Pendleton & Arto, Inc. v. Commissioner

Pendleton & Arto, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent Pendleton & Arto, Inc. v. Commissioner Docket No. 9792 United States Tax Court 8 T.C. 1302; 1947 U.S. Tax Ct. LEXIS 163; June 27, 1947, Promulgated *163 Decision will be entered for the respondent. During the taxable years the petitioner obtained money on open account from its parent corporation, because of need of operating capital. Earlier it had agreed to pay interest on any advances used as operating capital. Repayment was effected by withdrawals by the parent company from petitioner's bank account, subject to check only by the parent. Several years earlier the parent had paid off petitioner's creditors, but the amount necessary had been repaid prior to the taxable years. No note, bond, bill of exchange, debenture, certificate of indebtedness, mortgage, or deed of trust evidenced the debt. Held, that the Commissioner did not err in denying credit for invested capital, under section 719 (a) (1), Internal Revenue Code. Thomas A. Williams, Esq., for the petitioner. Allen T. Akin, Esq., for the respondent. Disney, Judge. DISNEY *1303 This case involves deficiencies in excess profits tax liability for calendar years as follows: 1942, $ 2,831.39; 1943, $ 3,504.33. The question presented is whether the petitioner's indebtedness to its parent corporation constitutes borrowed capital, within the meaning of*164 section 719 (a) (1), Internal Revenue Code. The parties filed a stipulation of a portion of the facts, which we adopt by reference and find the facts therein set forth. So far as considered material they will be set forth, with facts from other evidence adduced in our findings of fact. FINDINGS OF FACT. (1) Petitioner is a corporation organized under the law of Texas and having its principal place of business at Houston, Texas. Its business is that of dental, medical, and surgical supplies. It filed its excess profits tax returns for the taxable years with the collector for the first district of Texas. The capital stock consists of 500 shares of common stock, par value $ 100 a share. (2) Davidson Dental Supply Co., was incorporated in the State of Louisiana, and it has its general offices and its principal place of business in New Orleans, Louisiana, and operates a dental supply business in that city and state. It does not handle medical or surgical supplies. (3) In 1932 the petitioner was in financial difficulties. On August 25, 1932, a written agreement was entered into by petitioner, a committee representing creditors, and its principal and controlling stockholders, holding*165 400 of the 500 shares, which agreement was also agreed to and accepted by the only other stockholder, holding 100 shares, on October 30, 1932. The agreement in substance admitted petitioner's inability to pay its obligations as they matured, divested its directors of management, and invested the management in the creditors' committee, transferred and pledged the stock to the creditors, agreed that the members of the committee might handle the corporate affairs, and authorized the committee if, in their discretion, they found it impracticable and not to the best interests of the creditors and stockholders to continue the business, in their discretion to sell any or all corporate assets or property and distribute the proceeds pro rata among stockholders and creditors. In consideration of such *1304 agreement the creditors extended time for payment of debts and accepted notes for all open obligations due, the notes being dated September 1, 1932, and bearing 6 per cent interest from date. Each creditor in accepting the note waived interest from May 31, 1934, if the note was paid before November 30, 1936. (4) Sometime prior to September 1936 there was a change in conditions of *166 competition in the Houston area, due to a corporation of St. Paul, Minnesota, the principal competitor of petitioner, which had about 20 distributing units. Under the changed conditions as to competition petitioner did not have sufficient capital to operate. (5) On September 17, 1936, the petitioner and Stowell, its president and majority stockholder, executed a written agreement with Davidson Dental Supply Co. (hereinafter called Davidson) under which Davidson agreed to purchase the petitioner's assets at a price to be determined by appraisal. It provided also that Davidson would advance all necessary funds to pay petitioner's outstanding obligations due to the creditors' committee of the American Dental Trade Association not over $ 85,000, that Stowell would immediately settle with the creditors' committee on the best discount basis possible, and that any discount secured be shared in by Davidson and petitioner, in the proportion of the amount advanced by Davidson and petitioner's equity in the corporate assets after payment of creditors, the proportion to be determined by an appraisement. The agreement provided for payment of all creditors and transfer of all assets to Davidson*167 free of encumbrances, in consideration of the payment of the appraised price in cash, after deduction of the amount advanced for payment of the