Cleveland R. Co. v. Commissioner

CLEVELAND RAILWAY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Cleveland R. Co. v. Commissioner Docket Nos. 10537, 12535. United States Board of Tax Appeals 10 B.T.A. 310; 1928 BTA LEXIS 4145; January 27, 1928, Promulgated *4145 1. The City of Cleveland, Ohio, by ordinance and regulations provided a scale of fare to be charged by petitioner predicated upon a net return to petitioner each year of an amount sufficient to pay a dividend of 6 per cent upon its capital stock. The plan in substance was that if the net return to petitioner in any year exceeded a fixed amount, the rate of fare to be charged the public for the succeeding year was automatically reduced, and if the return in any year failed to equal the fixed return the fare was automatically increased for the succeeding year. The City of Cleveland did not own or operate the street railway. Held, the petitioner is not entitled under the taxing statutes in force during the taxable years to limit the income upon which the income and profits tax should be computed each year to the 6 per cent return upon its capital stock, but was taxable, the same as any other taxable corporation, upon its net income for each year, determined in accordance with the provisions of the Revenue Acts of 1918 and 1921. Held, further, that no portion of petitioner's gross income accrued to the City of Cleveland as a municipality of the State of Ohio, and the taxation*4146 thereof by the Federal Government does not impose a loss or burden upon the municipality as such. 2. Petitioner purchased certain shares of its own stock from its stockholders. Held, that this stock may not be included in petitioner's invested capital. Atlee Pomerene, Esq., Andrew Squire, Esq., Fielder Sanders, Esq., and H. J. Crawford, Esq., for the petitioner. M. N. Fisher, Esq., for the respondent. Carl F. Sheeler, Esq., and Alfred Clum, Esq., for the City of Cleveland, as amici curiae. LITTLETON *310 The Commissioner determined deficiencies in income and profits tax of $66,411.24 for 1918, $194,914.06 for 1919, $66,152.69 for 1920, and $143,514.91 for 1921. The principal issue is the amount of the taxable net income of the petitioner. Its contention is that by reason of certain franchises from the City of Cleveland, Ohio, its net income is limited to a return of 6 per cent on its outstanding capital as that amount is determined by the franchise, plus the amount of nondeductible Federal taxes and plus 2 per cent paid by it on its own tax-free covenant bonds. There is also the further issue whether its invested*4147 capital should be reduced by the amount of money in the investment fund invested in its own stock. FINDINGS OF FACT. The petitioner, the Cleveland Railway Co., is a corporation under the laws of the State of Ohio, engaged in the business of operating *311 street railways in Cleveland and adjacent suburbs. Up to February 1, 1910, it operated its lines under franchises permitting the charging of a fixed fare of 5 cents under all circumstances during the life of the franchise, and permitting an unlimited return on the stockholders' investment. These franchises were surrendered and a new contract made effective March 1, 1910, providing a return limited to 6 per cent to the stockholders and variable rates of fare to the car riders to the end that amounts equal to the cost of service be received. Several amendments and two renewals, the last in 1926, have since been made by the city but their provisions are unchanged so far as they are material to the question of Federal income or excessprofits taxes. The various franchises have been enacted into ordinances. The provisions of these contracts or franchises have been complied with in all particulars from March 1, 1910, until*4148 the present date by both the City of Cleveland and the petitioner. The following provisions of the ordinance are material: Sec. 9. The company shall place and continue upon all of its lines cars of modern design, equipped and furnished with such improvements and appliances as shall be deemed by the city to be necessary and proper for the safety, convenience and comfort of the passengers and the public, and shall run such cars in such numbers, at such intervals of time, subject to the limitation hereinafter provided, and under such rules and regulations as the city may from time to time require, and shall cause such cars to stop at such places as the city may designate for passengers to leave or enter the same. The city reserves to itself the entire control of the service, including the right to fix schedules and routes, including routes and terminals of interurban cars, the character of the cars, the right to increase or diminish service, provided only that the council shall not require service to an extent which at the maximum rate of fare, will not produce, to be credited to the interest fund, money enough to make good any loss therein, and to meet the requirements of Sections*4149 16 and 17 hereof; and provided further that whenever, in the opinion of the company, any resolution or ordinance of the council regulating service will, if such service be installed at the maximum rate of fare provided in Section 21 hereof, not produce, to be credited to the interest fund, money enough to make good and meet the requirements of Sections 16 and 17 hereof, then and in any event the company shall at once install such service, and may require the question whether the continuation of such service would, at the maximum rate of fare, impair the ability of the company to meet the requirements of Sections 16 and 17 hereof to be submitted to arbitration as hereinafter provided; and if the board of arbitration decide that such service will not produce the moneys needed as aforesaid, then the resolution or ordinance shall not be further complied with by the company, and the company shall have the right to recoup any losses sustained, in the manner fixed by the board of arbitration to which the question of the continuation of such service had been submitted. Sec. 15. At all times during the continuance of the rights herein granted, and any renewal hereof, the company shall keep*4150 in its office, open to inspection at all reasonable times, full, true and accurate accounts of all moneys expended and liabilities incurred in connection with said business, and the maintenance *312 and operation of said property, and also complete statistical accounts of its business and operations, which accounts shall be kept in the manner prescribed by the American Electric Railway Accountants' Association, or as may be provided by law, or by any authority created by law; and the said company shall make and furnish to the city street railroad commissioner monthly reports of its car-mileage and earnings, and such other statements and reports as the said commissioner may from time to time direct; nd said commissioner shall at all times have access to, and full authority to inspect, examine, audit and verify all accounts, vouchers, documents, books and property of the company relating to the receipt and expenditure of money and the business done by the company in the operation of its railway. SEC. 16. For the purpose of fixing, from time to time, the rate of fare to be charged by the company, and the return to the company, for the services rendered by it to the public, *4151 and for the further purpose of fixing the price at which the property of the company may be purchased as hereinafter provided, the capital value of all the property of said company shall consist of the following items: (a) The bonded indebtedness of the company, the principal thereof aggregating $8,128,000, and any renewal of any part or the whole thereof, and any addition thereto made pursuant to the provisions of this ordinance. (b) The floating indebtedness of the company, aggregating $1,288,000, represented by bills payable, as of January 1, 1908, less whatever part thereof has been paid at the time of the taking effect hereof; also whatever sum, if any, is needed to be added to money on hand to place the sum of $500,000 in the interest fund, as provided in Section d9; also, to the extent that there is no money on hand after deducting from the cash on hand said sum of $500,000, all existing debts of The Municipal Traction Company, The Forest City Railway Company, The Low Fare Railway Company, The Neutral Street Railway Company, including claims hereafter liquidated; also including a sum equal to 7 1/2 per cent upon the par value of all stock guaranteed