15 T.C. 118">*118 Respondent determined deficiencies in excess profits tax for the calendar years 1944 and 1945 in the respective amounts of $ 8,377.85 and $ 11,319.76. The sole issue is whether or not borrowings by petitioner from three banks, evidenced by notes, 1950 U.S. Tax Ct. LEXIS 113">*114 and used by petitioner to buy United States Treasury bonds and notes, which were pledged to the banks as collateral to secure payment of the notes, constitute borrowed invested capital under section 719, Internal Revenue Code. Part of the facts were stipulated and the stipulation of facts is incorporated herein as part of our findings of fact.

15 T.C. 118">*119 FINDINGS OF FACT.

Petitioner is a corporation organized on July 16, 1914, under the laws of the State of Iowa. During all times material herein, it has maintained its principal place of business at Sioux City, Iowa, and has been an authorized Ford dealer engaged in the business of buying, selling, financing and dealing in Ford cars and trucks, parts and accessories.

Petitioner's Articles of Incorporation provide, among other things, that petitioner may:

* * * execute and issue promissory notes, * * * and evidences of indebtedness, either secured by mortgage or otherwise, * * *.

* * * and to effectuate * * * its objects and purposes, or any of them, in the discretion of the directors, it may from time to time carry on any other lawful business, manufacture, or otherwise, to any extent or in any manner not unlawful.

Petitioner has 1950 U.S. Tax Ct. LEXIS 113">*115 always kept its books and filed its income tax, declared value excess profits tax, and excess profits tax returns on the basis of a calendar year and upon the basis of the accrual method of accounting. The returns for the period here involved were filed with the collector of internal revenue for the district of Iowa.

From 1932 to 1937 petitioner was in a weak financial condition and received all of its financing through a finance company, Securities Acceptance Corporation of Omaha, Nebraska. By 1937 petitioner's liabilities exceeded its assets. Petitioner's financial condition became worse during 1937, 1938, and 1939, and petitioner obtained a "capital loan" of $ 25,000 from the finance company, to secure which petitioner pledged all its assets, including its stock and its accounts receivable.

On numerous occasions Walter T. Mahoney, petitioner's president, went to the banks and tried to establish credit without success. Since 1943 he has annually had an independent audit made by an outside auditing firm and the statement presented to the banks.

Obtaining credit through the finance company had several disadvantages to petitioner. First, the rate of interest was substantially greater1950 U.S. Tax Ct. LEXIS 113">*116 than that charged on loans from banks, and, secondly, the security taken by the finance company was on specific units and when any unit was sold the loan thereon automatically became due, with the result that this type of financing controlled the capital available for the business and left little latitude. On the other hand, a bank loan is available in its entirety during the period of the loan, and as the due date of the loan is specified, the borrower is able to anticipate his needs and adjust his activities accordingly.

A further reason which prompted petitioner's officers to seek to establish banking connections was to enable petitioner thereby to finance its own credit sales. Financing retail sales is a profitable part 15 T.C. 118">*120 of the automobile business, and petitioner, in assigning all its good paper to the finance company to get operating capital, had to forego these profits and yet had all of the risk involved by remaining secondarily liable on the paper under a repurchase agreement. Moreover, petitioner's officers also thought that a finance business would create traffic through petitioner's showrooms as purchasers came in to make monthly payments and would thereby give1950 U.S. Tax Ct. LEXIS 113">*117 petitioner recurring opportunities to sell them parts, service, and new cars. Walter T. Mahoney, petitioner's president, had been employed by automobile finance companies for 10 years prior to his association with petitioner and was manager of the Sioux City office of American Credit Corporation before becoming associated with petitioner.

From 1944 through 1949 there was not as much need for financing in petitioner's business as in 1940, because of the lack of cars during most of that time, and the fact that most of the car buyers during that time were in a position either to pay for the cars or to make their own financial arrangements through banks. In 1949 petitioner had its offices and showroom remodeled and an office set up to be used for the handling of the finance business if the time came to go into it. As of the date of the hearing in January 1950, petitioner was still financing through the Securities Acceptance Corporation, a finance company, not doing its own financing through the banks.

In the year 1940 petitioner sustained a loss on its operations and consequently had no Federal income or excess profits tax liability for that year.

Petitioner duly filed its excess profits1950 U.S. Tax Ct. LEXIS 113">*118 tax return for 1941, computing its excess profits credit on the invested capital method and showing no excess profits tax liability. The daily average of petitioner's borrowed capital for 1941 was $ 101,780.54, which was comprised of notes (secured by new and used cars) and a portion of the "capital loan" which it owed to the Securities Acceptance Corporation.

