Boston & P. R. Corp. v. Commissioner

BOSTON AND PROVIDENCE RAILROAD CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Boston & P. R. Corp. v. Commissioner Docket Nos. 16815, 26843. United States Board of Tax Appeals 23 B.T.A. 1136; 1931 BTA LEXIS 1767; July 14, 1931, Promulgated *1767 1. Income and profits taxes of the petitioner were paid by the lessee of its property during the years 1920, 1921, 1922 and 1923 for the years 1919, 1920, 1921 and 1922 under the belief that it was required to do so by the terms of the lease. Subsequent litigation as to the payment of the petitioner's income tax for a year subsequent to 1923 established that the lease did not require the lessee to make such payments. The petitioner has never made restitution of the payments of tax made for it and the record does not indicate that it will ever be required to do so. Held that the payments of the petitioner's income and profits taxes constitute taxable income to it for the years in which made. 2. By the terms of a 99-year lease executed by the petitioner on its property the lessee agreed, among other things, to provide for the payment of $2,170,000 of the petitioner's indebtedness during the life of or at the end of the lease. In amended answers the respondent alleges that an aliquot portion of the amount of the indebtedness so assumed should be included in the petitioner's taxable income for the years 1920 through 1923. In the amended answers he also admits that the promise*1768 by the lessee had a fair value of $2,170,000 at the time made on April 7, 1888, and at February 15, 1893, and that the asset represented by such promise has remained a part of the petitioner's earned surplus continuously since 1893. Held that no portion of the amount of $2,170,000 is to be included in the taxable income of the petitioner for the years 1920 through 1923. O. R. Folsom-Jones, Esq., for the petitioner. George E. Brabson, Esq., for the respondent. TRAMMELL *1137 These proceedings, which were consolidated for hearing and decision, are for the redetermination of deficiencies in income and profits taxes as follows: Docket No Year Deficiency 16815 [1920] $25,850.13 [1921] 11,150.57 26843 [1922] 6,299.42 [1923] 8,822.27 In amended answers the respondent alleged that the deficiency for each of the years should be increased by the amount of tax on $35,050.50, representing taxable income accruing to the petitioner for each year under and by virtue of the terms of a lease entered into between the petitioner and the Old Colony Railroad Company on April 7, 1888, whereby, among other things, the latter company*1769 was to pay the petitioner a cash bonus of $1,300,000 and assume the payment of certain bonds to be issued by the petitioner for the funding of its then existing indebtedness. In addition to the issue presented by the foregoing allegation of the respondent, there is involved the question of whether certain amounts of income and profits taxes paid for the petitioner by a lessee of its property constitute taxable income to the petitioner where such taxes were paid under the mistaken belief that the lessee was required by the terms of the lease to make such payments. The proceedings were submitted on the pleadings and certain documentary evidence. FINDINGS OF FACT. The petitioner is a Massachusetts corporation, organized in 1831 and having its principal office at South Station, Boston. *1138 Prior to April 7, 1888, the petitioner owned and operated a line of railroad between Boston, Mass., and Providence, R.I. On April 7, 1888, the petitioner leased all of its property to the Old Colony Railroad Company (hereinafter referred to as the Old Colony) in accordance with a lease which was duly authorized by a special act of the Massachusetts legislature. The lease was for*1770 a period of 99 years from April 1, 1888, and provided in part as follows: FIFTH. The lessee shall pay to the lessor, as rent for the demised premises, the sum of one hundred thousand dollars for each quarter in each year during the term of this lease, to wit: On the first day of July, the first day of October, the first day of January, and the first day of April, in each and every year (the first payment to be made on the first day of July, A.D. 1888), and at the same rate for any portion of a quarter, at the office of the treasurer of the lessee, in the city of Boston; and shall also pay to the lessor, during the first three (3) years of said term, the sum of ten thousand dollars ($10,000) per annum, in equal quarterly payments, on the same days as said rent is payable; and each and every year thereafter, during said term, the sum of three thousand dollars ($3,000), in like manner, as and for the expense of preserving the organization of the lessor, as herein