creditors' committee and after deduction of Davidson's pro rata discount. Stowell was by the agreement given a right to purchase stock in Davidson at book value, to the extent of the amount received by him from liquidation of the petitioner. (6) On September 25, 1936, the creditors' committee of petitioner (named in the agreement of August 25, 1932) and Davidson executed an agreement, in substance, providing that the committee had a right to sell the corporate business property, assets, and capital stock as a going concern and that, in consideration of one dollar and other good and valuable considerations and of mutual covenants and agreements, it was agreed, that the committee should convey as a going concern, the entire business, property, assets, good will, and stock of the petitioner, Davidson "to pay the purchaser price for said property, etc. the net worth of the business as shown by the audited balance sheet of September 30, 1936" subject to certain immaterial adjustments. Davidson agreed to accept at face value all accounts under*168 120 days and current notes receivable where no delinquencies were in excess of 60 days, other accounts and notes to be appraised. Any interest charges waived *1305 by the creditors' committee were to be shared by petitioner and Davidson "in the proportion that the amount paid by and indebtedness assumed by Davidson * * * for the assets of Pendleton & Arto bear to the equity of Pendleton & Arto after deducting the amount paid to creditors of Pendleton & Arto." The creditors' committee was to disburse to petitioner's stockholders all remaining funds in excess of the amount due the creditors' committee. The contract further provides: "Upon payment of the purchase price and upon transfer of title to the said business to the Purchaser, * * * the purchaser agrees to accept liability for all outstanding indebtedness of Pendleton & Arto, except interest charges waived * * * [in accordance with clause 5 above] and except liability to stockholders of Pendleton & Arto." The agreement was carried out and the petitioner's capital stock was transferred to Davidson. (7) An audit report as of September 30, 1936, was submitted October 21, 1936, as to petitioner's books and records of assets*169 and liabilities. The report showed a deficit of $ 37,971.43 in capital on September 30, 1936, against the $ 50,000 capital stock, leaving $ 12,028.58 as net worth of the stock. Total current assets are shown as $ 117,253.41, and current liabilities total $ 111,052.36. The report was prepared for the purpose of setting up the evaluation of the business, and was used in working out the transaction between petitioner and Davidson. (8) On October 22, 1936, Davidson issued its check for $ 91,210.03 to the creditors' committee. Therefrom the creditors' committee made disbursements as follows: To its note holding creditors $ 75,817.25 To certain of petitioner's former stockholders for their share of interest waived on notes 1,453.37 To same former stockholders of petitioner 12,028.58 Total advanced for above purposes 89,299.20 Bonus for G. R. Stowell for assistance 1,910.83 91,210.03 (9) The above transaction is reflected by the entries made on the books of Davidson, on an account in its general ledger, captioned "investments," in which stocks, bonds, and other capital investments are recorded. There appears a debit on October 26, 1936, "item" of explanation stated*170 as "Pendleton & Arto, Inc. purchase," posted from "C. D. 131" (cash disbursement record) in the amount of $ 89,299.20. On November 2, 1936, there is a credit, "Jr. 210," to the same account in the amount of $ 77,270.62, "item" of explanation stated as "Transferred to current a/c of P & A for current purposes." (10) On the general ledger of Davidson appears an account captioned "Pendleton & Arto, Inc., current a/c." On this ledger sheet *1306 is a debit item dated November 2, 1936, "item" of explanation stated as "To Transfer from Latter a/c amount advanced P. & A. for current purposes," posted from "Jr. 210" in the amount of $ 77,270.62. (11) On the general ledger of petitioner herein is an account captioned "Davidson Den. Sup. Co. current a/c," to which was credited on November 2, 1936, "Jr. 6," an amount of $ 77,270.62, "item" of explanation stated as "Transferred from P. & A. for current purposes." This account is carried in the general ledger through the year 1943 and subsequently, without change in the caption of the account. (12) Petitioner's balance sheet as of December 31, 1936, showed among liabilities: "Due to parent company: For cash advances, $ 97,988.77." This amount*171 consisted of $ 120,708.61 (including $ 75,817.25 "Notes payable of Pendleton & Arto, Inc."), less $ 22,719.84, which includes "Repaid in cash by Pendleton & Arto, Inc., $ 22,000.00." A balance sheet of Davidson as of December 31, 1936, includes in "Investments: (At cost) $ 12,028.58" "Stock of subsidiary company" and "$ 97,988.77 Indebtedness of subsidiary company." (13) On December 7, 1936, Davidson and petitioner agreed in writing on a fixed interest charge of 6 per cent per annum on the "monies advanced by either party to the other which is