New York, C. & S. L. R. Co. v. Commissioner

THE NEW YORK, CHICAGO AND ST. LOUIS RAILROAD COMPANY, SUCCESSOR CORPORATION TO THE LAKE ERIE AND WESTERN RAILROAD COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. THE NEW YORK, CHICAGO AND ST. LOUIS RAILROAD COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. New York, C. & S. L. R. Co. v. Commissioner Docket Nos. 15803, 26777. United States Board of Tax Appeals 26 B.T.A. 1229; 1932 BTA LEXIS 1167; October 20, 1932, Promulgated *1167 1. The sale in 1920 by the L.E. & W.R.R. Co. of its shares of the N.O. Ry. Co., its leasehold interest in that corporation's properties, and its claims against that corporation for advances, resulted in no deductible loss, as there was no statutory basis for such loss, and the claim was worthless prior to the taxable year. 2. The deduction of the L.E. & W. in 1920 for maintenance held properly reduced by an amount accrued from the Director General as part of the settlement of mutual claims arising from Federal control and attributed to undermaintenance. 3. Various claims for deductible losses in 1920 arising from Federal control held unfounded. John H. Agate, Esq., and George Elliott, Esq., forr the petitioner. E. C. Algire, Esq., for the respondent. STERNHAGEN *1229 The respondent determined a deficiency in income tax against the Lake Erie and Western Railroad Company for 1920 in the amount of $103,537.40. The petitioner assails this determination, alleging it to be in error in the following respects: [(1) In adding to the Lake Erie's income the sum of $3,609.47, representing the amount received for side track donations; *1168 (2) In disallowing as a deduction from, and in adding to, the Lake Erie's income the sum of $92,661.33, and in failing and refusing to allow, as a deduction from such income, a loss of not less than $1,500,000, resulting from the sale, assignment and transfer of The Akron, Canton and Youngstown Railway Company, on March 1, 1920, of stock of the Northern Ohio Railway Company, of the lease of its properties to the Lake Erie, and of the Lake Erie's claim against the Northern Ohio Railway Company thereunder; (3) In disallowing as a deduction from the Lake Erie's gross income, $459,356.19 of its expenditures for maintenance of way and structures and for maintenance of equipment, which expenditures consisted of ordinary and necessary expenses paid or incurred by the Lake Erie during the taxable year in carrying on its business and of a reasonable allowance for exhaustion, wear and tear of property used in the business; (4) In not allowing, as a deduction from the Lake Erie's gross income, a loss of at least $1,500,000, sustained by the Lake Erie during the taxable year and not compensated for by insurance or otherwise, which resulted from the depreciation, destruction and undermaintenance*1169 of, and damage to, the Lake Erie's property (including the Fort Wayne, Cincinnati and Louisville Railroad and the Northern Ohio Railway) while under Federal control; *1230 (5) In proposing to assess the Lake Erie any normal tax for the year 1920 in excess of one-third of 2% plus $2,832.70, and in adding to the Lake Erie's income the sum of $500,918.65, or any other or different sum in excess of $498,085.95, representing the amount received from the United States under the guaranty provisions of section 209 of the Transportation Act, 1920, in final settlement of the Lake Erie's claim, as certified by the Interstate Commerce Commission in Finance Docket 571; (6) In not withdrawing said notice of deficiency before mailing and serving said subsequent notice of deficiency dated February 17, 1927, to petitioner under Section 280 of the Revenue Act of 1926. Respondent confesses the error charged in the first assignment; and, in connection with the fifth assignment, concedes that the Lake Erie is liable for a normal tax upon the net income earned in January and February, computed at the rate of 8 per cent, instead of 10 per cent as in the deficiency notice. FINDINGS OF FACT. *1170 The steam railroad of the New York, Chicago and St. Louis Railway Company, a corporation formed by consolidation of railroad corporations of Illinois and of other States, hereinafter called "the first Nickel Plate," situated partly in the State of Illinois and partly in the States of Indiana, Ohio, Pennsylvania and New York, and embraced in a mortgage or deed of trust, dated December 1, 1881, to the Central Trust Company of New York, trustee, and, also, in a certain other mortgage to the Union Trust Company of New York, trustee, was sold as an entirety in Cleveland, Ohio, in 1887, under and pursuant to a judgment or decree of foreclosure and sale under said mortgages rendered by the Court of Common Pleas of the County of Cuyahoga, Ohio, and pursuant to ancillary judgments or decrees of courts of competent jurisdiction of the several States of Illinois, Indiana, Pennsylvania and New York, and at such sale certain persons became the purchasers of said railroad. Thereafter, and in 1887, the New York, Chicago and St. Louis Railroad Company, hereinafter called "the second Nickel Plate," was duly formed and organized by the purchasers of the railroad property of the first Nickel Plate, *1171 under and pursuant to the laws of Indiana, New York,Ohio and Pennsylvania, and became the owner of that portion of said railroad of the first Nickel Plate extending from Buffalo, New York, through the States of Indiana, New York,Ohio and Pennsylvania, to the Indiana-Illinois State line. The Chicago and State Line Railroad Company, hereinafter called "the State Line," was duly created and organized by said purchasers, under and pursuant to the laws of Illinois, and became the owner of the remainder of the line of railroad of the first Nickel Plate, extending from the Indiana-Illinois State line, through the County of Cook, Illinois, to or near the city of Chicago. *1231 Under and pursuant to the laws of Illinois, Indiana, New York,Ohio and Pennsylvania, the following companies, hereinafter called "the constituent companies," united in an agreement and articles of consolidation, dated December 28, 1922, to form the New York, Chicago and St. Louis Railroad Company, hereinafter called "the Nickel Plate," the petitioner herein: The second Nickel Plate, a railroad corporation organized and existing under the laws of Indiana, New York,Ohio and Pennsylvania, owning and operating*1172 a main line of steam railroad extending from Buffalo, New York to the Illinois-Indiana state line. The State Line, a railroad corporation organized and existing under the laws of Illinois, owning a main line of steam railroad extending from the Illinois-Indiana state line to and into Chicago, Illinois, which said line of railroad was being operated by the second Nickel Plate. The Lake Erie and Western Railroad Company, a railroad corporation organized and existing under the laws of Illinois, owning a main line of steam railroad extending from Sandusky, Ohio, through the State of Indiana to Peoria, Illinois, and a main line of steam railroad extending from Michigan City to Indianapolis, Indiana, which said lines of railroad were being operated by the second Nickel Plate. The Fort Wayne, Cincinnati and Louisville Railroad Company, a railroad corporation organized and existing under the laws of Indiana, owning a line of steam railroad extending from Fort Wayne to Connersville and from New Castle to Rushiville, all in the State of Indiana, which said lines of railroad were being operated by the second Nickel Plate. The Toledo, St. Louis and Western Railroad Company, a railroad*1173 corporation organized and existing under the laws of Indiana, owning and operating a main line of steam railroad extending from Toledo, Ohio, through the States of Indiana and Illinois to East St. Louis, Illinois. This agreement and articles of consolidation were duly made and executed by the constituent companies, and each of them, and filed and recorded, pursuant to and in accordance with the statutes of the several states applicable thereto, and were duly approved by the Illinois Commerce Commission on February 14, 1923, by the Public Service Commission of the State of New York on March 28, 1923, and by the Public Service Commission of the Commonwealth of Pennsylvania on April 9, 1923. All things necessary to the completion and consummation of said consolidation were duly done and effected, thus creating the petitioner; and the consolidation effected in 1923 was carried out in all respects as set forth in the said agreement and articles of consolidation. The Lake Erie and Western Railroad Company, hereinafter called the "Lake Erie," was incorporated under the laws of Illinois, on February 10, 1887, and throughout 1920 was engaged in business as a common carrier. It owned*1174 and operated a main line of steam railroad extending from Sandusky, Ohio, to Peoria, Illinois, 412.770 miles, with a branch line extending from St. Marys to Minster, Ohio, 10.001 miles; a line of steam railroad extending from Fort *1232 Wayne to Connersville, Indiana, 102.827 miles, with a branch line extending from New Castle to Rushville, Indiana, 24.040 miles, and connecting with its main line at Muncie, Indiana; and a line of steam railroad extending from Indianapolis to Michigan City, Indiana, 158.612 miles, connecting with its main line at Tipton, Indiana. It also operated, until March 1, 1920, the line of steam railroad of the Northern Ohio Railway CompanyExtending from Delphos to Akron, Ohio, 161.744 miles. From 1887 to 1922 its total outstanding capital stock amounted to $23,680,000 par value, consisting of equal amounts of common and preferred. I. On October 8, 1894, the board of directors of the Lake Erie authorized its president, Calvin S. Brice, to purchase, among others, the properties of the Pittsburgh, Akron and Western Railroad Company, which were then in the hands of a receiver, and which, on October 17, 1894, had been sold in mortgage foreclosure proceedings. *1175 The properties of the latter included a line of steam railroad extending from Delphos, via Bluffton, to Akron, Ohio, 161.744 miles, connecting with the Lake Erie's main line, at Bluffton. On July 25, 1895, the board of directors authorized and directed the proper executive officers to obtain and execute a lease of the said line of railway, upon the conditions and terms set forth in the resolution, among which was a provision "to pay the interest of an issue of fifty year five per cent gold bonds secured by a mortgage or deed of trust, as a first charge upon said line of railway, and to be issued at the rate of $15,000 per mile of completed railroad to the amount of $2,500,000 in respect of existing line, and to an amount not exceeding $1,500,000, in respect of additional lines constructed or acquired by the lessor at the request of this company; and to guarantee the payment of the principal and interest of said issue of bonds," and further authorized and directed the executive officers to execute, upon the execution and delivery of the lease, a guaranty on each of the said first mortgage bonds of the lessor, substantially in the following form: For value received, the Lake Erie*1176 and Western Railroad Company hereby guarantees the punctual payment of the principal of the within bond at its maturity, and of the interest coupons hereto attached as they consecutively become due, in accordance with the terms, tenor and conditions thereof. On the same date, the board of directors authorized and empowered the president, in order to enable the lease of said line of railway to be carried into effect, "to acquire from the lessor the first mortgage bonds of the lessor to be issued thereon, and on said acquisition of said bonds by this company to enter into a contract with Messrs. *1233 Vermilye & Company or other bankers for the sale of said issue of bonds, with a guaranty by this company of the payment of the principal and interest thereof, at such prices and upon such terms as he and the committee hereinafter named in their discretion may deem advisable," and further empowering him, in connection with such contract, to agree with the bankers upon the form of the bonds, the form of the Lake Erie's guaranty, and the terms of the mortgage securing the same, and otherwise as may be necessary for the purpose of effecting such sale. On August 9, 1895, Vermilye*1177 & Company, on behalf of themselves and others interested with them in a syndicate for the purposes therein expressed, as party of the first part, and the Lake Erie, as party of the second part, entered into an agreement, which, so far as material here, reads as follows: WHEREAS, the railroad property formerly of the Pittsburgh, Akron & Western Railroad Company has lately been sold under foreclosure and purchased by parties who propose to organize or cause to be organized under the laws of Ohio a new corporation to be called "The Northern Ohio Railway Company," which new corporation is to execute a mortgage covering said railroad property as now held by the said purchasers, with its extension, to secure an issue of four million (4,000,000) dollars First Mortgage Five Per cent Fifty Year, Gold Bonds, of One Thousand (1,000) dollars each, to be dated October 1, 1895, with interest payable April and October; and WHEREAS, said railroad property is to be leased in perpetuity by said new corporation to the party hereto of the second part, under an arrangement by which the party of the second part is to guarantee the payment of the principal and interest of said bonds: NOW, THIS AGREEMENT*1178 WITNESSETH: Now, THIS AGREEMENT WITNESSETH: hundred thousand (2,500,000) dollars of said First Mortage Bonds, at 97 1/2 and accrued interest, upon condition that the payment of the principal and interest of said bonds shall be guaranteed by the said party of the second part, and the said party of the second part hereby agrees that it will, upon the issue of said bonds, execute upon each and every of said bonds a guaranty in due form of law, for the payment to the holder thereof of the principal and interest of said bonds according to the tenor thereof. And the party of the second part further agrees that it will expend the sum of at least One million (1,000,000) of dollars in the improvement of the said road, the expenditure of this sum to be approved by W. Barclay Parsons, Engineer, on behalf of the parties of the first part. Any sum not expended at the time of the taking of said bonds by the parties of the first part is to be deposited by them in such depositaries as the parties hereto may agree upon, to be expended only for the inprovement of said railroad property, and upon the approval of W. Barclay Parsons, Engineer, as hereinbefore expressed. The said bonds are to be*1179 ready for delivery October 5, 1895, at which time the parties of the first part are to take and pay for One million five hundred thousand (1,500,000) dollars thereof. The other one million (1,000,000) dollars thereof they are to take and pay for at their option as to time within six months from said October 5, 1895. It being understood and agreed that the *1234 residue of said bonds, One million five hundred thousand (1,500,000) dollars, being bonds numbered from 2501 to 4000, inclusive, are to be issued only for acquiring additional railroad property, and are to be issued only at the rate of not to exceed Fifteen thousand (15,000) dollars per mile of completed road on such hereafter constructed or purchased property, if any. This agreement upon the part of the said parties of the first part is conditioned upon the approval by their counsel of the title of the present holders of the said railroad property formerly of the Pittsburgh, Akron & Western Railroad Company, of the sufficiency of the foreclosure proceedings, of the validity of the mortgage and bonds to be issued by the new company, of the validity of the lease of said new company to the party hereto of the second*1180 part, and of the validity of the guaranty so to be given by the party hereto of the second part. The party of the second part upon the execution of this agreement is to pay to the firm of Vermilye & Co. a commission of Twenty-five thousand (25,000) dollars, being one per cent of the total amount of bonds so taken by the parties of the first part. This is to be for the personal services of Messrs. Vermilye & Co., in the formation of the syndicate and in the management thereof, and is to be in no event returned in case of any obstacles in consummating this agreement. The Northern Ohio Railway Company, hereinafter called "the Northern Ohio," was incorporated under the laws of Ohio, on August 14, 1895, and came into possession of the railroad properties formerly owned by the Pittsburgh, Akron and Western. Upon organization, it issued $3,580,000 par value of common stock, consisting of 35,800 shares of a par value of $100 each, $650,000 par value of preferred stock, and $2,500,000 face amount of first mortgage, 5 per cent, 50-year gold bonds; and there was no change in the amount of such stock and bonds outstanding, prior to March 1, 1920. On October 1, 1895, the Northern Ohio*1181 and the Lake Erie, referred to in the agreement as lessor and lessee, respectively, entered into a lease agreement, which, so far as material here, reads as follows: WHEREAS the lessor is the owner of and engaged in the operation of a line of railway extending from Akron, in the State of Ohio, to Delphos, in said State; and WHEREAS by indenture of mortgage, or deed of trust, bearing date the first day of October, 1895, made between the lessor of the first part, and the Central Trust Company of New York, of the second part, hereinafter called the first mortgage, the lessor mortgaged to said Trust Company, its said line of railway to secure an issue by the lessor of its 4,000 bonds, (hereinafter called the first mortgage bonds), for $1,000 each, to bear date the first day of October, 1895, and to mature the first day of October, 1945, with interest thereon at the rate of five per cent per annum, payable semi-annually on the first day of April and October in each year; and WHEREAS in and by the first mortgage it is provided that the trustee shall certify and issue the first mortgage bonds, numbered from 1 to 2500, both inclusive, in respect of said line of railway, the aggregate*1182 length of which was, for the purposes of the first mortgage, fixed at one hundred and sixty-six and two-thirds miles, and the residue of the first mortgage bonds, viz., the first mortgage bonds numbered from 2501 to 4000, inclusive, in respect of lines of railroad *1235 thereafter constructed by the lessor or acquired by it subsequent to the execution of the first mortgage, and made subject to the lien of the first mortgage; and WHEREAS the lessee has agreed to purchase said first mortgage bonds numbered from 1 to 2500, both inclusive; and WHEREAS the lessee desires to obtain the exclusive use of said line of railway of the lessor, and also desires to obtain the right to the exclusive use of lines of railroad hereafter constructed by the lessor, or acquired by it. NOW, THEREFORE, THIS INDENTURE WITNESSETH: FIRST. - The lessor, for and in consideration of the covenants and agreements hereinafter contained on the part of the lessee to be observed, kept and performed, hath let, leased and demised, and by these presents doth let, lease and demise unto the lessee, its successors and assigns, all and singular the railroad of the lessor. [Here follows a description of the*1183 property.] TO HAVE AND TO HOLD the same unto the lessee, its successors and assigns, from the first day of April 1895, for the full end and term of nine hundred and ninety-nine years, thence next ensuing, fully to be completed and ended, to wit, until the first day of April 2894, at noon; subject, however, in all respects to the first mortgage; The lessee, its successors and assigns, yielding and paying therefor the sums hereinafter specified and keeping and performing all and singular the covenants and agreements hereinafter set forth to be by the lessee observed, kept and performed. SECOND. - The lessor doth further let, lease and demise unto the lessee, its successors and assigns, all lines of railroad which shall hereafter, at the request of the lessee, in accordance with the provisions hereinafter contained, be constructed or acquired by the lessor, and made subject to the lien of the first mortgage, and in respect of which first mortgage bonds of the lessor shall, under the terms of the first mortgage, be issued; such hereafter acquired lines, however, not to exceed one hundred (100) miles in length; * * * TO HAVE AND TO HOLD the same unto the lessee, its successors*1184 and assigns, from the date of such construction or acquisition for the full end and term of nine hundred and ninety-nine years from the first day of April, 1895, fully