20 T.C. 983">*984 Respondent has determined a deficiency in income tax of $ 4,071.71 for the calendar year 1948. Certain minor adjustments made by respondent in determining the deficiency are not contested. Error is assigned upon the respondent's action in treating a loss realized in the taxable year on the sale of certain Government bonds as a capital loss, limited in its deduction by the provisions of section 117, Internal Revenue Code. Practically all of the facts were stipulated and are so found. Additional facts are determined upon the testimony of one witness.

FINDINGS OF FACT.

The petitioner is a New York corporation with place of business at 101 Pearl Street, 1953 U.S. Tax Ct. LEXIS 69">*71 Watertown, New York. It has for many years been engaged in the manufacture and sale of papermaking machinery, apparatus, and equipment. The return for the year in question was filed with the collector of internal revenue for the twenty-first district of New York, at Syracuse, New York.

In the year 1946 the petitioner negotiated with the Delegation of War Reparation Industry (Soveta), which appears to be a government instrumentality of Finland, a contract for the manufacture and delivery to the latter of two papermaking machines at a total cost of approximately $ 1,800,000. Under the contract as negotiated, the Government of Finland was to make certain periodic payments to petitioner during the progress of manufacture, and required, as a condition of the contract, that security be furnished by petitioner guaranteeing its performance. It expressed its desire that such security should be in the form of a deposit of United States bonds in the sum of $ 800,000 rather than by the filing of a surety bond.

To this expressed desire on the part of Finland the petitioner agreed, and the contract was executed, requiring by its terms that 20 T.C. 983">*985 petitioner deposit in escrow with the Bank1953 U.S. Tax Ct. LEXIS 69">*72 of the Manhattan Company, 295 Madison Avenue, New York City, $ 800,000 in United States bonds. The sum of $ 400,000 in United States bonds was to be deposited in escrow upon the execution of the contract and the payment by Finland of 20 per cent of the contract price. The additional $ 400,000 in bonds was to be deposited when the purchaser made its second 20 per cent payment. The deposited bonds were to be returned to petitioner when Finland made its last payment of 60 per cent under the contract.

Petitioner owned no Government bonds and its available cash reserve was necessary for working capital in the carrying on of its business. It accordingly borrowed from the Bank of the Manhattan Company the sum of $ 400,000 and had that company purchase $ 400,000 in 2 1/2 per cent Government bonds and hold them in escrow in compliance with the terms of the contract. It later, upon the second payment being made by Finland, had the Bank of the Manhattan Company purchase an additional $ 400,000 bonds and hold them in escrow as provided. The first purchase of United States bonds in the sum of $ 400,000 was made at a cost of $ 411,375 on November 6, 1946, and the second purchase of a similar1953 U.S. Tax Ct. LEXIS 69">*73 amount in bonds was made on May 27, 1947, at a cost of $ 408,687.50.

Upon the completion of the contract the aforesaid bonds were released from escrow by the Bank of the Manhattan Company. The first $ 400,000 in bonds released was on September 7, 1948, and these bonds were sold by the petitioner through The Northern New York Trust Company on September 13, 1948, at a price of $ 401,000. The second deposit of bonds was released from escrow on December 22, 1948, and sold through The Northern New York Trust Company on December 24, 1948, at a price of $ 403,187.50. The two deposits of bonds in a total of $ 800,000 brought on sale a sum of $ 15,875 less than the price paid, and this amount was claimed by the petitioner as an ordinary and necessary expense, as a loss from the sale of property other than capital assets, on its tax return for 1948. During the time the aforesaid bonds were held in escrow interest accrued and was collected by petitioner in the sum of $ 15,012.98. Of this interest collected, the amount of $ 13,279.79 was returned as income. This lesser amount was arrived at by a bookkeeping mistake made in accruing a customer's allowance of $ 3,783.33. This adjustment 1953 U.S. Tax Ct. LEXIS 69">*74 of accrued interest was erroneously made to the interest-earned account which should in fact show an additional amount of interest received of $ 3,783.33, and the amount shown as returns and allowance on Item 1 of petitioner's 1948 tax return should be increased by a similar amount.