used as operating capital." This was ratified by the directors of petitioner on March 25, 1937, the minutes using the same language as to "monies advanced by either party to the other which is used as operating capitol [sic]." On July 2, 1941, Davidson's directors reduced the 6 per cent rate to 3 per cent, the recitation being "the interest rate of 6% now being charged to Pendleton and Arto, Inc. for monies advanced * * *." (14) Interest was accrued and paid on the average monthly balance by petitioner herein in accordance with the terms of the agreement by monthly credits on the books of petitioner to a current account with its parent corporation, *172 Davidson Dental Supply Co., and by monthly debits on the books of the parent corporation to petitioner. Said interest accruals and payments were in the yearly aggregate from approximately $ 4,100 to approximately $ 9,800. (15) On December 7, 1936, the officers and directors of petitioner furnished Davidson with a signed agreement to the effect that petitioner would not pay dividends on its outstanding stock as long as it was indebted to the said Davidson. (16) A firm of certified public accountants also made audit examinations of the books of account and records of petitioner for the calendar years 1937 through 1943, inclusive, including balance sheets prepared from the books as at December 31 of each year. (17) The petitioner's books of account for December 31 of each of the years 1937 to 1943, inclusive, carry, under schedules captioned "Due to parent corporation" schedules showing, inter alia, the amounts of *1307 cash payments by the parent for items such as accounts payable, traveling expenses, auditing, taxes, purchases of merchandise; with credits to the parent for interest on monthly balances, merchandise at cost, managerial expense and bookkeeping (and, in 1937, *173 dividends, $ 12,500); also cash payments to parent, cash discounts on accounts payable deducted from payments made to parent, and merchandise at cost. The balances due the parent run from $ 97,988.77 (on December 31, 1936) to $ 160,451.37. The cash payments by the parent are from $ 183,066.21 to $ 283,879.16. "Cash payments to parent" are from $ 188,000 to $ 324,000. The balance "Due to parent company" on December 31, 1937, was $ 125,580.75; on January 1, 1943, it was $ 137,799.69; on December 31, 1943, it was $ 109,372.28. During 1936 petitioner repaid the parent company $ 22,000 in cash and $ 719.84 in purchases and discount. During 1937 payment was made, by cash $ 215,000, by cash discounts $ 5,156.62, and merchandise $ 477.40, total $ 5,634.02. The total amount recorded as received (to December 31, 1943, and including the transaction in September 1936) in cash or credits, from the parent, is $ 1,844,839.76. The total amount charged as received by the parent company in cash, merchandise or discounts is $ 1,735,467.41. The cash payments were withdrawals by Davidson, were in even amounts and did not cover any particular invoices or particular payments. (18) Petitioner maintained*174 two bank accounts in Houston, Texas. One, herein designated as account No. 1, is an impress fund out of which local expense bills are paid. Certain officials of petitioner in Houston are authorized to draw checks against account No. 1. Checks on the other account, herein designated as account No. 2, can be drawn only upon the signature of George A. Davidson, president of Davidson (petitioner's parent company) and vice president of petitioner. Funds collected from customers' accounts receivable are deposited in account No. 2. When bills for merchandise and supplies are received by petitioner they are checked for correctness and forwarded to the parent company in New Orleans for payment. The parent company pays the bill and charges the petitioner's current account on the parent company's books. At the same time the petitioner credits the parent company's current account on its books. At intervals during the year checks are drawn on account No. 2 in favor of the parent company reimbursing it for the payments made on behalf of the petitioner. (19) The continuation of business of Davidson and petitioner approximately doubled the business. This required much working capital. Petitioner*175 could not have operated successfully without the funds obtained from Davidson. (20) The moneys obtained from Davidson have been used by petitioner only for business purposes, including carrying inventories, *1308 purchases from manufacturers and pay rolls. The accounts outstanding between the petitioner and Davidson in the taxable years included interest, as indicated in finding 14 above. (21) The account carried on the books of petitioner and Davidson as "Due to parent corporation" has never been reduced from the amount originally set up, but has increased, the figures, at the end of the respective years being in round numbers as follows: 1936, $ 97,000; 1937, $ 125,000; 1938, $ 136,000; 1939, $ 160,000; 1940, $ 150,000; 1941, $ 153,000; 1942, $ 137,000; 1943, $ 109,000. (22) On the certified balance sheet prepared by its certified public accountants, Davidson carried, and still carries, the account carried as