to be completed and ended, to wit, until the first day of April, 2894, at noon; subject, however, in all respects to the first mortgage. * * * THIRD. - The lessee, in consideration of the premises, accepts, under the provisions hereof, the premises and property hereby demised for said term hereby granted, and covenants to and with the lessor to pay yearly and every year during the term hereby granted, by way of rental therefor, all the net earnings, to be determined as hereinafter provided, derived from the operation of the demised railroad, rolling stock, equipment and property, and in any event and though such net earnings may not be sufficient therefor: (a) all taxes that may be imposed, assessed or levied upon the lessor or upon the said demised premises and property of any part thereof as the same shall become due and payable; (b) the premiums of insurance upon the buildings, rolling stock and equipment demised; (c) such sum, not exceeding one thousand dollars per annum, as the lessor shall by resolution*1185 of its board of directors certify to be requisite for the maintenance of its corporate organization, the salaries of its necessary officers, the compensation of its board of directors and for other expenses of administration, including the expenses of the registration and transfer of its securities; *1236 (d) the coupons maturing upon all the first mortgage bonds of the lessor, issued under the first mortgage of the lessor, or to be issued under the first mortgage in respect of lines of railroad hereinafter constructed or acquired by the lessor at the request of the lessee, and which shall become subject to this lease as said coupons mature and become payable, by paying directly the coupons upon such bonds, as such coupons mature respectively, upon the first day of April and October in each year, said coupons to be cancelled as soon as paid. FOURTH. - The lessee covenants to and with the lessor as follows: * * * In order to express the obligations into which it has hereby entered, and as full and adequate security for the payment of the rental reserved in this lease and for the preservation of the property of the lessor in as good condition as on entering into possession, *1186 the lessee will under its corporate seal and the signature of its proper executive officers, endorse upon each of the twenty-five hundred bonds of the lessor issued under the first mortgage of the lessor in respect of the demised line of railroad from Main Street, in Akron, to Delphos, a guaranty of the faithful and punctual payment of said first mortgage bonds and of the interest accruing and to accrue thereon; and the lessee will further, from time to time, as additional lines of railroad shall, at the request of the lessee, be constructed by the lessor or acquired by it, and in respect of which first mortgage bonds of the lessor shall, under the terms of the first mortgage of the lessor, be issued, and which shall become subject to this lease, likewise, under its corporate seal and the signature of its proper executive officers, indorse upon each of the said additional first mortgage bonds of the lessor so to be issued in respect of said additional lines of railroad, a similar guaranty of the faithful and punctual payment thereof and of the interest accruing and to accrue thereon. * * * The lessee will, during the term of this lease, maintain the demised premises and property*1187 in good order and repair and keep and maintain the demised line of railway of the lessor in good and proper condition for the passage thereover of both freight and passenger traffic, * * *. The lessee shall, during the term, furnish and provide, or cause to be furnished and provided, all the rolling stock and equipment which may be necessary to do and perform with efficiency and dispatch all the business which can be obtained for the demised railroad, but the lessee shall be entitled to make the usual charge for rent or use or car service in respect of such additional rolling stock or equipment so provided by the lessee. * * * FIFTH. - The lessor covenants to and with the lessee as follows: The lessor shall and will, at the expiration of the term hereby granted and of each renewal term, grant another lease of the premises hereby demised for a further term of nine hundred and ninety-nine years, on the terms, conditions and stipulations of this indenture, including this agreement for renewal. * * * The lessor, for the purpose of providing the lessee with greater security of earning the amount necessary to be earned by the lessee to enable it to pay the interest to mature*1188 from time to time on the lessor's first mortgage bonds, has caused and will hereafter cause to be expended on the line of its present railroad in improving and equipping it, out of the proceeds of said first mortgage bonds, numbered from 1 to 2,500, inclusive, the sum of one million dollars, such expenditure to be made under the direction of the lessee and for such *1237 property and purposes as shall be directed by the lessee from time to time, such direction to be by resolution of the lessee's board of directors passed at any regular or special meeting, or by the orders of the lessee's executive committee or its president or general manager. The lessor further agrees that it will, from time to time, in like manner, under the direction of the lessee, expend for the benefit and advantage of its property the proceeds of its first mortgage bonds numbered from 2501 to 4000, inclusive, when issued in pursuance of the provisions of the first mortgage. * * * SIXTH. - It is mutually covenanted as follows: The lessee shall and will, at the determination of this lease, redeliver and surrender up to the lessor the demised premises and property in good order and condition, with*1189 such additions, alterations and improvements as shall have been made thereto. * * * In estimating the net earnings which shall be payable under the terms of this lease by way of rental for the demised premises, there shall be deducted from the gross earnings all fixed charges, all operating expenses, including taxes and expenses of administration, all sums which in the judgment of the lessee shall be necessary to be expended for betterments and additions and the maintenance as a first class railroad of the demised reilroad, all sums which shall be necessary fully to equip the demised railroad with sufficient and satisfactory rolling stock and equipment to enable it to transact such business as may be done over it. As between the parties, the lessee shall be entitled to make such charges in respect to the use of rolling stock, terminal facilities or otherwise howsoever growing out of the operation of the demised railroad in connection with the lines of the lessee, as though this lease had not been made. And the lessee shall be entitled to proper and reasonable compensation for its services in handling, managing and operating the business of the lessor, including therein services*1190 performed and expenses incurred by the lessee's officers, agents and attorneys in and about the business of the lessor. The lessee shall, immediately after September 30th of each year, make up an account of the earnings of the preceding year; and out of any net earnings shall first pay the fixed charges and other items hereinbefore provided to be paid, and shall thereafter, on or before December 15th of each year, pay over to lessor by way of rental any surplus remaining after such payments. In case in any year the net earnings of the demised railroad and property, as hereinabove determined, shall not be sufficient to meet the fixed charges and operating expenses, the lessee shall, notwithstanding, make the payments hereinabove in subdivision (d) of the third article hereof provided, but any amount paid by the lessee in excess of the net earnings for such year shall be deemed an advance on the part of the lessee to the lessor. SEVENTH. - It is agreed and declared that of the one million dollars before agreed to be expended by the lessor, under the direction of the lessee's officers, there has been so expended about the sum of $215,140. Concurrently with the execution of this*1191 lease agreement, the Lake Erie acquired, from the then holders thereof, all of the common capital stock of the Northern Ohio outstanding, of $3,580,000 par value. In connection with the acquisition of this stock, the ninth annual report of the Lake Erie to its stockholders, under date of December 31, 1895, contained the following statement: *1238 The Northern Ohio Railway Company has $650,000 non-cumulative 5 per cent preferred and $3,580,000 common stock outstanding. The entire issue of the common stock has been delivered to and is in the treasury of your company in consideration of the lease and guaranty. Under date of October 2, 1895, the Lake Erie, as party of the first part, and Vermilye & Company, on behalf of themselves and others interested with them in the syndicate for the purposes expressed in the agreement of August 9, 1895, as party of the second part, entered into an agreement, which, so far as material here, reads as follows: WHEREAS, by a resolution of the Board of Directors of the party hereto of the first part passed July 25th, 1895, it was resolved that said company lease the line of railway formerly of the Pittsburgh, Akron & Western R/R. Co., upon*1192 certain terms and conditions named, and in order to enable the lease of said line of railway to be carried into effect the President of the party of the first part was authorized and empowered "to acquire from the lessor the first mortgage bonds of the lessor to be issued thereon, and on said acquisition of said bonds by this company to enter into a contract with Messrs. Vermilye & Company or other bankers for the sale of said issue of bonds, with a guaranty by this company of the payment of the principal and interest thereof, at such price and upon such terms as he and the committee hereinafter named in their discretion may deem advisable and he is further authorized in connection with such contract to agree with the bankers purchasing said bonds upon the form of the bonds so to be issued and upon the form of the guaranty thereof by this company, and upon the terms of the mortgage securing the same, and otherwise as may be necessary for the purpose of effecting such sale," and WHEREAS, an agreement was made on the ninth day of August 1895 between the parties hereto, for the purchase by the parties hereto of the second part of Two million five hundred thousand dollars ($2,500,000) *1193 of the first mortgage bonds of said lessor Company, the Northern Ohio Railway Company, and WHEREAS, the said party of the first part has acquired from said lessor the said first mortgage bonds and has stamped its guaranty thereon in accordance with the terms of said agreement of August 9th, 1895: Now, Pursuant to said agreement, said party of the first part hereby, for value received, and by these presents does bargain, sell, assign and transfer unto said the said parties of the second part all those Twenty-five hundred first mortgage bonds of the Northern Ohio Railway Company, numbered from 1 to 2500, both inclusive. And the party hereto of the first part having agreed in and by said agreement of August 9th, 1895, that it would expend the sum of at least one million of dollars ($1,000,000) in the improvement of the said road, the expenditure of this sum to be approved by W. Barclay Parsons, Engineer, on behalf of the parties hereto of the second part, and that any sum not expended at the time of the taking of said bonds by the parties hereto of the second part should be deposited by them in such depositaries as the parties to said agreement might agree upon, to be expended*1194 only for the improvement of said railroad property, and upon the approval of W. Barclay Parsons, Engineer, as hereinbefore expressed: Now, for the purpose of carrying out said agreement, IT IS HEREBY AGREED AND STIPULATED, that the amount already expended in the improvement of said road is about the sum of One Hundred and eighty-five thousand dollars, and that the balance of said One Million of dollars to wit, *1239 the sum of eight hundred and fifteen thousand dollars, is to be deposited by the party hereto of the first part in such banks as the parties hereto may agree upon. The Lake Erie took possession and commenced operation of the Northern Ohio's properties on October 1, 1895, and continued in possession of and to operate them until the beginning of Federal control, January 1, 1918. The general ledger of the Lake Erie shows that it expended $1,000,000, between October 1, 1895, and September 30, 1898, for additions and betterments to, and equipment of, the Northern Ohio's properties. Such expenditures were made out of the proceeds of the sale of the Northern Ohio's $2,500,000 first mortgage bonds, pursuant to the provisions of the lease agreement and of the contracts*1195 entered into with Vermilye & Company on August 9 and October 2, 1895. In 1895 the board of directors of the Lake Erie, anticipating that the resulting connections which would be made with all the lines of railroad in the great freight-producing regions lying between Cleveland and Pittsburgh and that the local traffic in the populous districts lying between Akron and the eastern boundary of the state would be most advantageous and productive of results to the company, and in order to obtain a better and more important eastern outlet for its traffic, contemplated the extension of the Northern Ohio's line from Akron, Ohio, to New Castle, Pennsylvania. The matter, however, was held in abeyance because of the existing unfavorable financial situation, and for the further reason that negotiations were under way with the Baltimore and Ohio receivers, controlling the Pittsburgh and Western Railroad, looking to an interchange of business between those companies and the Northern Ohio at Akron. Similar negotiations with the "Carnegie people," controlling the Bessemer and Lake Erie, and with the Lake Shore and Michigan Southern, controlling the Pittsburgh and Lake Erie, were suspended pending*1196 the outcome of the negotiations with the Baltimore and Ohio interests. Prior to September 22, 1898, the Lake Erie acquired, at a cost of $725,323.65, all of the common capital stock of the Cleveland, Akron and Columbus Railway Company, of a par value of $2,237,500, of which $2,183,400 par value was acquired by the Lake Erie and the Northern Ohio prior to April 1, 1896. The line of the Cleveland, Akron and Columbus connected with that of the Northern Ohio at Akron and ran, via Cuyahoga Falls, to Hudson, Ohio. Prior to February 4, 1898, the Lake Erie caused the Cleveland and Newcastle Railway Company to be organized, for the purpose of constructing a line of steam railroad from Hudson to Bedford and Newburg, Ohio, *1240 and from Cuyahoga Falls, via Niles and Youngstown, to New Castle, approximately 90 miles in all. It was contemplated that the Cleveland and Newcastle would acquire trackage rights over the line of the Cleveland, Akron and Columbus from Cuyahoga Falls, south to Akron, where it would connect with the Northern Ohio, and north to Hudson, proceeding from the latter point over its own line to Bedford and Newburg, from which points trackage was to be arranged to*1197 coal, coke, and ore docks in Cleveland, and that it would connect at New Castle with the Buffalo, Rochester and Pittsburgh Railway Company and the Western New York and Pennsylvania Railroad Company. The Lake Erie became the owner of all of the capital stock of the Cleveland and Newcastle and assisted in the financing thereof. On the date mentioned, negotiations had been completed with the Buffalo, Rochester and Pittsburgh, which owned and operated a line between Punxatawney and Clearfield, Pennsylvania, connecting at the latter point with the Reading System, for the extension of its line from Punxatawney west to New Castle, where it was to connect with the proposed line of the Cleveland and Newcastle, and for the interchange of through traffic of all kinds between the Lake Erie system and the system of which the Buffalo, Rochester and Pittsburgh was a part. It was also arranged that the Lake Erie should have access over the proposed line of the Buffalo, Rochester and Pittsburgh between New Castle and Butler, Pennsylvania, to the railroad which had just been finished by "the Carnegie people," the Bessemer and Lake Erie, from Butler south to the Carnegie manufacturing establishments, *1198 with access to the Carnegie coke fields and running directly through the heart of the Pittsburgh coal regions. Beginning in early 1895 and continuing to the middle of 1898, the president of the Lake Erie carried on negotiations with the Lake Shore and Michigan Southern Railroad Company, the Pittsburgh and Lake Erie Railroad Company, the New York, Lake Erie and Western Railroad Company, the Baltimore and Ohio Railroad Company and the Pennsylvania Railroad Company, in an attempt to obtain for the Lake Erie rights to use portions of existing lines between Akron and New Castle, and agreements for interchange of through traffic moving to and from the Pittsburgh district and Western Pennsylvania coal fields, in order to avoid, if possible, the building of a competitive line. All such negotiations were unsuccessful and finally, on June 6, 1898, the board of directors of the Lake Erie authorized its executive officers to proceed with the construction of the line from Akron to New Castle. The Cleveland and Newcastle, or the Lake Erie for the account of the Cleveland and Newcastle, purchased 38,000 shares of the capital stock of the *1241 Western New York and Pennsylvania Railroad*1199 Company, at a cost of $141,000, and the former began construction of its lines to Cleveland and to New Castle. To obtain control, through reorganization, of the railroad of the Pittsburgh and Western Railway Company, which was in receivership, and thereby to avoid building a line between Niles and New Castle, the Lake Erie borrowed $4,500,000 to purchase the second mortgage bonds of that company, and did purchase a portion or all of such outstanding bonds. Calvin S. Brice, who had been the president and a director of the Lake Erie for many years and active in planning and carrying out its expansion program, died on December 15, 1898. At a meeting of the board on January 17, 1899, Frederick W. Whitridge was elected a director, to fill the vacancy caused by the death of Brice, elected chairman of the executive committee and to the newly created office of chairman of the board of directors, and vested with all of the functions theretofore discharged by the president. In 1899 the Lake Shore and Michigan Southern acquired stock control of the Lake Erie, and such stock control was held by that company and by its successor, the New York Central Railroad Company, until 1922 and then*1200 sold by the latter to the interests which controlled the second Nickel Plate. The annual report of the Lake Shore and Michigan Southern for the year ended June 30, 1901, certified by the Interstate Commerce Commission, shows that the cost of its stock interest in the Lake Erie was $5,847,016.78. The annual report of the New York Central to the Interstate Commerce Commission for 1922 shows that it sold in that year 59,400 shares of common and 59,300 shares of preferred stock of the Lake Erie, and in connection with that transaction charged off a loss of $2,847,016.78. The following is an excerpt from the minutes of the meeting of the board of directors of the Lake Erie held on February 3, 1899: In reference to what may be called indirect obligations of the company, the Chairman reported that the Northern Ohio Railway, which has been and is likely to remain a serious drain upon the earnings of the company, was so owned by it, and held under such circumstances, that there was no hope of getting rid of it. The Cleveland and New Castle Railway, which had become superfluous since the acquisition of the control of the Pittsburgh and Western bonds, and would be, even if this company*1201 were able to build its line, a mere luxury - represents at present a liability on the part of the company of $750,000.00, and in addition thereto, an undetermined amount of about $80,000, making a total of about $830,000.00. The Chairman reported that he had decided it would be for the interests of the company, that the Cleveland and New Castle Railway should be abandoned and steps taken looking forward to the payment of the indebtedness, debtedness, as rapidly as possible. With this in view, he has caused to be sold, some 38,000 shares of Western New York and Pennsylvania stock, which had been purchased on account of The Cleveland and New Castle Railway, at a cost of $141,000.00. He is glad to be able to report that the amount which had *1242 been realized