fore, the credits did not constitute borrowed capital for the purpose of computing the amount of petitioner's borrowed invested capital. Petitioner relies primarily on a provision contained in the agreement which the bank had with its corporation depositors and which it contends, precludes the conclusion that the bank purchased the drafts in question. The provision is, in part, as follows: * All items are credited conditionally, subject to final payments in cash or solvent credits. This Bank reserves the right to decline to honor checks, or other withdrawal orders, drawn against conditional credits. It may charge back any item before final payment There is some support for petitioner's view. A few courts have held that the existence of the right to charge back items before final collection indicates that the bank takes the instruments deposited as an agent for collection only, and not as an owner. See Denton v. Shenandoah Milling Co., 205 N. C. 77; 170 S. E. 107; First National Bank v. Munding, 83 Okla. 7; 200 Pac. 158. But the great weight of authority is to the contrary. In City of Douglas v. Federal Reserve Bank of Dallas, 271 U. S. 489, the Supreme Court held that, despite such a stipulation, the bank is a purchaser of the instruments if the paper is endorsed unrestrictedly and at once passed to the depositor's credit, since the stipulation merely authorizes the bank to charge back the amount of the credit in event of dishonor. In City of Douglas the facts were as follows: A depositor endorsed a check in blank and delivered it to the A bank. The depositor's account was credited with the amount of the check. The depositor's passbook, however, contained the statement "all out-of-town items credited subject to final payment." The check was sent to the B bank for collection, and, due to the negligence of this bank, the proceeds were not received. The A bank charged back the amount of the credit to the depositor. In an action by the depositor against the B bank, the Supreme Court held for the defendant on the ground that the A bank had become the owner of the check when it made the credit to the depositor's account, and, therefore, the depositor no longer possessed the relationship to the defendant necessary to bring suit. Speaking for the Court, Justice Stone said: When paper is indorsed without restriction by a depositor, and is at once passed to his credit by the bank to which he delivers it, he becomes the creditor of the bank; the bank becomes owner of the paper, and in making the collection is not the agent for the depositor. Burton v. United States, 196 U. S. 283; Union Electric Steel Co. v. Imperial Bank, 286 Fed. 857 Such was the relation here between the plaintiff and the Douglas Bank, unless it was altered by the words printed on the pass-book to the effect that outof-town items were credited "subject to final payment." The meaning of this language, as the cashier of the Douglas Bank testified, and as the court below held, was that if the check was not paid on presentation, it was to be charged back to plaintiff's account. The check was paid and the drawer and indorsers discharged. Without these words the relationship between the plaintiff and the bank was that of indorser and indorsee; and their use here did not vary the legal rights and liabilities incident to that relationship, unless it dispensed with notice of dishonor to the depositor. While there is not entire uniformity of opinion, the weight of authority supports the view that upon the deposit of paper unrestrictedly indorsed, and credit of the amount to the depositor's account, the bank becomes the owner of the paper, notwithstanding a custom or agreement to charge the payment back to the depositor in the event of dishonor. And in Martin v. Huber, 68 N. Y. Supp. (2d) 53, A drew a sight draft in the name of B, endorsed it in blank, and deposited the draft and the related bill of lading in his own account at the bank. The bank credited A with the full amount of the draft immediately upon deposit. The draft was not paid, and the question in the subsequent proceeding was whether or not title to the documents was acquired by the bank, which had the right to charge back the instrument. The court held that: When paper indorsed without restriction is deposited in a bank and the depositor's account is at once credited with the amount thereof, the depositor becomes a creditor of the bank; the bank becomes owner of the paper, and on making the collection is not the agent for the depositor, notwithstanding any right of the bank to charge back in the event of dishonor. Under the earlier excess profits tax provisions, it was held that transactions involving the discount of promissory notes did not give rise to the borrowing or loaning of funds, but effected a sale of the notes. See American National Bank of St. Paul, 14 B. T. A. 476. In Alworth-Washburn Co., 25 B. T. A. 140, we held that the discounting of notes constituted a sale and not a loan, so that taxable gain was realized. In affirming the decision of the Board of Tax Appeals, the Circuit Court relied upon Elmer v. Commissioner, 65 Fed. (2d) 568, 569, where Judge Learned Hand, speaking for the Circuit Court of Appeals for the Second Circuit, said: If a merchant discounts his customer's note at a bank, endorsing it, but getting immediate credit for its discount value, it would be a most unnatural thing to consider it a loan from the bank. He remains liable if the customer defaults, but the collection is in the bank's hands, and the transaction is closed in the absence of a default. See Alworth Washburn Co. v. Helvering, 67 Fed. (2d) 694. In the instant proceeding, we can not recognize any substantial difference between what the bank did upon receiving the drafts and bills of lading from the petitioner, i. e., crediting the face amount of the drafts to petitioner's account and making a small charge when the drafts were paid by the purchasers of grain, from discounting notes or drafts where the discount is calculated on the time the items will require for collection. If the bank had known just how long it would take to collect the drafts, doubtless it would have discounted them. But, from the very nature of the transaction, it could not know the exact time which would elapse until the purchasers of grain would honor the drafts drawn upon them. Therefore, it made this small charge for the time intervening between the dates of credit and payment. This is entirely consistent with purchase of the drafts by a bank. See, e. g., Vickers v. Machinery Warehouse & Sales Co., 111 Wash. 576; 191 Pac. 869. Petitioner calls our attention to Bay State Milling Co. v. Hartford Accident & Indemnity Co., 193 Minn. 517; 259 N. W. 4. That case interpreted Minnesota Statutes (1945), section 335.75, which has been incorporated largely verbatim by the bank in the provision with its depositors