Western Md. Ry. Co. v. Commissioner

WESTERN MARYLAND RAILWAY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Western Md. Ry. Co. v. Commissioner Docket No. 6475. United States Board of Tax Appeals 12 B.T.A. 889; 1928 BTA LEXIS 3443; June 27, 1928, Promulgated *3443 1. Where a corporation issued bonds at a discount and afterwards consolidated with other corporations, whereby a new corporation was formed, held that the new corporation should not be permitted to deduct from gross income an amortized part of such discount. 2. Where a railroad was taken over by the Government during the period of Federal control, where no contract was entered into between the Director General and the railroad during the period of control, but where compensation was fixed by the Director General and accepted by the railroad, and where the Director General paid or reimbursed the railroad for the 2 per cent normal tax on all taxes that had been assessed, held that the railroad is entitled to the benefit of the provisions of section 230(b) of the Revenue Act of 1918. 3. Respondent's affirmative claim that he erred in permitting petitioner to deduct from its gross income for 1919 a contribution made by it in that year to the Association of Railway Executives, disallowed for lack of evidence. 4. Additional compensation paid under the provisions of section 5 of the Act of July 28, 1916, by the Government to petitioner in the year 1920, for services*3444 rendered in transporting United States mail in the years 1916 and 1917, held not to be taxable income for the year 1919. George P. Bagby, Esq., and Eugene S. Williams, Esq., for the petitioner. M. N. Fisher, Esq., for the respondent. Chester A. Gwinn, Esq., as amicus curiae. MILLIKEN *889 This proceeding involves deficiencies in income taxes for the calendar years 1918 and 1919 in the respective amounts of $10,141.77 and $8,615.65. Petitioner alleges the following errors: (a) that respondent in determining petitioner's net income for 1918 added thereto the amount of $2,726.98 and in determining said net income for the year 1919 added thereto $638.67, these amounts representing the proportion of income taxes for said years which was paid by the United States Railroad Administration; (b) that respondent in determining petitioner's net income for 1918 added thereto $991.49, and in determining the net income for 1919 added thereto $4,721.59, said *890 amounts representing the value of a building destroyed by fire and the net return from a sale of land; (c) that respondent erroneously applied for 1918 a tax rate of 12*3445 per cent and for the year 1919 a tax rate of 10 per cent, each of which rates should be reduced by 2 per cent; (d) that respondent refused to permit petitioner to deduct from its gross income for the years 1918 and 1919, respectively, the amount of $80,796.24, which represents the yearly proportion of discount suffered on bonds, which were sold prior to December 31, 1909, at a discount of $3,638,451.67. Respondent in his amended answer confesses error as to contention (a). In said amended answer, respondent alleges (1) that he erred in failing to add $7,500 to income for 1918 and $50,860.88 to income for 1919, such amounts being interest on quarterly balances which accrued to taxpayer for said years; (2) that he erred in allowing a deduction in the year 1919 of the sum of $1,924.74, representing amounts paid by petitioner to the Association of Railway Executives; (3) that he erred in failing to increase petitioner's taxable income for the year 1919 by the sum of $13,885.03, the same being additional mail pay awarded to the taxpayer in the year 1919 by the Interstate Commerce Commission for services performed in prior years. FINDINGS OF FACT. Petitioner is a corporation existing*3446 under the laws of Maryland and Pennsylvania, with its principal offices at the Standard Oil Building, Baltimore, Md. Amortization of discount on bonds. The Western Maryland Railway Co., hereafter called Railway Company, was organized under the laws of Maryland and issued two classes of stock, to wit, preferred in the amount of $10,000,000 and common in the amount of $50,000,000. The Railway Company owned and operated seven subsidiary companies, some of which were organized under the laws of Maryland, and some of which were organized under the laws of Pennsylvania. All of the stock of these companies was owned and they were completely controlled by the Railway Company. All the subsidiary companies were planned and organized by the Railway Company as a convenient method of financing the construction of certain extensions of its line of railroad, which were made from time to time. The Railway Company had previously executed a mortgage lien upon the property of that company, which by its terms applied to subsequently acquired property. To save the additional properties free from the mortgage lien referred to, so that such properties might be available for security of debts*3447 incurred in the various extensions, the subsidiary corporations were *891 formed as occasion required and title to the additionally acquired property conveyed to them. All of the capital stock of the respective subsidiaries was immediately issued to the Railway Company and a perpetual lease taken by the latter upon the properties of the former. The foregoing is to be modified with respect to Baltimore & Harrisburg Railway Co. to the extent that that company had been in operation at the time it was acquired as one of the subsidiary companies. Its capital stock to the extent shown in the articles of consolidation hereafter set forth was acquired and a perpetual lease taken upon its property and the operation of its lines merged with that of the Railway Company in the same manner as was done with reference to the other subsidiaries. The operation of the properties of the subsidiaries by the Railway Company with its own line as a single system under leases above referred to dates from 1881 in the case of the oldest lease and from 1896 in the case of the most recent lease. None of the subsidiaries ever operated any of the properties to which they held title or otherwise*3448 engaged in carrying on business (except the Baltimore & Harrisburg Railway Co. prior to the time it was acquired by the Railway Company as before explained). No separate books of account were kept nor tariffs published by any of the subsidiaries but the Railway Company operated its own properties and those of the subsidiaries as a single system under the name of the Railway Company and so reported annually to the Interstate Commerce Commission, which Commission accepted reports as filed and required no change in that respect. The tariff publications by the Railway Company applied to the Railway Company and its subsidiaries as a unit and the names of the subsidiaries did not appear in the tariffs. Such tariffs publications were on file with the Interstate Commerce Commission in compliance with an Act of Congress known as the Interstate Commerce Act and with the public service commissions of the States of Maryland, Pennsylvania, and West Virginia, within which States the railroad system operated in pursuance of the statutory requirements of those States. At the time of the consolidation hereinafter set forth, these tariffs were not canceled but remained under the name of the Railway*3449 Company and were applied as they had been prior to the consolidation. Some of the tariffs are still on file in the name of Railway Company. Only as supplemental tariffs were filed after the consolidation did the name of petitioner company appear therein. All taxes, Federal, State and local, upon the properties of the subsidiaries, prior to the consolidation, were paid by Railway Company in accordance with the requirements of the terms of the leases. The *892 officers and directors of Railway Company were also officers and directors of the subsidiary corporations, which were organized under the laws of Maryland. The charter provisions with respect to the purposes and powers of Railway Company included all the charter provisions of the subsidiary corporations with respect to the corporate purposes and powers of the latter. The by-laws and other rules and regulations of Railway Company were not changed but were in force and applied, as by-laws, rules and regulations of the petitioner company after the consolidation hereinafter set forth. There were outstanding during the taxable years 1918 and 1919, certain first mortgage bonds in the amount of $46,633,000 to mature*3450 October 1, 1952, the payment of which petitioner has assumed and which constitute a prior lien on petitioner's property. These bonds were issued on the dates and at the discounts indicated in the following list, which list also shows the number of months which the bonds sold from time to time will run prior to maturity, and the yearly proportion of the total discount if spread over the life of the bonds: Date sold Amount of