from these sales will be upwards of $125,000.00. He has stopped the further purchase of properties and instructed Mr. McVey to cancel all contracts for the purchase of property - not yet consummated - upon the best terms possible; and to place the lands acquired on this Cleveland and New Castle account - for the purpose of protecting title - in a land company and arrange to market the same as rapidly as possible, and*1202 as reasonable prices can be got. In the meantime, we shall derive an income from these lands of $3,000.00 or $3,500.00 a year. The Chairman further reported that, in his judgment, The Cleveland, Akron and Columbus Road was a property which it was not necessary for The Lake Erie and Western to hold, and that it would be for the interests of the company to part with the control of that railroad, whenever the same could be done upon favorable terms. Some negotiations have been started by him with this object in view, but there is nothing as yet to report in reference thereto. In reference to the loan of $4,500,000.00 for the purchase of Pittsburgh and Western Second Mortgage Bonds, the Chairman reported that he hoped to obtain some modification of the onerous terms of that contract, at the time of repayment of the money borrowed under it, and that, under any circumstances, it would probably be possible to sell the securities purchased from the proceeds of the loan at a reasonable, if not a considerable profit. The large and important question as to whether or not trackage rights should be reserved over the Pittsburgh and Western, in the event of such sale, involves the consideration*1203 of perfecting the plans for the construction of what would have virtually been a new trunk line, by making connection between the Northern Ohio; Buffalo, Rochester and Pittsburgh; Reading and Jersey, Central. As to these plans, the Chairman reported that he had not yet reached a definite conclusion. It appears to him, from consultation with the officers of the company, that it is at least doubtful whether the new business which would be done by the road, if such plans were carried out, would compensate the company for the loss of business which would be involved, and, in particular, which would follow from the almost inevitable alterations in the relations between this company and the Lake Shore system. The Chairman further stated, that in reference to these matters, he was in consultation with some of the largest stockholders of the company, and would of course be largely influenced, in whatever conclusion he arrived at in reference to these matters, by their views. The Chairman finally stated, that in anticipation of the action by the Board upon the lines reported by him, he had caused to be prepared a circular to the stockholders, stating briefly the reasons why no dividend*1204 could be paid at the present time, and presented a copy to the Board. At the meeting of the board of directors of the Lake Erie, on June 27, 1899, the chairman announced the sale of the Cleveland, Akron and Columbus, and stated that $350,000 of the purchase price had been deposited in the banks and that the remainder had been reserved by him for certain purposes. At the meeting of the board, of July 13, 1899, the chairman announced that he had closed negotiations for the sale of the interest of the Lake Erie in the Pittsburgh and Western second mortgage bonds, for the sum of $2,300,000. Both of these actions of the chairman were approved and ratified by the board. *1243 Prior to August 1, 1898, many important transactions of the Lake Erie were handled by the Central Contract and Finance Company, in which some of the officers and directors of the Lake Erie were interested, which were not recorded on the Lake Erie's books of account. Those books did not show the Lake Erie's holdings of securities of the Northern Ohio, the Cleveland, Akron and Columbus, the Cleveland and New Castle, and several other companies, or any advances to the Northern Ohio. In 1898 the books were*1205 examined by a firm of public accountants, the accounts restated, and a revised balance sheet submitted for approval of the board of directors. That balance sheet, as of August 1, 1898, included as assets: "Advances to Northern Ohio Railway, $312,500," representing the payment of two and one-half years interest on the Northern Ohio's first mortgage bonds; the Northern Ohio's common stock, for which no cost or value was shown; and the Cleveland, Akron and Columbus stock and certain other securities, at a total cost of $1,579,232.84; and, as a contra liability account, "Investments in stocks and bonds and advances to Northern Ohio Ry. $1,891,732.84." That balance sheet was approved by the board of directors and ordered recorded, and was recorded, in the books of account. The books of the Lake Erie, as of December 31, 1898, show advances to the Northern Ohio of $375,000, representing three years interest on the Northern Ohio's first mortgage bonds, an increase of $62,500 over the amount shown in the revised balance sheet of August 1, an increase of $504 in the cost of investment in certain securities over the cost thereof shown in the revised balance sheet of August 1, and a contra liability*1206 account, "Investments in stocks and bonds and advances to Northern Ohio Ry. $1,954,736.84." On December 13, 1899, the board of directors by resolution directed that the advances made to the Northern Ohio, amounting to $437,500, be charged off, and that the book values of the Lake Erie's investments in certain securities be reduced; and this was accomplished by direct credits to the asset accounts concerned and a charge for the total amount involved against the above mentioned liability account. From October 1, 1895, to March 1, 1902, separate books of account were kept by the Lake Erie and the Northern Ohio, and all of the operating accounts for the Northern Ohio's property were kept in the books of that company. In 1900 and 1901 all but three of the Lake Erie's nine directors were replaced, upon their respective resignations, deaths, or expirations of term of office, by persons who were directors of one or more of the New York Central Lines; and one of the latter, W. H. Newman, who was president, both of the Lake Shore and Michigan Southern and of the Pittsburgh and Lake Erie, was elected president, *1244 both of the Lake Erie and the Northern Ohio; and another, W. C. *1207 Brown, later became vice president and general manager of the Lake Shore and Michigan Southern, and president and general manager of the Lake Erie. The meetings of the Lake Erie's board of directors were held at No. 80 Broadway, New York City, until January 1, 1900, but at the offices of the New York Central Lines, thereafter. During the period of control of the Lake Erie by the New York Central interests, New York Central companies loaned moneys to the Lake Erie, and the Lake Erie was included in general contracts made for the New York Central Lines, and portions of the salaries and expenses of the general officers of the New York Central Lines were charged to the Lake Erie and the Northern Ohio. During that period, the Lake Erie's accounting was in conformity with that of the other New York Central Lines, and the Lake Erie's chief local accounting officer reported immediately to the general auditor of the New York Central Lines. On March 1, 1902, all of the assets of the Northern Ohio, except its investment in road and equipment, and all of the Northern Ohio's liabilities, except capital stock, mortgage indebtedness and its indebtedness to the Lake Erie, were transferred to*1208 the books of the Lake Erie, and thereafter all of the operating accounts of the Northern Ohio were combined with those of the Lake Erie on the Lake Erie's books. At the time of the transfer of the Northern Ohio's assets and liabilities to the books of the Lake Erie, the assets so transferred exceeded the liabilities transferred, exclusive of accrued interest of $52,083.34 on first mortgage bonds, by $25,915.95. The Lake Erie advanced funds from which interest on the Northern Ohio's first mortgage bonds was paid in amounts aggregating $2,100,833.34, from October 1, 1895, to February 28, 1913, inclusive, and $875,000 from March 1, 1913, to March 1, 1920, a total of $2,975,833.34. The Lake Erie made additions to and improvements of the Northern Ohio's properties and expended therefor amounts aggregating $26,967.36, from June 1, 1905, to February 28, 1913, inclusive, and $11,714.54 from March 1, 1913, to June 30, 1914, a total of $38,681.90, all of which were charged to operating expenses. The operation of the Northern Ohio's properties resulted in aggregate net losses, exclusive of advances for interest and cost of additions and betterments, of $345,640.96, from March 1, 1902, to*1209 February 28, 1913, inclusive, and of $345,628.76 from March 1, 1913, to March 1, 1920, a total of $691,269.72, all of which, except certain charge for depreciation and retirements hereinafter mentioned, were borne by the Lake Erie, which made actual cash outlays therefor in corresponding amounts during those periods, respectively. The net losses mentioned in the preceding paragraph included charges for accrued depreciation of leased equipment, aggregating *1245 $568.28, from January 1, 1909, to February 28, 1913, inclusive, and $22,724.08 from March 1, 1913, to March 1, 1920, a total of $23,292.36; they also included charges for retirements of portions of those properties, aggregating $37,952.62, from January 1, 1909, to February 28, 1913, inclusive, and $41,632.87 from March 1, 1913, to March 1, 1920, a total of $79,585.49, of which $70,615.95 was for equipment retired and $8,969.54 for other property abandoned. These depreciation and retirement charges combined aggregate $38,520.90 before March 1, 1913, and $64,356.95 after that date, a total of $102,877.85. The said depreciation and retirement charges do not represent any cash outlay by the Lake Erie. No amount was*1210 shown separately in the Northern Ohio's balance sheet, as of February 28, 1913, for such depreciation and retirement charges; but they were carried in the balance sheet of February 29, 1920, under "Unadjusted debits" as "Lake Erie & Western R.R. Co. property retired, etc.," in the amount of $102,877.85. The Northern Ohio's operating deficit, including advances for interest, cost of additions and betterments, and operating losses, aggregated $1,768,441.66 from March 1, 1902, to February 28, 1913, inclusive, and $1,232,343.30 from March 1, 1913, to March 1, 1920, a total of $3,000,784.96. The Lake Erie's net cash outlays for this operating deficit and, prior to March 1, 1902, for bond interest, less the charges for depreciation and retirements and the excess of the Northern Ohio's assets over its liabilities transferred to the Lake Erie's books on March 1, 1902, amounted to $2,409,004.81, from October 1, 1895, to February 28, 1913, inclusive, and $1,167,986.35 from March 1, 1913, to March 1, 1920, a total of $3,576,991.16. With the exception of $437,500 set up on the books in 1898 and 1899 as an account due from the Northern Ohio, on account of advances for payment of interest*1211 on that company's first mortgage bonds, and which was charged off on December 13, 1899, in accordance with the resolution of the board of directors of that date, all of such expenditures by the Lake Erie were currently charged to operating expenses, and no portion thereof was set up on the Lake Erie's books as an account due from the Northern Ohio. Of the total cash outlay of $2,409,004.81 prior to March 1, 1913, sums aggregating $719,056.47 were taken as deductions from income by the Lake Erie in its excise-tax returns for the years 1909 to 1912, inclusive, and the sum of $37,131.60 was taken as a deduction from income in its income-tax return for 1913; and the entire amount of the Northern Ohio's operating deficit after February 28, 1913, $1,232,343.30, was taken as deductions from income in the Lake Erie's income-tax returns for the years 1913 to 1920, inclusive. *1246 In addition to the foregoing, the Lake Erie expended for additions to and improvements of the Northern Ohio's properties, from July 1, 1914, to February 29, 1920, inclusive, amounts aggregating $38,573.29, all of which was charged to Account 702, "Improvements on leased railway property," a capital account, *1212 as then required by the Interstate Commerce Commission's classification of accounts. On April 18, 1902, the Lake Erie's board of directors, in order to secure access to manufacturing establishments in Akron and Barberton, Ohio, authorized the acquisition by it, jointly with the Erie Railroad Company, the Cleveland, Akron and Columbus, then a Pennsylvania System company, and the Baltimore and Ohio Railroad Company, of certain switching and terminal railroads, known as the Barberton Belt Line Railroad, the Cleveland, Barberton and Northern Railroad and the Barberton, Akron and Eastern Railroad, for the purpose of uniting the latter into one belt line railroad and the extension thereof to connect with the Northern Ohio's line near Akron, and also to connect with the Wheeling and Lake Erie's railroad at Mogadore, Ohio. These switching and terminal roads were united in a new company, known as the Akron and Barberton Belt Railroad Company. In 1902, the Erie, the Cleveland, Akron and Columbus, the Baltimore and Ohio, and, instead of the Lake Erie, the Northern Ohio, each acquired one-fourth, or 250 shares of $25,000 par value, of the Akron and Barberton Belt's capital stock, and thereafter, *1213 and on June 24, 1902, at the Northern Ohio's request, the Lake Erie assumed certain contracts of the Northern Ohio relating to the organization and operation of the Akron and Barberton Belt, and agreed to pay for the account of the Northern Ohio the moneys required to fulfill the obligations of the latter under those contracts. The stock of the Akron and Barberton Belt acquired by the Northern Ohio was paid for as follows: In 1902 the Lake Erie paid for account of the Northern Ohio to the Akron and Barberton Belt $198,500, of which $170,125 was returned from the proceeds of first mortgage 4 per cent bonds, subsequently issued by the latter, and the balance of $28,375 was treated as the purchase price of that stock; each of the other proprietary companies paid for its stock in exactly the same way. Under the contract entered into by the four proprietary companies for the operation of the Akron and Barberton Belt, none of the stock of the latter could be transferred to any other individual or corporation without the unanimous consent of the four companies, and at the present time the said four proprietary companies own all of that stock in equal amounts. Subsequently, the Northern*1214 Ohio acquired $35,000 face amount of the Akron and Barberton Belt's first mortgage bonds, at a cost *1247 of $32,500, the funds being advanced by the Lake Erie, $10,000 prior to March 1, 1913, and $22,500 on July 1, 1917. The Lake Erie also paid for account of the Northern Ohio to the trustee under the Akron and Barberton Belt's first mortgage, for annual contributions to a sinking fund thereby provided for, sums aggregating $34,623.33 from January 1, 1903, to February 28, 1913, inclusive, and $28,807.50 from March 1, 1913, to March 1, 1920, a total of $63,430.83. The Lake Erie's advances to or for the account of the Northern Ohio, for the purchase of the stocks and bonds of the Akron and Barberton Belt and for annual contributions to the lattert's sinking fund for retirement of its first mortgage bonds, amounting in the aggregate to $124,305.83, were charged on the books of the Lake Erie to Account 706, "Investments in affiliated companies," a capital account, as advances to the Northern Ohio. Said payments were also entered and, until March 1, 1920, carried in the Northern Ohio's books in the liability account, "Non-negotiable debt to affiliated companies," as part*1215 of the "L.E. & W. Ry. Co. advance," the aggregate amount of which, as shown by the books on February 29, 1920, was $3,825,049.98; and said stock, bonds, and sinking fund advances were entered and, until March 1, 1920, carried in the Northern Ohio's books in the asset account "Investments in affiliated companies," in the amount of $124,305.83. At the termination of Federal control, March 1, 1920, the Director General transferred to the Lake Erie certain materials and supplies which were on the line of the Northern Ohio, and which he inventoried at $32,659.06. These were entered on the books of the Lake Erie, in the amount stated, in Account 716, "Material and Supplies," but, having been turned over to the Akron, Canton and Youngstown Railway Company by the Lake Erie, as will hereinafter more fully appear, the Lake Erie immediately charged them off to profit and loss. The Northern Ohio entered these materials and supplies on its books, as an asset, in the amount of $32,548.07, against which it set up a like amount in the liability account, "Unadjusted credits," as "Materials and Supplies, Feb. 29, 1920 transferred by Lake Erie & Western RR Co." The following is a summary of the*1216 net expenditures by the Lake Erie from October 1, 1895, to March 1, 1920, sudivided for the periods prior to and subsequent to March 1, 1913, in connection with the operation of the Northern Ohio's properties under the lease of October 1, 1895, and for the advances to or for the account of the Northern Ohio as hereinbefore stated, exclusive of any charge for the materials and supplies mentioned in the preceding paragraph: Net expenditures prior to March 1, 1913 Interest on Northern Ohio's first mortgage bonds $2,100,833.34 Additions and betterments to leased properties 26,967.36 Net losses from operation of leased property $345,640.96 Less: Accrued depreciation and retirements included in net losses, not representing any actual outlay of cash 38,520.90 307,120.06 Advance for purchase of Akron and Barberton Belt capital stock 28,375.00 Advance for purchase of Akron and Barberton Belt first mortgage bonds 10,000.00 Advance for contributions to sinking fund of Akron and Barberton Belt 34,623.33 2,507,919.09 Deduct: Excess of assets over liabilities, of the Northern Ohio transferred to Lake Erie's books on March 1, 1902 25,915.95 Total net expenditures prior to March 1, 1913 2,482,003.14 Net expenditures after March 1, 1913 Interest on Northern Ohio's first mortgage bonds $875,000.00 Additions and betterments to leased properties charged to operating expenses 11,714.54 Net losses from operation of leased property $345,628.76 Less: Accrued depreciation and retirements included in net losses, not representing any actual outlay of cash 64,356.95 281,271.81 Advance for purchase of Akron and Barberton Belt first mortgage bonds 22,500.00 Advance for contributions to sinking fund of Akron and Barberton Belt 28,807.50 Additions and betterments to leased property charged to capitalaccounts 38,573.29 Total net expenditures after March 1, 1913 1,257,867.14 Total net expenditures before and after March 1, 1913 3,739,870.28 *1217 *1248 From October 1, 1895, to December 31, 1907, the Lake Erie was paying interest on its first mortgage bonds at the rate of 5 per cent per annum; and on money thereafter borrowed by it, from New York Central System companies, on open account or promissory notes, it paid interest at the rate of 6 per cent per annum from January 1, 1908, to December 31, 1916, and at the rate of 5 1/2 per cent per annum from January 1, 1917, to December 31, 1919. There was no provision in the lease agreement obligating the Northern Ohio to pay interest on its indebtedness to the Lake Erie. *1249 After 1899, but at some date not disclosed by the record, the Lake Erie's holdings of capital stock of the Northern Ohio were set up as an asset on its books at the nominal sum of $1, and this entry remained unchanged until March 1, 1920. The lease never appeared in the Lake Erie's accounts as an asset. And, except as hereinbefore stated, the Lake Erie's accounts at no time after 1899 showed as an asset any amount whatever as a claim against, or investment in, the Northern Ohio or its properties. At March 1, 1920, the Lake Erie's books showed a net balance due from the Northern Ohio*1218 of $92,661.33, made up as follows: Debits Northern Ohio Railway Co. stock $1.00 Cash advance for purchase of Akron and Barberton Belt capital stock 28,375.00 Advances for purchase of Akron and Barberton Belt first mortgage bonds 32,500.00 Advances for Akron and Barberton Belt sinking fund 63,430.83 Expenditures for additions and betterments to Northern Ohio's properties 38,573.29 Material and supplies assigned to Northern Ohio 32,659.06 195,539.18 Credits Northern ,0hio property retired and abandoned $8,969.54 Northern Ohio equipment retirements 70,615.95 Northern Ohio reserve for depreciation 23,292.36 102,877.85 Net