Rule 50. 1. Public Law No. 88 was enacted on June 23, 1945. It provided that slaughterers of livestock who had received extra compensation (subsidy) payments when ineligible therefor should be relieved, in whole or in part, of the obligation to make repayment where the Director of Economic Stabilization, or any Government agency authorized by him, determined that the slaughterer reasonably and in good faith had believed that he was eligible to receive such payments and that it would be inequitable to require repayment. Thereafter during 1945 the petitioner in good faith filed claims for, and received payments of, subsidies for the months of July, August, and September 1945. Between January 1 and January 15, 1946, and at a time when R. F. C. which had investigated petitioner's eligibility to receive such payments had made no decision with respect thereto, the petitioner in closing its books for 1945 set up thereon as of December 31, 1945, as a liability to repay, the total amount of the subsidies received. Late in February 1946, R. F. C. held that the petitioner was ineligible to receive the subsidies in question. In April 1946 petitioner made*306 application for relief under Public Law No. 88 and shortly thereafter its application was allowed in full. Petitioner was never required to, and did not, make any repayment of the subsidies it had received for said months. Held, that the subsidies constituted taxable income to the petitioner when received in 1945. Held, further, that at the end of 1945 there was no obligation on the part of the petitioner which had become final to repay the subsidies and that the amount thereof does not constitute an allowable deduction for that year. 2. The petitioner purchased and received delivery of cattle and thereafter paid sight drafts drawn on it by the sellers for the amounts of such purchases. Held, that the amount of the drafts represented outstanding indebtedness of the petitioner which was evidenced by bills of exchange within the meaning of section 719 (a) (1) of the Internal Revenue Code. R. M. O'Hara, Esq., Joseph H. Jackier, Esq., and Benjamin E. Jaffe, Esq., for the petitioner. Roy E. Graham, Esq., for the respondent. Withey, Judge. WITHEY *648 The respondent has determined a deficiency of $ 58,594.96 in the petitioner's excess profits tax for 1945. The issues presented are (1) whether certain payments totaling $ 66,655.06 received by petitioner in 1945 from the Reconstruction Finance Corporation constituted taxable income for 1945, (2) if such payments constituted taxable income for 1945, then whether the amount thereof was properly deductible for that year as a liability to make repayment thereof to the Reconstruction Finance Corporation, and (3) whether certain sight drafts drawn on the petitioner for the purchase price of livestock purchased by petitioner *649 constituted borrowed capital for 1945 within the meaning of section 719 (a) (1) of the Internal Revenue Code. FINDINGS OF FACT. Part of the facts have been stipulated and are found accordingly. The petitioner is a Michigan corporation and has its principal office at Detroit, Michigan. It filed its income and excess profits*308 tax returns for 1945 with the collector at Detroit. Since its formation in 1930 the petitioner has kept its books and filed its income tax returns on the accrual basis and on the basis of a calendar year. At all times material herein the petitioner was engaged in the business of purchasing and slaughtering beef cattle and selling the beef to retail stores in the Detroit area. During 1945 and for several years prior thereto, the Federal Government had in operation a subsidy program whereby certain businesses engaged in the marketing and slaughtering of livestock were entitled to apply for and receive Federal subsidy under certain designated conditions. This subsidy program was first administered by the Federal agency known as the Defense Supplies Corporation. Effective July 1, 1945, the duties theretofore performed by the Defense Supplies Corporation in connection with the program were placed under the Reconstruction Finance Corporation, sometimes hereinafter referred to as R. F. C. Under the subsidy program there were two different types of subsidies for which eligible slaughterers of beef cattle could apply. One was known as "basic" payments. Its purpose was to enable the slaughterer*309 to pass on to the producer of the cattle a higher price for the cattle than he would be entitled to receive under the existing price control regulations relating to the sale of beef at retail. The other subsidy was known as "extra-compensation" payments. The purpose of the latter payments was to enable eligible slaughterers to remain in the same competitive position that they would have occupied had there been no governmental controls over the prices of cattle and over the prices at which the slaughterer could sell beef. Only "extra-compensation" payments, sometimes hereinafter referred to as subsidy payments or as subsidies, are involved in this proceeding. During 1945 and prior thereto, the above mentioned governmental agencies had in effect a regulation known as Livestock Slaughter Payments Regulation No. 3, Revised, of Reconstruction Finance Corporation, which set forth the eligibility requirements of businesses seeking to obtain Federal subsidies. Said regulation was applicable to the petitioner with respect to the subsidy payments involved herein. Under said regulation in order to receive subsidies of the character involved herein an