20 T.C. 983">*986 During the time that the aforesaid Government bonds were owned by petitioner they were carried on its books under a special account entitled "Government Bonds." The only entries made to this account were those recording the purchase and sale of these bonds. On the petitioner's balance sheet statements of December 31, 1946 and 1947, these bonds were shown under the caption "United States Government Bonds."

OPINION.

Respondent contends that the United States Government bonds acquired by petitioner for the purpose of being held in escrow to guarantee performance of its contract with the Government of Finland constituted capital assets under the definition of section 117 (a), Internal Revenue Code, ¹ and that consequently the loss sustained upon their disposition must be treated as a capital loss to be allowed only to the extent of offsetting capital gains, of which petitioner had none, and the 1953 U.S. Tax Ct. LEXIS 69">*75 deduction taken is subject to elimination. He argues that no matter what petitioner's purpose was in acquiring the bonds, their sale could not be considered as one of assets held for sale in the ordinary course of its business.

1953 U.S. Tax Ct. LEXIS 69">*76 It is petitioner's contention that though it is admitted that it is not in the business of buying and selling securities, the bonds in question were not bought as an investment but merely as an incident required and necessary in the performance of a contract carried out in the regular course of its business, and to be sold as soon as their use in performance of the contract was at an end. On this basis it contends that the bonds when released from escrow were, from that time until their sale a few days later, being held not as investments but for sale as an ordinary incident in the carrying on of its regular business, and, as such, not coming within the definition of capital assets.

20 T.C. 983">*987 Both parties to the proceeding cite various cases as supporting their theories. Most of these are upon facts which differ materially from those here involved. The question seems to be narrowed down finally as to whether the situation here existing is similar to and controlled by Exposition Souvenir Corporation v. Commissioner, 163 F.2d 283, which affirmed a Memorandum Opinion of this Court, or by the decisions of this Court in Western Wine & Liquor Co., 18 T.C. 1090,1953 U.S. Tax Ct. LEXIS 69">*77 and Charles A. Clark, 19 T.C. 48.

Respondent argues that the reasoning underlying the decision in Exposition Souvenir Corporation, supra, as detailed by the court in its opinion, covers perfectly the situation we have here and requires a holding that the sale of the bonds here in question resulted in a capital loss. In that case the taxpayer, engaged in the business of selling souvenirs, desired a concession for such sale at the New York World's Fair which was being held by New York World's Fair 1939 Incorporated, a nonprofit corporation organized under the laws of New York and which was financed by the sale of debentures payable out of gate receipts. The Fair corporation required as a condition precedent to an application for the acquiring of a concession to do business on the fairgrounds that the applicant first acquire debenture bonds issued by it, the acquiring of a contract for a concession depending largely upon the amount of bonds subscribed for by the applicant. Under these conditions the taxpayer purchased a substantial amount in debentures of the Fair corporation, which it sold at a loss after the closing 1953 U.S. Tax Ct. LEXIS 69">*78 of the New York World's Fair. On these facts we held, and were sustained by the circuit court, that petitioner had made an investment in the debentures of the Fair corporation and that these represented capital assets and the loss upon their sale a capital loss.

The cases of Western Wine & Liquor Co., supra, and Charles A. Clark, supra, arose under facts identical to each other. In each of these cases the taxpayer was in the business of buying and selling liquor. A large distilling corporation with a heavy inventory of whiskey announced that it would sell this at book cost to holders of its outstanding stock, the right to purchase being limited by the number of shares held. In each of these cases the taxpayer was not a shareholder in the distilling corporation and had no desire or purpose to make an investment in its stock, but each purchased a block of stock in that corporation solely for the purpose of obtaining the agreed allotment of liquor, exercised its right and, immediately upon receiving the liquor, sold at a loss the stock acquired. In these cases we held that there was no intent on the part of the taxpayer1953 U.S. Tax Ct. LEXIS 69">*79 to make an investment in the stock of the distilling corporation and that the purchase 20 T.C. 983">*988 and sale of such stock was merely an incident in its procurement of whiskey for resale, which was its business regularly carried on. On this basis, it was our conclusion that the loss realized upon the sale of stock represented merely an item to be reflected in the cost of goods sold, and that the stock must be considered as held by the taxpayer for sale in the regular course of its business of buying and selling liquor.