Petitioner duly filed its excess profits tax return for 1942, computing its excess profits credit on the invested capital method and showing no excess profits tax liability. The daily average of petitioner's borrowed capital for 1942 was $ 97,854.05. It paid off the "capital loan" and otherwise reduced its indebtedness to the Securities Acceptance Corporation from $ 108,550.72 to $ 60,922.78 during 1942.

During the year 1943 petitioner further reduced its indebtedness to Securities Acceptance Corporation from $ 60,922.78 to $ 9,845.29. Petitioner filed its excess profits tax return for the year 1943 computing its excess profits credit on the invested capital method and showing (for the first time since the excess profits tax had been in effect) an excess profits tax liability of $ 22,717.18 ($ 22,667.92 as stated in the 1950 U.S. Tax Ct. LEXIS 113">*119 return plus a deficiency of $ 49.26). Petitioner's daily average borrowed 15 T.C. 118">*121 capital for 1943 was $ 35,898.86 and at the end of the year it had only $ 9,845.29 borrowed capital outstanding.

On January 25, 1944, petitioner's board of directors unanimously adopted the following resolution:

BE IT RESOLVED that the Mahoney Motor Company borrow up to $ 500,000.00 in the aggregate upon its promissory notes executed by its president, secured by United States Government bonds eligible for use as collateral security for such loans and purchase such bonds for such use in the amount of said notes up to $ 500,000.00 in the aggregate, and repeat such borrowings and purchases from time to time, so long as the operation is and remains a profitable one for Mahoney Motor Company; that the president of Mahoney Motor Company be and he is hereby authorized, empowered and directed to execute and deliver said notes and to purchase and pledge said bonds as collateral security for the payment of said notes, to the loaning banks, and

BE IT FURTHER RESOLVED that Mahoney Motor Company establish, use and maintain lines of credit with various banks in Sioux City and elsewhere in the manner hereinbefore1950 U.S. Tax Ct. LEXIS 113">*120 set out to the end that Mahoney Motor Company shall develop credit standing and reputation with the banks from which borrowings are made and be eligible for credit from said banks in connection with the financing and carrying by it of the wholesale and retail installment paper received by it in the sale of new cars, trucks and other merchandise, and

BE IT FURTHER RESOLVED that the Board of Directors heartily and unanimously indorse the plan for the company to handle its own installment paper, and authorize, empower and direct the President of the company, with the assistance of the other officers, to do and perform everything deemed necessary or requisite to put said plan into effect and to establish proper credit standing and proper bank connections to effectuate that end.

Petitioner borrowed $ 250,000 from the First National Bank in Sioux City, Iowa, on February 11, 1944, which it used to purchase $ 250,000 in United States Treasury bonds maturing September 15, 1959, optional 1956, and bearing 2 1/4 per cent interest. The borrowing was evidenced by petitioner's note in the principal amount of $ 250,000 with interest at 1 1/2 per cent per annum, and the bonds purchased were pledged1950 U.S. Tax Ct. LEXIS 113">*121 as collateral to secure payment of the note. On March 24, 1944, the principal amount of this note was reduced by the amount of $ 125,000, received by petitioner from the borrowing described in the following paragraph, to $ 125,000, and a corresponding amount of the bonds pledged as security was released to petitioner. The principal amount was further reduced to $ 115,000 by two payments of $ 5,000 each, made by petitioner on August 10, 1944, and February 11, 1945, from its operating profits. Three renewal notes were executed by petitioner on August 11, 1944, February 11, 1945, and August 11, 1945. On February 15, 1946, the bonds securing the note were sold and the note was paid in full from the proceeds.

Petitioner borrowed $ 125,000 from The Live Stock National Bank, Sioux City, Iowa, on March 22, 1944, which it used to reduce the note to The First National Bank in Sioux City, Iowa, referred to above. 15 T.C. 118">*122 This borrowing was evidenced by a note in the principal amount of $ 125.000, bearing interest at 1 1/2 per cent per annum, and $ 125,000 of the United States Treasury bonds previously pledged to The First National Bank in Sioux City, Iowa, were pledged as collateral to1950 U.S. Tax Ct. LEXIS 113">*122 secure payment of this note. On September 21, 1944, petitioner, from its operating profits, paid $ 5,000 on the note, thereby reducing the principal amount to $ 120,000. Three renewal notes were executed by petitioner on September 22, 1944, March 22, 1945, and September 21, 1945. On February 28, 1946, the bonds securing the note were sold and the note was paid in full from the proceeds.