applicant was required to file a written*310 claim with *650 R. F. C. on special forms supplied by that agency. Further, in order to be eligible for such subsidies, the applicant during the period covered by the claim must not have received from any person, who sold fresh or processed meat or products containing meat, loans or advances in excess of 5 per cent of applicant's total sales of meat during the period covered by the claim. The special forms supplied by R. F. C. for filing claims required, among other things, a certification to that effect by the applicant. The petitioner filed written claims for subsidies with the R. F. C. on a monthly basis and included among the claims filed during 1945 were claims covering the months of July, August, and September of that year. Pursuant to the claims filed for said 3 months the petitioner received in 1945 subsidies as follows: For July $ 20,999.48, August $ 24,287.34, September $ 21,368.24, or a total of $ 66,655.06. Beginning several years prior to 1945 the petitioner and one of its customers, The Great Atlantic & Pacific Tea Company, sometimes hereinafter referred to as A & P, established a practice which continued through 1945 under which the petitioner on Thursday or*311 Friday of each week advised A & P by telephone of the dollar value of deliveries previously made to it during the week and the estimated dollar value of the deliveries scheduled for that day and the balance of the week. Thereupon A & P made payment to petitioner of 80 per cent of the total of such amounts. Due to the scarcity of meat in 1945 and the necessity for the petitioner to apportion its daily output among its customers it was not always able to deliver to A & P the deliveries scheduled for Thursday or Friday and the remainder of the week. As a consequence of this and the payments made by A & P, the account of the latter at times showed a substantial credit. On 1 day in July 1945 such credit was in excess of 5 per cent of petitioner's total sales for that month. On 2 days in August such credit exceeded 5 per cent of petitioner's total sales for that month and on 4 days in September the credit was in excess of 5 per cent of petitioner's total sales for the month. Postings were not made daily to the account of A & P of each day's sales but the invoices for the week were summarized and the totals were posted weekly. Due to a shortage of clerical and accounting personnel*312 and the thought not having occurred to the petitioner's management that the above mentioned credits in the account of A & P could be construed as advances from it, the petitioner had no analysis made of the account of A & P prior to filing its claim for subsidies for July, August, and September 1945. Consequently, when the claims were filed, petitioner's management was unaware of the fact that the amount of such credit during the respective months had exceeded 5 per cent of petitioner's total sales of meat for those months. *651 During the period beginning with the last week in November 1945 and extending to about the middle of December 1945, an examiner from R. F. C. conducted a field examination of the petitioner's records for the purpose of ascertaining petitioner's eligibility for the subsidy payments it had theretofore received as well as its eligibility to continue to receive subsidy payments. Early in December 1945 the examiner verbally informed Alfred Loewenstein, president and treasurer of petitioner, and A. P. Doherty, office manager of the petitioner, that the credit balance in the A & P account during the months of July, August, and September 1945 appeared to be*313 of such volume that under the regulations of R. F. C. petitioner's eligibilty for subsidy payments for those months "would appear to be voided," but that decision on such ineligibility was to be given only by the Washington, D. C., office of R. F. C. Although having been informed that decision on the question of petitioner's ineligibilty for the subsidy payments in question was to be given only by the Washington office of R. F. C., petitioner's office manager, Doherty, caused entries to be made on petitioner's books to show a reduction in petitioner's income for 1945 by the total amount of the payments, $ 66,655.06, and to show a liability to R. F. C. in the same amount. Such entries were made as of December 31, 1945, during the closing of the books for 1945, which occurred between January 1 and January 15, 1946. As a result of these entries the petitioner's balance sheet as of December 31, 1945, showed as a liability an item designated "Subsidy Refunds Due to Reconstruction Finance Corporation" in the amount of $ 66,655.06. After the examiner had completed his examination at the petitioner's office, the petitioner prepared and submitted to him lengthy analyses of the daily balances*314 of certain questioned accounts for the months involved. Because of the amount of work involved in the preparation of such analyses and because of the fact that the petitioner had to obtain supporting documents in connection with other matters involved in the examination the examiner's report of his examination was not submitted to R. F. C.'s Washington office until February 4, 1946. On February 26, 1946, the Washington office of the R. F. C. informed the Detroit office that petitioner's situation had been discussed with Doherty and that he was advised that petitioner was ineligible for the subsidy payments that had been made for the months of July, August, and September 1945; that the problem of repayment had