Maturity of Number of Monthly Yearly discount bond months to proportion proportion maturity April, 1904 $185,810.00 Oct. 1, 1952 [581] $319.81 $3,837.72 August, 1904 195,000.00 do [577] 337.95 4,055.40 October, 1904 90,000.00 do [575] 156.52 1,878.24 January, 1905 202,500.00 do [572] 354.02 4,248.24 June, 1905 270,750.00 do [567] 477.51 5,730.12 July, 1905 15,000.00 do [566] 26.50 318.00 September, 1905 14,250.00 do [564] 25.27 303.24 October, 1905 72,500.00 do [563] 128.77 1,545.24 November, 1905 72,500.00 do [562] 129.00 1,548.00 January, 1906 91,800.00 do [560] 163.93 1,967.16 February, 1906 35,700.00 do [559] 63.86 766.32 June, 1906 216,000.00 do [555] 389.19 4,670.28 September, 1906 299.166.67 do [552] 541.97 6,503.64 May, 1908 1,260,250.00 do [532] 2,368.89 28,426.68 December, 1908 125.00 do [525] .24 2.88 July, 1911 519,600.00 do [494] 1,051.82 12,621.84 August, 1911 97,500.00 do [494] 197.77 2,373.24 3,638,451.67 6,733.02 80,796.24 *3451 These bonds were issued by the Western Maryland Railroad Co., a corporation organized under the laws of the State of Maryland, predecessor of, and which for the purposes of this case may be taken as identical with the Railway Company. The Railway Company succeeded the Western Maryland Railroad Co. as of January 1, 1910, and the amount of the discount at which the bonds were sold was entered upon the books of the new company as of that date. The Railway Company continued to operate the railroad until it became unable to meet an indebtedness and interest thereon, under certain notes maturing in 1915, which necessitated a reorganization to avoid receivership. The Western Maryland Railway Co., petitioner, *893 was formed in consequence. The reorganization was accomplished by the consolidation of Railway Company with its subsidiary corporations under the laws of the State of Maryland, with the concurrence of the Commonwealth of Pennsylvania. The Railway Company and its subsidiaries were consolidated under article 23, sections 33 to 35, inclusive, of the Annotated Code of Maryland (Bagby's Edition) and the Act of March 24, 1865 (P.L. 49) and the Act of April 10, 1869 (P. *3452 L. 24) of the statutes of Pennsylvania. The material part of the articles of consolidation read: AGREEMENT OF CONSOLIDATION, dated the 23rd day of January 1917, by and between the following named corporations (hereinafter sometimes called the constituent companies): THE WESTERN MARYLAND RAILWAY COMPANY, a corporation of the State of Maryland (hereinafter sometimes called the party of the first part); BALTIMORE AND HARRISBURG RAILWAY COMPANY, a corporation of the States of Pennsylvania and Maryland; BALTIMORE AND HARRISBURG BAILWAY COMPANY EASTERN EXTENSION, a corporation of the State of Pennsylvania; THE BALTIMORE AND HARRISBURG RAILWAY COMPANY WESTERN EXTENSION, a corporation of the State of Pennsylvania; BALTIMORE AND CUMBERLAND VALLEY RAILWAY COMPANY, a corporation of the State of Maryland; THE BALTIMORE AND CUMBERLAND VALLEY RAILROAD COMPANY, a corporation of the State of Pennsylvania; GEORGE'S CREEK AND CUMBERLAND RAILROAD COMPANY, a corporation of the State of Maryland; THE CONNELLSVILLE AND STATE LINE RAILWAY COMPANY, a corporation of the State of Pennsylvania. WHEREAS, the constituent companies severally own the lines of railway in the States of Mrayland, *3453 pennsylvania and West Virginia hereinafter described; and WHEREAS, the lines of railway hereinafter described have been constructed and are not parallel or competing railroads, but are continuous and connected and form continuous routes for the transportation of persons and property and are so situated that the said companies parties hereto are authorized to consolidate by the laws of the States of Maryland and Pennsylvania in such cases made and provided any all of the lines of railroad of all of the parties hereto are operated by The Western Maryland Railway Company, party hereto of the first part; and WHEREAS, all of the companies parties hereto desire to consolidate with one another and to form a new consolidated corporation owning, controlling and possessing said continuous and connecting lines of railroad, and owning and possessing all the rights, privileges and franchises of each of said companies under and in pursuance of the provisions of the law of said State of Maryland and Pennsylvania; and WHEREAS, such consolidation will, in the judgment of each of the companies parties hereto secure greater economy and efficiency in the management and operation of said lines of*3454 railway, and thereby promote the interests of the public and of said companies and of all the stockholders of each of them; and WHEREAS, the Western Maryland Railway Company, party hereto of the first part, has issued and there are now outstanding certain promissory notes, as *894 follows: $10,000,000 face value of Five Per Cent Collateral Trust Notes issued under a Trust Agreement, dated January 1, 1912, to The Equitable Trust Company of New York, as Trustee, and $6,000,000 face value of Six Per Cent Unsecured Noted, all of which said notes matured on July 1, 1915, and are unpaid, and the amount due and payable thereon for principal and interest on July 1, 1916, was $17,739,500; and WHEREAS, the Western Maryland Railway Company desires to provide for the payment and discharge of its above-mentioned promissory notes as hereinafter set forth; and WHEREAS, the George's Creek and Cumberland Railroad Company and The Connellsville and State Line Railway Company, two of the parties hereto, are indebted to The Western Maryland Railway Company, party hereto of the first part, for certain sums of money advanced by said last mentioned Railway Company in connection with the construction*3455 and equipment of the lines of railroad and property of said George's Creek and Cumberland Railroad Company and The Connellsville and State Line Railway Company, and the amount so owing by said two last mentioned Companies, as of November 1, 1916, is as follows: Owing by George's Creek and Cumberland Railroad Company - $2,729,485.60; owing by The Connellsville and State Line Railway Company - $7,133,009.28; and WHEREAS, said George's Creek and Cumberland Railroad Company and The Connellsville and State Line Railway Company, two of the parties hereto, desire to provide for the discharge and cancellation of the indebtedness owing by said Companies to The Western Maryland Railway Company, party hereto of the first part; NOW, THEREFORE, the constituent companies severally in consideration of the premises and of the mutual execution of this agreement, do hereby covenant and agree, to and with each other, that upon the due approval of this agreement by the stockholders of said constituent companies and the filing of the same or a copy thereof, in accordance with the statutes in such case made and provided: ARTICLE I. The constituent companies do by these presents consolidate their*3456 stocks, property and franchises and their powers, rights, privileges, immunities and property of every name, nature and description into, and they do hereby create, form and make, one new consolidated corporation (hereinafter sometimes called the consolidated corporation), which shall own and possess all of the stocks, property, franchises, powers, rights, privileges, immunities and property of every name, nature and description of each of the constituent companies, and shall be called and known by the corporate name of WESTERN MARYLAND RAILWAY COMPANY. ARTICLE II. The constituent companies do hereby respectively grant, bargain, sell, assign, transfer, release, convey and deliver over unto Western Maryland Railway Company, the consolidated corporation hereby created, all and singular the lines of railroad and other properties, real, personal and mixed, powers, rights, privileges, immunities and franchises belonging to any of the constituent companies parties hereto, including the following: FIRST: The lines of railroad, with all their appurtenances, now owned by The Western Maryland Railway Company, described as follows: (Here follows description of property.) *895 *3457 SECOND: The lines of railroad, with all their appurtenances, now owned by the Baltimore and Harrisburg Railway Company, described as follows: (Here follows description of property.) THIRD: The lines of railroad, with all their appurtenances, now owned by The Baltimore and Harrisburg Railway Company Eastern Extension, described as follows: (Here follows description of property.) FOURTH: The lines of railroad, with all their appurtenances, now owned by The Baltimore and Harrisburg Railway Company Western Extension, described as follows: (Here follows description of property.) FIFTH: The lines of railroad, with all their appurtenances, now owned by the Baltimore and Cumberland Valley Railway Company, described as follows: (Here follows description of property.) SIXTH: The lines of railroad, with all their appurtenances, now owned by The Baltimore and Cumberland