agreed to be preserved and kept up. And the lessee will, on the first day of May, 1888, pay to the lessor the sum of thirteen hundred thousand dollars ($1,300,000), and also a sum equal to five dollars ($5) per share upon*1771 its capital stock, as and for a dividend, out of the net earnings of the lessor up to the date of this lease. The lessee shall also pay as the same becomes due, the interest on the indebtedness of the lessor * * *, and upon such future indebtedness as shall be created for the purpose of paying such indebtedness and other existing obligations and liabilities of the lessor, in the manner herein provided, and to that end shall pay to the lessor such sums of money at such times as shall enable it punctually to meet such interest as the same becomes due. And the lessee shall also pay all taxes and assessments, whether in the nature of taxes, now in being or not, of every description, national, state and municipal, or otherwise, upon the property, business, franchises and capital stock of the lessor as the same shall be imposed or assessed, and shall at all times keep the lessor indemnified against the same during the term of this lease. * * * ELEVENTH. The lessor hereby assigns, transfers and delivers to the lessee all its material and supplies, bills and accounts receivable, money and cash on hand to be by the lessee applied (at the value thereof to be fixed by appraisal), to the*1772 payment of the dividend herein agreed to be paid upon the capital stock of the lessor on the first day of May, 1888, and to the payment of outstanding liabilities of the lessor. The lessor shall issue bonds for periods not exceeding the longest allowed by law, and at a rate of interest as low as practicable, for such sums as may be necessary to fund all its outstanding liabilities which are not thus paid, including the expense of defending and adjusting all claims and suits against the lessor, arising in the past use and operation of the demised premises, or of any railroad operated by the lessor, which bonds shall, at the request of the lessee, be extended as they mature for periods not exceeding the unexpired term of this lease on the most favorable terms then practicable. *1139 To provide for the payment of the net indebtedness of the lessor as thus ascertained and funded, the lessee shall, within six months after the same is thus approximately ascertained, and not later than January 1st, 1890, establish a sinking fund in the hands of three trustees, appointed and maintained by its directors from their own number, and shall make such annual or more frequent payments thereto*1773 as may be necessary, with interest at four per cent per annum, compounded semi-annually, to cause it to meet said indebtedness during the term of this lease. And the lessee hereby agrees that such sinking fund shall be adequate to pay, and shall pay, said indebtedness at its maturity, as thus funded and extended, and that it will make up any deficiency therein. All bonds thus issued shall be certified by the lessor and lessee as issued under the provisions of this lease. * * * THIRTEENTH. If this lease shall be terminated within the demised term of ninety-nine years without fault of the lessee, the lessor shall pay the lessee a proportional part (having regard to the unexpired portion of the lease and other circumstances) of its indebtedness which may have been funded by the lessor and paid by the lessee under the provisions of this instrument, (but not including interest which may have been paid thereon), and of the cost of such permanent improvements as may have been made and paid for by the lessee upon the demised premises; and if the parties are unable to agree with reference thereto, the same shall be submitted to the decision of three arbitrators, one chosen by each party, *1774 and the other by the two thus chosen, whose decision shall be final; and if at any time it shall happen that this lease shall be or become invalid, or shall be terminated without the fault of either party, then, and in such case, each party shall be restored, as nearly as may be, to the condition in which it stood before the lease, it being understood that the rent and interest paid by the lessee on the funded debt of the lessor shall be considered equivalent to the value of the occupation, but that the lessor is not to repay any part of the money agreed to be paid to it by the lessee on the first day of May, 1888, under the provisions of Article Five hereof. From April 7, 1888, to February 15, 1893, the Old Colony operated its own lines of railroad and those of the petitioner. On February 15, 1893, the Old Colony leased all of its property, including its leasehold interest in the property of the petitioner to the New York, New Haven & Hartford Railroad Company (hereinafter referred to as the New Haven). The lease was made under the general railroad law of Massachusetts and was subsequently approved and confirmed by the legislatures of Rhode Island and Connecticut. The directors*1775 of the petitioner formally assented to the assignment of its lease with the Old Colony to the New Haven. The lease from the Old Colony to the New Haven was for a period of 99 years from March 1, 1893, and provided in part as follows: And the lessee further covenants to provide for the payment in the manner hereinbefore mentioned, of the principal of all funded indebtedness for the payment of which the lessor may be legally holden as the same shall from time to time mature, and to assume and pay all the other obligations of the lessor of every name and nature as the same shall from time to time fall due, and to keep and perform all and singular the contracts relating to said demised *1140 premises and property now in force and binding on the lessor, whether arising under leases or otherwise, and as to property leased to the lessor, the lessee shall be subject to the leases under which such property is held. And the lessee further covenants to pay, during each year of said term, all taxes, rates, charges and assessments, ordinary and extraordinary, which may be lawfully imposed or assessed in any way upon the lessor or lessees with reference to the premises and property*1776 hereby demised, the capital stock of the lessor, its indebtedness, franchises and revenues or said rental; said payments to be made to the authority or treasurer entitled by law to receive the same, whether Federal, State or municipal, so that said lessor shall be saved harmless, during the continuance of this lease from any tax, assessment or charge under laws or proceedings made or authorized by the United States or any State or municipality. On or about May 1, 1888, the Old Colony, in accordance with the provisions of the lease of the petitioner's property to it and as a cash bonus for the making of the lease, paid to the petitioner the sum of $1,300,000. This money was, on May 2, 1888, distributed as a dividend of $32.50 per share to the petitioner's stockholders of record at the close of business on April 14, 1888. The net indebtedness of the petitioner, referred to in the eleventh paragraph of the lease of April 7, 1888, and for the payment of which the Old Colony and the New Haven agreed to provide, was $2,170,000. This indebtedness was funded by the issuance of $2,170,000 face value of the petitioner's 30-year bonds, due July 1, 1918. This funded indebtedness was refunded*1777 at maturity by the issuance, at the request of the New Haven, of $2,170,000 face value, of the petitioner's 5-year bonds, due July 1, 1923. The indebtedness was again refunded at maturity by the issuance, at the request of the New Haven, of $2,170,000, face value of the petitioner's 15-year bonds, due July 1, 1938. The New Haven has conducted all financial and legal negotiations for the refunding of said funded indebtedness, including the procurement of all necessary governmental authority or approval, and has in all respects regarded the petitioner's indebtedness as being, in substance, its own indebtedness. The New Haven has on its books a liability in the amount of $2,170,000 representing its liability to provide for the payment of the petitioner's indebtedness. The Old Colony duly established a sinking fund as required by the eleventh paragraph of the petitioner's lease and, prior to the lease to the New Haven, paid into said fund the principal sum of $20,000. In 1893 the New Haven paid into said fund the principal sum of $7,500, and in every year since has made semiannual payments of $2,500 into the fund. The total amount of principal payments made by the Old Colony*1778 and/or New Haven into the fund up to and including December 31, 1927, is $192,500. The income of the fund (now a part of the corpus) from date of establishment to December 31, 1927, was $248,464.73. The total expenses of administering *1141 the fund from the date of its establishment to December 31, 1927, were $3,055.57. On or about the first days of July and October, 1888, and on or about the first days of January, April, July and October in each year thereafter, the petitioner received from the Old Colony or the New Haven, as rent for the petitioner's premises, the sum of $100,000; and also the sums provided for in the fifth paragraph of the petitioner's lease, as and for the expense of preserving the organization of the petitioner. Since April 7, 1888, either the Old Colony or the New Haven has paid, as the same became due, the interest on the indebtedness of the petitioner. The above mentioned leases of April 7, 