by The Municipal Traction*4152 Company, and such further sum, not exceeding fifty thousand dollars ($50,000), as shall be determined should equitably be paid to persons who have disposed of stock held under such guarantee; also an amount equal to the par value of the issued and outstanding capital stock of The Neutral Street Railway Company; also all existing debts of the Cleveland Railway Company and existing claims against said company hereafter liquidated, and one and one-half (1 1/2%), on $14,675,600, less the amount paid by The Municipal Traction Company to stockholders of The Cleveland Railway Company, on or about October 1, 1908, as for dividend, and interest at the rate of six (6) per cent per annum, from January 1, 1910, to the taking effect of this ordinance, upon the residue of the capital value of The Cleveland Railway Company, as determined by the provisions of paragraph (c) of this section, to be divided among the stockholders of The Cleveland Railway Company; also all claims against the receivers which the company may be required by order of court to pay; all of which shall be assumed, by the acceptance of this ordinance, by the company upon the taking effect of this ordinance. (c) The residue*4153 of the capital value of the company, to-wit, the sum of $14,675,600 (the value of the property is agreed to be $21,127,149.53, to which must be added, as the value of The Forest City property, $1,805,600; and there is added the sum of $1,158,300, interest accrued, but used to equalize stock value and not to be paid, said interest being the equivalent of 9 per cent. upon $12,870,000 for the period ending January 1, 1910. The total of these sums is $24,091,049.53. From this aggregate is deducted bonded indebtedness of *313 $8,128,000 and floating indebtedness as of January 1, 1908, $1,288,000. The total of these sums is $9,416,000, leaving $14,675,049.53, agreed addition to equalize stock value, $550.47, making for residue of capital value, $14,675,600), with such additions thereto as may from time to time be made pursuant to the provisions of this ordinance. The company may, at any time, refund its bonds, or capitalize or issue mortgage bonds for its floating debt as defined in paragraph (b). All bonds hereafter sold by the company shall be sold at the best price obtainable therefor, and shall contain a provision making them payable on ninety days' call, at any interest*4154 maturing period, at one hundred and five and accrued interest; and the city shall have thirty days' notice in advance of all such proposed sales of bonds by the company. There shall be paid out of the interest fund, as hereinafter provided, all taxes and other payments herein provided to be made therefrom, and also, as return upon the capital value above described five (5) per cent per annum upon the total bonded indebtedness of the company, payable as provided by the mortgages securing the bonds; and, upon the refunding of any such bonded indebtedness, there shall be paid out of the interest fund that rate per cent. upon such refunded bonded indebtedness which the refunding bonds may bear, and such rate as may be necessary to amortize the discount, if such bonds are sold at a discount, the total, however, of such rate of interest and addition thereto for amortization to be not in excess of six (6) per cent. per annum on par. There shall be paid out of the interest fund, as hereinafter provided, from time to time, interest at the rate of six (6) per cent. per annum upon the aggregate amount of the debt of the company as fixed in clause (b) of this section. The company may*4155 issue and sell its capital stock or mortgage bonds, said stock being sold for not less than par, and said bonds on a basis which will not be in excess of six (6) per cent on par and will include such rate provision for amortizing the discount, if such bonds are sold at a discount, or increase its floating indebtedness, in such amounts as shall be necessary to capitalize the debt enumerated in said paragraph (b), or to provide for such extensions, betterments or permanent improvements as it is by this ordinance provided may be added to the capital value upon which interest is to be paid; and the par value of the stocks or bonds sold or debt created for such purpose shall become part of the capital value; and if bonds are sold at a premium, such premium shall be used for extensions, betterments or permanent improvements, or for paying any then existing indebtedness of the company. After meeting the payments heretofore provided for by this section, there shall be paid, from the remainder of said interest fund, to the stockholders, from the taking effect of this ordinance, quarterly, a sum equal to six (6) per cent per annum, payable quarterly, upon the residue of capital value and*4156 additions thereto, as provided by paragraph (c) hereof. The company may, without the consent of the city, issue and sell its capital stock, or increase its bonded or floating debt; but no increase in capital stock or bonded or floating indebtedness by the company shall be considered a part of the capital value for the purposes of this section unless made pursuant to the provisions of this ordinance, or with the consent of the city. Sec. 17. To the capital value of the company, and as a part of the capital value of said property, as that term is defined by the provisions of Section 16 hereof, there shall be added from time to time the par value of bonds or stock sold or debt created for extensions, betterments and permanent improvements, as hereinafter provided. All earnings of the company, from every source, above the operating expenses and maintenance, depreciation and *314 renewal allowance, shall go into the interest fund, as that fund is defined by Section 16. Out of that fund shall be paid the sums provided to be so paid by Section 16. Any surplus remaining in said interest fund after the payment of taxes and other charges provided by this ordinance to be paid*4157 therefrom, over and above the sum of $500,000, shall constitute a fund to be absorbed in the reduction of fares; and any deficiency in the interest fund below $500,000, in any period of operation, shall be first made good as is hereinafter provided; it being the intent hereof that the said interest fund shall be maintained at $500,000, and that all the payments provided to be made by Section 16 shall be cumulative, and shall be first paid out of the interest fund, without any deductions whatever; and for that purpose, and out of the interest fund, the company shall pay all sums assessed against the company its property or stock, or against any income or interest of the stockholders by reason of their ownership of stock, by the United States, the same being by law payable by the Company, or by the state of Ohio, or by any county, municipal or township authorities in that state. The proceeds of the sale of any property of the company represented in the aggregate capital value of the company, as that term is defined in Section 16 hereof, may be used by the company in the payment of floating indebtedness, or may, in the company's discretion, or if required by the provisions of any mortgage*4158 made by the company to secure any bonded indebtedness forming a part of said capital value, be deposited with the trustee of such mortgage. All such sums at any time on deposit with such trustee shall be first taken down and used by the company in the construction or acquisition of any extension, betterment or permanent improvement thereafter made. All such property shall be sold at the best obtainable price, and the amount of the proceeds and the items of property sold shall be forthwith reported to the council. To the extent that any part of the proceeds of such sales is otherwise used by the company than in the making of extensions, betterments and permanent improvements, or depositing with such trustee as above set forth, the capital value of the company, as described in Section 16 hereof, shall be reduced. Sec. 18. Under the provisions of ordinance No. 16238-A the company has, out of the money on hand or as provided in Section 16 hereof, placed the sum of $500,000, less prepaid accounts and plus accrued accounts, in the interest fund. This fund shall be deposited separately from the current receipts of the company, and shall from time to time have credited to it interest*4159 earned thereon by being deposited in such banks as the company shall select, or invested in such securities as may be agreed upon between the