referred to previously. But the Bay State Milling Co. case merely held that the Minnesota statute was remedial in nature and expressly drawn to relieve banks of responsibility for the acts of their correspondents. See, also, White Brokerage Co. v. Cooperman, 207 Minn. 239; 290 N. W. 790. There is nothing inimical to the purchase concept in the fact that a bank may be the owner of a negotiable instrument and yet at the same time be held not to bear the risks incident to collection. In the law of sales, for example, there has been no insurmountable difficulty in the way of treating a buyer as "owner" and yet allowing a stipulation that the seller should bear the risk of loss in transit. Williston on Sales (Rev. Ed. 1948), sec. 302. In view of all the facts in this case, it is concluded that the petitioner did not borrow funds from the bank, and that the bank was not petitioner's agent for the collection of the drafts, but, instead, that there was a transfer of ownership of the instruments from petitioner to the bank. Petitioner argues, further, that even if it was only contingently liable as the drawer of the drafts to the bank which was the payee, such contingent liability is sufficient to qualify as borrowed capital within the intendment of section 719 (a) (1). But, for borrowed capital to be present under section 719 (a) (1), there must be an "outstanding indebtedness." And this Court, as well as other courts, has held that a contingent liability does not constitute "outstanding indebtedness" as intended by this section. In C. L. Downey Co. v. Commissioner, 172 Fed. (2d) 810, affirming 10 T. C. 837, the court said that a contingent liability did not represent an "indebtedness" within the mean *The drawer of a draft or bill of exchange is secondarily liable to the holder thereof. His liability is contingent upon due presentment of the instrument for acceptance or payment and its subsequent dishonor. See Minnesota Statutes (1945), sec. 335.231, which is the same as section 61 of the Uniform Negotiable Instrument Law. ing of section 719 (a) (1). The court quoted with approval from Gilman v. Commissioner, 53 Fed. (2d) 47, 50, in which it was said: The term "indebtedness" as used in the Revenue Act implies an unconditional obligation to pay. While the sum of money may be payable upon a 串 * contingency, yet in such case it becomes a debt only when the contingency has happened, the term "debt" being opposed to "liability" when used in the sense of an inchoate or contingent debt. See also Player Realty Co., 9 T. C. 215. The respondent's determination in excluding from borrowed capital the average amounts of the drafts delivered to the bank in the taxable years is sustained. Reviewed by the Court. Decision will be entered for the respondent. KAY-FRIES CHEMICAL, Inc., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Docket No. 21563. Promulgated May 23, 1950. EXCESS PROFITS TAX-EQUITY INVESTED CAPITAL-CAPITAL CON- Thomas L. Keaney, C. P. A., for the petitioner. OPINION. MURDOCK, Judge: The Commissioner determined deficiencies in excess profits tax of $5,467.94 for 1941 and $11,070.80 for 1942. The only issue for decision is whether the Commissioner erred in failing to include in equity invested capital $98,787.74 representing the value placed by the petitioner upon a secret process for the manufacture of formaldehyde. The case was presented upon a stipulation of facts, which is adopted as the findings of fact. The petitioner's returns for the taxable years were filed with the collector of internal revenue for the fourteenth district of New York. The petitioner claimed in those returns, as a part of equity invested capital, $98,787.74 representing the alleged value of a secret formula for the making of formaldehyde. The Commissioner, in determining the deficiencies, refused to include it as a part of equity invested capital under section 718. Tennants Consolidated, Ltd., through two affiliates, owned all of the stock of the petitioner after October, 1936. Tennants was the largest manufacturer of formaldehyde in the United Kingdom in 1937. It manufactured the product under a secret process. It decided in 1937 to manufacture formaldehyde in the United States, through the petitioner, using the secret process. It therefore disclosed the secret process to the chief chemist of the petitioner in 1937, and thereafter the petitioner constructed equipment and facilities for the manufacture of formaldehyde in the United States by means of the secret process, based on plans and specifications drawn up by the chemist in England under the direction of Tennants. The first sales were made in August, 1938. The stipulation shows the petitioner's sales and gross profits from formaldehyde, and also its sales and gross profits from all products combined, for the years 1938 through 1942. The secret process was turned over to the petitioner by Tennants at no capital cost to the petitioner. No royalty was charged. There was no written contract with respect to the use of the process. No stock or other consideration was issued by the petitioner to Tennants for the process, and no asset was set up on the books of the petitioner to represent in any way the secret formula. Tennants gave the petitioner the secret process for the manufacture of formaldehyde, including the plans and specifications. The petitioner contends that the value of the secret process at the time of acquisition should be included in invested capital under section 718 (a) (2) as property paid in as a contribution of capital. That section provides in part that equity invested capital for any day shall include: (2) PROPERTY PAID IN.-Property (other than money) previously paid in (regardless of the time paid in) for stock, or as paid-in surplus, or as a contribution to capital. Such property shall be included in an amount equal to its basis (unadjusted) for determining loss upon sale or exchange. The Commissioner, conceding nothing, has denied the petitioner the right to include any amount in equity invested capital representing the secret process. It was incumbent upon the petitioner to prove facts necessary to show that some amount should be included and to show the amount to be included. The knowledge of the secret process and the right to use that process, together with the plans and specifications, received by the petitioner from its parent, were valuable to the petitioner, as it contends. However, section 718 (a) (2) provides that property paid as a contribution to capital shall be included in equity invested capital in an amount equal to its basis (unadjusted) for determining loss upon sale or exchange. Section 113 (a) (8), not referred to by the petitioner, provides that the basis of property acquired after December 31, 1920, by a corporation as a contribution to capital shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable |