Midland Valley R.R. v. Commissioner

MIDLAND VALLEY RAILROAD CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Midland Valley R.R. v. Commissioner Docket No. 25000. United States Board of Tax Appeals 19 B.T.A. 423; 1930 BTA LEXIS 2405; March 26, 1930, Promulgated *2405 1. Compensation received by the petitioner for the use of its properties during the period of Federal control was income in each of the accounting periods for which allowed, irrespective of the date of final settlement with respect thereto. 2. Terminal Railroad Association of St. Louis,17 B.T.A. 1135, followed with respect to the treatment of compensation received from the Director General of Railroads for undermaintenance during the period of Federal control. 3. Great Northern Railway Co.,8 B.T.A. 225, followed with respect to the treatment of so-called "donations" received by the petitioner during 1920. W. R. Spofford, Esq., for the petitioner. R. W. Wilson, Esq., for the respondent. MORRIS *423 This proceeding is for the redetermination of a deficiency in income and profits taxes of $121,239.08 for the calendar year 1920. The errors alleged to have been committed by the respondent are: 1. That he included in the net income for 1920 the sum of $642,666.10 representing the excess of Government compensation allowed for 1918 and 1919 over the amount of the so-called "standard return" for said*2406 years; 2. That he included in its net income for 1920 the sum of $322,720.75 which was paid to it in that year by the United States Railroad *424 Administration as compensation for loss and damage to property during the period of Federal control; and 3. That he has included in its net income the amount of $11,399.97 received during 1920 on account of so-called "donations." FINDINGS OF FACT. The petitioner is a corporation organized and incorporated under the laws of the State of Arkansas, and its principal office is located at Muskogee, Okla. The petitioner is engaged in the operation of a railroad. Its books and accounts were kept on the accrual basis at all times material to this proceeding. On December 28, 1917, the President of the United States, by Proclamation dated December 26, 1917, took possession and assumed control of the petitioner's railroad property as of January 1, 1918, and retained such possession and control until February 28, 1920, the conclusion of the period of Federal control, when the property was returned to the petitioner. The petitioner did not, after the enactment of the Federal Control Act of March 21, 1918, execute the just compensation*2407 agreement commonly known as the "standard return" (its average railway operating income for the three years preceding Federal control) authorized by that act, but filed an application with the Director General of Railroads for compensation in excess of the standard return, on the ground that abnormal conditions made compensation on such basis inequitable in its case. Negotiations were continued during 1918, 1919, and 1920, and on March 11, 1919, the Director General of Railroads offered annual compensation based upon the average income for the preceding two years, or $530,000, as opposed to $444,435.95, the amount of the standard return. This increased compensation was refused by the petitioner and, upon its application, the determination of compensation was referred to a board of referees appointed by the Interstate Commerce Commission. This board fixed the compensation at $765.679 per annum (approximately the net railway operating income of the petitioner for the year ended December 31, 1917). The Railroad Administration at first declined to accept this award, with the result that the question was referred to the United States Court of Claims in the form of a suit brought*2408 by the petitioner, but the case having been settled, was never brought to trial. Settlement was effected in 1920 between the petitioner and the Director General on the basis of $765,679 as annual compensation to be paid by the United States to the petitioner for the use of its property. Final settlement between the petitioner and Director General *425 of Railroads was made on this basis, pursuant to agreement dated January 3, 1921, by which the petitioner received the sum of $550,000 in settlement of balance of annual compensation then due, open accounts and all other claims against the Cirector General. A statement from the records of the Director General, showing the amount paid by the Director General and its application to various accounts of petitioner and settlement of petitioner's claims against the United States, follows: Original Claim Claim as Settled of Company Compensation $2,002,833.32 $1,656,879.15 Less Advances, Loans, Etc 887,040.00 887,040.00 1,115,793.32 769,839.15 Rental Interest on Completed A & B 13,334.81 13,334.81 Balance due to corporation 1,129,128.13 783,173.96 OPEN ACCOUNTS DUE TO CORPORATION Cash on hand, December 31, 1917 445,676.94 445,676.94 Agts. & Condt'rs. Bal. Dec. 31, 1917 165,580.22 165,580.22 Assets, Dec. 31, 1917 - Collected 159,503.94 159,503.94 Revenue Prior to Jan. 1, 1918 36,668.87 36,668.87 Cash Payment on Open Account 105,120.00 105,120.00 Total 912,549.97 912,549.97 OPEN ACCOUNTS DUE FROM CORPORATION Liabilities, Dec. 31, 1917, Paid 694,464.49 694,464.49 Corporate Transactions 281,929.23 281,929.23 Expense Prior to Jan. 1, 1918 53,228.71 53,228.71 Total 1,029,622.43 1,029,622.43 Bal. due from Corp'n Open Accts 117,072.46 117,072.46 