debit balance 92,661.33 From October 1, 1895, to March 1, 1920, the Northern Ohio's books continuously reflected its indebtedness to the Lake Erie, the amount of such indebtedness changing from time to time as debits or credits were entered. As shown by the Northern Ohio's books, its indebtedness to the Lake Erie was $2,528,097.13 as of February 28, 1913, and $3,825,049.98, as of February 29, 1920, the last mentioned amount being offset by a charge of $102,877.75 for the Lake Erie's retirements*1219 of Northern Ohio's properties. From 1904 to 1919, inclusive, each of the Northern Ohio's balance sheets as of December 31 showed a liability to the Lake Erie in an amount conforming with its books of account. None of the expenditures by the Lake Erie hereinbefore set forth were ever repaid by the Northern Ohio to the Lake Erie. On December 11, 1919, the Lake Erie, therein referred to as the Lake Erie Company, the Akron, Canton and Youngstown Railway Company, therein referred to as the Akron Company, and the *1250 Northern Ohio, therein referred to as the Ohio Company, entered into an agreement, which, so far as material here, reads as follows: WHEREAS, The Lake Erie Company is the owner and holder of thirty-five thousand eight hundred (35,800) shares, being all of the outstanding common stock, and twenty-one (21) shares of the preferred stock of the Ohio Company and is the lessee, under the lease hereinafter referred to, of the line of railway of the Ohio Company extending from Akron in the State of Ohio to Delphos in said State, said railway being now under Federal control; and WHEREAS, The Akron Company is the owner of, and is engaged in operating, a line of railway*1220 from the City of Akron to the Village of Magadore in said State, with connecting switches, side tracks and industrial tracks reaching many of the manufacturing and industrial plants in said City of Akron; and WHEREAS, On the 1st day of October, A.D. 1895, the Lake Erie Company entered into an indenture of lease with the Ohio Company, lessor thereunder (hereinafter called the Northern Ohio lease), whereby the Lake Erie Company obtained exclusive use of the line of railway of the Ohio Company * * * for the full term of nine hundred ninety-nine years from the first day of April, 1895, until the 1st day of April 2894, at noon, and which said lease also contains an option to the lessee thereunder to renew the same for further terms of nine hundred ninety-nine (999) years forever on the same terms and conditions; and WHEREAS, The Lake Erie Company desires to sell, transfer, assign and deliver to the Akron Company, its successors and assigns, without recourse, the said lease and said capital stock, both common and preferred, belonging to the Lake Erie Company; Now THEREFORE, in consideration of the premises and of the considerations moving between the respective parties hereto, as hereinafter*1221 set forth, the parties hereto, being thereunto duly authorized by resolutions adopted by their respective boards of directors, hereby agree and take action as follows: SECTION 1. The assignments and transfers herein made and the provisions of the following sections of this agreement shall be operative and effective if and when, and only if and when, the railroad and transportation property of the Ohio Company and the Lake Erie Company's leasehold thereof under lease, dated October 1, 1895, shall be released from Federal control thereof, and the term "effective date hereof" as herein used shall be construed to mean the date and time at which Federal control of said property of the Ohio Company and of said leasehold thereof shall be relinquished. SECTION 2. The Lake Erie Company, for and upon the considerations herein mentioned, hereby assigns and transfers to the Akron Company the following shares of the capital stock of the Ohio Company, being all of such capital stock owned by the Lake Erie Company, of the par value of One Hundred ( $100) Dollars per share, namely: (a) Common stock, thirty five thousand and eight hundred (35,800) shares, being the total number of shares thereof; *1222 (b) Preferred stock, twenty-one (21) shares, of a total issued thereof of sixty-five hundred (6500) shares. The Akron Company acknowledges receipt, on the effective date hereof, of said shares of stock, evidenced by proper certificates therefor, duly assigned in writing by the Lake Erie Company. SECTION 3. The Lake Erie Company hereby assigns and transfers to the Akron Company the Northern Ohio lease and all of the rights, obligations and interest of the Lake Erie Company thereunder save as hereinafter otherwise expressly provided. *1251 SECTION 4. The Akron Company hereby accepts from the Lake Erie Company the assignment made in Section 3 hereof and, save as herein otherwise expressly provided, assumes (a) All of the obligations and liability of the Lake Erie Company under the Northern Ohio lease arising or accruing after the effective date hereof and agrees to save the Lake Erie Company harmless therefrom and from any and all claims of the Ohio Company based on any alleged deterioration or insufficiency, in character, condition, amount, or value, of the leased railroad and property, including locomotives, cars and other rolling stock, or any part thereof, on*1223 the effective date hereof as compared with the date upon which the Lake Erie Company came into possession thereof under thf Northern Ohio lease, or any failure of the Lke Erie Company to conform to any standard of maintenance in respect to said railroad and property, or any part thereof, contemplated or required by the Northern Ohio lease; (b) All of the obligations and liability of the Lake Erie Company upon its guaranties of the outstanding first mortgage bonds, principal and interest, of the Ohio Company from and in respect to which, and all loss, cost and expense by reason thereof, the Akron Company covenants and agrees with the Lake Erie Company to hold it harmless; Provided, however, that the Lake Erie Company shall in respect to the said outstanding bond indebtedness of the Ohio Company pay for the account of the Ohio Company and save the Akron Company harmless in respect to one year's interest thereon accruing next after the effective date hereof, such interest to be paid by the Lake Erie Company on the semi-annual interest dates next following the several periods of accrual thereof. SECTION 5. The Lake Erie Company hereby assigns to the Akron Company: (a) The net*1224 indebtedness of the Ohio Company to the Lake Erie Company accruing at, or for the period prior, to the effective date hereof, that is to say, the total indebtedness of the Ohio Company to the Lake Erie Company accrued at, or for the period prior to, the effective date hereof, less any indebtedness of the Lake Erie Company to the Ohio Company arising or accrued at or for the period prior to, the effective date hereof and whether then due or deferred. (b) Any claim that may accrue to the Lake Erie Company against the Ohio Company by reason of the payment by the Lake Erie Company of certain interest on bond indebtedness of the Ohio Company accruing after the effective date hereof as provided in Section 4 hereof. SECTION 6. The Lake Erie Company shall, as between it and the Akron Company be entitled to all the benefits and revenues accruing from the possession and operation of the railroad and property covered by the Northern Ohio lease prior to the effective date hereof and bear and discharge all expenses, debts, claims and liabilities arising, incurred, or accrued prior to the effective date hereof in the operation of the demised property, and save the Akron Company harmless with*1225 respect thereto, it being the intention hereof that the said railroad and property shall upon the transfer hereunder of possession thereof to the Akron Company be free and clear of every debt and encumbrance whatsoever except the first mortgage of the Ohio Company securing an issue of bonds, now outstanding, of Two Million Five Hundred Thousand ($2,500,000) Dollars. SECTION 7. The Lake Erie Company hereby assigns and releases to the Ohio Company any interest it may have in the additions or improvements made by it upon or to the said railroad and property of the Ohio Company under said lease as a part thereof and any such interest of the Lake ErieCompany in *1252 any and all materials and supplies (not including locomotives, cars or other rolling stock and equipment of the Lake Erie Company) that may be upon the railroad and premises covered by said lease at the effective date hereof and which shall have been placed thereon for permanent use upon said property or consumption in the current operation and maintenance thereof; provided that the Akron Company shall pay and save the Lake Erie Company harmless from such amount, if any, for which the Lake Erie Company may become*1226 liable to the United States under the contract of December 27, 1918, between the Lake Erie Company and the Director General of Railrlroads on account ofmaterials and supplies on the leased railroad and premises of the Ohio Company at the effective date hereof and delivered up by the Director General therewith in excess of the materials and supplies thereon on January 1, 1918. SECTION 8. All the assignments and transfers herein mentioned shall be without recourse. * * * SECTION 11. The Ohio Company, thereunto duly authorized by resolutions adopted by its Board of Directors on Decrmber 3, 1919, joins in this agreement as a party hereto for the purpose of consenting, and does hereby consent, to the assignment of said lease of its railroad and property by the Lake Erie Company to the Akron Company and to all the provisions hereof in so far as its rights, obligations and interests may be affected thereby. Federal control of the properties of the Lake Erie and the Northern Ohio was terminated on March 1, 1920, and on that date the foregoing agreement, in all respects, was carried into effect. Concurrently therewith the Lake Erie charged off to profit and loss the net indebtedness*1227 of the Northern Ohio appearing on its books, in the amount of $92,661.33, and the Northern Ohio made appropriate entry in its books recording the transfer of its indebtedness to the Lake Erie, in the sum of $3,825,049.98, to the account of the Akron Company. Thereupon, the Akron Company entered on its books, in Account 706, "Investments in affiliated companies," a capital asset account, the following charges: N.O. Ry. Stock and lease $8,972.00 N.O. Ry. advances assigned to A.C. & Y. Ry. Co. by L.E. & W. Ry 3,700,744.15 N.O. Ry. advances for investment assigned to A.C. & Y. Ry. Co. by L.E. & W. Ry 124,305.83 The first of these sums was set up by the Akron Company on the arbitrary basis of 25 cents a share for the common stock, $1 per share for the preferred stock, and $1 for the lease; the second and third aggregate $3,825,049.98, the amount of the Northern Ohio's indebtedness to the Lake Erie, as shown by the former's books of account; and the third sum is the total of the Lake Erie's advances to or for the Northern Ohio ror the purchase of securities of the Akron and Barberton Belt and for contributions to the latter's sinking fund. *1253 Pursuant*1228 to the provisions of section 4 of the foregoing agreement, the Lake Erie paid within the year 1920, subsequent to March 1, and in 1921, interest on the Northern Ohio's first mortgage bonds, in the respective amounts of $72,916.67 and $52,083.33, a total of $125,000. The said amount of interest paid in 1920, was taken as a deduction from gross income by the Lake Erie in its income-tax return for that year, and such deduction has been allowed by the respondent. From October 1, 1895, to and including the year 1900, the operation of the Northern Ohio's properties resulted in an operating net income for each year; but such operating net income was insufficient to meet the fixed charges for each year, for interest on first mortgage bonds and taxes. The following is a statement of the operating net income and the deficit after payment of such fixed charges for each of the years within the period mentioned, as reflected by the Northern Ohio's books: Period of year Operating Deficit after net income payment of fixed charges Oct. 1, 1895, to Dec. 31, 1896 $11,963.38 $151,950.95 [1897] 18,324.81 115,595.64 [1898] 12,905.66 121,716.86 [1899] 31,874.16 102,495.61 [1900] 44,745.87 90,519.89 *1229 Such operations resulted in an operating deficit for each of the years 1901 to 1919, inclusive, excepting 1902 and 1906, in which there was realized a small operating net income, insufficient to meet the interest on the first mortgage bonds. On February 28, 1913, the Northern Ohio carried its investment in road and equipment on its books at a value of $6,746,737.42, and on the same date its books showed outstanding capital stock of $4,230,000 par value and a surplus deficit of $2,461,143.11. On February 29, 1920, the Northern Ohio carried its investment in road and equipment on its books at a value of $6,713,835.07, and on the same date its books showed outstanding capital stock of $4,230,000 par value and a surplus deficit of $3,700,744.15. All of the outstanding preferred stock of the Northern Ohio, except 21 shares owned by the Lake Erie, was in the hands of the public. On June 7, 1924, the Interstate Commerce Commission, pursuant to the provisions of section 19(a) of the Interstate Commerce Act of March 1, 1913, generally referred to as "the Valuation Act," promulgated its tentative report, Valuation Docket No. 359, in the matter of the tentative valuations of the Lake*1230 Erie and the Northern *1254 Ohio, in which the Commission tentatively fixed the cost of reproduction new and the cost of reproduction less depreciation, of the Northern Ohio's railroad properties, exclusive of land and materials and supplies, as of June 30, 1918, at $3,679,129 and $2,672,343, respectively; tentatively fixed the present values of its carrier lands at $785,800.36, its carrier rights in public domain at $9,903.65, its rights in private lands at $27.80, and its noncarrier real estate at $104,324.03; and tentatively found the value "for rate-making purposes," of all of the Northern Ohio's carrier properties, to be $3,600,000. In the case of property other than land, the cost of reproduction new was based upon a physical inventory of such property as of June 30, 1918, to which there were applied the average prices for the years 1910 to 1914, inclusive, which are generally referred to as "the 1914 prices." In the case of land, the valuations tentatively fixed by the Commission are based upon the unit values of privately owned naked lands adjoining or adjacent to the right of way, and they do not include anything for excess cost of acquisition over the market value, *1231 such for instance, as improvements, severance damages, court costs, abstract and recording fees, legal expenses and commissions. Subsequent to the promulgation of that report, stipulations were entered into by the carrier and the Bureau of Valuation of the Interstate Commerce Commission which resulted in increasing the cost of reproduction new and the cost of reproduction less depreciation to $3,680,561 and $2,680,428, respectively, and in reducing the valuation of lands and noncarrier real estate from $900,055.84 to $841,373.87. Included in the valuation report, are additions and betterments made subsequent to February 28, 1913, at a cost of reproduction new of $32,200 and a cost of reproduction less depreciation of $22,870. Said report does not include in the valuation certain properties which were on hand at March 1, 1913, but were retired before the inventory date. Applying to these latter items the same unit prices as used for similar items in the valuation report and computing the depreciation in respect of those items in accordance with the practice and methods followed by the Bureau of Valuation in the underlying reports which are the basis of the valuation, the cost*1232 of reproduction new of such items is $15,352 and the cost of reproduction less depreciation is $9,289. Computing the accrued depreciation to March 1, 1913, on all of the depreciable property included in the valuation in accordance with the practice and methods followed by the Bureau of Valuation in the said underlying reports, the amount thereof is $81,501.75 less than the accrued depreciation to June 30, 1918, which was deducted in arriving at reproduction cost less depreciation in the valuation report. *1255 In the case of Account 12, "Track laying and surfacing" and Accounts 71 to 77 "General expenditures," there was deducted in arriving at cost of reproduction less depreciation, in said underlying reports, $176,159. By a recent order of the Interstate Commerce Commission, 118 I.C.C. 295, in the matter of telephone and railroad depreciation charges, these accounts have been excluded by the Commission from the classes of property for which depreciation charges may be included under operating expenses. From March 1, 1913, to June 30, 1918, there was an increase in the value of the lands of the Northern Ohio, carrier and noncarrier, of $314,176.36. The*1233 Northern Ohio did not acquire any real property during that period. A study by the Nickel Plate of the actual costs of all lands acquired by it in the period 1912 to 1927, inclusive, through purchase, condemnation proceedings and otherwise, in comparison with the estimated market value of naked adjacent lands, disclosed the presence of an excess cost of acquisition, represented by the factor of 1.38 applied to the market values of such lands, sue to improvements on the properties acquired, severance damages, court costs, abstract and recording fees, legal expenses and commissions. The application of that factor to the land values fixed in the aforementioned valuation report, reduced by the amounts involved in the stipulations entered into by the carrier and the Bureau of Valuation and by the increase in the value of such lands between March 1, 1913, and June 30, 1918, results in a product of $707,555.06. The Northern Ohio's railroad lies in the maidst of what was on and prior to March 1, 1913, the area of greatest traffic density in the United States, its line extending parallel to the four all-rail main traffic routes, in the direction of the heaviest traffic flows of the country. *1234 Its line was paralleled by the through trunk lines, from the Chicago district and the Central States to the Pittsburgh district and the Atlantic Seaboard, of the Baltimore and Ohio, the New York Central, the Nickel Plate, and the Pennsylvania. In May, 1920, the Akron Company purchased from the Northern Ohio about 9.4 miles of the latter's railroad, from Akron west to Copley Junction, Ohio, for $2,683,002, of which $2,500,000 was satisfied by the Akron Company assuming the entire funded indebtedness of the Northern Ohio, of that face amount, and $183,002 was paid by a credit on the Northern Ohio's open account. In its return for 1920 the Lake Erie deducted an item of $92,661.33, representing a loss alleged to have resulted from the transfer of the Northern Ohio lease, stock and indebtedness, to the Akron Company, the amount so deducted being the net indebtedness of the Northern *1256 Ohio to the Lake Erie shown on the latter's books at the date of the transfer; and the respondent disallowed the deduction. II Under date of December 27, 1918, an agreement was entered into between the Director General, acting on behalf of the United States, and the Lake Erie, which recited*1235 the circumstances under which the United States had taken possession and assumed control of the railway systems of the companies named and provided the terms under which the companies were to be compensated. Said agreement provided in paragraphs (a), (b) and (c) of section 5 thereof, as follows: SEC. 5(a) During the period of Federal control the Director General shall, annually, as nearly as practicable, expend and charge to railway operating expenses, either in payments for labor and materials or by payments into funds, such sums for the maintenance, repair, renewal, retirement, and depreciation of the property described in paragraph (a) of section 2 hereof as may be requisite in order that such property may be returned to the Company at the end of Federal control in substantially as good repair and in substantially as complete equipment as it was on January 1, 1918: Provided, however, That the annual expenditure and charges for such purposes during the period of Federal control on such property and the fair distribution thereof over the same, or the payment into funds of an amount equal in the aggregate (subject to the adjustments provided in paragraph (c) and to the provisions*1236 of paragraph (e) of this section) to the average annual expenditure and charges for such purposes included under the accounting rules of the