Valley Rail Road Company, described as follows: (Here follows description of property.) SIXTH: The lines of railroad, with all their appurtenances, now owned by the George's Creek and Cumberland Railroad Company, described as follows: (Here follows description of property.) EIGHTH: The lines of railroad, *3458 with all their appurtenances, now owned by The Connellsville and State Line Railway Company, described as follows: (Here follows description of property.) NINTH: Also all other lines of railroad and other properties, real, personal and mixed, powers, rights, privileges, immunities and franchises belonging to any of the constituent companies making this consolidation, or which would belong to any of the said constituent companies, if this consolidation were not made, and all other lands, real estate, rights-of-way, leases, leasehold interests, contracts, branches, extensions and additions, stations, station grounds, lands, lots, bridges, cars, locomotives, rolling stock, ferries, floats, transfers, docks, wharves, tools, implements, machinery, fuel, rails, materials and supplies, goods and chattels, all and singular their several and respective bonds, stocks, bills, notes, accounts, demands, moneys and things in action, and all and singular their several estates, property and effects, real and personal, now owned or hereafter acquired, wheresoever and howsoever and by whomsoever held, and all and singular their several and respective corporate and other franchises, powers, rights, *3459 privileges and immunities which are or have been granted to or conferred upon or possessed or enjoyed by all or any of the constituent companies, and they do hereby mutually agree and declare that the same shall, from the date of the consummation of the said consolidation, thenceforth be held, owned, possessed, enjoyed and controlled by said consolidated corporation, its successors and assigns forever, for its own use and behoof, to all intents and purposes as fully and completely as the respective constituent companies theretofore did or could own, hold, use, possess, enjoy or control the same. ARTICLE III. The terms and conditions of the proposed consolidation and the general purposes and objects of Western Maryland Railway Company, the consolidated corporation hereby formed, shall be: 1. To own, possess, maintain, operate, use, extend and improve each and all of the several lines of railroad, with the appurtenances thereto belonging or in *896 any way appertaining, heretofore held, owned, possessed or controlled by all or any of the constituent companies and heretofore mentioned, and to use and enjoy all the corporate and other franchises, rights, privileges, immunities*3460 and property of every name and description which form a part or are appurtenant to all or any of the said lines of railroad and which have been held, owned, possessed or controlled by the constituent companies, or any of them, or by the predecessors, assignors or grantors of all or any of them. 2. To observe, keep and perform, as the successor and assign of the several constituent companies, all legal and valid agreements and traffic arrangements entered into between any of the constituent companies and any other railroad or railway company or companies, and to carry out and perform, as the successor and assign of the several constituent companies, all legal and valid contracts and agreements of every kind and description entered into by any of said constituent companies. 3. To construct or acquire, by purchase, lease or otherwise, other lines of railroad, and to maintain, use, control and operate the same as a part of its railway system, and generally to have and to exercise all rights, powers and privileges now or hereafter conferred upon the consolidated corporation, and all powers, privileges and franchises in respect of said lines of railroad of the constitutent companies*3461 which are now possessed or enjoyed by said constituent companies under and by virtue of their respective charters and any amendments thereto, and under any laws of any state in which any part of said railroads is situated, or by reason of any ordinance or grant, and also to have and to exercise all rights, powers and privileges, in respect of said lines of railroad and property and of all lines of railroad hereafter acquired by said consolidated corporation conferred by law. ARTICLE IV. Western Maryland Railway Company, the consolidated corporation hereby created, shall have and possess: 1. Each and all of the corporate and other franchises, rights, powers, privileges and immunities heretofore held, possessed or enjoyed by said constituent companies, or by any of them, together with all franchises, privileges, and immunities secured to any of the constituent companies or its predecessors or assignors by its charter or charters, or by the charter or charters of its predecessors or assignors, under the laws of any state or of the United States, and all such additional powers as may be secured or obtained by it by reason of this consolidation under the laws of the States of Maryland*3462 and Pennsylvania. 2. Power to renew and extend, from time to time, in such manner as may be provided by law, its own corporate existence and franchises, rights, privileges, powers and immunities, including the power further to consolidate its stock and properties with other railroad companies. 3. Power to sue and be sued, contract and be contracted with, in its corporate name, and to have and use a corporate seal; to do any and all acts and to transact any and all business which a common carrier of persons and property may lawfully do; to acquire, hold, transfer and convey property; to purchase, take, receive and hold or sell the stocks, bonds and other securities of other companies; to borrow money and to make and issue its bonds and secure payment of the same by mortgages and pledges of its property, or any part thereof, for all purposes authorized by law, to make and establish by-laws, and to make such rules and regulations as may be deemed proper for the management and control of its business and not in conflict with law. *897 ARTICLE V. Western Marryland Railway Company, the consolidated corporation hereby created, expressly adopts and assumes all obligations, *3463 agreements and stipulations set forth and contained in all mortgages or deeds of trust heretofore made by the constituent companies, or any of them, to secure outstanding bonds of said constituent companies, or any of them, including a certain mortgage or deed or trust, dated October 1, 1902, executed by Western Maryland Rail Road Company, known as its First Mortgage to The Mercantile Trust Company (now Bankers Trust Company) as trustee, and a certain Indenture Supplemental to said First Mortgage, dated November 1, 1905, and the said consolidated corporation shall possess and may exercise each and every right and power reserved to and heretofore possessed by the constituent companies, or any of them, in respect of any such mortgage or deed of trust, including each and every right and power reserved to and heretofore possessed by Western Maryland Rail Road Company or by The Western Maryland Railway Company under the terms of the First Mortgage and Indenture Supplement thereto above mentioned, including the right and power to require the certification by the Trustee of said First Mortgage of all bonds not heretofore certified, pursuant to the provisions thereof, for the purposes for*3464 which said uncertified bonds are appropriated by the provisions of said First Mortgage, and the right and power to issue and use the said bonds for the purposes and objects for which the same are reserved and appropriated by the terms of said First Mortgage, and also the right and power to require the payment and application as in said First Mortgage provided of any and all sums of money now or at any time hereafter held by the Trustee of said First Mortgage and the release by said Trustee of property from the lien of said First Mortgage as therein provided; and any such bonds and other obligations may be so issued in the name of Western Maryland Rail Road Company or in the name of the consolidated corporation, as may be deemed desirable by the board of directors of the consolidated corporation. ARTICLE VI. The capital stock of Western Maryland Railway Company, the consolidated corporation hereby created, shall be Seventy-eight million Dollars ($78,000,000), which shall be divided into and represented by Seven hundred and eighty thousand (780,000) shares of the par value of $100 each, and each of which shares shall be entitled to one vote at any meeting of the stockholders of*3465 the consolidated corporation. Of such capital stock one hundred and eighty thousand (180,000) shares of $100 each, may be issued as first preferred stock, One hundred thousand (100,000) shares, of $100 each, may be issued as second preferred stock, and Five hundred thousand (500,000) shares, of $100 each, may be issued as common stock. * * * ARTICLE VII. The total amount of the authorized capital stock of said constituent companies, respectively, the amount thereof now issued and outstanding, the amount thereof now owned by The Western Maryland Railway Company, party hereto of the first part, and the amount thereof not so owned, hereinafter termed Free Stock, are respectively as follows: Name of company Stock authorized Stock issued n1 $50,000,000.00 n1 $49,429,230.00 Western Maryland Railway Co n2 10,000,000.00 n2 10,000,000.00 1 629,900.00 n1 690,850.00 Balto. and Harrisburg Rwy. Co n2 29,100.00 n2 29,100.00 Balto. and Harrisburg Rwy. Co. Eastern Extension 600,000.00 563,750.00 Balto. and Harrisburg Rwy. Co. Western Extension 250,000.00 240,000.00 Balto. and Cumberland Valley Rwy. Company 50,000.00 42,500.00 Balto. and Cumberland Valley Rail-Road Company 76,700.00 76,700.00 George's Creek and Cumberland Railroad Company 3,500,000.00 3,500,000.00 Connellsville and State Line Rwy. Co 3,000,000.00 3,000,000.00 *3466 Name of company Owned by the Free stock Western Maryland Ry. Co. 1 $131.60 1 $49,429,098.40 Western Maryland Railway Co 2 1,000.00 2 9,999,000.00 1 690,850.00 Balto. and Harrisburg Rwy. Co 2 8,200.00 2 20,900.00 Balto. and Harrisburg Rwy. Co. Eastern Extension 563,750.00 Balto. and Harrisburg Rwy. Co. Western Extension 240,000.00 Balto. and Cumberland Valley Rwy. Company 42,500.00 Balto. and Cumberland Valley Rail-Road Company 76,700.00 George's Creek and Cumberland Railroad Company 3,500,000.00 Connellsville and State Line Rwy. Co 3,000,000.00 *898 The manner of converting the capital stock of each of the constituent companies into that of the consolidated corporation hereby created and the mode of carrying said consolidation into effect shall be as follows: For each $100, par value, of the Free preferred capital stock of The Baltimore and Harrisburg Railway Company there shall be issued $100, par value, of the first preferred stock of the consolidated corporation. For each $100. par value, of the preferred capital stock of The Western Maryland Railway*3467 Company, party hereto of the first part, there shall be issued one share, of the par value of $100, of the second preferred stock of the consolidated corporation. For each $100, par value, of the common stock of The Western Maryland Railway Company, party hereto of the first part, there shall be issued one share, of the par value of $100, of the common stock of the consolidated corporation. In satisfaction and discharge of the indebtedness represented by the Five Per Cent, and Six Per Cent Promissory Notes, hereinbefore mentioned, of The Western Maryland Railway Company, party hereto of the first part, which said indebtedness amounted on July 1, 1916, to the sum of $17,739,500, there shall be issued a like amount at par, viz., $17,739,500 par value thereof, of the first preferred stock of the consolidated corporation. All indebtedness due and owing to The Western Maryland Railway Company, party hereto of the first part, by any and all of the other constituent companies, including the indebtedness above mentioned owing by the George's Creek and Cumberland Railroad Company and The Connellsville and State Line Railway Company, shall be satisfied and discharged by reason and as*3468 the result of the consummation of this Agreement of Consolidation. All the holders (other than the constituent companies) of the capital stock of the constituent companies shall, from the date of the consummation of this consolidation, be stockholders in the consolidated corporation, and, until such holders of stock of the constituent companies shall have received certificates of stock of the consolidated corporation each such holder of record on the books of the constituent company issuing such stock shall be entitled to cast all votes as a stockholder of the consolidated corporation with the same force and effect as if such exchange of stock had been perfected. Every stockholder in the consolidated corporation shall be entitled to receive for his entire interest, legal and equitable, in the capital stock of each and every of the constituent *899 companies, shares of the capital stock of the consolidated corporation, in the amounts and of the classes as hereinbefore in this article set forth and to receive certificates representing the same in exchange for and on surrender of the certificates representing said stock of the constituent companies. Upon the consummation*3469 of this consolidation, all authorized but unissued capital stock of each of the constituent companies shall be retired, canceled and extinguished, and no shares of the capital stock of the consolidated corporation shall be issued in exchange for any of said unissued capital stock of the constituent companies or for any issued capital stock of said constituent companies now owned by The Western Maryland Railway Company, as hereinbefore stated. All shares of the capital stock of the consolidated corporation not required to be issued, as aforesaid, in exchange for shares of stock in the constituent companies and in discharge of the indebtedness of certain of said constituent companies, shall remain subject to be issued from time to time for such lawful purposes and upon such lawful terms as may be determined by the board of directors of the consolidated corporation. From and after the consummation of this consolidation none of the constituent companies shall declare or pay any dividend or make any other distribution of capital or surplus to its stockholders, and all stock of the constituent companies owned by The Western Maryland Railway Company, as hereinbefore stated, shall be*3470 canceled. The officers of the old company became the officers of the new company. Petitioner issued three classes of stock, to wit, first preferred in the amount of $17,742,050; second preferred in the amount of $10,000,000, and common in the amount of $50,000,000. All classes of stock of both the Railway Company and petitioner were of the par value of $100 per share. The common stock of the Railway Company was exchanged, share for share, for the common stock of petitioner, which latter was in the same amount as the former. The preferred stock of the Railway Company was exchanged, share for share, for the second preferred stock of petitioner. The second preferred stock of petitioner was in the same amount as preferred stock of the Railway Company. The preferred stock and common stock of the Railway Company and the corresponding stocks of petitioner carried the same rights with respect to voting dividends, sharing and distribution upon dissolution and other rights ordinarily incident thereto. The first preferred stock of petitioner was issued to provide for the payment of certain secured promissory notes of the Railway Company which matured in 1915 and which with accrued*3471 interest equaled the amount of the first preferred stock which was issued. The holders of the promissory notes mentioned owned approximately three-fourths of the common stock and approximately one-half of the preferred stock of the Railway Company. The stockholders of the Railway Company were given the privilege of purchasing the first preferred stock of petitioner at par in proportion of their respective *900 holdings of stock in the Railway Company. The amount received from such sales was applied in payment of the debt. The amount of the first preferred stock not taken by the stockholders in pursuance of the above privilege was accepted at par by the note holders in payment of the notes and interest so that the entire issue of the first preferred stock exactly equaled the principal and interest of the notes. The only transfer of the Railway Company and its subsidiaries to the petitioner was by the agreement of consolidation above set forth. The bonds above set forth were never refunded but in the reorganization were intended to and do now remain a prior lien upon the property and have been recognized and treated by petitioner as its own obligations. Petitioner*3472 is required by the Interstate Commerce Commission under the latter's classification of Income, Profit and Loss and General Balance Sheet Accounts prescribed in accordance with section 20 of the Interstate Commerce Act, under section 725, Discount on Funded Debt, to carry in its general balance sheet the unextinguished discount on the bonds above set forth and to amortize the same by charge against income for the remaining life of the bonds. Profit from sale of certain properties - Items of $991.49 and $4,721.59. In lieu of the addition to income of $991.49 set up in the deficiency letter, income to the extent of $100 was realized, and in lieu of the item of $4,721.59, income to the extent of $620 was realized. Normal tax assumed by United States Railroad Administration. During the years 1918 and 1919 the petitioner was under Federal control but did not enter into any contract with the