Balance due to Corporation 1,012,055.67 666,101.50 OTHER ITEMS DUE TO CORPORATION Equipment Retired 28,562.55 29,203.88 Road Property Retired and Not Replaced 3,215.53 1,023.61 Total 31,778.08 30,227.49 OTHER ITEMS DUE FROM CORPORATION Additions and Betterments 356,844.99 367,843.85 Material & Supplies - Excess 80,593.59 80,593.59 A & B - Adjustment of Prices on M & S used in A. & H. work 4,406.41 4,406.41 Interest other than Rental Interest 1,933.00 Total 441,844.99 454,776.85 Bal. due from Corpn. on Other Items 410,066.91 424,549.36 Bal. due to Corporation 601,988.76 241,552.14 TRUSTEE ITEMS DUE FROM CORPORATION Federal Agt's & Condtrs. Balances 5,553.54 Bal. due from Corp. on Trustee Items 5,553.54 Bal. due to Corporation 596,435.22 241,552.14 DEPRECIATION OBLIGATION Equipment 95,082.21 59,075.00 Balance due to Corporation 691,517.43 300,627.14 MAINTENANCE Way and Structures - Under 650,000.00 Equipment - Under 350,000.00 249,372.86 Balance due to Corpn. on Maint 1,000,000.00 249,372.86 Net Balance due to Corpn 1,691,517.43 550,000.00 *2409 *426 At the time of filing its original income-tax return for 1918, petitioner included in its gross income the amount of compensation actually paid by the Railroad Administration, to wit, $270,000, and in the original return for 1919, it included in its gross income the amount of $444,345.95, being the so-called "standard return" of petitioner as originally certified to by the Interstate Commerce Commission. As soon as practicable after the terms of settlement with the Railroad Administration were agreed upon, the petitioner filed amended returns for 1918 and 1919 and included in its gross income the amount of its annual compensation, $765,679 for each year, in place of the amounts theretofore reported on its original returns. At the time of filing its original return for 1920, petitioner included in its gross income one-sixth of $765,679 representing the proportion of its annual compensation applicable to the months of January and February, 1920. The respondent excluded the difference between the "standard return" of $444,435.95 and $765,679, or $321,333.05, from income as reported in the amended return for the year 1918 and a similar amount for the year 1919, and included*2410 the total, $642,666.10, excluded from 1918 and 1919, in income for 1920. The respondent increased the reported net income of the petitioner for 1920 by the amount of $322,720.75, which amount was said to have been received in settlement of damage to petitioner's roadbed, because of undermaintenance during the period of Federal control. The amount shown by the records of the Director General to have been paid because of the Director General's undermaintenance during the Federal control period is $249,372.86, and in addition $59,075 was paid to petitioner to make good depreciation of equipment sustained during the same period. If the Board decides that the amounts received by the petitioner for undermaintenance and for depreciation constitute taxable income, then the amount to be included in income is $308,447.86, in lieu of $322,720.75, as added by the respondent in his determination of a deficiency. During 1920 the petitioner received the sum of $11,399.97 from shippers along its line in part or full payment for facilities constructed to serve the parties making said payment. The facilities in question consisted of plant sidings, spurs, and the like. Said amount was not reported*2411 by the petitioner but was included in the computation of its net income subject to tax by the respondent. It is agreed between the parties that the petitioner is entitled to a credit in the determination of the final tax due for 1920 in the amount of 2 per cent of the proportion of income applicable to the period of Federal control and that such credit should be taken into consideration in determining the final deficiency. *427 OPINION. MORRIS: Substantially all of the facts herein were stipulated between the parties and are set forth in our findings in the language of the stipulation with the exception of certain minor changes in form. The first question urged by the petitioner is with respect to the respondent's treatment of the excess of Government compensation allowed for 1918 and 1919 over the amount of the so-called "standard return" for said years. This question has been amply considered and decided favorably to the petitioner's contention in a number of cases heretofore, among which are ; *2412 ; and . The second allegation of error urged by the petitioner is that the respondent erred in including in its net income for 1920 an amount paid to it by the United States Railroad Administration as compensation for loss and damage to its property during the period of Federal control. In , we held that a payment or allowance for undermaintenance does not constitute income, but represents a return of original capital investment. This issue, therefore, must be decided in favor of the petitioner. The respondent conceded error with respect to the third issue set forth herein. . The parties stipulated, and we have incorporated in our findings of fact herein, that the petitioner is entitled to a credit in the final determination of the tax due for 1920 in the amount of 2 per cent of the proportion of income applicable to the period of Federal control and that such credit should be taken into consideration in determining the*2413 final deficiency. Decision will be entered under Rule 50.