Petitioner borrowed $ 150,000 from The Security National Bank of Sioux City, Iowa, on June 21, 1944, which it used to purchase $ 150,000 in United States Treasury notes bearing 1 1/4 per cent interest and maturing March 15, 1947. The borrowing was evidenced by petitioner's note in the principal amount of $ 150,000 with interest at 1 per cent per annum, and the Treasury notes were pledged as collateral to secure payment of the note. On December 21, 1944, petitioner, from its operating profits, paid $ 5,000 on the note, thereby reducing the principal amount to $ 145,000. Three renewal notes were executed by petitioner on December 21, 1944, June 21, 1945, and December 21, 1945. On March 12, 1946, the Treasury notes securing the note were sold and the note was paid in full from the proceeds.

There1950 U.S. Tax Ct. LEXIS 113">*123 was a substantial increase in the market price of these Government bonds and notes in the last part of 1945 and first part of 1946, and petitioner, in February and March 1946, at the suggestion of the banks from which the loans were obtained, sold the Treasury bonds and Treasury notes and paid off its own notes to the banks with the proceeds. Petitioner sold the bonds and notes at about the highest peak of the market, and very shortly after petitioner sold them the market declined rapidly and steadily.

The following table shows the borrowings, purchases, sales and payments above described, together with the total amounts of interest paid by petitioner to the banks on the notes, the total amounts of interest received by petitioner on the Treasury bonds and notes and the total amounts of the premiums received by petitioner on the sale thereof:

The daily average of the borrowings above described for the taxable year 1944 was $ 296,049.12 and for the taxable year 1945 was $ 380,561.64.

Petitioner's assets and liabilities as of December 31, 1943, 1944, 1945 and 1946, were as follows:

The amount of interest received by petitioner on the United States Treasury bonds and notes was $ 5,937.71 in 1944 and $ 7,500 in 1945, and the amount of interest paid by petitioner to the banks on the money borrowed to buy those bonds and notes was $ 4,088.19 in 1944 and $ 5,018.51 in 1945.

Petitioner filed its excess profits tax return for 1944 computing its excess profits credit on the invested capital method. It claimed a daily average borrowed capital of $ 297,967.26, of which amount $ 296,049.12 represented the borrowings used to purchase United States Treasury bonds and notes. In the notice of deficiency the Commissioner, in determining petitioner's excess profits credit and the resulting deficiency in excess profits tax, reduced petitioner's borrowed invested 15 T.C. 118">*124 capital by 50 per cent of the latter amount, explaining his adjustment as follows:

(ii) It is held that money borrowed and used to purchase United States Government bonds may not be included in borrowed invested capital for the purpose of computing the excess profits credit.

Petitioner filed its excess profits tax return for 1945 computing its excess profits 1950 U.S. Tax Ct. LEXIS 113">*126 credit on the invested capital method. It claimed a daily average borrowed capital of $ 380,561.64, all of which represented the borrowings used to purchase United States Treasury bonds and notes. In the notice of deficiency the Commissioner, in determining petitioner's excess profits credit and the resulting deficiency in excess profits tax, disallowed the entire amount claimed by petitioner as borrowed invested capital, explaining his adjustment as follows:

(ii) It is held that money borrowed and used to purchase United States Government bonds may not be included in borrowed invested capital for the purpose of computing the excess profits credit.

OPINION.

Petitioner contends that sums borrowed by it to purchase United States Treasury obligations, which borrowings were evidenced by notes, the notes being secured by the obligations purchased, constitute borrowed invested capital under section 719, ¹ Internal Revenue Code, for the purpose of computing its excess profits tax credits for 1944 and 1945. It is petitioner's position that the instant proceeding is ruled by Globe Mortgage Co., 14 T.C. 192.

1950 U.S. Tax Ct. LEXIS 113">*127 Respondent contends that these sums do not constitute borrowed invested capital within the meaning of section 719. He relies upon Regulations 112, section 35.719-1, ² and upon Hart-Bartlett-Sturtevant 15 T.C. 118">*125 ., 12 T.C. 760; affd., 182 Fed. (2d) 153, (hereinafter referred to as the Hart-Bartlett case).