been discussed; and that if a check of petitioner's financial condition showed petitioner unable to repay the full amount at once but that it would be able to continue in production if repayment were to be postponed, then R. F. C. would be willing to enter into a standby agreement which *652 would provide for the release of all current subsidy payments for a period of 4 months. In the event the Detroit office found that petitioner was unable to make repayment in full at*315 once, it was authorized to prepare, and to obtain petitioner's signature to, a standby agreement containing certain stated provisions. Among such provisions was one that petitioner agree to submit forthwith to the Office of Price Administration, sometimes herein referred to as O. P. A., under Procedural Regulation No. 15, relating to Public Law No. 88, enacted June 23, 1945, its application for relief from repayment of the subsidies and to press its application expeditiously to a conclusion. On March 26, 1946, the petitioner and R. F. C. entered into an agreement which contained the foregoing provision and also provided (1) that the agreement was without prejudice to any rights of the petitioner to contest the decision of R. F. C. as to petitioner's ineligibility or as to the amount of any repayments, and (2) that the agreement would remain in effect until O. P. A. announced its decision, but not to exceed 4 months, and that if at the end of the 4 months O. P. A. had not announced its decision the entire situation would be reviewed by the parties with a view to arriving at a new agreement or considering further action. On March 8, 1946, the Washington office of the R. F. C. authorized*316 the Detroit office to set up a claim receivable against the petitioner for the subsidies which had been paid it for the months of July, August, and September 1945, but to hold collection in abeyance. Thereafter, on March 22, 1946, a claim receivable in the amount of $ 66,655.06 was set up. The petitioner, on April 19, 1946, filed with O. P. A. its application for relief from repayment of the subsidies it had received for the months of July, August, and September 1945. In a "Statement of Facts" constituting part of its application the petitioner stated, among other things, that it collected the subsidies in good faith and that it would be inequitable to require repayment thereof to R. F. C.; that the alleged violation was of a technical nature and unintentional; that the daily credit balances of A & P could be ascertained only by analysis and that the shortage of clerical help made it impossible to give proper attention to normal accounting procedure; that the existence of overdrafts to the extent shown was not suspected by the management due to the activity of the account; and that the cash position of the petitioner was such that withdrawal of $ 66,655 would force curtailment of*317 operations. On May 16, 1946, O. P. A. issued an order wherein it granted in full the petitioner's application for relief and thereby relieved petitioner from repayment of the subsidies in question. In the order the price administrator also certified to R. F. C. that it would be inequitable for R. F. C. to require repayment of such subsidies and *653 that petitioner believed reasonably and in good faith that it was eligible to receive those subsidies. Thereafter, on May 21, 1946, the Washington office of R. F. C. instructed its Detroit office to reverse the claim receivable set up against petitioner on March 22, 1946, and this was done on May 24, 1946. The petitioner included the subsidies received for the months of July, August, and September 1945, in the total amount of $ 66,655.06, on its books as income for the calendar year 1946 and reported said sum as income in its income tax return for that year. The respondent determined that the subsidies in question constituted taxable income to the petitioner for 1945. During 1945 the petitioner purchased cattle at various places situated in Iowa, Nebraska, and South Dakota. A typical purchase of cattle was effected in the following*318 manner: The cattle were shipped by the seller, by common carrier, to the petitioner at Detroit. The seller prepared and mailed to the petitioner an invoice for the shipment. So far as appears the bill of lading for the shipment accompanied the invoice. The seller also prepared a sight draft drawn on the petitioner for the amount of the selling price of the cattle shipped. The seller deposited the draft with its bank which sent the draft through banking channels to a bank in Detroit with which the petitioner dealt. Upon arrival of the cattle in Detroit, they were unloaded at the railroad's stockyards, weighed, and then delivered to petitioner. Payment of the draft covering the selling price of the cattle was not a condition precedent to the petitioner's receipt of delivery of the cattle. The draft, which was received by petitioner's bank several days after petitioner's receipt of the cattle, was paid by petitioner immediately upon being notified by the bank that it had been received. The petitioner paid for the cattle on the basis of their weight at the point at which purchased and paid the freight on them on the basis of their weight when received at Detroit. In the event *319 of delay in loading the cattle at the point at which purchased the petitioner paid for feeding them. In the event of the death of cattle in transit the petitioner filed with the carrier claims for the losses and received payment on such claims. During 1945, the average daily outstanding sight drafts drawn on petitioner in connection with its purchases of cattle during that year amounted to $ 64,675.71. In computing its excess profits credit for 1945 under the invested capital method the petitioner included said amount of $ 64,675.71 as borrowed capital. The respondent determined that the drafts did not constitute borrowed capital for the purpose of determining the excess profits credit under the invested capital method. *654 OPINION. The first question for determination is whether the subsidies, amounting to $ 66,655.06, actually received by petitioner in 1945 for the months of July, August, and September of that year and which were never repaid constituted taxable income to the petitioner for 1945. The petitioner contends that since the credit balances in the account of A & P on certain days during the months of July, August, and September 1945 were in excess of 5 per cent*320 of its total balances for the respective months, it was ineligible to receive the subsidies for those months and that it was so determined by R. F. C.; that since it was ineligible to receive them, it had no right to receive them; that it is the right to receive income and not the actual receipt thereof that determines whether a taxpayer keeping books on the accrual basis has taxable income; and that since it kept its books on the accrual basis and in 1945 had no right to receive the subsidies in question, they did not constitute income to it for that year. The petitioner further contends that the income tax law contemplates that tax liability is to be determined for annual periods on the basis of facts existing at the end of each of such periods and that if effect is given to the developments which occurred in December 1945 and prior to the close of the taxable year, it must be concluded that the subsidies in question did not constitute taxable income for 1945. The respondent takes the position that the petitioner acting in good faith filed claims for and received the subsidies in question; that having so received them, it received them under a claim of right; and that under the*321 rule of North American Oil Consolidated v. Burnet, 286 U.S. 417; United States v. Lewis, 340 U.S. 590; and Edwin E. Healy and Gordon W. Hartfield v. Commissioner, 345 U.S. 278, they constituted income to the petitioner for the year in which received. In North American Oil Consolidated v. Burnet, supra, the taxpayer, during the progress of litigation relating to the beneficial ownership of certain property, received in 1917 certain income arising from the property. The litigation continued until 1922 when it terminated favorably to the taxpayer. In holding that the income received by the taxpayer in 1917 was taxable to it in that year, the Supreme Court, after stating that it was not material for the purposes of the case whether the taxpayer's return was filed on the cash basis or on the accrual basis, said: If a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to return, even though it may still be claimed that he is not entitled to retain the money, *322 and even though he may still be adjudged liable to restore its equivalent. * * * *655 In United States v. Lewis, supra, the taxpayer received in 1944 an employee's bonus which a State court in 1946 decided was improperly computed. As a result of that decision, the taxpayer in 1946 paid to his employer approximately one-half of the amount of the bonus. In holding that the full amount of the bonus was income to the taxpayer in 1944, the Supreme Court applied the claim of right rule and held that an exception to the rule could not be made merely because a taxpayer was mistaken as to the validity of his claim. The Supreme Court again applied the claim of right rule in Edwin E. Healy and Gordon W. Hartfield v. Commissioner, supra. There officer-stockholders, as transferees, paid deficiencies in tax of corporations which arose as the result of disallowance of part of excessive salaries paid to them in an earlier year. In holding that the full amounts received by the officer-stockholders as salaries were income to them in the year of receipt, the Court said: There is a claim of right when funds are received and*323 treated by a taxpayer as belonging to him. The fact that subsequently the claim is found to be invalid by a court does not change the fact that the claim did exist. A mistaken claim is nonetheless a claim * * *. In filing its claims for the subsidies in question the petitioner took the position, and made claim, that it was entitled to the subsidies. On the basis of the representations made by petitioner, its claims were allowed and the subsidies were paid to it. So far as appears, the petitioner received them as funds belonging to it and without any restriction whatever as to the use or disposition it might wish to make of them. The petitioner's balance sheet as of December 31, 1945, was put in evidence. It shows that petitioner's cash at the close of 1945 amounted to only $ 780. From that it appears that, upon their receipt, the petitioner treated the subsidies as its own funds and expended them as it saw fit. The evidence shows that in the early part of December 1945 the examiner from R. F. C., who was investigating the petitioner's affairs, informed an officer of the petitioner and petitioner's office manager that it would appear that the petitioner's eligibility to receive*324 the subsidy payments made for the months of July, August, and September 1945 was voided because of the situation that existed in the