Commission in railway operating expenses during the test period, less the cost of fire insurance included therein, shall be taken as a full compliance with the foregoing covenant. (b) The Director General may expend such sums, if any, in addition to those expended and charged under paragraph (a) of this section (subject to the adjustments provided in paragraph (c) of this section) as may be requisite for the safe operation of the property described in paragraph (a) of section 2 hereof, assuming a use similar to the use during the test period and not substantially enhancing the cost of maintenance over the normal standard of maintenance of railroads of like character and business during said period; and the amount, if any, of such excess expenditures during Federal control shall be made good by the Company as provided in paragraph (b) of section 7 hereof. (c) In comparing the amounts expended and charged under the provisions of paragraphs (a) and (b) of this section with the amounts expended and charged during the test period, due allowance*1237 shall be made for any difference that may exist between the cost of labor and materials and between the amount of property taken over and the average for the test period, and, as to paragraph (a), for any difference in use between that of the test period and during Federal control which in the opinion of the Commission is substantial enough to be considered, so that the result shall be, as nearly as practicable, the same relative amount, character, and durability of physical reparation. *1257 Pursuant to the provisions of an Act of Congress, approved February 28, 1920, known as "Transportation Act, 1920," the President relinquished possession and control of the properties of the Lake Erie and of its affiliated companies, at 12.01 a.m., March 1, 1920. "The Director General failed adequately to maintain the Lake Erie's property and failed to return the Lake Erie's property to the Lake Erie, at the end of federal control thereof, either in substantially as good repair or in substantially as complete equipment, as it was in at the beginning of federal control thereof." (So alleged and admitted in pleadings.) On June 24, 1924, the petitioner, as successor of the Lake Erie, *1238 and the Director General entered into a final settlement agreement, which was in the usual form except for modifications attributable to the consolidation of the Lake Erie and other railroad corporations to form the petitioner, and except for the insertion of a specific clause whereby the petitioner agreed to warrant and defend the Director General, the United States and the President against any and all claims which might, or could be, presented by the Northern Ohio for any use of its property during the period of Federal control. This agreement provided in part as follows: The New York, Chicago and St. Louis Railroad Company hereby acknowledges payment of the sum of seven hundred thousand dollars ($700,000) by the said Director General, the receipt whereof is hereby acknowledged, in full satisfaction and discharge of all claims, rights, and demands, of every kind and character, which the said Company now has or hereafter may have or claim against the Director General, or any one representing or claiming to represent the Director General, the United States or the President, growing out of or connected with the possession, use, and operation of the property of the Lake Erie and*1239 Western Railroad Company by the United States during the period of Federal control, or out of the contract between the Director General of Railroads and the Lake Erie and Western Railroad Company dated the 27th day of December, 1918; and the said Company hereby 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 of the property of The Lake Erie and Western Railroad Company. 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 the property of the Lake Erie and Western Railroad Company * * *. At the time of the execution of the settlement agreement, the Director General's books showed a credit balance due the Lake Erie of $360,141.90, made up of the following debits and credits (Exhibit 87): Debits Credits Compensation liability $3,403,473.72 Compensation installments paid $1,639,000.00 Interest reserve account 42,100.87 Interest due carrier corporation on assets of the Central Freight Association 129.67 Assets, December 31, 1917 - collected 676,521.83 Agents & conductors balance 12-31-17 257,826.77 Cash, December 31, 1917 656,196.30 Corporate transactions 444,464.78 Expense prior to January 1, 1918 367,180.75 Liabilities - December 31, 1917 - paid 1,649,238.30 Revenue prior to January 1, 1918 28,816.36 Corporation working funds 535.63 Additions and betterments closed by final settlement 976,490.59 Material and supplies, December 31, 1917 1,110,968.91 Federal material and supplies 2-29-20 1,232,497.15 Equipment retired 73,651.76 Accrued depreciation - equipment 346,989.48 Road property retired and not replaced 71,802.18 6,308,871.57 6,669,013.48 Credit balance 360,141.91 Total 6,669,013.48 6,669,013.48 *1240 *1258 On June 24, 1924, journal entry No. 55 was entered on the books of the Director General, the purpose of which is stated therein to be "To close into the settlement account of the Lake Erie & Western Railroad Company, balances due to or from that Company, as per agreement entered into on June 24, 1924, copy of which is made a part hereof." By this journal entry (Exhibit 88), the following debits and credits were entered on the Director General's books: (Table omitted) *1259 At the time of the execution of the settlement agreement, the accounts in petitioner's books pertaining to Federal control of the Lake Erie showed a net credit balance made up as follows (Exhibit 54): (Table omitted) The difference between the net credit balance of $118,529.50 shown due the Lake Erie on the petitioner's books, and the credit balance of $700,000 shown due that company on the Director General's books, or $581,470.50, is accounted for as follows: (Table omitted) *1260 The petitioner recorded the said final settlement with the Director General on its books and cleared the account balances in Exhibit 54 through "Federal Control Settlement Suspense" and "Profit*1241 and Loss - Miscellaneous Credits" accounts, by journal entry 1869 of July, 1924 (Exhibit 29); and as a part of the said journal entry, there were credited to "Profit and Loss - Miscellaneous Credits" and "Reserve for Undermaintenance of Freight Train Cars and Other Equipment, Except Locomotives" accounts, the sums of $113,314.42 and $468,156.08, respectively. (Exhibit 29.) The said journal entry was made pursuant to a letter from the vice president and general counsel of the petitioner, dated July 3, 1924, to the comptroller of the petitioner (Exhibit 30), which reads in part as follows: In order that you may properly account for the payment of $700,000 I give below the facts of settlement upon which such payment was based, to wit: the payment covers on following items: Agreed amount due corporation (as of December 31, 1923) on Open Accounts (Section 4 of Contract) and for Compensation, etc., (Section 7 of Contract) - Old items 1 to 12 inclusive $927,927.26 (This provides for credit claimed by the Director General, with corresponding debit to the corporation of $37,306.33 for adjustment in differences in freight accounting at the beginning and at the end of Federal control.) Amount due corporation for shortage in materials and supplies returned (Section 9(b) of Contract) - Old item 13 65,287.85 "Normal" Equipment Retirements admitted by the Director General (Section 5(a) and (c) of Contract) - Old item 14 69,520.29 "Fire Losses", Equipment (Section 5(e) of Contract) - Old item 15 6,503.59 So-called "Normal" Retirements of Road Property admitted by the Director General for Road Property Retired and Not Replaced placed (Section 9(e) and Section 5 of Contract). - Old item 17 29,132.55 "Fire Losses" admitted by the Director General for Road Property damaged or destroyed by fire and not replaced (Section 5(e) of Contract). Old item 18 16,709.28 Interest on Assets Central Freight Association as of December 31, 1923, admitted by Director General (Section 4(d) of Contract). Old item No. 26 129.67 Interest other than rental interest as of December 31, 1923, admitted by Director General (Section 4(a) of Contract). Old item 27 8,910.24 Depreciation of equipment admitted by Director General (Section 5(a) of Contract). Old item 32 $295,633.00 Less cost of allocated equipment applied thereto (Section 4(c), Section 5(a) and (c), Section 7(b) and Section 8(f) of Contract). Old item 31 211,419.22 84,213.78 Total of items due corporation specifically agreed to by the Director General in our negotiations 1,208,334.51 From which there is to be deducted for Additions and Betterments made by the Director General carried into our capital account 976,490.59 Leaving a net amount due company on items agreed to or claimed by the one party and admitted by the other of 231,843,92 The remainder of the amount paid in final settlement, to wit 468,156.08 Represents amount allowed for destruction of property and UNDERMAINTENANCE under Section 5 of the Contract not specifically allocated, Making a total of $700,000.00 *1242 *1261 By reference to your copy of my letter of April 26th to the Director General with supporting statements, wherein I offered to accept the cash sum of $1,400,000 in compromise and adjustment of all of our claims, you will note that all items in negotiation were reduced to three classes, to wit: 1. Items agreed to or claimed by one party and admitted by the other, which are included in the category of such items listed above. 2. Additions and Betterments made by the Director General, as to which, in view of the fact that we had included these Additions and Betterments in our capital account and had in fact drawn bonds against them, I was compelled to yield and which item may, therefore, now be included in the list of agreed items. 3. Items claimed by the company for undermaintenance under Section 5 of the standard contract not fully accepted by the Director General. You will also note that all items finally in dispute related wholly to the question of maintenance or destruction of property under Section 5 of the Contract, or, in general terms to UNDERMAINTENANCE. That is to say, the whole of the smounts claimed by us in this aspect related to reduction of*1243 capital values for which we demanded reimbursement or reparation and not at all to income. Assuming that the proper adjustments were made in capital account for fire losses and other property retired and not replaced, etc., it will be seen that the entire amount of $468,156.08 allowed by the Director General in compromise of the disputed items covers UNDERMAINTENANCE. As you will note from my letter of April 26th the undermaintenance claimed by us for equipment alone was very much more than the unallocated amount allowed for undermaintenance by the Director General and, consistently with our practice of accounting for depreciation of equipment while not charging depreciation of way and structures, it would appear to me proper and certainly in accordance with the settlement to charge the entire amount of $468,156.08 to the Director General for agreed or liquidated undermaintenance not specifically allocated and to credit this entire amount to reserve for undermaintenance of freight train cars and other equipment, except locomotives. As to locomotives, as you will note from my letter of April 26th, we made no specific claim for undermaintenance. The difference ($8,800.09) between*1244 the allowance for undermaintenance stated in the said letter, $468,156.08, and the entry on the Director General's books, of $459,356.19, represents the loss through fire of the Lake Erie's locomotive shop at Lima, Ohio, of which the petitioner's vice president failed to take account. *1262 In 1919 and 1920 the Director General issued Accounting Circulars 101 and 109, later supplemented by Accounting Circulars 101 A to C and 109 A and B, prescribing the formula, generally known as "the Director General's formula," to be used for determining the Government's liability for maintenance under section 5 of the Federal control contract. The following is a brief summary of the formula (Exhibits 89 to 95): (1) An allocation of test period maintenance expenses, exclusive of expenditures and charges for depreciation, insurance and retirements of property, as between labor and materials; (2) A labor equation factor equal to the total compensation to labor for hours worked in the test period, on the basis of average labor rates during Federal control period, divided by total test period expenditures and charges allocated to labor; (3) A materials equation factor equal to the total*1245 cost of annual average test period quantities of materials, on the basis of average prices for same materials in the Federal control period, divided by average annual test period expenditures allocated to materials; (4) An equated average annual test period cost of labor, being the average annual test period expenditures and charges allocated to labor multiplied by the labor equation factor; (5) An equated average annual test period cost of materials, being the average annual test period expenditures and charges allocated to materials multiplied by the materials equation factor; (6) The sum of items 4 and 5 equals the equated average annual test period maintenance expenses, exclusive of depreciation, insurance and retirements of property; (7) Adjustment of Federal control period expenditures and charges for maintenance, exclusive of depreciation, insurance and retirements of property, by appropriate amounts, for the differences in amount and use of property maintained, as between the test and Federal control periods; (8) Comparison of the sum of item 6 with the adjusted sum of item 7, to determine the liability of the Government or the carrier for undermaintenance or overmaintenance, *1246 respectively, accordingly as the adjusted sum of item 7 was less than or exceeded the sum of item 6. The carriers, generally, including the petitioner on behalf of the Lake Erie, challenged the formula, on the ground that it failed to take into consideration, as an element of the cost of labor, the difference in the quality and results, or "efficiency" of labor of the two periods; and contended that because of such failure the results of the formula did not provide the physical reparation to which they were entitled under section 5 of the contract. The Director General refused to change the formula, although he made adjustments in its results in special cases. A strict application of the Director General's formula indicated overmaintenance of the Lake Erie's property during Federal control, of approximately $36,000. The petitioner contended before the Director General that the formula reflected an excessive labor charge against the Lake Erie. *1263 The Director General did not give the petitioner any information, until long after the final settlement, as to how the allowance representing the difference between the net amount of $231,843.92, stated in the vice president's*1247 letter of July 3, 1924, to the petitioner's comptroller, to be due the Lake Erie "on items agreed to," and the sum of $700,000 paid on final settlement, or $468,156.08, was accounted for. During 1924 expenditures for maintenance and repair of equipment were charged by petitioner against the reserve referred to in the vice president's letter for undermaintenance of freight train cars and other equipment, to the full amount thereof, instead of being charged to appropriate operating expense accounts under "Maintenance of equipment"; and the deduction for maintenance of equipment taken by the petitioner in its return for 1924, in computing taxable net income, was $459,356.19 less than the actual expenditures for that purpose made during the year. The petitioner has filed claim for refund of so much of the tax paid on its 1924 taxable income as was attributable thereto. The number of man-hours of shop labor applied in repair of equipment in the Lake Erie's shops for an average 10 months of the Federal control period was 1,803,440 for locomotives and 773,980 for cars, a total of 2,577,420; and for the last 10 months of 1920 was 1,699,952 or locomotives and 780,679 for cars, a total*1248 of 2,480,631. During both of the periods above mentioned the Lake Erie's shops were operated as a part of the shop pool system, for car repairs, of the New York Central Lines, and the above figures include man-hours of labor applied in repair of equipment of other members of the pool system, but do not include man-hours of labor applied in repair of the Lake Erie's equipment in other than its own shops. There was no pool system for locomotive repairs. During the Federal control period of 26 months 57 locomotives belonging to the Lake Erie were repaired in other than its own shops, which is an average of 21.9 locomotives for 10 months of that period; and during the last 10 months of 1920 the number so repaired was 11. No records are available which will show the number of man-hours applied in the two periods in repair of equipment belonging to the Lake Erie in other than its own shops. On November 1, 1919, the so-called "National Agreement," which made certain changes in existing wage scales and working rules and conditions, became effective. It applied to all carriers. One of the major changes effected by the national agreement was a more particular distribution of work*1249 among the several crafts. For some time before the national agreement became effective the New York Central Lines, including the Lake Erie, had agreements with the different crafts affiliated with the American Federation of Labor, which, as respects the distribution of work between crafts, was *1264 nearly like the national agreement; and, as the Lake Erie had observed those agreements, the national agreement effected but little change. After the national agreement became effective, the Lake Erie did distribute the work among proper crafts in its shops with more precision than before, and, consequently, the number of man-hours of shop labor applied in maintenance of equipment in its shops was affected to some extent by the changes effected by the national agreement. During the Federal control period of 26 months the total weitht of locomotives belonging to the Lake Erie which were repaired in its own and outside shops was 30,220,890 pounds, which is an average of 11,623,419 pounds for 10 months of that period; and during the last 10 months of 1920 the total weight of the Lake Erie's locomotives so repaired was 14,309,030 pounds, of which 2,899,200 pounds was the weight*1250 of locomotives acquired, but not repaired, in the Federal control period. The average number of locomotives owned and leased by the Lake Erie, exclusive of those leased from the Northern Ohio, during the Federal control period and during the last 10 months of 1920 was 154.7 and 157.6, respectively. The average number of freight train cars and of passenger train cars owned and leased, exclusive of those leased from the Northern Ohio, during the Federal control period and during the last 10 months of 1920 was as follows: Average of Average of Federal control last 10 period months, 1920 Freight-train cars 5,434 5,383 Passenger-train cars [59] The monthly reports of operating statistics made by the Lake Erie to the Interstate Commerce Commission for the last 10 months of 1920 show the number of home freight cars on line, including caboose and work equipment, distributed between those serviceable and those in or awaiting shop, as follows: Month, 1920 Serviceable In or awaiting shop Total on line March [272] April [509] May [282] June [279] July [317] August [398] September [394] October [495] November [655] December [738] *1251 Generally speaking, a carrier's cars on foreign lines are in serviceable condition. The operating statistics reports of the Lake Erie to the Interstate Commerce Commission show that the monthly *1265 average of foreign cars on line for the last 10 months of 1920, was 5,407.8, of which only 163.6 were in or awaiting shop. It is the general practice of carriers to make only such repairs to a foreign car as will enable it to proceed to destination under load or to return to its home line. The essence of the car-repair pool of the New York Central Lines was that additions and betterments and repairs were made to members' cars to a greater extent than would be the case if the repairs were made in the shops of nonmembers of the pool; and one of the principal reasons for establishing the pool was to get members' cars into shop more quickly than was possible were the cars in need of repairs on nonmembers' lines. It was the equipment repair policy of the