Commissioner of Internal Revenue v. Hunt Foods, Inc

This is a petition by the Commissioner of Internal Revenue for review of a decision of the Tax Court which failed to sustain his determination of certain deficiencies in the respondent’s excess profits taxes for the years 1941 and 1942. The facts are not in dispute.

The legal questions arise under former Section 719(a) (1) of the Internal Revenue Code, 26 U.S.C.A. § 719 , which in pertinent part, is that “borrowed capital * * * [is] * * * The amount of the outstanding indebtedness * * * of the taxpayer which is evidenced by a bond, note, bill of exchange, debenture, certificate of indebtedness, mortgage, or deed of trust, * * * ”. Did the Tax Court err in holding that taxpayer had such an outstanding indebtedness evidenced by bills of exchange ?

Taxpayer, a California corporation, is engaged in the business of packing fruits and vegetables. Its products are widely marketed throughout the United States. During the fiscal years ended February 28, 1941 and 1942, it obtained funds in connection with its operation in the following manner:

When goods were shipped to a customer, a sight draft would be drawn on such customer, payable to taxpayer. Upon payment of the draft the customer…