Director General as provided by the Federal Control Act. The Director General, however, paid or reimbursed the petitioner for the 2 per cent normal tax on all taxes heretofore assessed against the said petitioner with the exception of the deficiencies asserted in the 60-day letter from*3473 which petitioner's appeal is taken. Petitioner made its final settlement on August 10, 1922, which is evidenced by the following agreement: THIS AGREEMENT, entered into this 10th day of August, A.D. 1922, by and between James C. Davis, Director General of Railroads and Agent for the President, acting on behalf of the United States and the President, hereinafter called the "Director General", and the Western Maryland Railway Company, hereinafter called the "Company." WITNESSETH: The said Director General hereby acknowledges payment of the sum of Eight Hundred Thousand Dollars ($800,000.00) by the said Western Maryland Railway Company, the receipt whereof is hereby acknowledged, in full satisfaction and discharge of all claims, rights, and demands, of *901 every kind and character, which the Director General, or anyone representing or claiming to represent the Director General, the United States, or the President, now has or may hereafter have or claim against the Company, growing out of or connected with the possession, use, and operation of the Company's property by the United States during the period of Federal control; and the said Company hereby acknowledges the return*3474 to and receipt by it of all its property and rights which it is entitled to, and further acknowledges that the Director General has fully and completely complied with and satisfied all obligations on his part, or on the part of the United States, or the United States Railroad Administration, growing out of Federal control. The purpose and effect of this instrument is to evidence a complete and final settlement of all demands, of every kind and character, as between the parties hereto, growing out of the Federal control of railroads, save and except that the following matters are not included in this adjustment and are not affected thereby: EXCEPTIONS. 1. The obligations on the part of the Company as expressed in the standard form of contract between the Director General and the railroads, as to the conduct of litigation arising out of Federal control (except as to claims and suits of carriers against the Director General or the United States), as same is stated in paragraph (f) of Section 9 of said contract, or as heretofore agreed to by the Company, is to continue, and is not affected by this settlement. 2. This settlement does not includes or affect any moneys or assets*3475 of the Director General turned over to the Company pursuant to General Order No. 68, the account created by this order to be adjusted as though this agreement had not been made. 3. The Director General shall save the Company harmless from all unpaid claims of third persons against the Director General arising or growing out of the possession, operation, and use of the Company's property by the United States during Federal control, save and except claims, suits, and judgments based on causes of action arising between twelve o'clock, noon, of December 28th, 1917, and twelve o'clock, midnight, of December 31st, 1917, during which period the carrier assumes all liability. 4. This settlement does not affect or alter any obligation executed by the Company for amounts loaned, advanced, or funded by the Director General, or amounts due by reason of any equipment trust agreements, all such obligations on the part of the Company to remain in full force, the same as if this agreement had not been entered into. Interest on quarterly balances due petitioner by Director General of Railroads. There accrued to petitioner for the year 1918, the sum of $7,500 interest on quarterly balances*3476 due the said petitioner by the Director General of Railroads under the provisions of the Federal Control Act of March 21, 1918. There accrued in the year 1919, a liability to pay $50,860.88, interest on quarterly balances due by the petitioner to the Director General of Railroads under the provisions of the aforesaid Federal Control Act. No part of the aforementioned $7,500 is included in the income set out in the 60-day deficiency letter and no *902 part of the said $50,860.88 has been excluded from the income set out in the said letter. Depreciation. During the years 1918 and 1919, while the properties of petitioner were under Federal control, certain depreciation was accrued on the petitioner's books. In the final settlement the Director General of Railroads declined to reimburse petitioner for depreciation in each of said years to the extent of $11,300.50 on the ground that it was based on rates of depreciation in excess of those employed during the test period. It is now agreed that the depreciation accrued on the books was a reasonable allowance for exhaustion, wear and tear, including obsolescence, and that in each of the said years the net income disclosed*3477 by the 60-day deficiency letter should be reduced by the aforesaid sum of $11,300.50. Assessment by Association of Railway Executives. During the year 1919, the petitioner paid to the Association of Railway Executives, a voluntary Association of which petitioner and a large number of other railroads are members, the sum of $3,079.59, the same being its pro rata proportion of one-half of the seventh assessment of said Association in the total sum of $1,600,000. Petitioner deducted in its return the said amount of $3,079.50 and no part thereof was disallowed by the Commissioner in the determination of the deficiency. Petitioner received a communication from the Chairman of the Association of Railway Executives under date of October 16, 1919, together with a "Report on National Advertising for the Association of Railway Executives" and under date of November 1, 1919, the Chairman of the Association of Railway Executives sent another communication to petitioner containing an enclosure entitled "Item in Proposed (Seventh) Annual Assessment." Both these communications and enclosures are to the extent pertinent set forth in the findings of fact in *3478 Texas & Pacific Railway Co.,9 B.T.A. 365, and same are made a part of this finding of fact as fully as if set forth herein. Additional compensation for transportation of United States mail. On December 23, 1919, the Interstate Commerce Commission made a report setting out the basis on which the petitioner and other roads were entitled to certain additional compensation for transporting the United States mails. As a result of this report, there was paid in the year 1920, to the petitioner, the sum of $13,885.03, additional compensation for the period June 30, 1916, to December 31, 1917. The award of the Interstate Commerce Commission was rendered in *903 Railway Mail Pay,56 I.C.C. 1, pursuant to the provisions of sections 5 and 6 of the Act of July 28, 1916, Post Office Department Appropriation, 39 Stat. 412, 425. No part of the said $13,885.03 was included in taxable income for any of the years 1916 to 1919, inclusive, but the same was returned for the year 1920. OPINION. MILLIKEN: All the facts were stipulated and our findings of fact conform to the stipulation of the parties. *3479 With respect to its right to deduct from gross income for each of the years herein involved the sum of $80,796.24, petitioner contends (1) that the consolidation gave rise to no change of substance but only a change of form and (2) that the creation of a new corporate entity does not of itself give rise to a different taxable basis. In connection with the first contention, petitioner invites attention to the fact that Railway Company not only owned and operated its subsidiaries but that such subsidiaries in fact transacted no business, kept no separate books of account, and that Railway Company operated all as parts of a single system and then insists that the reorganization was but the legal recognition of an existing economic fact. In support of this contention, it cites Southern Pacific Co. v. Lowe,247 U.S. 330. That case turned upon "its very peculiar facts" and on these very peculiar facts it was held that, since the Southern Pacific Co. not only owned and operated the property of its subsidiary but also had in its treasury all its revenue and that since under such circumstances the declaration of a dividend would be only "a paper transaction," the Southern*3480 Pacific Co. was in possession of a certain income prior to March 1, 1913, although a formal dividend was not declared until after that date. In that case the question was when did a corporation come into possession of income. Here it is whether a consolidated corporation has by succession the same right of deduction that belonged to one of the consolidating companies. We do not feel justified in extending the reasoning of that case to a case wholly unlike it, unless cogent