company and the city. To the interest fund thus created there shall be added monthly the sum remaining after deducting from the gross receipts for the month nineteen and one-half cents per car-mile for each revenue mile, exclusive of car-house and car-yard miles, made by a car equipped with motors operated during the month, exclusive of cars operated to carry materials used in the construction and repair work of the company itself, and also sixty (60) per cent of nineteen and one-half cents per car-mile for each revenue mile, exclusive of car-house and car-yard miles, made by a revenue trailer operated during the month, and the sums provided in Section 19 to be deducted from gross receipts for the maintenance, renewal, and depreciation account; and the fund thus created shall be and constitute the interest fund, out of which all taxes, interest, and other payments hereinbefore and hereinafter provided for shall be made. Whenever the city establishes for any line a schedule which requires the operation of more cars during any hour in the day*4160 than twice the number of cars operated per *315 hour on the base table for such line, the company shall be allowed by the city such additional car-mile allowance for cars so operated as shall be necessary to pay the increased cost of such operation in excess of twice the base table, if there shall be any such increased cost; and in the event of disagreement thereon, the amount, if any, to be allowed shall be determined by arbitration, in the manner hereinbefore provided. Sec. 19. The sum provided in Section 18 hereof to be deducted from the gross receipts of the company per car-mile of operation shall be used by the company for operating expense, insurance, payment of claims, and all other expenditures, exclusive of the payments required by Section 16 hereof to be made upon the capital value of the company, and taxes and interest on floating debt, and payments herein provided to be made out of the interest fund; and no part thereof in excess of $1,000 per month shall in any event be expended for any extension, betterment, or permanent improvement; and all sums so expended within the limitation hereinbefore stated for such extensions, betterments, or permanent improvements*4161 shall be reported monthly to and approved by the council, and the interest fund shall annually be reimbursed for the full amount so expended by new capital; and all sums so expended and not approved by the council as for extensions, betterments, or permanent improvements shall be charged to operating expenses. * * * The sum so deducted each month shall be placed to the credit of the maintenance, depreciation, and renewal account, and shall not thereafter be expended for any other purpose whatever. The sum so set aside shall, if not needed for immediate maintenance or renewals, be accumulated, and may from time to time be invested in the bonds of the company, or in the payment of its floating indebtedness, to the extent that the same form part of the capital value of the company, as that term is defined in Section 16 hereof; and to facilitate the investment of said fund in such bonds, the company shall, in any bonds hereafter issued by it, stipulate the call price and conditions provided in Section 16 hereof; but if the amount so invested or paid is at any time needed for maintenance and renewals, the company may, for that purpose, issue new mortgage bonds, or incur new floating*4162 indebtedness, to the amount of such investment or payment, with the interest that would have accrued thereon, which new bonds or floating indebtedness shall become part of the capital value of the company, as that term is defined in Section 16 hereof. Sec. 20. The amounts per car-mile allowed in Section 18 hereof may be increased or decreased from time to time by agreement between the city and the company, so as to enable the company to meet the legitimate expenses of operation, insurance, accident and damage claims, and to prevent or make good any deficit on account of such operating expenses; and also the amount required by Section 19 hereof to be set aside for maintenance, renewals and repairs may be similarly increased or decreased by agreement; and in the event of disagreement any such increase or decrease in either car-mile allowance shall be submitted to arbitration. Any surplus in the hands of the company at the expiration of any period of one year remaining unexpended for operating expenses, as hereinbefore provided, out of the car-mile allowance provided by Section 18 hereof, exclusive of the amount required to be credited to the maintenance and renewal account by Section*4163 19 hereof, shall be placed to the credit of the interest fund hereinbefore described. The intent hereof with regard to the sum authorized by Section 19 hereof to be set aside for maintenance, depreciation and renewal is to enable the *316 company to maintain, renew, replace, preserve and keep its railway system and property, and every part thereof, and all extensions, betterments and permanent improvements hereafter made pursuant hereto, in good condition, thorough repair and working order, the standard of such condition, repair and working order being an average for the entire system of 70 per cent of its reproduction value; and the car-mile allowance provided by Section 19 hereof for the purpose of maintenance and renewal shall not at any time be diminished unless the value of the property of the company and the amount accumulated in the maintenance and renewal fund, and invested as is provided in Section 19 hereof, aggregate more than 70 per cent of the reproduction value of the said entire system. No renewal or replacement charged to the maintenance, depreciation and renewal account shall be made by the company until it has been approved by the city council, or by the*4164 city street railroad commissioner when thereunto duly authorized by the council to act. Sec. 22. The rate of fare shall be changed from time to time as follows: Whenever the amount credited to the interest fund, less the proportionate accrued payments to be made therefrom, shall be less than five hundred thousand dollars ($500,000) by the amount of two hundred thousand dollars ($200,000), this shall be prima facie evidence of the necessity of raising the rate of fare to the next higher rate on the scale provided in section 21 hereof. Whenever the balance in the interest fund, less proportionate accrued payments to be made therefrom, shall be more than five hundred thousand dollars ($500,000) by the amount of two hundred thousand dollars ($200,000), it shall be prima facie evidence of the necessity of lowering the rate of fare to the next lower rate on the scale provided in section 21 hereof. * * * Sec. 28. Nothing shall be added to the capital value provided in section 16 hereof on account of any extension, betterment or permanent improvement made by the company without the approval of the city. Sec. 37. Nothing in this ordinance contained shall operate as an abridgment*4165 of the corporate rights or powers of the company, nor of the discretion of its board of directors in the selection of managers and employes, or any one performing any duties imposed upon the company and its officers by law; nor shall anything herein contained be deemed a limitation upon the amount of capital stock which shall be issued by the company, or indebtedness incurred by it. The capital valuation fixed by Section 16 hereof is for the sole purpose of determining the return to the company from the carriage of passengers, and for the purpose of fixing, from time to time, the rate of fare and the price at which the purchase of the property of the company may be made. The petitioner provided the $500,000 for the interest fund as contemplated in the ordinance. The City of Cleveland at all times has exercised the powers reserved to it under the franchise and the petitioner has complied therewith. The petitioner has distributed to the owners of its capital stock 6 per cent return each year and no more. The amount of money in the interest fund has varied from year to year as follows: *317 Balance in interest fund at beginning of ordinance year Year Amount March 1, 1910 $500,000.00 [1911] 604,232.19 [1912] 379,712.06 [1913] 537,169.41 [1914] 351,228,04 [1915] 318,157.82 [1916] 653,496.17 [1917] 434,744.39 [1918] 120,846.82 [1919] $256,576.57 [1920] 590,591.25 [1921] n1 53,425.30 [1922] 241,177.59 [1923] 708,643.45 [1924] 207,907.26 [1925] 586,225.93 [1926] 240,323.45 *4166 The interest fund has