1888, and February 5, 1893, have been in full force and effect continuously from the dates of their execution and no default in the performance of the covenants thereof ever has occurred. Since March 1, 1893, the property of the petitioner has formed*1779 an important part of the New Haven Railroad System. Such importance exists at the present time and will probably continue to exist in the future. On April 7, 1888, the promise of the Old Colony to provide for the payment of the net indebtedness of the petitioner had, for the purpose of the petitioner's invested capital, as earned surplus, a fair value equal to its face value of $2,170,000. The same condition existed on February 15, 1893, when the New Haven assumed the obligation of this promise. No distribution has ever been made by the petitioner, in stock, cash or other property, of or on account of said asset, the same having remained a part of the earned surplus of the petitioner continuously since its receipt or accrual in or prior to the year 1893. No part of the fair value of the aforementioned promise was included in the amounts of invested capital of $4,108,354.56 and $4,131,552.43 determined by the Commissioner for 1920 and 1921 respectively. In the determination of the invested capital for said years the Commissioner excluded, as borrowed capital, the amount of petitioner's funded debt, $2,170,000. In its income-tax returns for the years 1920, 1921, 1922 and*1780 1923 the petitioner did not report as income any portion of the $1,300,000 received by it from the Old Colony on or about May 1, 1888, nor did it report as income any portion of the indebtedness of $2,170,000 the payment of which was assumed by the Old Colony and by the New Haven in accordance with the terms of the leases of April 7, 1888, and February 15, 1893, respectively. In determining the deficiencies here involved the respondent did not add to the income reported by the petitioner any amount representing a portion of the $1,300,000 cash received by the petitioner or *1142 any portion of the amount of $2,170,000 representing the indebtedness of the petitioner the payment of which was assumed by the Old Colony and/or the New Haven. In its income and profits-tax return for the calendar year 1920 the petitioner reported as an item of gross income "Rentals (Accrued Federal Income Taxes to be paid by lessee) $52,517.96." In determining the deficiency here involved for 1920 the respondent increased this amount by $405.46 to $52,923.42. This latter amount represented the tax liability on the petitioner's income for 1920 before including any amount for taxes to be paid*1781 by the lessee. In its returns for 1921, 1922 and 1923 the petitioner did not report as income any amount for Federal income and/or profits taxes paid or to be paid for it by lessees. In determining the deficiencies for these years the respondent increased the petitioner's net income for such years by the amounts of $52,723.42, $50,395.31 and $50,398.58, respectively, on the ground that Federal income and profits taxes assumed by the lessee for the lessor constituted taxable income from rental to the lessor. These amounts represented the tax liability on the petitioner's income for the respective years before including any amount for taxes to be paid by the lessee. The amount of Federal income taxes paid for the petitioner in 1920 for the year 1919, computed at the applicable rate for 1919 on the original income of the petitioner before adding any amount for taxes to be paid by the lessee for that year, was $38,075.68. For and on account of the taxes reported by the petitioner on its returns to be due for the calendar years 1920, 1921, 1922 and 1923 there were paid to the collector of internal revenue at Boston, by the New Haven, and by the Director General of Railroads under*1782 the provisions of the Federal Control Act of March 21, 1918, and section 230 of the Revenue Act of 1918, for the year 1920, and by the New Haven for the years 1921, 1922 and 1923, the following amounts: For taxable year - Paid on or about - By the New Haven By the Director General Total [1920] Mar. 15, 1921 $17,244.34 $354.65 $17,598.99 June 15, 1921 17,244.35 354.65 17,599.00 Sept. 15, 1921 17,244.35 354.64 17,598.99 Dec. 15, 1921 17,244.35 354.64 17,598.99 68,977.39 1,418.58 70,395.97 [1921] Mar. 15, 1922 14,081.23 June 15, 1922 14,081.22 Sept. 15, 1922 14,081.23 Dec. 15, 1922 14,081.22 56,324.90 [1922] Mar. 15, 1923 12,598.83 June 15, 1923 12,598.83 Sept. 15, 1923 12,598.83 Dec. 15, 1923 12,598.82 50,395.31 [1923] Mar. 15, 1924 11,969.08 June 15, 1924 11,969.08 Sept. 15, 1924 11,969.08 Dec. 15, 1924 11,969.08 47,876.32 *1143 No part of the amounts paid as indicated in the preceding paragraph has been refunded to the petitioner