due it from petitioner, at full face value, and so represents its value to its bank for purposes of securing credit. (23) The transaction between Davidson and petitioner entailed business risk for Davidson, and the deposit of funds collected in bank account No. 2, subject*176 to withdrawal only by the president of Davidson, gave Davidson a degree of security. (24) The reason petitioner herein did not give Davidson a formal note, dated, signed, and with a fixed amount of indebtedness shown, was because the moneys advanced petitioner would fluctuate too widely, i. e., large amounts one month, smaller amounts another, and because Davidson felt that the 1936 agreement entered into with petitioner was sufficiently binding. (25) When petitioner's balance in the No. 2 account built up to a reasonable sum, Davidson withdrew the money and deposited it in its general account and reduced the current account balance, or working balance, on which Pendleton & Arto, Inc., had to pay interest. (26) Prior to the issuance of the deficiency notice in this matter on October 17, 1945, no note in any usual form had been given by the petitioner to Davidson. After the deficiency notice a note was taken, but it was not for an exact indebtedness, merely covering what was estimated to be the approximate amount at the time. The amount has in most instances exceeded the face value of the note. The amount over and above the note is charged to petitioner. The amount of the note *177 has never exactly equaled the amount of the obligation, which fluctuates as bills are paid. (27) In its excess profits tax returns filed for the years 1942 and 1943 petitioner computed its average borrowed invested capital (borrowed from Davidson, New Orleans, Louisiana) as being $ 152,783.98 and $ 138,690, respectively, and claimed a credit of 50 per cent of such amount in the respective years, or $ 76,391.99 in 1942 and $ 69,345 in 1943. (28) In the notice of deficiency the Commissioner disallowed the credits claimed for average borrowed invested capital of $ 76,391.99 *1309 and $ 69,345 for the respective years 1942 and 1943, with the following explanation: It is held that the agreement between you and Davidson Dental Supply Co., Inc., which provides for the payment of interest on indebtedness of either corporation to the other, does not constitute a bond, note, bill of exchange, debenture, certificate of indebtedness, mortgage, or deed of trust, and your indebtedness to the Davidson Dental Supply Co., Inc., during the year 1942 (1943) accordingly is not borrowed capital for that year (those years) within the meaning of section 719 (a) (1) of the Internal Revenue Code. OPINION. *178 We are here again to decide the question as to whether a financial arrangement constitutes borrowed capital, within the language of section 719 (a) (1), Internal Revenue Code, 1 defining it as outstanding indebtedness of the taxpayer (not including interest) evidenced by bond, note, bill of exchange, debenture, certificate of indebtedness, mortgage, or deed of trust. The petitioner, contending that the statute is satisfied by the situation presented, reviews many cases to demonstrate that there is indebtedness, arguing also that the money advanced to the petitioner had a business purpose, and that the transaction was bona fide. But these elements the respondent concedes to be present here, for on brief he says: "The Commissioner does not dispute that an indebtedness existed between petitioner and its parent corporation in 1942 and 1943"; and again, referring to contention of bona fides and business purpose: "No one disputes this fact." We may, therefore, pass directly to the further statutory requirement that indebtedness be evidenced by "note," etc. The respondent strongly denies that any such statutory requisite is shown. *179 The petitioner admits specifically that no note, in the usual form, was executed (until after deficiency notice issued -- and does not rely on such belated compliance). It takes the view, in effect, that there was written contractual obligation entered into in 1936, wherein Davidson advanced money to pay notes payable to creditors in the sum of $ 75,817.25; that the petitioner was obligated to repay the advance "or loan"; that the indebtedness was secured by petitioner being required to deposit its collections in a bank account subject only to withdrawal by Davidson; that the petitioner needed capital and could not continue to operate without it; that the intent of the arrangement in 1936 was to extend credit to the petitioner over a period of years in order to furnish working capital; that petitioner had been unable, by the end of 1943, to repay the original indebtedness of $ 75,817.25, *1310 it having in fact increased; that the agreements in 1936 constituted a written promise to pay for any moneys advanced for capital; and that the statute is thus satisfied. Thus it appears that the petitioner does not contend that there was here any particular instrument described in section*180 719 (a) (1). It never contends that there was note in any usual form (though contending that the agreements in 1936 contain written promise to pay), and, in effect, does not rely on bond, bill of exchange, debenture, mortgage, or deed of trust (or even of "certificate of indebtedness," except that the agreements have "many of the characteristics of a certificate of indebtedness"). Its contention is general that "if the 1936 agreements are examined carefully, it will be found that they contain attributes which characterize them as the type of documents which evidence indebtedness as defined by section 719 (a) (1), and that, therefore such indebtedness represents borrowed capital." We have made such careful examination of the agreements executed in 1936, both on September 17, by petitioner, Stowell, and Davidson, and on September 25, by the creditors' committee and Davidson, though we fail to find anything consummated under the first agreement, the only one in which the petitioner was a party. After such examination and study of the numerous cases cited by both parties, which it is not necessary to discuss in detail, it is our view that the petitioner has failed to demonstrate an*181 arrangement, contract, or instrument coming within the purview of section 719 (a) (1). The instrument of September 17 contains an agreement by Davidson to advance "funds to pay outstanding obligations * * * due the Creditors' Committee * * * not to exceed Eighty-five Thousand Dollars"; also, Davidson agreed to purchase the petitioner's assets. Obviously, such an agreement, if it implied any agreement by petitioner to repay Davidson, constitutes none by petitioner to pay more than "outstanding" obligations, or to pay above $ 85,000, or to pay any future debts. We consider it altogether insufficient to constitute a promise or note in any form to pay debts in 1942 and 1943, here involved, even if the September 17 agreement had been consummated in the later agreement of September 25, which to us it was not. We should here keep in mind that the affairs of petitioner were on September 17 in the hands of a creditors' committee, and that in the agreement of that date Stowell was "to immediately contact the Creditors' Committee and settle the obligations due said Creditors' Committee"; whereas on September 25, 1936, Davidson purchased from the committee itself the assets and capital stock*182 of the petitioner for its net worth as shown by audit and did on October 22, 1936, issue its check to the committee, out of which there was paid $ 75,817.25 to noteholding creditors and $ 12,028.58 to petitioner's stockholders (representing *1311 value of their stock), as well as other minor items not significant here. The agreement of September 25 does contain the provision that, "Upon payment of the purchase price and upon transfer of title * * *, the Purchaser [Davidson] agrees to accept liability for all outstanding indebtedness of Pendleton & Arto, except interest charges waived in accordance with Clause 5 and except liability to stockholders of Pendleton & Arto," but the liability is clearly only for outstanding indebtedness, which was discharged by the proceeds of the check of October 22, 1936, and any possible inferential agreement by petitioner to repay must be considered equally limited. We are unable to find any promise by petitioner to pay anything thereafter, to anyone; yet, petitioner's position is that there was outstanding in 1942 and 1943 an agreement of the form and nature described in section 719 (a) (1) to discharge indebtedness then existing to Davidson. *183 We find in the written agreements in 1936 no agreement by petitioner to repay Davidson, but only an agreement by Davidson to buy and pay the price set, which it did by paying the "outstanding indebtedness." It would, indeed, be a stretch of the imagination to think that such language obligated Davidson to continue to advance, and petitioner to repay, moneys throughout a period of several years -- more than seven years to the end of 1943. So far as repayment of the $ 75,817.25 "outstanding" in September 1936 is concerned, the record shows repayment of $ 22,719.84 before the end of 1936, and repayment of $ 215,000 cash, as well as $ 5,156.62 by discounts, in 1937; so that it is apparent that by the end of 1937 the petitioner had in fact repaid the advances to pay "outstanding" debts mentioned in the agreements made in September 1936. To us it is clear that the petitioner was in 1942 and 1943 indebted to Davidson -- as the respondent admits; and, further, it is clear that the indebtedness was for money for operating capital. But it is equally clear, we consider, that the indebtedness in those years was not evidenced by anything in the written agreements in September 1936, or by anything*184 else, so far as this record shows, except a mere open account between the parties, by which the parent furnished capital from time to time and the subsidiary, in effect, repaid it, when its finances permitted, through withdrawals by Davidson. That the principal bank account of the petitioner was subject to check only by its parent fails completely to demonstrate the requisites of section 719 (a) (1). Nothing in writing, of which the record apprises us, required such maintenance of bank account. We know only that it was so