established the rate of fare charged in the period of the operation of the franchise, and that rate of fare has varied a great deal. The amounts of money in the interest fund on the dates of the fare changes were as follows: Amount in interest fund when rate was established or changed Year Amount [1910] $500,000.00 [1911] 701,000.00 [1914] 223,654.24 [1917] 253,976.96 [1917] 250,000.00 [1918] 118,710.69 [1918] 110,000.00 [1918] 1 247,166.18 [1919] $821,603.88 [1919] 704,664.31 [1920] 608,368.72 [1921] 128,110.51 [1922] 709,821.17 [1923] 708,643.45 [1923] 81,596.87 [1923] 1 140,537.24 The City of Cleveland, in order to clarify its rights, in April, 1918, brought an action against the petitioner to enjoin the automatic raise of fares, and lost in the courts. From 1910 to 1921, inclusive, the petitioner filed its income-tax returns in due course, but in 1921 and 1922 the petitioner filed amended tax returns for the years 1917 to 1921, inclusive. In these amended returns, the company returned as its net income the amount of money paid as the 6 per cent return to its stockholders and also the income tax of the*4167 previous year. Subsequently, the respondent determined the tax liability of the petitioner in the manner set out in the deficiency notices attached to the petition, which show net income for each of the years in question which differs from that shown in either the original or amended return. A summary of the income as shown by the original return, the amended return and as determined by the Commissioner follows: *318 Original return Amended return As determined by the commissioner [1917] $1,310,434.21 $1,651,247.65 $1,216,745.62 [1918] 2,033,936.49 1,797,480.81 2,211,439.54 [1919] 2,732,932.72 1,940,132.40 3,454,085.16 [1920] 738,846.84 1,997,582.40 1,464,943.70 [1921] 1,727,581.95 1,937,081.90 2,651,304.65 Total 8,543,732.21 9,323,525.16 10,998,518.67 When the ordinance went into effect the petitioner borrowed $500,000 from the banks in Cleveland after an agreement with the city that it might sell capital stock to take up that outstanding obligation. The $500,000 additional capital stock was issued and sold and the proceeds became a part of the original capital value of the petitioner in 1910. In order that the interest fund might*4168 earn as much as possible, part of the fund was invested in order to gain the excess over the 2 per cent paid by the banks. By agreement between the city and the company in 1918, $433,920.88 from the interest fund was invested in stock of the petitioner. This was increased in 1920 to $434,020.88. Thereafter substantial amounts were kept invested in these stocks. The stock was issued in the name of the investment fund. This stock is voted by the treasurer of the petitioner as custodian of the fund. The Commissioner treated the gross amount received from car riders, less the usual statutory deductions, as the taxable income for the years in question and determined deficiencies in the aggregate amount of $470,992.90. In the computation of invested capital he deducted the amount invested by the petitioner in its own stock. OPINION. LITTLETON: The principal issue in this proceeding is the determination of what constitutes the petitioner's income in a taxable year. The Commissioner contends that the petitioner is a corporation subject to tax under the provisions of section 232 of the Revenue Acts of 1918 and 1921; that its taxable net income should be determined in the ordinary*4169 way, namely, by treating all receipts as gross income and deducting therefrom those deductions allowed by statute, and that the remainder should be taxed as income irrespective of whether the net income so determined exceeded or was less than the 6 per cent permitted and required to be paid to its stockholders. The petitioner claims that all sums received by the company from operation or profit on sale of property, over and above operating expenses, proper maintenance, renewal, depreciation and obsolescence allowances, interest on the bonded and floating debt, and a 6 per cent return to the petitioner or its stockholders, must be returned *319 to the car riders in reduced fare, and are therefore "ordinary and necessary expenses" paid or incurred during the taxable year in carrying on its business, and are deductible in computing net income under section 234 of the Revenue Acts; that any tax upon that portion of the interest fund over and above the return permitted to the company or its stockholders would "impose a loss or burden" upon the City of Cleveland, as representing the public; that in no sense can this excess over and above the permitted return to the petitioner or*4170 its stockholders under the franchise be regarded as taxable income. Prior to the year 1900, the history of the street railway companies in Cleveland was not unlike that of other companies in other cities. For some time prior to the granting of the existing franchise, there were four distinct street railway companies in the City of Cleveland. In 1903 the Cleveland municipal authorities began a vigorous fight for the reduction of fares and the improvement of the service. Tom L. Johnson was then the mayor of Cleveland. He was an experienced and successful street railway operator and financially had been largely interested in the Cleveland Electric Railway Co. He announced as a part of his political program his purpose to secure 3-cent fare for transportation on the street railways within Cleveland and its suburbs. The Cleveland Electric Railway Co. was operating under a number of franchises, each covering separate sections and streets of the city, which were about to expire. The mayor and city council refused to grant renewals of expiring contracts except upon a 3-cent fare basis, and as a part of his campaign the mayor caused to be financed and built another competing 3-cent*4171 fare line. The fight for and against 3-cent fare continued for a period of about eight years. At one time Johnson got possession of and operated the whole system. The company through which he operated became financially embarrassed. A receiver was appointed by the United States Circuit Court for the Northern District of Ohio. The receiver continued the operations of those railways under order of the court for about one year and a half. The city council, at the suggestion of the court, passed an ordinance granting to the Cleveland Railway Co. a new franchise which became effective February 19, 1910, commonly known as the "Taylor Plan." Under it the Cleveland Railway Co. has been and is now operating the entire street railway system in the City of Cleveland. All the unexpired franchises were surrendered. Several amendments and extensions, and two renewals, have been made by the city council but the provisions are unchanged so far as they are related to the question of the Federal income or excess-profits tax. The corner stone upon which the "Taylor Plan" and all the amendments thereto and the renewals thereof were constructed was *320 transportation at the cost of service. *4172 This cost of service includes operating and maintenance costs fixed by the City of Cleveland on a car-mile basis, interest on bonded and floating indebtedness and a return to the stockholders of 6 per cent on the outstanding capital stock. In fixing a return of 6 per cent it was provided that this would be paid in quarterly amounts and would not be dependent upon the earnings of the petitioner, but regardless of the amount earned, the return to the stockholders could not exceed 6 per cent. The purpose of furnishing transportation at the cost of service is very definitely stated in the preamble to Ordinance No. 19238-A, granting the franchise to the petitioner. This reads in part as follows: Whereas, it is the common desire of the City and the Cleveland Railway Company to have all the grants of street-railway rights in the City of Cleveland now outstanding surrendered and renewed upon terms hereinafter recited, to the end that the rate of fare may be reduced, the transfer privileges made definite, and the right of the City as to regulations and possible acquisition made certain; and Whereas, it is agreed that a complete readjustment of the street-railroad situation should*4173 be made, upon terms that will secure to the owners of the property invested in street-railroads security as to their property, and a fair and fixed rate of return thereon, at the same time securing to the public the largest powers of regulation in the interest of public service, and the best street