or the Old Colony or the New Haven or to any agent of them, except the amount of $28,517 refunded to the petitioner for 1920*1783 in connection with a certificate of overassessment scheduled September 25, 1924. The petitioner's books of account for the years 1920, 1921, 1922 and 1923, and for prior and subsequent years, were kept, and its returns were made, upon the accrual basis. OPINION. TRAMMELL: By agreement of counsel at the hearing only two issues are submitted for our determination. All other issues raised by the pleadings, including those relating to invested capital, are disposed of either by the admissions of the respondent or are waived by the petitioner. The issues before us for consideration are (1) whether the payments of the petitioner's Federal income and profits taxes for the years 1920 through 1923 by the lessee of its property constitute taxable income to the petitioner in the years for which the taxes were paid, and (2) whether there is to be included in the petitioner's income for each of the years 1920 through 1923 an amount of $35,050.50, representing a one-ninety-ninth portion of $3,470,000, which is composed of $1,300,000 representing the cash bonus paid to the petitioner in 1888 for the execution of the lease to the Old Colony and $2,170,000 representing the amount of the*1784 petitioner's indebtedness for the payment of which the Old Colony, in 1888, and the New Haven, in 1893, agreed to provide. With respect to the first issue, the fifth paragraph of the lease of April 7, 1888, between the petitioner and the Old Colony contained the following provision: And the lessee shall also pay all taxes and assessments, whether in the nature of taxes, now in being or not, of every description, national, state and municipal, or otherwise, upon the property, business, franchises and capital stock of the lessor as the same shall be imposed or assessed, and shall at all times keep the lessor indemnified against the same during the term of this lease. By the terms of the lease of February 15, 1893, the New Haven assumed the obligation imposed upon the Old Colony by the above quoted provision. At some undisclosed date the question arose as to whether under the above provision the Old Colony was required to pay the Federal income tax of the petitioner. In Boston & Providence Railroad Corporation v. Old Colony Railroad Co.,169 N.E. 157, decided December 5, 1929, the Supreme Judicial Court of Massachusetts held that the provision did not*1785 impose on the lessee the obligation to pay such tax of the petitioner. The decision did not cover any of the years *1144 involved in the instant proceeding, nor did it direct the repayment by the petitioner to the Old Colony, or to the New Haven, or to anyone else, of any taxes previously paid for the petitioner. The petitioner admits that it has never repaid any portion of the taxes paid for it for any of the years here involved and there is nothing in the record to show that it will ever be required to do so. The petitioner contends that under the circumstances here presented the payments of its taxes by the New Haven do not constitute taxable income to it. It urges that the payments were not made as rent nor as compensation, but because of a mistake of law, and, not being in satisfaction of any obligation, do not constitute taxable income. The respondent contends that the payments constitute taxable income to the petitioner. He insists that the payments were made by virtue of the lease, notwithstanding the parties' misinterpretation of it, that the petitioner received the benefit of the payments, which were made under circumstances which prevent their recovery by*1786 the New Haven. That the payment of Federal income taxes by the lessee for account of the lessor, as required by the terms of the lease, constitutes taxable income to the lessor is no longer open to question. United States v. Boston & Maine Railroad Co.,279 U.S. 732; Old Colony Railroad Co.,18 B.T.A. 267. The instant case, however, presents the question as to whether Federal income taxes paid by the lessee for the lessor under the mistaken belief that the lease required such payments constitute taxable income to the lessor where the lessor has not made restitution to the lessee on account of such payments or where there is no indication that it will ever be required to do so. The decision of the Supreme Judicial Court of Massachusetts related to some undisclosed year subsequent to the years here involved. Under that decision it is clear that the payments involved in the instant case were not made in discharge or satisfaction of any obligation imposed by the lease, notwithstanding the fact that at the time they were made the parties apparently considered them to be such. At the time the payments were made the parties unquestionably considered*1787 them to be a part of the cost to the New Haven for the use of the petitioner's railroad properties. No contention is made by the petitioner that there is an obligation on its part to make repayment to the New Haven, or to the Old Colony, or to anyone else, of the amount of the taxes paid for it, nor does it contend that it will be required to do so. We think the situation here is similar to that in Chicago, Rock Island & Pacific Railway Co.,13 B.T.A. 988, wherein the taxpayer sought to have excluded from its taxable income certain amounts received by it from passengers in excess of its tariff rates. *1145 Such excess resulted principally from the station agents' errors in computing the correct fares for passengers and was not refundable because the identity of the parties who had made the excess payments constituting the amounts in question was unknown. We there said: The amounts received by petitioner were paid for the right to travel over its road. They were income unless the fact that the overcharges were unlawful takes these items out of that category. That such is not the case see *1788 United States v. Sullivan,274 U.S. 259. We can perceive no difference between an undercharge and an overcharge in this respect and we know of no provision in the Revenue Acts which requires a railroad to report a whole charge where it received only a part. The record is clear that it is impossible to discover to whom refunds should be made. The obligation to repay will not in the nature of things be discharged and from a common sense viewpoint the money will remain the property of petitioner subject to its free use and enjoyment. * * * Respondent did not err in including the above amounts in gross income. See Chicago, Rock Island & Pacific Railway Co. v. Commissioner, 47 Fed.(2d) 990, wherein the Board's decision on the above point was affirmed. In the instant case the taxes paid for the petitioner were paid by the lessee for the use of the petitioner's property. Such payments constituted an economic benefit to the petitioner, as it was thereby relieved of liabilities it would otherwise have to discharge. The petitioner still retains the benefits thus derived. We therefore are of the opinion that the payment of the petitioner's*1789 taxes under the circumstances here presented constitutes taxable income to it. In determining the deficiencies here involved the respondent has treated as income for each of the years the amount of the petitioner's tax liability for such years, even though not due and payable until the succeeding year. In other words, he has treated as income for 1920 the tax liability for that year, as income for 1921 the tax liability for that year, and so on for 1922 and 1923. We think this was erroneous. Providence & Worcester Railroad Co.,5 B.T.A. 1186; Old Colony Railroad Co., supra.In recomputing the deficiencies there should be included as income for 1920 the amount of tax which became due and was paid in that year upon 1919 income. For 1921 there should be included as income the amount of tax which became due and was paid in that year upon 1920 income. The same rule should be followed with respect to the years 1922 and 1923. In amended answers the respondent alleged that there should be included in the petitioner's taxable income for each of the years before us an amount of $35,050.50 representing one ninety-ninth of $3,470,000. This latter amount is composed*1790 of $1,300,000 representing *1146 the cash bonus paid to the petitioner on or about May 1, 1888, by the Old Colony for the making of the lease of April 7, 1888, and $2,170,000 representing the amount of the petitioner's indebtedness for the payment of which the Old Colony, in the lease of April 7, 1888, and the New Haven, in the lease of February 15, 1893, agreed to provide. In his brief the respondent concedes that, in view of the provision contained in the thirteenth paragraph of the lease of April 7, 1888, that the petitioner was not to repay any part of the $1,300,000 in case the lease should be or become invalid or terminate without the fault of either party, there is no basis for contending that a portion of such amount should be included in the petitioner's income for each of the years before us. In view of the respondent's concession it will not be necessary to give further consideration to the item of $1,300,000. With respect to the petitioner's funded indebtedness of $2,170,000, for the payment of which the Old Colony and the New Haven agreed to provide, the respondent contends that an aliquot portion of such amount, or $13,131.13, should be added to the petitioner's*1791 income for each of the years before us as additional rent. The petitioner contends that no part of the $2,170,000 should be added to its income for any of the years and relies on the decision of the Circuit Court of Appeals for the First Circuit in United States v. Boston & Providence R.R. Corporation, 37 Fed.