Lake Erie to give shop preference to equipment needing the lightest repairs, and to equipment of a type most needed in service. On March 1, 1920, there were 46 locomotives belonging to the Lake Erie in or awaiting shop for*1252 repairs. Of this number, 5 were dismantled between March 1 and December 31, 1920, 2 were dismantled in 1921, and 12 were put in and taken out of shop at unknown dates; and as to these 19 locomotives, the cost of repairs made in 1920 is unknown. The following statement shows, for each of the other 27 locomotives, the date put in shop, the date out of shop, and the cost of repairs made in 1920, the statement being divided into three parts so as to present such facts separately for the three periods, 1919, January 1 to February 29, 1920, and March 1 to December 31, 1920. Engine number Date in Date out Cost of shop of shop repairs in 1920 In shop in 1919: [4155] 12/ 6/19 3/12/20 $11,934.40 [5553] 12/30/19 3/2/20 6,340.33 [5545] 12/31/19 4/11/20 7,709.37 In shop 1/1 to 2/29/20: [5391] 1/13/20 3/26/20 8,913.77 [5335] 1/19/20 3/20/20 3,866.13 [5390] 1/30/20 3/13/20 7,096.50 [5347] 2/6/20 4/3/20 4,512.58 [4158] 2/ 9/20 3/ 6/20 5,039.52 [4373] 2/ 9/20 3/25/20 4,396.48 [5517] 2/12/20 3/31/20 Unknown. [5533] 2/14/20 3/14/20 Unknown. [5516] 2/24/20 3/ 8/20 Unknown. [4249] 2/26/20 5/4/20 4,933.65 In shop 3/1 to 12/31/20: [5541] 3/ 1/20 4/24/20 7,220.98 [5512] 3/2/20 5/12/20 3,970.74 [5538] 3/3/20 6/3/20 7,353.74 [5511] 3/9/20 4/9/20 3,760.48 [5393] 3/16/20 5/15/20 4,045.57 [4150] 3/16/20 6/11/20 13,756.95 [5344] 3/22/20 4/20/20 3,050.77 [5398] 3/26/20 4/13/20 3,754.41 [4261] 3/29/20 6/26/20 8,254.59 [5614] 4/16/20 6/18/20 5,872.18 [5334] 4/24/20 5/19/20 4,082.79 [5531] 6/18/20 7/16/20 6,386.26 [5502] 6/23/20 10/28/20 18,706.91 [5506] 7/2/20 11/5/20 19,188.37 *1253 In the case of repairs to locomotives put in shop on and after March 1, 1920, the entire cost of such repairs was borne by the Lake Erie. *1266 In the territory which the Lake Erie served the principal materials, measured in terms of dollars, used by railroads in maintenance of roadway are ties and rails. The principal structures maintained by the Lake Erie in 1918, 1919 and 1920 were wooden trestles. The only rails and ties installed and bridge renewal work done on the Lake Erie in the months of January and February of 1918, 1919 and 1920 was emergency work, and such work was practically negligible. The following is a statement of the number of ties and tons of rail applied to roadway, and of the number of lineal feet of wooden bridges renewed or replaced, in the years 1918, 1919 and 1920: [1919] Average, 1918-1919 [1920] Main track ties used 174,082 193,180 183,631 150,400 Side track ties used 47,896 38,099 42,998 54,565 Total ties used 221,978 231,279 226,629 204,965 New rail applied (tons) 1,951 3,015 2,483 2,194 Wooden bridges renewed or replaced (lineal feet) 553.4 314.8 434.1 360.2 The following statement*1254 shows the average number of ties and of tons of rail applied to roadway by the Lake Erie in three 10-month periods of the test period, each of such periods corresponding with the months of March to December, inclusive, and the number of ties and tons of rail so applied in the last 10 months of 1920: Average for Last 10 3 tenmonth periods months of the test period of 1920 New rail applied (tons): 90-lb. first class 95.9552 1,853.0208 80-lb. first class 1,343.9766 15.8609 75-lb. first class .6512 .3348 56-lb. first class None. 68.2596 All weights, second quality 39.0639 None. Total new rail applied 1,479.6469 1,937.4761 Second-hand rail applied (tons): 90-lb 12.7632 91.5070 80-lb 129.1173 96.7527 75-lb 891.7358 1,711.8945 60-lb 104.5277 16.6867 56-lb 624.0576 116.6424 52-lb None. 4.6425 All weights, scrap 89.3792 61.6484 Total second-hand rail applied 1,851.5808 2,099.7742 Total rail applied 3,331.2277 4,037.2503 New ties applied: Oak 77,782 70,029 Chestnut [545] 1,231 Cedar 20,925 12,147 Zinc chloride treated None. 7,688 Creosote treated 147,239 104,681 Fir None. 6,291 Culls None. [576] Total new ties applied 246,491 202,643 Second-hand ties applied: Oak None. [442] Zinc chloride treated None. [70] Creosote treated None. [28] Total second-hand ties applied None. [540] Total ties applied 246,491 203,183 *1255 *1267 Taken as a whole, the general physical condition of the Lake Erie's roadway and structures was probably better on December 31, 1920, when an entire year's maintenance work had been completed, than on March 1, 1920, after five months of winter weather with little maintenance on the roadway. In 1920 there was a shortage of maintenance materials in the territory served by the Lake Erie; and in that year the Lake Erie was indebted to the New York Central to the amount of $1,300,000. The test period, July 1, 1914, to June 30, 1917, was a normal period of expenditures for maintenance. The following statement shows the average ratios of expenditures for maintenance of way and structures and equipment to total operating expenses, for the four-year period, July 1, 1910, to June 30, 1914, and for the test period, of Class I railroads of the country, Class I railroads of the Eastern District, and the Lake Erie alone. Percentage of operating expenses Four years Test 7/1/10 to 6/30/14 period 1 All Class I railroads: Maintenance of way and structures 18.834 17.653 Maintenance of equipment 23.392 24.832 Total 42.226 42.485 Class I railroads of Eastern District: Maintenance of way and structures 17.611 15.928 Maintenance of equipment 24.421 25.506 Total 42.032 41.434 Lake Erie: Maintenance of way and structures 19.299 16.770 Maintenance of equipment 24.057 24.985 Total 43.347 41.755 *1256 By the provisions of the Transportation Act, 1920, the Interstate Commerce Commission was charged with the duty of determining the amounts payable by the United States to carriers accepting the guaranty provisions of section 209 of that act. In paragraph (3) of subdivision (f) of section 209 of the said act, it was provided that: There shall not be included in operating expenses [of the guaranty period, March 1 to August 31, 1920], for maintenance of way and structures, or for maintenance of equipment, more than an amount fixed by the commission. In fixing such amount the commission shall so far as practicable apply the rule set forth in the proviso in paragraph (a) of section 5 of the "standard contract" between the United States and the carriers (whether or not such contract has been entered into with the carrier whose railway operating income is being computed). *1257 *1268 The settlement with the Lake Erie for the guaranty period was made in accordance with the principles and rules announced by the Commission in 70 I.C.C. 115, and 70 I.C.C. 711. The Commission assigned the Lake Erie to the eastern region, for which it determined a factor of 2.35 as representing the increase in the general level of cost of labor and material between the test period and the guaranty period. The said factor of 2.35 was a judgment factor, not based upon a rigid adherence to any mathematical formula, but arrived at after deliberate consideration and extensive studies of the general conditions prevailing in the region, as reflected by the returns of 49 carriers, and a composite return of five representative carriers operating in that region. The factor is not susceptible of precise division into its component parts, but an approximate breakdown is as follows: Component factors Material Labor Maintenance of way 2.05 2.63 Maintenance of structures 2.16 2.61 Composite maintenance of way and structures 2.07 2.62 Maintenance of equipment 2.03 2.64 Composite maintenance of way and structures and maintenance of equipment 2.04 2.64 *1258 The factor was varied by the Commission, according to the circumstances which the individual carriers could support with proof. In determining the amount to be included in the Lake Erie's operating expenses of the guaranty period on account of maintenance of way and structures and maintenance of equipment, for the purpose of settlement under section 209 of the Transportation Act, 1920, the Commission used a factor of 2.35, which was the regional factor for the eastern region, as representing the increase in the general level of cost of labor and materials between the test period and the guaranty period. The average annual test period expenditures and charges of the Lake Erie for maintenance of way and structures was $720,294.43, and for maintenance of equipment, $1,112,063.64; and these amounts include $19,769.80 and $148,046.26, respectively, representing average annual test period expenditures and charges for depreciation, insurance and retirements of property. The Commission allocated one-half (six months) of such average annual test period equipment expenditures and charges, exclusive of depreciation, insurance and retirements, to the four classes of equipment maintained, *1259 as follows: Locomotives, $205,772.70; freight train cars, $254,389.87; passenger train cars, $16,938.60; and work equipment, $4,907.52. *1269 The following is the Commission's allocation of one-half (six months) of the average annual test period expenditures and charges for depreciation, insurance and retirements, as between way and structures and equipment: Way and structures Equipment Depreciation $58,095.68 Insurance $615.48 196.89 Retirements of property 9,269.42 15,730.56 The Commission determined the amount to be included in operating espenses of the guaranty period for maintenance of way and structures to be $873,952.28, made up as follows: One-half average annual test period expenditures and charges for maintenance, exclusive of expenditures and charges for depreciation, insurance and retirements $350,262.31 Add adjustments for: Difference in amount of property maintained 5,870.40 Difference in use of property maintained 11,357.07 Differences in cost of labor and materials 496,111.20 Insurance - One-half average annual test period expenditures and charges $615.48 Adjustment for difference in amount of property maintained 10.34 625.82 Retirements of property: One-half average annual test period charges 9,269.42 Adjustment for difference in amount and use of property maintained 456.06 9,725.48 Total amount determined and allowed by Commission for expenses of maintenance of way and structures in the guaranty period 873,952.28 *1260 The Commission determined the amount to be included in operating expenses of the guaranty period for maintenance of equipment to be $1,468,789.38, made up as follows: One-half average annual test period expenditures and charges for maintenance of locomotives $205,772.70 Add adjustments for: Difference in amount of property maintained 73,368.26 Differences in cost of labor and materials 316,169.01 595,309.97 Deduct adjustment for: Difference in use of property maintained 44,941.69 Total for locomotives 550,368.28 One-half average annual test period expenditures and charges for maintenance of freight train cars $254,389.87 Add adjustments for: Difference in amount of property maintained 71,229.16 Differences in cost of labor and materials 430,793.98 756,413.01 Deduct adjustment for: Difference in use of property maintained 6,512.38 Total for freight train cars 749,900.63 One-half average annual test period expenditures and charges for maintenance of passenger train cars 16,938.60 Add adjustment for: Difference in cost of labor and materials 20,708.41 37,647.01 Deduct adjustments for: Difference in amount of property maintained $1,402.67 Difference in use of property maintained 196.37 1,599.04 Total for passenger train cars 36,047.97 One-half average annual test period expenditures and charges for maintenance of work equipment 4,907.52 Add adjustment for: Difference in amount of property maintained 323.24 Difference in use of property maintained 166.81 Differences in cost of labor and materials 7,286.72 Total for work equipment 12,684.29 One-half average annual test period expenditures and charges for depreciation 58,095.68 Add adjustment for: Differences in amount of property maintained 42,699.34 Total for depreciation 100,795.02 One-half average annual test period expenditures and charges for insurance 196.89 Add adjustment for: Difference in amount of property maintained 61.20 Total for insurance 258.09 One-half average annual test period charges for retirements 15,730.56 Add adjustment for: Differences in amount and use of property maintained 3,004.54 Total for retirements 18,735.10 Total amount determined and allowed by Commission for expenses of maintenance of equipment in the guaranty period 1,468,789.38 *1261 *1271 The amount of the adjustment of the test period expenses of maintenance of way and structures, for difference in amount of property maintained, was determined by the Commission in the following manner: The average investment in way and structures of the test period was deducted from the average investment in those properties of the guaranty period, to arrive at the increase in average investment, as between the two periods; an equalizing factor of 1.675 was found on the basis of 1 plus the general factor for changes in wages and cost of materials of 2.35, divided by 2; the increase in average investment was divided by the equalizing factor of 1.675, to arrive at the comparable increase in amount of property maintained; two-thirds of the expense of maintenance of way and structures was accepted as varying as the amount of property maintained; the comparable increase in amount of property maintained was divided by the average investment of the test period, and two-thirds of the quotient accepted as the adjustment factor; and the one-half average annual test period expenditures and charges for maintenance of ways and structures, exclusive of expenditures and charges for*1262 depreciation, insurance and retirements of property, was multiplied by the adjustment factor, to arrive at the amount of the adjustment for difference in amount of property maintained. The amount of the adjustment of the test period expenses of maintenance of equipment, for difference in amount of property maintained, was determined by the Commission in the following manner: The increase or decrease in amount of equipment maintained was arrived at in the case of locomotives and passenger train cars by comparison of the average aggregate weight in tons of equipment maintained in the two periods, and in the case of freight train cars by comparison of the average aggregate tons of carrying capacity of cars maintained in the two periods; 100 per cent of maintenance expenses of equipment was accepted as varying as the amount of equipment maintained; the adjustment facrors were arrived at in the case of locomotives and passenger train cars by dividing the increase or decrease in average aggregate weight in tons by the average aggregate weight of the two classes of equipment maintained in the test period, and in the case of freight train cars by dividing increase or decrease in the average*1263 aggregate tons of carrying capacity by the average aggregate tons of carrying capacity of cars maintained in the test period; and the one-half average annual test period expenditures and charges for maintenance of each of said classes of equipment, exclusive of expenditures and charges for depreciation, insurance and retirements of property, was multiplied by the adjustment factor determined for that class, to arrive at the *1272 amount of the adjustment for difference in amount of property maintained. The amount of the adjustment of the test period expenses of maintenance of each class of property maintained, for difference in use of property, was determined by the Commission by multiplying the sum of one-half of the average annual test period expenses of maintenance of that class, exclusive of expenditures and charges for depreciation, insurance and retirements of property, plus the amount of the adjustment of the test period expenses applicable to that class for difference in amount of property maintained, by an adjustment factor determined according to formulas, principal or alternate, prescribed by the Commission in *1264 Finance Docket 1606, 70 I.C.C. 711. The amount of the adjustment of the test period expenses of insurance, for difference in amount of property maintained, was determined by the Commission to be that amount which bears the same ratio to the one-half average annual test period expenditures and charges for insurance as the amount of the adjustment of maintenance expenses for difference in amount of property maintained bears to the one-half average annual test period expenditures and charges for maintenance, exclusive of expenditures and charges for depreciation, insurance and retirements of property. The amount of the adjustment of the test period charges for retirements of property, for difference in amount and use of property maintained, was determined by the Commission to be that amount which bears the same ratio to the one-half average annual test period charges for retirements as the amount of the combined adjustments of maintenance expenses for differences in amount and use of property maintained bears to the one-half average annual test period expenditures and charges for maintenance, exclusive of expenditures and charges for depreciation, insurance and retirements*1265 of property. The average test period investment of the Lake Erie, in way and structures, was $33,684,524.47, and the average investment in the same facilities for the last 10 months of 1920 was $35,160,081.85. The average aggregate weight of locomotives maintained by the Lake Erie during the test period was 11,975.90 tons, and during the last 10 months of 1920 it was 8,863.60 tons. The average aggregate carrying capacity of freight train cars maintained by the Lake Erie during the test period was 160,000 tons, and during the last 10 months of 1920 it was 205,000 tons. The average aggregate weight of passenger train cars maintained by the Lake Erie during the test period was 2,705 tons, and during the last 10 months of 1920 it was 2,481 tons. The average number and average aggregate weight of locomotives, the average number and average aggregate carrying capacity of *1273 freight train cars, and the average number and average aggregate of passenger train cars, in service in the last 4 months of 1920, were less than such averages for the guaranty period. The trend of prices of maintenance materials in the last 4 months of 1920, and for a period of time in 1921, *1266 was upward from the general level of prices of similar materials prevailing at the end of the guaranty period; and the trend of wages of railroad maintenance labor in the last 4 months of 1920 was downward from the general level of wages of similar labor prevailing at the end of the guaranty period. The factor, for the eastern region, for equating the test period costs of maintenance labor and materials on the basis of 1921 costs, computed in accordance with the same principles under which the Interstate Commerce Commission determined the factor for equating the test period costs on the basis of guaranty period costs, is 2.29, made up as follows: Component factors Composite Material Labor of labor and materials Maintenance of way and structures 2.26 2.32 2.30 Maintenance of equipment 2.01 2.46 2.29 Composite maintenance of way and structures and maintenance of equipment 2.10 2.41 In computing taxable net income in its return for 1920, the Lake Erie deducted from gross income, as ordinary and necessary expenses of its business, the sum of $4,401,355.90 representing expenditures and charges made in the last 10 months of 1920 for*1267 maintenance of way and structures and equipment, and for depreciation, insurance, retirements and fire losses, in respect of such facilities. Of the total sum so deducted, the respondent disallowed $459,356.19 on the ground that the Lake Erie was reimbursed to that extent by the Director General in the 1924 final settlement of Federal control. III. The number of locomotives owned and leased by the Lake Erie at the beginning of Federal control, exclusive of those owned by and leased from the Northern Ohio, and used by the Director General during Federal control, was as follows: December 31, 1917, 146; December 31, 1918, 146; december 31, 1919, 143; January and February, 1920, 143. The Northern Ohio owned 10 locomotives at the beginning of Federal control, which were leased by the Lake Erie and were used by the Director General throughout the Federal control period. The average cost of all of such locomotives was $12,196. There were added to the Lake Erie's equipment during Federal *1274 control, 18 locomotives, as follows: 5 in September, 1918; 5 in October, 1918; 5 in January, 1919; and 3 in January, 1920. No additional locomotives were acquired by the Northern Ohio*1268 during Federal control. The average cost of the 18 locomotives added to the