railroad transportation at cost, consistent with the security of the property, and the certainty of a fixed return thereon, and no more. The ordinance placed a valuation on the assets as of the date of the acceptance of the franchise and provided that additional assets could only be acquired with the consent of the city. The franchise is in effect perpetual, but the city may by giving proper notice acquire the assets of the petitioner at the valuation plus 10 per cent. In the event of forfeiture, the city takes them over at cost. As a part of the plan to give the street-car riders of the City of Cleveland transportation at cost, a fund known as the "interest fund" was created, which acts as a barometer to determine when and how the rate of fare is to be changed. In the event that the fund, established at $500,000, increases in the amount of $200,000, the fares are automatically*4174 lowered. If it should fall below $500,000 by a like amount the fares are automatically increased. That is, it was recognized that it was practically impossible to fix a rate of fare that would produce earnings exactly equal to the amounts which were agreed upon as representing cost of service. The method devised, however, provided a means by which excess earnings in one year or period would not only indicate that a reduction in fare should be effected, but also permit the use of the excess earnings to furnish lower fares in the succeeding year or period. Similarly, deficiencies in one year or period may be offset by increased fares in *321 the succeeding year or period. The terms of the ordinance with respect to increase of fare have been interpreted by the Supreme Court of Ohio and there held to provide that when the "interest fund" reaches the upper or lower specified amounts a change in fare must automatically be made. City of Cleveland v.Cleveland Railway Co., (Ohio). Certiorari denied by Supreme Court of Ohio, April 30, 1918 (unreported). Is the net income of petitioner, as the respondent contends, gross income less the deductions ordinarily allowable*4175 by statute under section 234, Revenue Acts of 1918 and 1921, or, is it an amount which is limited by the 6 per cent return to the stockholders of the petitioner? The amended returns submitted to the Commissioner by the petitioner were prepared on the basis that its net income for the taxable years was 6 per cent of its outstanding capital stock, plus nondeductible Federal taxes and the 2 per cent paid by it at source on tax-free-covenant bonds, regardless of whether the earnings in a given year were more or less than this amount. That this is not entirely its present position is shown by the following statement from its reply brief: Counsel [for respondent] say, on page 7 of their brief: "The taxpayer's position seems to be that nothing in excess of 6% of its capital stock in any given year can be income to it, and that it always has income of 6%, even though its net operating income is less than that amount." This does not state our position. We have said, and say now, that the company is entitled to a net income of six per cent. The stockholders have a claim against it for six per cent, whether net income is earned or not. It so happens that this "return of 6%" has been*4176 given to the stockholders, in quarterly payments, though at times it has not been earned. The company has not objected to the payment of the taxes on this six per cent, earned or not earned, for the reason that the stockholders were entitled to six per cent return under the ordinance, and if the company did not pay the income tax on the six per cent and the stockholders received that amount, they would have to include it in their individual returns, if it was not taxed at its source. In truth , the company has at times paid more income tax than it was required to pay, and the government has received more than it was entitled to receive from the company, as distinguished from the stockholders. To state the question in another way, does the fact that the stockholders have a claim against the corporation for a 6 per cent annual return, whether net income is earned or not, or that the company must reduce fares in a succeeding year because the fares charged in a given year have produced net income showing that service has been rendered in excess of "cost" as defined by the ordinance, serve to fix the taxable net income of the petitioner at 6 per cent of its outstanding capital stock? *4177 While from an economic viewpoint or from the viewpoint of the petitioner when considered over a cycle of several years, there is undoubted merit to the proposition that the net income of a given *322 year may not reflect the exact status of the petitioner, yet when viewed in the light of the statute, we are of opinion that the petitioner's position is untenable. Under the Federal system of taxation, returns are rendered for income-tax purposes on the basis of a year (except in certain instances not material to this discussion) and not on a longer period such as we find, for instance, in Great Britain. Such a return includes all items of income for the year for which the return is rendered and all items of expense allowable as deductions. The statute defines the items to be included as "gross income" and also the items of expense to be allowed as "deductions" from gross income. The difference constitutes taxable income for a given year, regardless of the fact that there may be included therein accretions of income, for example, which may be said to have been accumulating in prior years, but which were not actually realized in a statutory sense until the taxable year. It*4178 is of course true that when petitioner's charges for transportation are less than cost in a given year, thus giving rise to less net income than contemplated by the ordinance, there arises an obligation to increase fares in the succeeding year, but this additional income of the succeeding year is income of that year and not of the prior year, for the reason that the income was earned in the succeeding year. Likewise, income earned in one year on account of charges for transportation in excess of cost results in an accumulation of earnings showing that fares should be reduced for the succeeding year and these earnings may be used to defray a part of the expenses for the succeeding year, but this does not alter the fact that a given amount of income was earned in the first year when a specific rate of fare was being charged. The petitioner answers the situation with respect to the income in any year on account of excessive fares by saying that the amounts paid in, which represented payments at more than costs, are ordinary and necessary expenses which the petitioner, after receiving them from the car riders, is obligated to return in the form of reduced fares in succeeding years. *4179 That is, the petitioner says that these amounts which go into the "interest fund" and which can not be used for the payment of dividends, but which can only be used to reduce fares in succeeding years, are "ordinary and necessary expenses" in that the continued enjoyment of its rights under the franchise makes this action necessary and therefore constitutes, in effect, a part payment for use of the streets. In our opinion this argument is without force, for the reason that this income is at all times retained by the petitioner and is in no sense paid to the City of Cleveland. The payment that would constitute an expense and, therefore, be deductible, occurs when the fund is used for operating and maintenance costs, and interest charges. There is no return of the fund to the car riders who paid excessive fares, nor is it held *323 in trust to be paid to any one. The most that can be said is that the fares in the succeeding period will be less and a part of the expenses incident to the collection of these fares will be paid out of this interest fund, but until such payments are made or incurred, there has been nothing expensed that would constitute a deduction from gross*4180 income. To say that it would be a violation of the ordinance not to raise or lower fares as the amounts which are accumulated in the "interest fund" indicate that such action should be taken, and that therefore the doing of what the ordinance says is an ordinary and necessary expense, would in effect be saying that whatever a taxpayer is required to do in fulfillment of a contract is an ordinary and necessary expense. Admittedly, it was necessary for the petitioner to comply with the ordinance as a