A & P account during those months, but that decision of the question of the petitioner's ineligibility to receive the payments was to be given only by the Washington office of R. F. C. The evidence also shows that at that time there was some conversation between the three about petitioner's repayment of the subsidies. The evidence further indicates that petitioner never controverted the existence of the situation that existed in the A & P account nor questioned the correctness of the regulations which precluded the payment of subsidies for periods in which such a situation existed. However, there is nothing to indicate that *656 at any time during 1945 there was any admission by any of petitioner's officers or employees to R. F. C. or any of its employees that the petitioner was not entitled to the subsidies in question. Nor is there anything to indicate that any expression of willingness to, or offer to, repay was made on behalf of the petitioner either to R. F. C. or any of its employees, including the examiner, either at the time of the above*325 mentioned conversation or later in December 1945. The petitioner's balance sheet as of the end of 1945 shows as an account receivable subsidies due from R. F. C. in the amount of $ 195,292.12 or approximately three times the amount of the subsidies here involved. At no time, either in 1945 or later, does the petitioner appear to have directed or requested R. F. C. to offset the subsidies in question, or any part thereof, against the subsidies shown in petitioner's balance sheet as owing to it by R. F. C. While the petitioner's office manager, Doherty, caused entries to be made in petitioner's books as of December 31, 1945, during the closing of the books which occurred between January 1 and January 15, 1946, to show a liability owing from petitioner to R. F. C. in the amount of the subsidies in question, we can not find in the situation presented that the entries so made represented any liability which the petitioner had admitted during 1945 or that the entries themselves constituted any admission of such liability. From the circumstances presented, it appears that at the end of 1945 the petitioner was content to let the situation remain as it had been theretofore and await the*326 decision of the Washington office of the R. F. C. as to its ineligibility to have received them. Considering the situation here presented in the light of the holdings of the Supreme Court in the above mentioned cases, we think that it must be concluded that the petitioner received the subsidies in question under a claim of right and that having so received them they constituted income to it when received. Accordingly, we sustain the respondent's determination that the subsidies were income to the petitioner in 1945. The situation here is unlike that in Bates Motor Transport Lines, Inc., 17 T. C. 151, affd. 200 F. 2d 20, relied on by petitioner. In that case the taxpayer carried freight for the Federal Government under an agreement that its charges would not exceed the lowest land grant railroad rate available to the Government over any combination of carriers between the points of shipment and the points of destination. The taxpayer's efforts to obtain such land grant rates from the Government for the purpose of billing the Government for freight carried were unsuccessful and it was required to bill the Government for the*327 shipments at its prevailing rates and accept payment therefor in full pending determination by the General Accounting Office of the amount or amounts it would be required to refund under the agreement. The *657 taxpayer never at any time felt or claimed that the amounts it would be required to refund under the agreement belonged to it. There, it was held that the excess of the amounts collected over the lowest land grant rate for the shipments in question which it was obligated to refund to the Government did not constitute gross income to the taxpayer. Clearly the instant case presents no such an arrangement as was involved in that case. The petitioner contends that if the subsidies in question were income to it at the time of their receipt in 1945, then it was entitled to accrue on its books and deduct in its income tax return for 1945 the amount of the subsidies as a liability to R. F. C. for the repayment of them. The respondent takes the position that at the end of 1945 the petitioner had no fixed liability to repay any settled amount of the subsidies and that, at most, petitioner's liability to make repayment of any amount was merely contingent. The propriety of an *328 accrual must be judged by the facts which the taxpayer knew or could reasonably be expected to know at the closing of its books for the taxable year. Baltimore Transfer Co., 8 T. C. 1. However, as was pointed out by the Supreme Court in Security Flour Mills Co. v. Commissioner, 321 U.S. 281, it is now settled that a taxpayer may not accrue as an expense an item, the amount of which is unsettled or the liability for which is contingent, and may not allocate outgo to a year other than the year in which "the obligation to pay, has become final and definite in amount." In addition to the fact that at the end of 1945 R. F. C. had made no decision as to the petitioner's ineligibility to receive the subsidies in question, there had been in effect since June 23, 1945, Public Law No. 88, which provided in section 2 thereof as follows: Any slaughterer who heretofore or hereafter shall have received extra compensation payments under Livestock Slaughter