reasons therefor are presented, and before doing so, we should look into the origin of petitioner, the law under which the consolidation took place and the agreement of consolidation. It is stipulated that petitioner was organized under article 23, sections 33 to 35, inclusive, of the Annotated Code of Maryland (Bagby's Edition) and certain Pennsylvania statutes. Putting to one side the Pennsylvania statutes, we will first look to the Maryland statutes. The pertinent parts of section 33 read: (1) Any two or more corporations having capital stock, now existing or hereafter formed under any law or laws of this State, which have been or shall have *904 been duly authorized by law to carry on in whole*3481 or in part any kind of business of the same or a similar nature, may consolidate and by such consolidation form one new corporation; provided, however, that the provisions of this section and of Sections 34 and 35 of this Article shall not be held to repeal any of the restrictions imposed by this Article on the consolidation of railroads owning or operating competing or parallel lines, and provided further that any corporation which shall take advantage of this section shall be deemed to have waived all claim to exemption from taxation or from repeal or modification of its charter. (2) Such consolidation shall be made in the manner following: There shall be an agreement of consolidation between the consolidation corporations giving: (a) the terms and conditions of the proposed consolidation; (b) the mode of carrying the same into effect; (c) the name of the new corporation; (d) the postoffice address of the place at which the principal office of the corporation in this State will be located as in the case of a certificate of incorporation and the name or names and postoffice address or addresses of the resident agent or agents who will be in charge thereof, as in the case of a certificate*3482 of incorporation; (e) the counties in this State in which any of the consolidating corporations own property, the title to which could be affected by the recording of an instrument among the land records, and if any of the consolidating corporations own such property in the City of Baltimore, the agreement of consolidation shall so state; (f) the number, names and addresses of the directors and the names of the officers, who shall act as such until their successors are duly chosen and qualified; (g) the amount of authorized capital stock of each consolidating corporation and the total amount of authorized capital stock of the new corporation and the number and par value of the shares; (h) the total amount of capital stock of the new corporation to be issued for stock of the consolidating comporations; (i) the restrictions, if any, imposed upon the transfer of the shares or of any of them; (j) if the capital stock is classified, the amount, par value, preferences, restrictions and qualifications of each class, specifying the amount of each class authorized and the amount of each class to be issued for stock of the consolidating corporations; (k) the manner of converting the capital*3483 stock of each of the consolidating corporations into stock of the new corporations; (1) all such other provisions and details which shall be deemed necessary to perfect the consolidation. * * * This section further provides for the filing of the articles in certain offices and for the payment of certain organization fees. Section 34 in part provides: When such agreement of consolidation has been delivered to the State Tax Commission with the fees required by Section 33 of this Article and the bonus tax, if any, payable, and not before, all of the property and assets belonging to said consolidating corporations of whatsoever nature and description, and all the powers and rights and all debts and liabilities of said consolidating corporations of whatsoever nature and description, shall be devolved upon said new corporation, which shall be regarded as substituted by operation of law in the room and stead of consolidating corporations; and from the time of the delivery of said agreement of consolidation, as aforesaid, any amendment or amendments made by said agreement of consolidation shall take effect, and not before. Section 218 of the same article makes further provisions for*3484 the consolidation of railroad corporations and, among other things, provides that such consolidations may be made "upon such terms as may be agreed upon." *905 It may be observed in passing that the statute throughout refers to the consolidated corporation as a "new corporation"; that such new corporation is organized in much the same manner as any ordinary corporation; and that until the new corporation has complied with the statutory requirements, it does not acquire the property and assets of the consolidating corporations. The agreement of consolidation makes similar recitals and follows the statute. At this point, petitioner asserts: There was no surrender or cancellation of the charter of the principal company, but the charter became that of the consolidated company (together with the charter of the subsidiaries, which, however, added no powers not provided for in the charter of the principal company). No charter power, and no right, privilege, or immunity was lost in the consolidation. The consolidation only welded together the principal company and the subsidiaries so as to embody them all. In support of this contention, petitioner relies on *3485 State, Use of Dodson v. Baltimore & Lehigh Railroad Co.,77 Md. 489; 26 Atl. 865. This case was reviewed by the same court in Diggs v. Fidelity & Deposit Co.,112 Md. 50; 75 Atl. 517, where in an exhaustive opinion the court defines the status of a consolidated corporation under the laws of Maryland. In the Diggs case the facts were that a gas company had executed a mortgage to a trustee to secure bonds which were to be issued and sold for two purposes (1) to retire existing lien indebtedness and (2) for the acquisition of additional property by the company. The mortgage covered all the property the gas company then owned and all that it might thereafter acquire. Before all the bonds had been issued the gas company consolidated with another like company and one of the questions before the court was whether the trustee could issue bonds for the purpose of acquiring additional property for the consolidated corporation. This right the court denied. We make the following excerpts from the opinion: In the case of *3486 State v. Consolidated Gas, Electric Light & Power Company,104 Md. 364, 65 Atl. 40, it was held by us that the very consolidated corporation with which we are now dealing, was a new corporation, and as such was liable for the bonus tax, imposed by section 98 of Article 81 of the Code upon corporations as a condition precedent to commencing to do business. We have also held to be new corporations other consolidated companies formed under the same or similar statutes in the case of State, Use of Dodson, v. B. & L.R.R. Co.,77 Md. 489, 26 Atl. 865, and in three cases of State v. Northern Central Ry. Co., appearing respectively in 44 Md. 131, 90 Md. 447, 45 Atl. 465, and 93 Md. 737, 51 Atl. 1108. Our decision in those cases is in accord with the great weight of authority. 10 Cyc. 302; Yazoo & Miss., Ry. Co. v. Vicksburg,209 U.S. 358, 28 Sup.Ct. 510, 52 L.Ed. 833; Rochester Ry. Co. v. Rochester,205 U.S. 256, 27 Sup.Ct. 469, 51 L.Ed. 784; *3487 Keokuk & Western Ry. Co. v. Missouri,152 U.S. 301, 14 Sup.Ct. 592, 38 L.Ed. 450. We held in State, Use of Dodson, v. B. & L.R.R. Co.,77 Md. 489, 26 Atl. 865, supra, and Consolidated, etc., Co. v. Baltimore County,98 Md. 689, 57 Atl. 29, *906 that the new corporation, which comes into being by a consolidation of corporations made under the general corporation laws of this state, comprehends both of the constituent corporations which then ceased to exist and is in effect both united in one, and that nothing was destroyed by the consolidation, and that it was the purpose of the Legislature in providing for such consolidations to enable the constituent corporations to do more efficiently what they had done before and not to deprive them of any rights or property which they previously had. It is however true that the means adopted by the Legislature to carry into effect its purposes involved the extinction of the life of the constituent corporations and the creation of a new corporation which is a legal unit and not a mere association or aggregation of coexisting corporations. The rights and powers received*3488 by it, from the state, at its formation, although identical in character with those which had been possessed by the extinct constituent corporations, are its own rights and powers and are exercisable by it alone. The property and franchises formerly held by the extinct constituent corporations, which devolved through the consolidation on the new corporation, thereby became its own and