condition to its continuing in business under the franchise, but this does not make amounts required to be retained by it for use in a subsequent year or period an expense item and, therefore, a deduction when it has not in fact been expended. Each year must be dealt with as a unit. We can no more say that the amounts retained in this fund for use in a subsequent year's operation are expenses in the year when retained than we can say that the income of the subsequent year should be increased because a part of the expenses were paid from funds which had been accumulated for this purpose in the prior year. What is to be taxed is the income earned without regard to what may be distributed*4181 as dividends. That the petitioner would not object to being taxed on more income than is earned in the "lean years" does not make taxable income that which is not taxable income under the statute. "Income" is defined in , as "the gain derived from capital, from labor, or from both combined." To the same effect are , and . The "net income" of the petitioner which is subject to tax under the Revenue Acts of 1918 and 1921 is "gross income" as therein defined, less the statutory deductions specifically enumerated. The period for which a return is to be rendered is defined in section 212(b), as follows: The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made upon such*4182 basis and in such manner as in the opinion of the Commissioner does clearly reflect the income. If the taxpayer's annual accounting period is other than a fiscal year as defined in section 200 or if the taxpayer has no annual accounting period or does not keep books, the net income shall be computed on the basis of the calendar year. *324 In , the Board said: Much stress was laid, both in the testimony on behalf of the taxpayer and in the argument of counsel, upon the fact that the total of all the company's operations from its inception in 1915 to its close in 1924, will result in losses, and that, therefore, apparent book profits for any given annual period, which profits have never been realized, should not be subject to income and profits taxes. It appears that the company's accounting system showed profits for the years 1919 and 1920, and it was argued that the following years of 1921 and 1922 showed losses, and that the apparent profits of 1919 and 1920 were more than exhausted by losses of the following years before such profits were in any sense realized by the stockholders of the taxpayer corporation. While this*4183 presents a situation which has a strong appeal, we can not overlook the fact that the taxing statutes have been designed to levy income and profits taxes upon the gains and profits of business for annual periods, and that each annual period must necessarily, under the provisions of the law, stand by itself, subject only to those provisions of the Revenue Acts of 1918 and 1921 permitting the adjustment of one year's net losses against another year's profits. But those provisions do not apply to the years 1919 and 1920 except as to losses of 1919. * * * To hold, therefore, that something is taxable income in a given year which is not earned in that year (that is, does not represent gain derived in that year), or to allow deductions in one year which represent expenses of another year, would result in a determination of taxable income for a given year in a manner contrary to the taxing statutes. The petitioner makes the further contention that the imposition of any tax upon that portion of the "interest fund" over and above the return permitted to the company or its stockholders would "impose pose a loss or burden" upon the City of Cleveland as representing the public, and, therefore, *4184 be contrary to the following provisions of section 213(b)(7), Revenue Act of 1918, which provides for the exclusion of certain classes of income from "gross income": Income derived from any public utility or the exercise of any essential governmental function and accruing to any State, Territory, or the District of Columbia, or any political subdivision of a State or Territory, or income accruing to the government of any possession of the United States, or any political subdivision thereof. Whenever any State, Territory, or the District of Columbia, or any political subdivision of a State or Territory, prior to September 8, 1916, entered in good faith into a contract with any person, the object and purpose of which is to acquire, construct, operate, or maintain a public utility, no tax shall be levied under the provisions of this title upon the income derived from the operation of such public utility, so far as the payment thereof will impose a loss or burden upon such State, Territory, District of Columbia, or political subdivision; but this provision is not intended to confer upon such person any financial gain or exemption or to relieve such person from the payment of a tax*4185 as provided for in this title upon the part or portion of such income to which such person is entitled under such contract. While it is undoubtedly true that the levying of the tax in question will impose a burden upon the petitioner which in turn will mean *325 a burden to the car riders who use these transportation facilities, this is not a burden upon a "State, Territory, or the District of Columbia, or any political subdivision." The burden is not on the City of Cleveland as such; no income is received by it from the operations of the petitioner, nor is it required to pay any of the petitioner's expenses, be they taxes or otherwise. The car riders of the City of Cleveland and its suburbs are in no sense a political subdivision, but are merely members of a community, or of several communities, which use the transportation facilities of the petitioner. The burden would indirectly fall upon them in their individual capacities, but not upon a political unit or subdivision in its sovereign or governmental capacity. An examination of the legislative history of the provision in question reveals an intent on the part of Congress clearly opposed to this construction asked*4186 by the petitioner. The language used in the Acts of 1918 and 1921 in this connection does not differ in any material respect from the language of the Act of October 3, 1913. In that Act the exempting clause is as follows: Provided further, That there shall not be taxed under this section any income derived from any public utility or from the exercise of any essential governmental function accruing to any State, Territory, or the District of Columbia, or any political subdivision of a State, Territory, or the District of Columbia, nor any income accruing to the government of the Phillippine Islands or Porto Rico, or of any political subdivision of the Philippine Islands or Porto Rico: Provided, That whenever any State, Territory, or the District of Columbia, or any political subdivision of a State or Territory, has, prior to the passage of this Act, entered in good faith into a contract with any person or corporation the object and purpose of which is to acquire, construct, operate, or maintain a public utility, no tax shall be levied under the provisions of this Act upon the income derived from the operation of such public utility, so far as the payment thereof will impose*4187 a loss or burden upon such State, Territory, or the District of Columiba, or a political subdivision of a State or Territory; but this provision is not intended to confer upon such person or corporation any financial gain or exemption or to relieve such person or corporation from the payment of a tax as provided for in this section upon the part or portion of the said income to which such person or corporation shall be entitled under such contract. The above proviso was carried forward without material change into the Act of 1916 and that Act as amended by the Act of 1917 and is found in section 11(b) thereof. The statute in the form substantially as that which the Board is called upon to construe has, therefore, existed from the inception of Federal income taxation. The Act of 1913, H.R. 3321, as first introduced in Congress did not contain any provision for exempting income to political subdivisions from utilities. When reported out by the Senate Committee on Finance it contained certain amendments including substantially the proviso here under consideration. (S. Rept. No. 80, Congressional *326 Record, vol. 50, p. 2513.) The Senate amendment was at first rejected by*4188 the House, but later that position was abandoned. (Congressional