It is argued by petitioner that the facts in the two last-cited cases are identical in principle with those before us in the present case. Upon careful consideration of the facts in connection with those existing in the three cited cases, we conclude that petitioner's contention must be sustained.

In Exposition Souvenir Corporation, supra, the New York World's Fair was being financed by the sale of debenture bonds of that corporation payable out of gate receipts. It was vitally interested in selling its debentures, and thus laid down the condition that applicants for concessions must be investors in those securities. By this condition1953 U.S. Tax Ct. LEXIS 69">*80 two objectives were obtained, the primary one being the securing of the finances necessary for operation, and secondly, securing the active participation of its concessionaires in the successful operation of the Fair. Such interest would be assured in the case of an investor in the debentures, as successful operation would be necessary to safeguard his investment. In that case it is true that the primary motive of the taxpayer in making his investment in the debentures was to secure a license for a concession, but the making of an investment was required of him, and the debentures necessarily were held as investments and sold as such. That case seems to fall clearly within the classifications represented by Logan & Kanawha Coal Co., 5 T.C. 1298, where the taxpayer, in the business of buying and selling coal, made investments in the stock of various coal mining companies for the purpose of securing a voice and influence in their management, aiding it in the carrying on of its regular business by making it possible to procure coal of the grades and sizes it needed for sale to customers. Certain of these investments proved unprofitable and the stock1953 U.S. Tax Ct. LEXIS 69">*81 represented by them was sold at a loss. There it was held that irrespective of the basic reason for the taxpayer's action in making these investments, they were nonetheless investments in stock which represented capital assets at the time purchased and sold.

The facts in the present case, we think, are clearly closer in principle to those involved in Western Wine & Liquor Co., supra, and Charles A. Clark, supra. In the present case it is clear that no investment 20 T.C. 983">*989 in United States bonds was intended by the petitioner. These bonds were acquired solely to carry out a condition imposed by the contract under which it was manufacturing and selling a large order of equipment in the regular course of its business. The Government of Finland was in no way interested in petitioner's making an investment in United States bonds. There was no requirement under the contract that petitioner make such an investment. The Government of Finland merely wished this form of security, and it would have satisfied the demand of the contract completely for petitioner, instead of acquiring the bonds for deposit in escrow, to have borrowed1953 U.S. Tax Ct. LEXIS 69">*82 the bonds themselves from the Bank of the Manhattan Company under an agreement permitting it to deposit them as security and to have paid the bank a fee for such loan. The facts in connection with the acquisition of the bonds, like those in the two last-cited cases covering the acquisition of the distilling company stock, is, we think, shown clearly to have been with no intention of making an investment. It is not thought that any business concern in the exercise of the most ordinary prudence and judgment would borrow funds from a bank and pay interest thereon to buy Government 2 1/2 per cent bonds at a premium where the interest return would be less than that paid for the loan and the probability of any increase in market value of the bonds would be negligible. Also, as in the two cited cases, we have an immediate sale of the bonds when they had served their purpose as a security deposit and been released from escrow. The time elapsed in each instance between the release of the bonds from escrow and their sale shows definitely that the order of sale must have been coincident with the release.

Under these circumstances we think that the purchase and sale of these bonds was merely1953 U.S. Tax Ct. LEXIS 69">*83 an incident in the carrying on by petitioner of its regular business of manufacturing and selling papermaking machinery. The cost to it of making the required deposit was the interest paid the bank on funds borrowed for the purchase, together with the loss sustained in effecting the deposit, this being that which was realized upon the immediate sale of the bonds. There being no intent on the part of the petitioner to hold the bonds after they had served their business purpose requires the holding similar to that made by us in Western Wine & Liquor Co., supra, and Charles A. Clark, supra, that the sale of the bonds was of assets held for sale in the ordinary course of petitioner's business and that the loss incurred constituted an ordinary and reasonable expense.

Decision will be entered under Rule 50.