(2d) 670. In that case the taxpayer, who is the petitioner in the instant case, was seeking to have its invested capital for 1918 increased on account of the agreement of the Old Colony and of the New Haven to pay the indebtedness involved. In disposing of the Government's contention that the assumption of indebtedness was a part of the rental to be paid for the use of the property and should be prorated over the term of the lease, and in deciding that the petitioner was entitled to include in its invested capital the value of the agreement by which the indebtedness was assumed, the court said: Neither do we think, if the agreement to pay the petitioner's funded debt can be treated as income, that it should be prorated over the term of the lease. An amount paid in advance as rental, or as a bonus for a leasehold interest, may be prorated by the lessee*1792 in computing his income tax over the period of the term, upon the ground that the interest acquired is an exhaustible capital asset, Galatoire Bros. v. Lines, (C.C.A.) 23 F.(2d) 676; Alland & Bros. Inc. v. United States (D.C.) 28 F.(2d) 792, or is a part of the rental; but as to the lessor in computing his tax, it is treated as income in the year in which received. O'Day Investment Co. v. Commissioner of Internal Revenue,13 B.T.A. 1230; Miller v. Gearin (C.C.A.) 258 F. 225; Cryan v. Wardell (D.C.) 263 F. 248. The crux of this case, of course, is whether the obligation to discharge the funded debt of the petitioner was income received in 1888, and, if so, whether *1147 its cash value in 1918 or any part of it could be treated as "invested capital" within the meaning of the Revenue Act. * * * While the case is not entirely free from doubt, we think the obligation to discharge the funded debt of the petitioner in this case was properly treated by the court below as income received when the lease was signed, at least to an amount equal to the fair cash value of the obligation. *1793 By the assumption of its funded indebtedness, * * * by a responsible third party as a part consideration for a leasehold interest in its properties, whether the obligation be viewed as so much additional rental or otherwise, a value was added to the net assets of the petitioner equal to the cash value of the obligation, which the court below found to be at least $2,000,000. The respondent admits that the decision of the Circuit Court of Appeals is contrary to his contention in the instant case. In amended answers the respondent admits the following allegations of fact contained in the amended petitions: That the promise of the Old Colony to provide for the payment of the net indebtedness of the petitioner had a fair value on April 7, 1888, for purposes of the petitioner's invested capital, equal to its face value of $2,170,000. That the promise of the New Haven to provide for the payment of the net indebtedness of the petitioner had a fair value on February 15, 1893, for purposes of petitioner's invested capital, equal to its face value of $2,170,000. That the joint and several promise of the Old Colony and the New Haven to provide for the payment of the net indebtedness*1794 of the petitioner had a fair value on February 15, 1893, for purposes of petitioner's invested capital, equal to its face value of $2,170,000. No distribution has ever been made by the petitioner, in stock, cash, or other property, of or on account of said asset, the same having remained a part of the earned surplus of the plaintiff continuously since its receipt or accrual in or prior to the year 1893. If it be true, as conceded by the respondent, that the promise here involved had the admitted value and has remained a part of the petitioner's earned surplus since its receipt or accrual in or prior to the year 1893, we think that it would necessarily follow that no part of it was income in later years. The respondent's admission is in conformity with the decision of the Circuit Court of Appeals. We agree with the court that the conceded value of the promise to pay or relieve the petitioner from payment of the indebtedness was income prior to the taxable years. Nothing occurred during the years before us to give rise to any taxable income in so far as this transaction is concerned. Everything occurred prior to March 1, 1913. Prior to that time the petitioner had the benefit*1795 of the promise and was enriched thereby. On March 1, 1913, this amount was a part of the capital of the petitioner and included in its surplus. Judgment will be entered under Rule 50.