Record, vol. 50, p. 5227.) On October 2, 1913, the matter was debated on the floor of the Senate and reported in volume 50 of the Record, beginning with page 5320. The substance of the debate was, in general, whether or not the language used would exempt all public utilities. It is apparent that all of the Senators opposed any idea of enacting a bill that could be so construed. In the course of the debate, Senator Shivley stated: "The fact is that we were trying to draw the line sharply between the revenue derived by the corporation from its business and revenue derived by the Government from the corporation." Senator Shivley was defending the language of the bill and was a member of the committee which reported the bill. On page 5321, Senator Williams, a member of the committee, defended and explained the language of the proviso and responded to questions from Senator Burton of Ohio. The pertinent portions of the debate follow: Mr. BURTON. I should like to ask another question * * *. Suppose there is an arrangement under which a public utility, a street railway or a gas company, is to fix its rates so*4189 that it can make 6% interest on its investment, and no more. To take a concrete case, a street railway company operates under a 3-cent fare, and if by charging a 3-cent fare the income of the street railway company is brought down below 6% by the imposition of a tax, does the language which I have read mean that the tax is not to be paid? Mr. WILLIAMS. No; it does not mean that. Mr. BURTON. But it says: "So far as the payment thereof would impose a loss or burden upon such State, Territory, or the District of Columbia, or a political subdivision of a State or Territory." Mr. WILLIAMS. That would not impose a burden upon any State, Territory, or the District of Columbia; it would merely reduce the dividend of the company. To explain this, the State of Illinois, for example, receives 7 per cent from the Illinois Central Railroad; the city of Baltimore receives 9 per cent upon the gross earnings of all its street railways, or used to do so, and does so yet, I think; the city of New York has a contract whereby a certain amount of money was raised and it has a contract whereby it undertakes to hold harmless some of the street railways from all taxes, and then at the end of*4190 a certain period the railways become the property of the city of New York or the city has a right to go in and purchase them under certain circumstances. In that case New York gets half, and the street railway gets half. The object is to exempt New York's half, and therefore, the language was put in below: "But this provision is not intended to confer upon such person or corporation any financial gain or exemption or to relieve such person or corporation from the payment of a tax as provided for in this section upon the part or portion of the said income to which such person or corporation shall be entitled under such contract." Mr. BURTON. It is a different class of cases from those mentioned by the Senator from Mississippi to which I am referring. I am referring to cases which are becoming somewhat frequent now, where the value of the public utility owned by a private corporation is capitalized and a certain rate fixed, *327 say 60 cents per thousand cubic feet for gas, or 3 cents for fare in the case of street railroads, and those rates continue so long as the corporation can earn 5 or 6 per cent or whatever rate is agreed upon. Suppose the imposition of an income*4191 tax on the corporation brings down its earnings below 6 per cent, then the price for gas would have to go above 60 cents or the street-car fare above 3 cents. Does this provision apply in such a case? Mr. WILLIAMS. Oh, does not the Senator see that, even if the fare had to go above 3 cents or the price of gas had to go above a certain figure, it would not be the city that would be burdened; it would be the user of the gas and the travelers upon the street railway? Mr. BURTON. Is there not an identity between the city and the street-car users? Mr. WILLIAMS. This does not undertake to protect the people from all burdens. We can not do that because every income tax puts burdens upon the people, although somebody else may pay them. All taxes, as the Senator is aware, are shifted more or less. (Italics ours.) To carry the petitioner's argument to its logical conclusion would mean to exempt the petitioner from tax, since to levy any tax on this corporation would be to increase the "cost" of transportation, which in turn means increased car fares, and, therefore, impose a burden on the community of car riders to that extent. The difference between the burden imposed*4192 by the tax which the petitioner admits and that which the respondent seeks to impose is one of degree only. The Board is of the opinion that the contentions of the petitioner for a limitation of its taxable income to a 6 per cent return on its outstanding capital stock, without regard to the income earned, as defined by the statute, must be denied. The remaining contention relates to invested capital and arises by reason of the fact that the respondent reduced invested capital by the amount of petitioner's investment in its own stock, such investment being made out of the interest fund and pursuant to the directions of the city officials. The Board is of the opinion that the petitioner's stock purchased by it from money designated "interest fund" can not be considered as an asset for invested capital purposes. The interest fund belonged to the petitioner and constituted a part of its invested capital as surplus or otherwise for income-tax purposes, and the purchase by petitioner out of this fund of its own stock was no different for income-tax purposes than other cases considered by the Board wherein the corporation acquired its own stock. *4193 The reacquisition by petitioner of this stock represented the return to the stockholders of capital or surplus of the corporation. The fact that, for the purpose of determination of the rate of fare to be charged under the plan with the City of Cleveland, the stock was to be regarded as a part of the interest fund does not warrant the same being included in petitioner's invested capital at cost to it. ; ; *328 . In , the Board said: It was a capital transaction involving a return to this particular stockholder of its capital contribution plus its share in the accumulated surplus, and the paid-in capital and surplus, of which these funds were a part, were lessened by the withdrawal of the same. The purchase by a corporation of its own capital stock eliminates the stockholder without substituting another in his place, repays to the withdrawing member his share of the capital, and reduces the amount of the fund contributed to the common venture. Even if this stock*4194 could be considered as an asset at the hands of the petitioner, it would be an inadmissible asset under the statute. We affirm the Commissioner on this point. Reviewed by the Board. Judgment will be entered for the respondent. GREEN GREEN, dissenting: I am unable to concur in the foregoing opinion. It seems to me that both legal and economic reasoning lead to an entirely different conclusion. We should reject, as did the Supreme Court in , "the broad contention of the government that all receipts - everything that comes in - are income within the proper definition of the term 'gross income.'" We should consider, first, whether the receipts here under consideration are income within the meaning of the Sixteenth Amendment, and second, whether they are income within the meaning of the statute, for, as was said in , "but it is not necessarily true that the income means the same thing in the constitution and in the act." Here, as in *4195 , we should analyze everything connected with the receipts and having a bearing upon their source and nature, and determine whether or not they are income within the meaning of the constitution, and we must carefully regard the truth and substance and disregard the form. In , the court had under consideration the question of what constituted income within the meaning of the constitution. "Income" is there defined as the "gain derived from capital, from labor, or both combined, including profit gained through sale or conversion of capital." On page 207, Mr. Justice Pitney, in the case just cited, said: The Government, although basing its argument upon the definition as quoted, placed chief emphasis upon the word "gain" which was extended to include a variety of meanings, while