1950 U.S. Tax Ct. LEXIS 113">*128 In view of the reliance by the parties upon the two cases above cited, a brief summary of those cases is in order. In the Hart-Bartlett case, which antedated the Globe Mortgage Co. case in this Court, the taxpayer, a corporation engaged in the grain business, borrowed substantial amounts during the taxable year and used them to purchase United States securities during war loan drives. It allocated its security purchases to communities where it had grain elevators to obtain local good will. The amount of interest payable on the securities was substantially the same as the amount the taxpayer had to pay on notes evidencing its borrowings. The taxpayer contended that the borrowed amounts constituted borrowed invested capital under section 719. It attacked the validity of Regulations 112, section 35.719-1, requiring that to qualify as borrowed invested capital under section 719 an indebtedness must be incurred for business reasons, and also argued in the alternative that even if the regulation was valid, it, the taxpayer, borrowed the sums in question for business reasons in that, by participating in war loan drives in the communities where it had grain elevators, it obtained1950 U.S. Tax Ct. LEXIS 113">*129 local good will essential to its business. This Court upheld the validity of the regulation, found that the sums in question were not borrowed for business reasons and not subject to business risks and sustained the Commissioner's determination that the sums did not constitute borrowed invested capital under section 719. The Court of Appeals, Eighth Circuit, affirming this Court, said in part:

* * * We note that the statute does not provide for a credit based on a taxpayer's total asset value, but only upon invested capital. And while the sums borrowed by petitioner do constitute borrowed capital they do not constitute borrowed invested capital. * * *

In the Globe Mortgage Co. case, supra, the taxpayer, a corporation engaged in the general investment and finance business, was accustomed to borrowing large sums from the banks to finance its business investments. When, as a result of wartime building restrictions, the taxpayer became unable to obtain sufficient mortgage loan investments, it used its available credit to borrow substantial amounts from banks to purchase U. S. Government securities, depositing the securities purchased, together with additional cash, with the1950 U.S. Tax Ct. LEXIS 113">*130 banks for collateral. It was to the taxpayer's interest to maintain the level of its borrowings from the banks in order to keep open its available credit lines with them. Also, the taxpayer had for several years made investments in corporate and Government securities in its business. Upon the liquidation of this investment in U. S. Government securities, the taxpayer realized a net profit of $ 115,669.37. This Court found these facts 15 T.C. 118">*126 clearly distinguishable from the facts in the Hart-Bartlett case and concluded that the borrowings in question were for business reasons and that the amounts borrowed were includible in the taxpayer's borrowed invested capital under section 719.

Petitioner herein, as did the taxpayer in the Hart-Bartlett case, attacks the validity of Regulations 112, section 35.719-1, supra. However, following our decision and that of the Court of Appeals, Eighth Circuit, in that case, we hold that the regulation is in clear harmony with the statute and is therefore not subject to attack. Cf. Emeloid Co., 14 T.C. 1295.

Similarly, petitioner's argument that, under section 719,50 per cent of all borrowed capital1950 U.S. Tax Ct. LEXIS 113">*131 automatically constitutes borrowed invested capital is precluded by the language we have quoted above from the opinion of the Court of Appeals, Eighth Circuit, in the Hart-Bartlett case, to the effect that sums may be borrowed capital and yet not constitute borrowed invested capital.

We are met, therefore, with the problem of whether the sums herein are borrowed invested capital within the statute and borrowed for business reasons within the regulations. We have found that petitioner realized a profit on these investments in Government securities in the amount of $ 4,704.42 net interest profit over the interest it paid on the notes and in the amount of $ 17,647.22 net premium on the sale of the securities, making a total net profit of $ 22,351.64. In the Hart-Bartlett case the Court of Appeals, Eighth Circuit, found that the borrowings therein did not qualify as borrowed invested capital because:

* * * The sums borrowed were never actually invested as a part of petitioner's working capital, they were never utilized for the earnings of profits and they were never subject to the risk of petitioner's business. * * *

Here the sums involved were utilized for the earnings of1950 U.S. Tax Ct. LEXIS 113">*132 profits. But we note that the sentence above quoted from the opinion of the Court of Appeals in the Hart-Bartlett case does not use the disjunctive "nor" but the conjunctive "and." We therefore can not say that to qualify as borrowed invested capital as distinct from mere borrowed capital it is sufficient under the language of that opinion for borrowed sums simply to have been utilized for the earnings of profits without having also been a part of the taxpayer's working capital and subject to the risk of the taxpayer's business. Cf. Emeloid Co., Inc., supra.

Similarly, in Globe Mortgage Co., supra, this Court said.

* * * the fact that petitioner did realize a substantial profit on the investments does not in itself determine whether the investments were bona fide transactions in connection with petitioner's business, * * *.

Thus we think it clear that the phrase "borrowed invested capital" in section 719 means invested in the business of the taxpayer, and the phrase "for business reasons" in Regulations 112, section 35.719-1, 15 T.C. 118">*127 means for reasons of the business of the taxpayer and does not include all transactions1950 U.S. Tax Ct. LEXIS 113">*133 entered into for profit by the taxpayer or from which profit was realized by the taxpayer. As said in West Construction Co., 7 T.C. 974 (at 978):

* * * We must never lose sight of the fundamental purpose of the legislation, which was to establish a measure by which the amount of profits which were "excess" could be judged. Thus, capital funds placed at the risk of the business might be regarded as entitled to an adequate return. * * *

Similarly, in Player Realty Co., 9 T.C. 215, this Court said:

We are therefore of the opinion that by the use of outstanding indebtedness the statute contemplates the inclusion in invested capital of outstanding indebtedness, in the form required, for capital borrowed and invested in the business of the taxpayer * * *. [Emphasis added.]

Here petitioner was an automobile dealer. It was not in the investment business. There is nothing in the record to show that it had ever invested in Government securities or any other securities before 1944, when the securities herein were purchased, or after 1946, when they were sold, or that it had ever borrowed from banks before 1944, or after1950 U.S. Tax Ct. LEXIS 113">*134 1946. The program of borrowing from banks and investing in Government securities here embarked upon by petitioner was a purely collateral undertaking so far as its automobile dealer business was concerned. The borrowings were at no time placed at the risk of the automobile dealer business, but were used to buy Government obligations and secured by the obligations purchased. It is obvious that this factual situation is considerably different from that in Globe Mortgage Co., supra, where this Court concluded from the facts:

* * * that the petitioner borrowed the sums here in question and used them to purchase Government securities in the normal course of its business as bona fide business transactions, subjecting the borrowed capital to business risks for profit. * * *

The borrowings herein amounted to $ 385,000 as of December 31, 1944, and to $ 380,000 as of December 31, 1945. Petitioner's total assets, including the securities purchased with these borrowings, amounted to $ 533,904.96 as of December 31, 1944, and to $ 559,629.98 as of December 31, 1945. The securities were sold and the outstanding notes retired early in 1946, at about the peak of1950 U.S. Tax Ct. LEXIS 113">*135 the market for such securities, to be sure, but also, significantly, when the excess profits tax (terminated by the Revenue Act of 1945, effective as to taxable years beginning after December 31, 1945), was no longer in effect and the tax benefits of a large amount of borrowed invested capital could no longer be obtained, the same factual situation obtaining in the Hart-Bartlett case, supra. In contrast, the taxpayer in Globe Mortgage Co., supra, did not sell out the securities and repay the loans until, in some cases, long after the excess profits tax was no longer effective.

15 T.C. 118">*128 But petitioner ascribes a business reason to its borrowings from the banks in that it was seeking to establish credit lines with the banks so that it could end its reliance on automobile finance companies for credit and so that it could do its own automobile financing. We have found that petitioner's officers did have these reasons for wanting petitioner to establish bank credit lines in the automobile business before 1944 and to a lesser degree thereafter. But whether the borrowings here in question would have materially helped petitioner to attain that result1950 U.S. Tax Ct. LEXIS 113">*136 is questionable. The two bankers who were called as witnesses by petitioner said that such borrowings would be "good experience" and "favorable", but at the time of the hearing in January 1950, petitioner had not yet established lines of bank credit and was still financing its automobile sales through an automobile finance company, as it has always done.

Furthermore, the fact that petitioner has never had lines of bank credit in its business, either before or after the transactions here involved, indicates that, however desirable, such lines of credit were certainly not essential to petitioner's business. This situation contrasts sharply with that in Globe Mortgage Co., supra, where this Court found as a fact that "the development and maintenance of large credit lines were essential to petitioner's business operations." We must on the facts, then, regard petitioner's desire to establish bank credit lines for its business as no more substantial a business reason to justify the inclusion of its large borrowings in borrowed invested capital than was the desire of the taxpayer in the Hart-Bartlett case to obtain local good will for its business.

We1950 U.S. Tax Ct. LEXIS 113">*137 accordingly conclude that the amounts borrowed herein were not borrowed for business reasons within the requirement of Regulations 112, section 35.719-1, and that they did not constitute borrowed invested capital under section 719 of the Internal Revenue Code.

Decision will be entered for the respondent.