Payments Regulation Numbered 3 of Defense Supplies Corporation (adopted pursuant to directives of the Director of Economic Stabilization) when such slaughterer was not in a class*329 eligible for such extra compensation payments, shall be relieved, in whole or in part, of obligation to repay the amount thereof and shall be entitled to receive, in whole or in part, the amount of such extra compensation payments repaid by such slaughterer to, or withheld by Defense Supplies Corporation on account of such extra compensation payments, to the extent that it is determined by the Director of Economic Stabilization, or any agency of the Government authorized by him, that it would be inequitable for Defense Supplies Corporation to require repayment by such slaughterer or to retain the amounts so repaid or withheld, provided such Director or agency also determines that such slaughterer believed reasonably and in good faith that he was eligible to receive such extra compensation payments: Provided, That any determination by such Director or agency under this section shall be reviewable by the Emergency Court of Appeals under such rules as such court may prescribe. Under Directive 62 issued by the Director of Economic Stabilization on July 3, 1945, O. P. A. was authorized to handle all proceedings *658 for relief brought under section 2 of Public Law No. 88. On *330 August 13, 1945, O. P. A. issued Procedural Regulation No. 15 prescribing the procedure to be followed by ineligible slaughterers seeking relief under Public Law No. 88. From the foregoing it is apparent that for some time prior to the time the petitioner filed its claims for the subsidies in question Congress had provided a method by which slaughterers could be relieved of liability for making repayment of subsidies received at times when they were ineligible to receive them. Although the petitioner's office manager, who handled matters of petitioner relating to subsidies, testified that he did not learn of such provision by Congress until during February 1946, we think the petitioner could reasonably have been expected to know of it at the end of 1945. With such provision having been available to the petitioner during, and at the end of, 1945 and the petitioner's application for relief from repayment having been allowed in full by O. P. A. promptly after it was filed in April 1946, the petitioner's relief from repayment can not be attributed to a change in the law after 1945 or to an official interpretation of the law not reasonably to have been expected in 1945 so as to create*331 after that year independent operative facts for accounting purposes. Under the circumstances we do not think it could have been correctly said at the close of 1945 that petitioner's liability for the repayment of the subsidies was an "obligation to pay [which] has become final." The contentions of the petitioner as to this issue are denied. The remaining issue is whether the average daily outstanding sight drafts, amounting to $ 64,675.71, drawn on petitioner in connection with its purchases of cattle during 1945 under the circumstances set out in our findings constituted borrowed capital within the meaning of section 719 (a) (1) of the Internal Revenue Code. 1 In order to resolve that issue it must be determined whether said amount represented an outstanding indebtedness of the petitioner for 1945 and whether such outstanding indebtedness was evidenced, in this instance, by a bill of exchange. Hunt Foods, Inc., 17 T. C. 365, affd. 204 F. 2d 429; Wm. A. Higgins & Co., 4 T. C. 1033. *332 The petitioner contends that having purchased and received delivery of the cattle, it had become unconditionally obligated to pay the sellers therefor, and that since the drafts were drawn for the amount of the purchase price of the cattle, they represented an outstanding indebtedness owing by it for the cattle. The petitioner contends that therefore the drafts evidenced its indebtedness to the sellers of the *659 cattle and qualified as bills of exchange within the intendment of section 719 (a) (1) of the Code. The respondent does not deny that the petitioner had become unconditionally obligated to pay, and was indebted to, the sellers for the cattle and that the drafts were drawn for the purchase price of the cattle. Nor does he deny that the drafts were bills of exchange. However, he contends that prior to the petitioner's acceptance and payment of the drafts, the petitioner's indebtedness for the cattle was evidenced by an account receivable entry on the books of the seller and an account payable entry on the books of the petitioner and that, consequently, there never was an outstanding indebtedness of the petitioner evidenced by a bill of exchange within the purview *333 of section 719 (a) (1). In substance, the respondent's contention here is the same as that which was made by him in Hunt Foods, Inc., supra, and Wm. A. Higgins & Co., supra, and there rejected. In denying essentially the same contention made by respondent, the Court of Appeals for the Ninth Circuit, in affirming our decision in Hunt Foods, Inc., supra, said: Congress in using the term "evidenced by" was no doubt aware of the distinction between evidence and proof. For while the words are often used interchangeably, the latter is the legal effect of the former. In view of the holdings in the above mentioned cases, the petitioner is sustained on this issue. Decision will be entered under Rule 50. Footnotes 1. 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, * * *↩