are held by it in its own right with the same powers of use and disposition as those enjoyed by other corporate owners of property and the respective portions of it which came from the several constituents no longer have any separate legal existence. It may in its discretion apply particular portions of its property to like uses and in the same enterprises to those in which they had been formerly employed by the constituent corporations from which they came, but in so doing it holds and uses the property in its own right and on its own account, and not as and for the extinct constituent corporation or in a special capacity as its successor. * * * In *3489 New York Security and Trust Company v. Louisville, etc., R.R. Co., (C.C.) 102 Fed. 382, two railroad companies, on the property of each of which there was a mortgage, entered into a consolidation, and the new company thereby formed made a general mortgage upon the combined properties. All three of the mortgages covered after-acquired property. A controversy arose between the trustees of the three mortgages as to the proper disposition of equipment purchased by the consolidated company. The trustees of the two underlying mortgages which had been made by the constituent companies contended that a proportionate part of the equipment should be deemed to have come under each of the divisional mortgages but the court rejected the contention saying, "The after-acquired property clause in each of the mortgages can be rightly construed I think to apply only to property subsequently acquired by the mortgagor. The consolidated company is a new and different organization. The case of Hinchman v. Railway Co. [14 Wash. 349], 44 Pac. 867, is quite in point and in principle the question seems to be covered by the decision in *3490 Pullman Pal. Car Company v. Missouri Pac. Ry. Co.,115 U.S. 587." We think that, in the present case also, the after-acquired property for account of which bonds were authorized to be issued by the terms of the gas company's mortgage should be construed to mean only property subsequently acquired by that company. As that company put it out of its power to acquire any more property when it surrendered its corporate existence by entering into the consolidation, that action on its part is conclusive of this branch of the case. In State v. Northern Central Railway Co.,44 Md. 131, referred to in the above opinion, it was held that a consolidated railroad company, which was consolidated under a special act in many respects similar to the statute here involved, was the creation of the act permitting *907 the consolidation and was in no sense created by the articles of consolidation and further that the rights and privileges which it acquired from its predecessor were acquired not by the transfer but as new and special grants under the act permitting the consolidation. The decision of the court in this case was affirmed by the Supreme*3491 Court of the United States in Northern Central Railway Co. v. Maryland,187 U.S. 258. It thus clearly appears that the Railway Company which issued the bonds herein involved is extinct; that petitioner is not a mere association or aggregation of coexisting corporations, but a new and distinct corporation; and that it owns its property and franchises in its own right and not in the capacity as successor to the consolidating corporations. Under the agreement of consolidation it assumed the indebtedness of all the consolidating corporations. It would have become liable for such indebtedness under section 33 of article 23, even though no such provision had been included in the articles of consolidation. The mortgage debt which is here involved and which petitioner assumed was the debt of another and distinct entity. The money that was received in exchange for the bonds was received not by petitioner but by another corporation and used by that corporation perhaps for the purchase of assets received by petitioner by reason of the consolidation and which, for all we know, may have enhanced in value. At any rate, petitioner came into possession of the assets of*3492 Railway Company and in consideration thereof agreed to pay the mortgage bonds herein involved and the contract rate of interest thereon. What was received by Railway Company in exchange for its bonds was of no concern to petitioner. Its obligation began with the date of the consolidation and the debt which it now owes, it owes in its own right, both by reason of the statutory provisions and the contractual assumption, and not as a successor to or the representative of the Railway Company. Such being the case, it has no right to take as a deduction as a loss or otherwise any part of the difference between the face value of the bonds and what was received by the Railway Company. In reaching this conclusion, we have not considered the interesting questions which arise from the fact that some of the consolidating corporations were of Pennsylvania origin and the further fact that the Railway Company, in so far as it appears from the record, was a corporation of Maryland only, whereas petitioner is both a Maryland and a Pennsylvania corporation. But, whatever may be the rights which petitioner derived from the consolidation, neither it nor the Railway Company is entitled to deduct*3493 from gross income an amortized proportion of the discount. See Commissioner of Internal Revenue v. Old Colony Railroad, 26 Fed.(2d) 408. *908 Relative to the 2 per cent tax borne by the Director General, respondent admits that if petitioner and the Railroad Administration had, pending Federal control, entered into the contract provided by section 1 of the Federal Control Act, this proceeding would be controlled by New York, Ontario & Western Ry. Co.,1 B.T.A. 1172, and that the normal tax for each of the years (1918 and 1919) should be reduced by 2 per cent, but contends that in the absence of such contract, petitioner is relegated to section 3 of the Act, with the result that it is not entitled to the benefits of the contract but only to a just compensation for the taking of its property. There is no merit in respondent's contention that petitioner was relegated to section 3 for his remedy. Section 1 provides that the President is authorized "to agree with and guarantee to" any carrier whose railroad was taken over by him just compensation within the limits thereafter set forth. The Act then provides the stipulations which may be*3494 inserted in the contract, including the one relative to taxation. Sections 2 and 3 contain the following provisions: Section 2. If no such agreement is made, or pending the execution of an agreement, the President may nevertheless pay to any carrier while under Federal control an annual amount, payable in reasonable installments, not exceeding ninety per centum of the estimated annual amount of just compensation remitting such carrier, in case where no agreement is made, to its legal rights for any balance claimed to the remedies provided in section three hereof. Any amount thereafter found due such carrier above the amount paid shall bear interest at the rate of six per centum per annum. The acceptance of any benefits under this section shall constitute an acceptance by the carrier of all the provisions of this Act and shall obligate the carrier to pay to the United States, with interest at the rate of six per centum per annum from a date or dates fixed in proceedings under section three, the amount by which the sums received under this section exceed the sum found due in such proceedings. (40 Stat. 453.) Section 3. All claims for just compensation not adjusted (as provided*3495 in section one) shall, on the application of the President or of any carrier, be submitted to boards, each consisting of three referees to be appointed by the Interstate Commerce Commission, members of which and the official force thereof being eligible for service on such boards without additional compensation * * *. It is at once apparent that petitioner's compensation was not determined under section 3. There was no reference to any board. The compensation was adjusted by agreement and therefore under section 1. We can perceive no difference in principle between this case and New York, Ontario & Western Ry. Co., supra, and the only difference in fact is that in one case the agreement was made after the taking and before the release of the property and in this proceeding the agreement was made subsequent to both events. In both cases the amount of compensation was reached by agreement and in both cases the same standard of measurement was used. In United States v. Pittsburgh & West Virginia Railway Co.,271 U.S. 310, it *909 was held that a railroad which "failed to make any agreement with the Railroad Administration as to just*3496 compensation to be paid for the use of their properties until final settlement was made" was not entitled to the benefits of the standard contract, on the sole ground that