Lake Erie's equipment during Federal control was $48,069.20. The said 18 locomotives were purchased by the Director General, and, upon final settlement with the Director General for Federal control, the Lake Erie was required to make payment therefor. The number of freight train cars owned and leased by the Lake Erie at the beginning of Federal control, exclusive of those owned by and leased from the Northern Ohio, and used by the Director General during Federal control, was as follows: December 31, 1917, 5,496; December 31, 1918, 5,436; December 31, 1919, 5,368; January and February, 1920, 5,368. The Northern Ohio owned 11 freight train cars at the beginning of Federal control, which were leased by the Lake Erie, and which were used by the Director General throughout the Federal control period. The average cost of all of such freight train cars was $825. There were added to the Lake Erie's equipment during Federal control, 11 freight train cars, as follows: 2 in July, 1918; and 1 in each of the months of August and September, 1918, February, April, June, September, November and December, 1919, and*1269 February, 1920. No additional freight train cars were acquired by the Northern Ohio during Federal control. The average cost of the 11 freight train cars added to the Lake Erie's equipment during Federal control was $1,679.63. The number of passenger train cars owned and leased by the Lake Erie at the beginning of Federal control, exclusive of those owned by and leased from the Northern Ohio, and used by the Director General during Federal control, was 60. The Northern Ohio owned 3 passenger train cars at the beginning of Federal control, which were leased by the Lake Erie and were used by the Director General throughout the Federal control period. The average cost of all of such passenger train cars was $7,694. No additional passenger train cars were acquired by either the Lake Erie or the Northern Ohio during Federal control. During Federal control, 101 items of road property belonging to the Lake Erie and 12 items of road property belonging to the Northern Ohio were retired and not replaced. As to the 101 items belonging to the Lake Erie, the total ledger value was $49,156.66, the total salvage recovered was $31,611.33, and the total cost of demolition was $5,289.65. *1270 Of the said 101 items, 92 were acquired by the Lake Erie prior to March 1, 1916, and as to said 92 items, the total ledger value was $46,357.07, the total salvage recovered was $28,446.38, and the total cost of demolition was $5,084.67; and as to the other 9 items *1275 acquired by the Lake Erie after March 1, 1913, the total ledger value was $2,799.59, the total salvage recovered was $3,164.95, and the total cost of demolition was $204.98. As to the 12 items belonging to the Northern Ohio, the total ledger value was $12,177.35, the total salvage recovered was $3,741.28, and the total cost of demolition was $660.41. Of the said 12 items, 9 were acquired prior to March 1, 1913, and as to said 9 items, the total ledger value was $6,815.65, the total salvage recovered was $2,843.96, and the total cost of demolition was $600.81; and as to the other 3 items acquired by the Northern Ohio after March 1, 1913, the total ledger value was $5,361.70, the total salvage recovered was $627.32, and the total cost of demolition was $59.60. The Lake Erie did not accrue any depreciation on its books, in respect of way and structures, during the period 1914 to 1920. In April, 1913, the*1271 Lake Erie entered into a contract with the Lewisburg Stone Company for the sale of gravel from a pit owned by the Lake Erie at 5 cents per cubic yard. Under the contract, the Stone Company was required to bear the entire expense of removal of the gravel. The contract continued in force throughout the Federal control period; and during that period, the Stone Company removed 87,712.33 cubic yards of gravel, for which it was billed by the Director General in the total amount of $4,385.62. The Director General did not, during the Federal control period, account to the Lake Erie for the proceeds from such sales. The cost to the Lake Erie of such 87,712.33 yards of gravel was $1,096.40. During Federal control the Director General purchased certain quantities of rail and ties under hold-over contracts which the Lake Erie had entered into prior to the beginning of Federal control with certain dealers in those materials. The contract prices were lower than the prices for similar materials at which the Lake Erie settled with the Director General for the supplies and materials which were turned over to it by the latter at the end of Federal control. The total cost of the materials so*1272 purchased by the Director General, computed at contract prices and including freight charges to points of destination, was $254,537.35. The cost of such materials, had they been paid for at the prices at which the Lake Erie settled with the Director General for materials and supplies turned over to it by the latter at the end of Federal control, would have amounted to $340,344.76. Some or all of the materials so purchased by the Director General were used by him, and were so used, to some extent, in the maintenance of the Lake Erie's roadway during Federal control. After Federal control, the Lake Erie purchased certain quantities of rail under hold-over contracts which the Director General had entered into during Federal control with certain dealers in that material. The total cost of the rails so purchased by the Lake Erie *1276 amounted to $163,481.20. Had the Lake Erie been required to pay current market prices at the respective dates of purchase, the total cost would have amounted to $171,906.80. During Federal control the Director General made additions and betterments to the properties of the Lake Erie, and to those of its lessor, the Northern Ohio, to replace*1273 facilities retired; The total cost of such additions and betterments amounted to $519,282.47 in the case of the Lake Erie, and to $6,775.79 in the case of the Northern Ohio, which the Director General charged against the Lake Erie; but the Director General allowed, as credits against the total amount so charged, the actual cost to those carriers of the facilities retired, which amounted to $107,454.07 in the case of the Lake Erie, and to $10,390.16 in the case of the Northern Ohio. The net amount so charged by the Director General was entered on the books of the Lake Erie in its property investment account; and any of such additions and betterments which have since been retired have been charged to profit and loss at the amounts so recorded on the Lake Erie's books. In maintaining the roadways of the Lake Erie and of the Northern Ohio during Federal control, the Director General, in making renewals and replacements of ties, installed 116,068 zinc chloride ties. Theretofore no zinc chloride ties had been used by the Lake Erie or the Northern Ohio in the maintenance of their roadways. The average life of zinc chloride ties is 11 years. The average life of creosote treated ties*1274 is 14.2 years. IV. The Lake Erie accepted all of the provisions of section 209 of the Transportation Act, 1920. Pursuant to those provisions and the certification of the Interstate Commerce Commission, the Lake Erie in 1922 received $500,918.65 from the United States. For the purpose of determining the amount due the carrier for the guaranty period, the Interstate Commerce Commission allowed as a deduction in computing net railway operating income of the guaranty period, railway tax accruals of $258,662.55, which amount included $2,832.70 for Federal income taxes. OPINION. STERNHAGEN: The respondent sent to the petitioner two notices of the same deficiency in the 1920 income tax of the former Lake Erie & Western Railroad Company, one treating the petitioner as the taxpayer and the other as a transferee of the taxpayer. From each notice, the petitioner, as the successor by consolidation, instituted a separate proceeding. It admits its liability for whatever deficiency may be held to be correct as to the Lake Erie. Both proceedings *1277 were consolidated, since they were in their substantive issues identical. *1275 It is suggested either that the transferee proceeding should be dismissed or that it should be disposed of by a judgment of no transferee liability. Either of these courses, however, may involve unexpected results, for a dismissal is given, by section 1000, Revenue Act of 1926, amending section 906 (c), Revenue Act of 1924, the effect of affirming the deficiency determined by the Commissioner, and a judgment of no liability would, in view of the disposition of the issues, involve confusion. Cf. Oswego Falls Corporation,26 B.T.A. 60. We shall proceed to consider the substantive questions at issue, leaving the judgment in both cases to be formulated later. The first assignment of error in respect of the sidetrack donations has been conceded by respondent and needs no consideration. The next three assignments are controverted. The facts have, for convenience, been separated as far as they could be, under Roman numbers, in correlation with the opinion. The question in the fifth assignment, in respect of the inclusion within the guaranty income of the normal tax, the facts of which appear under IV, is decided against petitioner by *1276 Union Pacific R.R. Co. et al.,26 B.T.A. 1126. I. The Lake Erie on its original and amended returns for 1920 took a deduction of $92,661.33, which it described as "loss sustained by reason of assignment of the lease of the Northern Ohio Railway Company to the Akron, Canton & Youngstown Railway Company effective March 1, 1920." This was the net debit amount shown on the Lake Erie's books at the time of the assignment purporting to represent the net amount claimed by the Lake Erie to be owing to it by the Northern Ohio. The respondent disallowed the deduction. The petitioner assails this disallowance and sets up in addition that it is entitled to the further deduction, not heretofore claimed, of "a loss of not less than $1,500,000 resulting from the sale, assignment and transfer to the Akron, Conton & Youngstown Railway Company, on March 1, 1920, of stock of the Northern Ohio Railway Company, of the lease of its properties to the Lake Erie, and of the Lake Erie's claim against the Northern Ohio Railway Company thereunder." On March 1, 1920, the Lake Erie, pursuant to the agreement of December 11, 1919, transferred to the Akron Company, the lease of the Northern*1277 Ohio's railroad properties, dated October 1, 1895, 35,800 shares of the common and 21 shares of the preferred stock of the Northern Ohio, the net indebtedness of the Northern Ohio to the Lake Erie at March 1, 1920, and any claim that might accrue to the Lake Erie against the Northern Ohio by reason of the Lake *1278 Erie's payment of certain interest, accruing after March 1, 1920, on the Northern Ohio's bonded indebtedness. In addition, the Lake Erie agreed to pay one year's interest on the Northern Ohio's bonded indebtedness, accruing after March 1, 1920. In consideration for the transfer, the Akron Company assumed all of the obligations and liability of the Lake Erie under the lease agreement, arising or accruing after March 1, 1920; agreed to save the Lake Erie harmless from any and all claims of the Northern Ohio, based upon any alleged deterioration of, or insufficiency in, the leased properties on the effective date of the agreement as compared with the date upon which the Lake Erie came into possession thereof; and assumed all of the obligations and liability of the Lake Erie upon its guaranties of the Northern Ohio's outstanding first mortgage bonds, both as to principal*1278 and interest. The petitioner alleges that such of the transferred properties as were acquired before March 1, 1913, cost the Lake Erie $2,380,514.59; that the fair market value of such properties, as of March 1, 1913, was at least $1,700,000; that the cost to the Lake Erie of such of the transferred properties as were acquired after March 1, 1913, was $122,539.85; and, therefore, that the Lake Erie sustained a loss of at least $1,822,539.85 from the transaction, which is deductible in computing net income for 1920, under section 234(a)(4) of the Revenue Act of 1918. It recognizes that it must prove as to properties acquired before March 1, 1913, the lower of cost or value on that date, Burnet v. Houston,283 U.S. 223, and as to subsequently acquired properties, the cost. The respondent's position is that the Lake Erie acquired the lease and the stock without statutory cost; that the Northern Ohio's indebtedness to the Lake Erie, if any, on March 1, 1913, had no fair market value on that date; that, since, under section 202(a) of the Revenue Act of 1918, any deductible loss from the disposition of property acquired before March 1, 1913, must be determined*1279 upon the basis of cost or fair market value as of that date, whichever is lower, the Lake Erie sustained no deductible loss upon the transfer to the Akron Company of the lease and stock, because they were acquired without cost, or upon the transfer of the Northern Ohio's indebtedness as of March 1, 1913, because such indebtedness had no fair market value on that date; and that any indebtedness of the Northern Ohio to the Lake Erie incurred after March 1, 1913, was worthless and uncollectible at the time incurred, and, consequently, should have been charged off prior to the taxable year in question. At the time of the acquisition by the Lake Erie in 1895 of the lease and the 35,800 shares of common stock, no cost was paid or incurred, the consideration being entirely in promises. No one *1279 seems to know when or how the 21 shares of preferred came to the Lake Erie, and from the record it is impossible to find whether it was acquired before or after March 1, 1913, if at all, and of course impossible to find a figure of cost. From October 1, 1895, to March 1, 1920, the Lake Erie made net cash expenditures for the operation of the Northern Ohio's properties, for the payment*1280 of interest on the first mortgage bonds of the Northern Ohio and other fixed charges of the latter, and for additions and betterments to the said properties, in excess of operating revenues from those properties, in the total sum of $3,615,564.45, of which $2,409,004.81 was expended before, and $1,206,559.64 after, March 1, 1913. The said total sum of $3,615,564.45, except $38,573.29 expended for additions and betterments after March 1, 1913, was charged by the Lake Erie to operating expenses, as and when paid or incurred. Of the amount so expended before March 1, 1913, sums aggregating $719,056.47 were taken as deductions from income by the Lake Erie in its corporation excise-tax returns for the years 1909 to 1912, inclusive, and the sum of $37,131.60 was taken as a deduction from income in its income-tax return for 1913. The total amount so expended after March 1, 1913, except $38,573.29 expended for additions and betterments, was deducted in income-tax returns for the years 1913 to 1920, inclusive. The petitioner has renounced any right to have any sums so deducted in income-tax returns for the years 1913 to 1920, inclusive, included in the basis for determining the amount of*1281 any deductible loss sustained by the Lake Erie in the transaction with the Akron Company, but claims that the basis should include the amounts deducted in the Lake Erie's excise-tax returns for 1909 to 1912, inclusive. In addition to the foregoing, the Lake Erie expended $72,998.33 before, and $51,307.50 after, March 1, 1913, for the purchase of securities of the Akron & Barberton Belt and for contributions to the Akron & Barberton Belt's sinking fund, all for the account of the Northern Ohio; and such expenditures were charged to the account of the Northern Ohio and no part thereof was deducted iv the Lake Erie's income-tax returns. Thus the total net cash expenditures by the Lake Erie for the purposes above mentioned, not taken as deductions in its income-tax returns, were $2,444,871.54 before, and $89,880.79 after, March 1, 1913. Also the Lake Erie turned over to the Akron Company materials and supplies on the Northern Ohio's railroad at the end of Federal control, which, it is said, the Director General, in the final settlement of Federal control of the Lake Erie, inventoried and turned over to the latter, at a value of $32,659.06. The petitioner concedes that, for the purpose*1282 of arriving at total cost to the Lake Erie of the Northern Ohio's indebtedness transferred *1280 to the Akron Company, net cash expenditures should be offset by $64,356.95, depreciation and retirements of Northern Ohio properties deducted from income in the Lake Erie's income-tax return. Thus the petitioner computes the total cost to the Lake Erie of the Northern Ohio's indebtedness, as follows: Net cash expenditures before March 1, 1913 $2,444,871.54 Net cash expenditures after March 1, 1913 89,880.79 Materials and supplies after March 1, 1913 32,659.06 2,567,411.39 Less: Depreciation and retirements of Northern Ohio property deducted in Lake Erie's income-tax returns 64,356.95 Cost of Northern Ohio's indebtedness 2,503,054.44 The respondent says that all smounts expended by the Lake Erie for the operation of the leased properties, for the payment of interest on the first mortgage bonds of the Northern Ohio and other fixed charges of the latter, and for additions and betterments to the said leased properties, in excess of operating revenues from those properties, were, under the terms of the lease, rentals, a part of the Lake Erie's operating*1283 expenses, and, therefore, they may not be included in the cost basis for determining the Lake Erie's loss from the transaction with the Akron Company. On the other hand, the petitioner alleges that all such amounts were, under the terms of the lease, advances to the Northern Ohio, which the latter was obligated to repay, and such obligation was a part of the Northern Ohio's net indebtedness which the Lake Erie transferred to the Akron Company. The agreement of December 11, 1919, by which the Lake Erie made the transfer to the Akron Company, does not state the nature or amount of the Northern Ohio's indebtedness so transferred. It provides, in section 3, that: The Lake Erie Company hereby assigns and transfers to the Akron Company the Northern Ohio lease and all of the rights, obligations and interests of the Lake Erie Company thereunder save as hereinafter otherwise expressly provided; and in section 5, it is provided that the Lake Erie assigns to the Akron Company: The net indebtedness of the Ohio Company [Northern Ohio] to the Lake Erie Company accruing at, or for the period prior, to the effective date hereof, that is to say, the total indebtedness of the Ohio Company*1284 to the Lake Erie Company accrued at, or for the period prior to, the effective date hereof, less any indebtedness of the Lake Erie Company to the Ohio Company arising or accrued at, or for the period prior to, the effective date hereof and whether then due or deferred. Prior to the effective date of the agreement, March 1, 1920, all such expenditures were, as heretofore pointed out, charged by the *1281 Lake Erie to operating expenses. At the date of transfer, the Lake Erie's books showed the net indebtedness of the Northern Ohio to be $92,661.33, all of which represented charges for expenditures made by the Lake Erie for purchase of securities of the Akron & Barberton Belt and contributions to the Akron & Barberton Belt's sinking fund for the account of the Northern Ohio, for additions and betterments to the Northern Ohio's properties, and for materials and supplies on the Northern Ohio's railroad at the end of Federal control turned over by the Director General. A breakdown is included in the findings. On the other hand, the Northern Ohio consistently recorded on its books all expenditures by the Lake Erie in excess of operating revenues from the leased properties; so*1285 that on March 1, 1913, the Northern Ohio's books showed an indebtedness to the Lake Erie of $2,528,097.13, and on March 1, 1920, its books showed an amount due the Lake Erie of $3,825,049.98, and an amount due from the Lake Erie, for retirements and depreciation of leased properties, of $102,877.85, a net indebtedness of $3,722,172.13. Throughout the period 1902 to 1920, the accounts of both the Lake Erie and the Northern Ohio were kept under the general supervision of the general auditor of the New York Central Lines; and the "Green Book" issued annually by the general offices of the New York Central Lines, embracing all of the general financial statements of the various companies, contained balance sheets of the Northern Ohio, as of December 31 of each year, in which there was shown the Northern Ohio's indebtedness to the Lake Erie, in amounts conforming with those