the significance of the next three words was either overlooked or misconceived - "derived-from-capital"; "the gain-derived-from-capital" etc. Here we have the essential matter; not a gain accruing to capital, not a growth or increment of value in the investment, but a gain, a profit, something*4196 of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being "derived", that is received or drawn by the recipient (the taxpayer) for his separate use, *329 benefit, and disposal; that is income derived from property. Nothing else answers the description. (Italics ours.) See also ; ; ; . Section 213(a) of the Revenue Act of 1918 is identical with section 213(a) of the Revenue Act of 1921 and reads as follows: SEC. 213. That for the purposes of this title (except as otherwise provided in section 233) the term "gross income" - (a) Includes gains, profits, and income derived from salaries, wages, or compensation for personal service (including in the case of the President of the United States, the judges of the Supreme and inferior courts of the United States, and all other officers and employees, whether elected or appointed, of the*4197 United States, Alaska, Hawaii, or any political subdivision thereof, or the District of Columbia, the compensation received as such), of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. The amount of all such items shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under subdivision (b) of section 212, any such amounts are to be properly accounted for as of a different period; but * * * The receipts here under consideration must meet the test as prescribed by the statute and as prescribed by the Supreme Court in its interpretation of the constitution. The petitioner admits that it has income in an amount equal to 6 per centum on its capital plus nondeductible Federal taxes, plus the 2 per centum tax paid on its own tax-free-covenant*4198 bonds. The question is whether the remainder of its receipts are income. Have they the essential attributes? Have they the element of gain, of profit? Are they something of exchangeable value? Are they severed from the capital of the taxpayer? In ,the Supreme Court in discussing the definition set forth in , expressed itself as "entirely satisfied with that definition." Further in their application of the definition to the facts in that case, they said: "It is palpable that it was 'a gain or profit' 'produced by' or 'derived from' that investment and that it 'proceeded' and was 'severed' or rendered severable from it by the sale for cash and thereby became that 'realized gain' which has been repeatedly declared to be taxable income within the meaning of the constitutional amendment and the acts of Congress." They further said with reference to the meaning of the word income and their definition thereof, "There would seem to be no room to doubt that the word must be given the same meaning in all of the Income *330 Tax Acts of Congress that was given to it in the Corporation*4199 Excise Tax Act, and that what that meaning is has now become definitely settled by the decisions of this court." It should be borne in mind that the receipts here under consideration are not subject to the will of the corporation. They may not be distributed, their use is limited by and to the provisions of the franchise. The mere fact that these receipts may not be distributed as earned, is not in itself sufficient to take them out of the classification of income but that fact as it here appears, is of the greatest importance in applying the test prescribed by the Supreme Court. The taxpayer has pledged itself to apply these receipts against the cost of service as soon as the accumulation reaches $700,000. This situation has already arisen and the fund thus accumulated has already been so applied. It may arise again at any time. I do not see how it can possibly be said that these receipts in the hands of this taxpayer have an "exchangeable value" because, if for no other reason, they have not been and can not be "severed" from the fund and made available to the taxpayer. Note the language of Justice Pitney - "for his separate use, benefit, and disposal." Separate*4200 use, separate benefit, separate disposal - each of those words has a commonly accepted meaning. Are these receipts subject to the separate use, the separate benefit, the separate disposal of this taxpayer? Clearly they are not. They may not even be added to or included in the capital account upon which the petitioner is permitted to earn 6 per centum. In fact the excess receipts, by the terms of the franchise, serve to reduce the receipts for the succeeding period or periods in which the accumulations exceed $700,000. In them this petitioner has nothing definite, nothing tangible, nothing usable in the way of income. Their accumulation is a matter of no interest to the petitioner because no advantage is gained thereby. No gain or profit results from such an accumulation and it lacks several of the essentials of true income under the Sixteenth Amendment. In the case of , the court, after quoting the definition from Eisner v. Macomber, said: Gains arising out of dealings in property are not taxable unless they fall within the above definition of income. This is true whether the statute under which the tax*4201 is levied is that of 1916 or 1926. The explicit recognition of the principle that income is not realized unless it is received in a form which has an equivalence in cash, a realizable market value, found in the 1918 and subsequent statutes is not a restriction of the incidence of the income tax. It is merely an express statement of a principle inherent in the nature of income as recognized in , in the statement that income must be "a gain, a profit, something of exchangeable value, proceeding from the property." The statutory definition of gross income is phrased to include gains, profits, and "income derived from any source whatever." It *331 is clear that this definition is limited by the broad concept of income and that anything which is not income in the broad sense may not be gross income within the meaning of the statute. For example, if the thing received has no exchangeable value or if it has not been severed from capital, it may not be considered gross income under the statute. It seems to me that these receipts lack the essential attributes of income whether tested by the common concept of income or the statutory definition*4202 of gross income. If these receipts are income, it does not follow that the Commissioner's determination should be approved. The last sentence of section 213(a) reads as follows: The amount of all such items shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under subdivision (b) of section 212, any such amounts are to be properly accounted for as of a different period. Section 212(b) reads as follows: (b) The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income. If the taxpayer's annual accounting period is other than a fiscal year as defined in section 200 or if the taxpayer has no annual accounting period or does not keep books, the net income shall*4203 be computed on the basis of the calendar year. If a taxpayer changes his accounting period from fiscal year to calendar year, from calendar year to fiscal year, or from one fiscal year to another, the net income shall, with the approval of the Commissioner, be computed on the basis of such new accounting period, subject to the provisions of section 226. In accordance with the last sentence of section 213(a), the respondent has, both by regulation and decision, repeatedly permitted or required the accounting for income in a period other than that of its receipt. As to his action in this respect it is sufficient to call attention to article 36 of Regulations 45 relative to long-term contracts and article 44 of the same regulations relative to sales of real estate on the deferred payment plan. Upon consideration of these receipts, the purposes to which they are pledged, and the limitations upon their use, I am convinced that if they are income (and in my judgment they are not) they may not be included in gross income in the year in which received unless and only to the extent that they are expended within the year. Such part as is not absorbed should be carried forward as deferred*4204 income until actually expended. The result of this conclusion is to limit income in any year to the amounts contended for by the petitioner. SMITH, TRUSSELL, and LOVE concur in this dissent. Footnotes 1. Deficit. ↩