maintained. Such an arrangement, or customary procedure, between parent and subsidiary can not stand the test of section 719 (a) (1). It fails altogether, we think, to comprise the mortgage, within the statute, *1312 which the Circuit Court found in Brewster Shirt Corporation v. Commissioner, 159 Fed. (2d) 227, because of assignment of accounts receivable "as collateral security for all sums which may now or hereafter be due." Had Davidson wished at any time to cease advancing money, it was free to do so, so far as the record indicates; and obviously its interest in its subsidiary caused continuation of the arrangement. *185 The status in 1942-1943 can not rest on the agreements in 1936. True, there was the agreement, on December 7, 1936, "setting a fixed interest charge of 6% per annum on the monies advanced by either party to the other which is used as operating capital," which rate was reduced in July 1941 to 3 per cent, but such agreement alone plainly can not be regarded as compliance with section 719 (a) (1). It could only approach one of the requisite forms of debt there mentioned, i. e., note, and could not possibly pertain to any other. But a mere promise to pay interest on any moneys which might be advanced does not constitute a note. Even after the deficiency notice and the issuance of a note, it did not represent any definite amount of debt; and a reason given for not executing a note was the fluctuating character of indebtedness. But this fact contravenes the essential element of a note -- absolute promise to pay a sum certain, at a fixed or determinable future time -- Black's Law Dictionary. There is found here no absolute promise to pay, no sum certain, no fixed or determinable future time. The arrangement for withdrawals by Davidson at any time desired from a bank account, the *186 application of other items against the indebtedness, the fluctuation in the amounts, all negative the essential attributes of a note as above defined. This is not the narrow construction argued against by the petitioner, and though the Brewster case, supra, relied on with other cases by the petitioner for broad construction, says the construction there was narrow (in the face of an assignment by way of collateral security, or mortgage), it nowhere says that our construction in other cases has been too narrow. The statute enumerates certain forms of indebtedness as coming within its bounds. Inclusio unius est exclusio alterius. Other forms were, we think, clearly intended to be excluded. This can only fairly mean that the mere presence of operating capital obtained can not, alone, satisfy the statute, but it must be represented by established forms of debt. Mere open account was not included, and we have heretofore considered it was not intended. Flint Nortown Theatre Co., 4 T. C. 536. Economy Savings & Loan Co., 5 T. C. 543, involving certificates of deposit, does not demonstrate the arrangement here to*187 be a certificate of indebtedness. It has no attribute of an investment security, such as issued by corporations. Regulations 112, sec. 35.719-1 (d), covering the section here involved. Other cases cited are found to be distinguishable. *1313 That the petitioner needed capital and obtained it from its parent, by the procedure set up on the books of the two corporations, does not of itself permit application of section 719 (a) (1). We must take Congress' words as expressed. If the statute should be broadened to include other forms of debt, it is not our burden or proper power so to do. We should apply the language in its usual sense, Deputy v. DuPont, 308 U.S. 488; United States v. Kirby Lumber Co., 284 U.S. 1; Journal Publishing Co., 3 T. C. 518, and include nothing not included, therefore under ordinary interpretation excluded, by Congress. The gist and effect of petitioner's argument is that other similar evidences of debt should, because of the general intent of the law, be added to those enumerated in section 719 (a) (1). But we may not logically or reasonably disregard*188 the fact that Congress specifically listed several forms of indebtedness, and did not, as it did in defining indebtedness in section 783 (d) of the Internal Revenue Code, include "or other evidence of indebtedness." See Journal Publishing Co., supra.In such a situation we regard as not controlling here the thought as to ascertaining general purpose of statutes even despite literal meaning, suggested by the petitioner from such cases as United States v. American Trucking Association, Inc., 310 U.S. 534; Helvering v. New York Trust Co., 292 U.S. 455. Congress indicated to us, by the specific listing of the several indicia of debt and omission of the catch-all phrase elsewhere used, that such, and only such, evidences of debt were within the general purpose of the law. We find no error in the determination by the Commissioner that section 719 (a) (1) was not complied with. This renders it unnecessary to discuss the fact that the amounts of indebtedness in 1942-1943 include interest, excluded by the statute from borrowed capital. Decision will be entered for the respondent. 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 * * *.↩