it returned all its income arising from Federal control as income received in the year 1921 (a state of affairs which does not exist in this proceeding) and had asserted and had respondent hold that "none of it was attributable to the period of federal control." The court said: The provisions of § 6 of the standard form of contract, the Federal Control Act and the Revenue Acts are to be read together. When this is done, it is clear that the obligation of the Director General to bear the normal income taxes of the corporations did not go beyond those assessed for the period of federal control. That obligation was not held down to the normal tax on amounts received as compensation for the use of their properties, but extended to the normal tax assessed for that period on all incomes taxed without regard to source. But it cannot be held to extend to taxes on incomes for 1921 without excluding from consideration the provisions of the Federal Control Act and standard agreement clearly limiting the obligation to*3497 taxes assessed for the period of federal control. The meaning of these provisions is plain. There is no room for construction. The period in which the assessments were made governed. The sources of taxable incomes were not regarded. It would be contrary to the plain language of the statute and contract to hold the United States liable for any part of the taxes for 1921. Plaintiffs were not entitled to recover. It is to be noted that although the railroad company in the above case did not enter into the standard contract, that contract was made a determining factor in ascertaining the railroad's rights in a case which was settled by agreement and not under section 3. In this proceeding the settlement was not made by a board under section 3, but was fixed by agreement and therefore under section 1. For these reasons we are of opinion that petitioner is entitled to the benefits of subdivision (b) of section 230 of the Revenue Act of 1918. Respondent affirmatively pleads that he erred in allowing to petitioner a deduction of $1,924.74, being a part of a total payment of $3,079.50 made in 1919 by petitioner to the Association of Railway Executives, the said amount of $1,924.74*3498 being paid for the purpose of promoting railroad legislation. The same question was presented in Texas & Pacific Railway Co.,9 B.T.A. 365, on the same facts that are in evidence in this proceeding. For the reasons given in that opinion, we hold that respondent has not met the burden of proof imposed upon him. Under the facts as herein presented, the allowance of the deduction should not be disturbed. Cf. Great Northern Ry. Co.,8 B.T.A. 225. Respondent further affirmatively pleads that he erred in failing to increase petitioner's taxable income for the year 1919 by the sum of *910 $13,885.03, which represents additional compensation paid by the Post Office Department to petitioner in the year 1920, for services rendered during the period June 30, 1916, to December 31, 1917, in transporting United States mails. The reason advanced by respondent for this contention is that it was not known until December, 1919, what would be the precise amount which petitioner would receive for the services rendered in 1916 and 1917, and further that there was a controversy between the Government and petitioner as to the amount of its compensation which*3499 was not settled until the finding was made by the Interstate Commerce Commission on December 23, 1919. From March 3, 1873, to November 1, 1916, the Government paid for the transportation of the mail on the basis of weight with additional payment to those railroads which operated R.P.O. cars of greater length than 40 feet. Section 5 of the Act of July 28, 1916, 38 Stat. 425, in part provides: That the Postmaster General is authorized and directed to readjust the compensation to be paid to railroad companies from and after the thirtieth day of June, nineteen hundred and sixteen, or as soon thereafter as may be practicable, for the transportation and handling of the mails and furnishing facilities and services in connection therewith upon the conditions and at the rates hereinafter provided. Then follow provisions for maximum rates to be paid on the basis of space used. Section 5 contains the following provisions: All railway common carriers are hereby required to transport such mail matter as may be offered for transportation by the United States in the manner, under the conditions, and with the service prescribed by the Postmaster General and shall be entitled to receive*3500 fair and reasonable compensation for such transportation and for the service connected therewith. The Interstate Commerce Commission is hereby empowered and directed as soon as practicable to fix and determine from time to time the fair and reasonable rates and compensation for the transportation of such mail matter by railway common carriers and the service connected therewith, prescribing the method or methods by weight, or space, or both, or otherwise, for ascertaining such rate or compensation, and to publish the same; and orders so made and published shall continue in force until changed by the commission after due notice and hearing. In fixing and determining the fair and reasonable rates for such service the commission shall consider the relation existing between the railroads as public service corporations and the Government, and the nature of such service as distinguished, if there be a distinction, from the ordinary transportation business of the railroads. * * * At the conclusion of the hearing, the Commission shall establish by order a fair, reasonable rate or compensation to be received, at such stated times as may be named in the order, for the transportation*3501 of mail matter and the service connected therewith and during the continuance of the order the Postmaster *911 General shall pay the carrier from the appropriation herein made such rate or compensation. * * * The existing law for the determination of mail pay, except as herein modified, shall continue in effect until the Interstate Commerce Commission under the provisions hereof fixes the fair, reasonable rate or compensation for such transportation service. On December 23, 1919, the Interstate Commerce Commission made its reports (56 I.C.C. 1). The Interestate Commerce Commission found, subject to certain modifications, that the space system should be extended to all mail routes and fixed the rates which it held were "the fair and reasonable rates for the transportation of mail matter as of November 1, 1916, and to January 1, 1918 * * *." Thereafter, payment was made to petitioner as above set forth. Respondent asserts that under the rule laid down in Bump Confectionery Co.,4 B.T.A. 50, and in similar cases, petitioner should not be permitted to accrue its compensation. In the cases referred to, the petitioners had breached certain contracts*3502 and had admitted no liabilities. In this proceeding there was no breach of contract. There was no denial of liability. Under the Act of July 28, 1916, petitioner was entitled to and the Interstate Commerce Commission was directed "to fix and determine * * * the fair and reasonable rates and compensation for the transportation of such mail matter by railway common carriers * * *." Petitioner was entitled at all events to a reasonable compensation for its services. There was no dispute about that. All that remained was for the Interstate Commerce Commission to determine what constituted such compensation. There was no greater uncertainty about the amount due than existed with respect to the compensation of those railroads which were taken over by the President for war purposes and where the standard form of contract was not entered into. In several cases, where the taxpayer kept his accounts on an accrual basis, we held that all such income should be returned for taxation for the year in which it was earned for the reason "that a taxpayer's net income is not clearly shown unless all the items of income are first set up and included in the amount from which the accrued deductions*3503 are subtracted." In the instant case, the income was earned in the years 1916 and 1917 and the expenses incident to the earning of that income were paid or incurred in these same years. If petitioner was on an accrual basis, and we assume such to be the case, the payments received in 1920 should have been allocated to and returned for the years in which they were earned, to wit, 1916 and 1917. See Illinois Terminal Co.,5 B.T.A. 15; Great Northern Railway Co., supra; and Texas & Pacific Railway Co., supra. *912 The years 1916, 1917, and 1920 are not before us. We limit our opinion to the year 1919 and hold that no part of the payment made by the Post Office Department in 1920 was taxable income in 1919. The other issues should be settled in accord with the facts found. Judgment will be entered under Rule 50. Footnotes 1. Common ↩ 2. Preferred. ↩