appearing in the Northern Ohio's books, although the balance sheets of the Lake Erie, likewise embraced therein, stated the Northern Ohio's indebtedness to it in different, and greatly less, amounts. Concurrently with the Lake Erie's assignment to the Akron Company, the Northern Ohio transferred on its books its indebtedness*1286 to the Lake Erie to the account of the Akron Company, crediting the latter with the sum of $3,825,049.98; and, at the same time, the Akron Company entered a similar amount on its books as the Northern Ohio's indebtedness to it by virtue of the Lake Erie's assignment. In view of these facts, it can not be said that the Northern Ohio's indebtedness to the Lake Erie, at the date of the transfer, is correctly shown by the Lake Erie's books of account, and did not exceed the amount shown thereby. Under article third of the lease agreement, the Lake Erie obligated itself "to pay yearly and every year during the term hereby granted, by way of rental therefor, all the net earnings, to be determined as hereinafter provided, derived from the operation of the demised railroad, rolling stock, equipment and property, and in any event and though such net earnings may not be sufficient therefor: *1282 (a) all taxes that may be imposed * * * upon the lessor or upon the said demised premises and property * * *; (b) the premiums of insurance upon the buildings, rolling stock and equipment demised; (c) such sum, not exceeding one thousand dollars per annum, as the lessor shall * * * certify*1287 to be requisite for the maintenance of its corporate organization * * *; (d) the coupons maturing upon all the first mortgage bonds of the lessor * * *." Under article sixth, it is provided that: In estimating the net earnings which shall be payable under the terms of this lease by way of rental for the demised premises, there shall be deducted from the gross earnings all fixed charges, all operating expenses, including taxes and expenses of administration, all sums which in the judgment of the lessee shall be necessary to be expended for betterments and additions and the maintenance as a first class railroad of the demised railroad, all sums which shall be necessary fully to equip the demised railroad with sufficient and satisfactory rolling stock and equipment to enable it to transact such business as may be done over it. * * * In case in any year the net earnings of the demised railroad and property, as hereinabove determined, shall not be sufficient to meet the fixed charges and operating expenses, the lessee shall, notwithstanding, make the payments hereinabove in subdivision (d) of the third article hereof provided, but any amount paid by the lessee in excess of the net earnings*1288 for such year shall be deemed an advance on the part of the lessee to the lessor. From this it would appear that all sums expended by the Lake Erie, in excess of the revenues derived from the operation of the leased properties, were intended by the parties to be advances by the Lake Erie to the Northern Ohio. The Lake Erie was to pay all of the operating expenses of the leased properties, taxes, insurance premiums, $1,000 to maintain the lessor's corporate organization, and interest coupons maturing on the lessor's bonds; all such payments were to be made out of the revenues derived from the operation of the leased properties, and in case the revenues were not sufficient for the purpose, the Lake Erie was to make up the deficiency out of its own funds; any surplus revenues, after all payments with which the Lake Erie was charged were made, were to be paid over to the Northern Ohio as rentals; and any payments made by the Lake Erie, in excess of revenues, were to be deemed advances by the Lake Erie to the Northern Ohio. But the respondent says that, since the lease contains no provision "for the repayment of any of such so-called 'advances' by the lessor to the lessee at the expiration*1289 of the term of the lease or prior termination thereof," it must have been contemplated by the parties that such advances should "be deducted from subsequent earnings derived from the operation of the properties before any of such earnings are paid to the lessor," such earnings being the Northern Ohio's only source of income, and if they were so deductible, they were advance rentals. It is true that the *1283 lease contains no provision as to how these advances shall be repaid by the Northern Ohio; but the important thing is that they were to be repaid, and the method of reimbursement is of little or no consequence, and could not serve to change their character into rentals. The respondent's position implies that there was no obligation to repay the advances in the event the rentals accruing to it under the lease were not sufficient to permit such repayment. The implication is unfounded. The lease unmistakably places such advances in the category of loans, and contains no provision which would enable the Northern Ohio to escape repayment in the circumstance of insufficient future income; and the Northern Ohio has always recognized this in its accounting for these advances. *1290 The respondent further contends that the entire indebtedness of the Northern Ohio to the Lake Erie became worthless and uncollectible before 1920, and may not properly be included in the cost basis for determining the deductible loss from the transaction with the Akron Company. If in a prior year the indebtedness of the Northern Ohio was ascertained by the Lake Erie to be worthless, the statute will not permit its deduction in 1920, notwithstanding the desposition in the latter year for a consideration havimg no determinable monetary value. The statute requires that the deduction be made in the year in which worthlessness and uncollectibility were ascertained, and failure to make the deduction then does not justify the deduction later. It should be borne in mind that of the total cost of $2,500,000 claimed for the Northern Ohio's indebtedness, $2,444,000 represents the Lake Erie's advances prior to March 1, 1913, and approximately $56,000 after that date. Was this indebtedness good and collectible up to the date the Lake Erie assigned it to the Akron Company? Or was it ascertained to be worthless in a prior year? The burden rested upon the petitioner to furnish such evidence*1291 as would justify an affirmative answer to the first question, and, thereby, to establish its right to have the cost of the indebtedness determined as it contends it should be. In that it has clearly failed. Such evidence as there is tends to show that the Northern Ohio's indebtedness became worthless and uncollectible prior to the taxable year. Every year of operation of the leased property by the Lake Erie resulted in a deficit. In not a single year were the revenues derived from such operations sufficient to meet the expenditures required to be made by the Lake Erie. The following statement shows the net cash outlay by the Lake Erie to meet the deficits from operation of the leased properties and fixed charges of the Northern Ohio; that is to say, the amount which the Lake Erie, under the terms of the lease, was required to expend each year, in excess of the revenues derived from operation of the property: [1896] $125,000.00 [1897] 125,000.00 [1898] 125,000.00 [1899] 105,000.00 [1900] 100,000.00 [1901] 125,000.00 [1902] 97,840.76 [1903] 151,012.13 [1904] $166,654.35 [1905] 133,422.29 [1906] 115,274.33 [1907] 150,738.98 [1908] 171,994.80 [1909] 159,450.09 [1910] 191,933.63 [1911] 172,896.84 [1912] $156,823.29 [1913] 159,082.43 [1914] 180,050.30 [1915] 166,016.88 [1916] 117,948.94 [1917] 214,470.99 [1918] 140,185.59 [1919] 206,416.97 *1292 *1284 The balance sheets of the Northern Ohio indicate that it owned no property of an income-producing character, other than its leased railroad. Any indebtedness which it incurred could only be paid out of the net revenues derived from the operation of its railroad by the Lake Erie, or out of an increase in its capital structure or funded indebtedness. As already shown, the operating revenues of its railroad were insufficient to meet current obligations; and there is little likelihood that additional funds could have been obtained by an issuance of additional securities, considering the circumstance of failure to earn any return on the existing investment and the absence of earnings out of which to make sinking-fund provisions for the retirement of an additional issue of bonds at maturity, to say nothing of the inadequacy of the earnings to meet the increased interest charge which would result from any increase in indebtedness. As early as February 4, 1899, the board of directors of the Lake Erie was made aware of the serious financial aspects of operation under the Northern Ohio lease. At a meeting of the board, held on that date, the then chairman reported, with*1293 reference to the company's "indirect" obligations, "that the Northern Ohio Railway, which has been and is likely to remain a serious drain upon the earnings of the company, was so owned by it, and held under such circumstances, that there was no hope of getting rid of it." There is not a note of faith, hope or optimism in that statement, and there was nothing to justify any expectation of the ultimate satisfaction by the Northern Ohio of its obligations under the lease. The Northern Ohio's balance sheet, as of March 1, 1913, shows total assets of $6,811,835.75, which includes investment in road and equipment of $6,746,737.42, and shows an unmatured funded debt of $2,500,000. At the hearing, the petitioner introduced a great volume of evidence to show that the fair market value of the road and equipment, as of March 1, 1913, was $4,100,000. In its brief, it contends for that value. Assuming this as the fair market value of the road and equipment, as of March 1, 1913 (which we need not and do not decide), the total value of the Northern Ohio's assets on that date did not exceed $4,165,098.33, and the value of the Northern Ohio's equity in those assets, over and above the unmatured*1294 funded debt, was not more than $1,665,098.33. The total advances *1285 by the Lake Erie to the Northern Ohio, on the same date, amounted to more than $2,444,000. In the transaction with the Akron Company, on March 1, 1920, it disposed of the lease, all of the Northern Ohio's common stock, and the Northern Ohio's indebtedness, for a consideration that had no demonstrable monetary value. That transaction sets at rest any doubt as to the worthlessness of the indebtedness on the date it was disposed of. From all of these considerations, it is clear that there is no foundation for the deduction which the petitioner claims. The Lake Erie in 1920 disposed of a burden, the original cost of which in 1895 was merely a future undertaking and under the revenue act must be treated as zero. This figure being less than any fair market value which could be determined for the stock or the lease as of March 1, 1913, it must under the statute be used as the basis for determining loss incurred in its disposition. Thus there is no justification under the law for attempting to determine a fair market value on March 1, 1913, for either the stock or the lease. The amounts expended by the*1295 Lake Erie, aside from those which were so far regarded by itself as other than investment as to be taken as current deductions on its annual tax returns from 1909 on, were either rentals, and thus clearly not cumulative cost of stock and lease, or advances, and thus deductible in the earlier years when ascertained to be worthless and charged off. The Commissioner was, in our opinion, correct in disallowing the deduction of $92,661.33 which the Lake Erie continued to carry on its books as if it were an asset, and further, we are of opinion that the additional claim now urged for a deduction of $1,500,000 or any other sum as such a loss is not supported by the evidence. II. The second point urged by the petitioner is that the respondent has erroneously disallowed an amount of $459,356.19 of its deduction for maintenance of way and structures and of equipment during the period of the last ten months of 1920, which immediately followed the period of Federal control. This amount is part of the petitioner's actual expenditure for the period accounted for as maintenance, but the disallowance is based on the respondent's determination that to this extent the petitioner's ostensible*1296 maintenance cost was really not its own, but a burden assumed by the Director General, the liability for which accrued during the ten-month period and was subsequently discharged by payment in 1924 at the time of final settlement under the Federal control contract. It is alleged in the petition and admitted in the answer that the Director General failed in his contractual duty to maintain the petitioner's property adequately *1286 during Federal control. This has come to be known as "undermaintenance," and for it the Director General assumed liability under the contract. The carrier and the Director General were in dispute after Federal control as to their several obligations, and after extended negotiations they agreed upon a lump-sum settlement whereby the Director General in 1924 paid the carrier $700,000. As shown in the list of settlements attached as Exhibit 14 to the Director General's report to the Rresident (Exhibit 57, p. 88, item 181), the carrier first claimed $1,526,437.88 which was raised to a final claim of $3,438,525, while the Director General's tentative set-up was a claim against the carrier of $222,015.24. Notwithstanding that there were numerous items*1297 to be adjusted as to which there were detailed and specific consideration and, in some respects, widely varying differences of contention, the final settlement was expressly agreed to be a hotchpot, the Director General refusing to recognize any allocation of the lump sum to the several items in controversy. In his annual report to the President for 1924 (Exhibit 57), the Director General discussed fully the nature and extent of the difficulties inherent in the settlements with contract carriers generally, including the Lake Erie, stating that in all cases the settlements were made in lump sum and that no carrier was advised of any specific recognition or allowance for a particular item of claim. A large part of the Director General's report is devoted to the discussion of the problem of maintenance, and the following excerpts throw light on the background of the allowance for undermaintenance here in question. [At page 6.] These claims, because of their unique character and large amount, present the most interesting feature of this liquidation. The large items in each claim and the items which were the principal cause of dispute and acute differences of opinion were the demands*1298 for compensation for the use of the property, maintenance of way and structures, maintenance of equipment, materials and supplies, and, of lesser controversial importance, the items of depreciation and retirements. It should be understood that final settlements were based on the accounts as prepared and set up made by the Government and not upon the claims presented by the carriers. The final adjustments were made in "lump sums," in accordance with the Railroad Administration's theory of liability, adjusted to meet such meritorious modifications as resulted from the final hearing. In no instance was the carrier advised as to the specific allowances made upon particular items claimed, except in the case of non-contract roads, where it was necessary under the law to certify to the Interstate Commerce Commission the amount of compensation finally agreed upon. [Page 9.] A physical comparison of the property [at the beginning and end of federal control] was impossible, not only because of the constant and daily changes going on in the physical condition of a busy railroad in active operation, but for the further reason that there was no satisfactory record of the condition*1299 of the properties as between January 1, 1918, and March 1, 1920, that could be the basis of a physical comparison. *1287 The equation factor and the carriers' demand for its modification so as to reflect the "efficiency of labor" ar discussed as follows: [Page 10.] In fixing the amount due the carriers during the six months' guaranty period immediately following Federal control, the Interstate Commerce Commission, under the provisions of section 209 of the transportation act, was required to apply the rules set forth in the proviso in paragraph (a) of section 5 of the standard contract between the United States and the carriers, and it, therefore, became necessary for the commission to construe this portion of the standard contract. Protracted hearings were had before the commission, in which the Railroad Administration and the carriers were represented. As a result of these hearings, much difference of opinion developed among the several members of the commission. At first a majority was in favor of the contention of the carriers, making claim in different ways for inefficiency of labor, but a final opinion was rendered July 12, 1921, under the head of "Maintenance*1300 expenses under section 209" (70 I.C.C. Reports 115), in which a majority of the members approved the construction which the Railroad Administration had adopted and contended for, and this rule of construction was consistently applied by the Railroad Administration in all final settlements made with the carriers. The importance of this question will be appreciated when it is considered that claims aggregating several hundred million dollars might have been created and presented for the period of Federal control and the guaranty period, based upon alleged inefficiency of labor, these claims appearing in many forms, founded upon widely different formulas. The final rule adopted by the Railroad Administration in making these settlements and in recognizing the liability of the government in the matter of maintenance, was to "match" the expenditures of the carriers made during the pro rata time of the test period corresponding with the period of Federal control, making due allowance for any difference that existed between the cost (price) of labor and materials, taking into consideration any difference in the amount of property taken over as between Federal control and*1301 the test period, and any difference in use substantial enough to be considered, these expenditures to be subject to a fair distribution, as provided for in paragraph (a) of section 5 of the standard contract. I believe this rule, followed as consistently as was humanly possible in all adjustments, making in exceptional cases, when the accounting method resulted in grossly unjust conclusions, equitable modifications, came as near as practicable doing substantial justice between the parties. As to the general problem of measuring maintenance, is the following: [Page 17.] The general situation as to maintenance must always be borne in mind. The exigencies of the war required, in the taking over of this vast property, arbitrary action on the part of the Government, without any sort of examination or record as to the physical condition of the property at the time it was taken over. There was no general or special survey made that could be the basis of intelligent physical comparison at some future time. Except in a most general way, the physical condition of the roadway, structures, and equipment of the railroads on January 1, 1918, was unknown, and the conditions could be established*1302 only by the opinion largely of interested nersons. *1288 [Page 18.] Therefore, in the particular items of excess maintenance now under consideration, as well as the general subject of maintenance, the representatives of the Government were always confronted with complicated propositions, absolutely incapable of definite or mathematical solution, and depending largely upon the exercise of an honest and intelligent discretion and judgment. [Page 20.] Early in the progress of this adjustment it became quite definitely apparent, if the carriers, except in very exceptional cases which clearly justified the charges, should insist upon substantial allowances on their claims for undermaintenance, and the Government insisted upon collection of its excess expenditures for maintenance, under par. b of sec. 5 of the standard contract, no amicable adjustments to any appreciable extent would be made and litigation of a most protracted, uncertain, and expensive character would result. Such litigation would require an analysis of involved railroad accounting, the merits of which would be extremely difficult to present by competent evidence to a court inexperienced, as the ordinary*1303 court is, in the science of railroad maintenance and accouting. The significance of the tentative set-up by the Director General of his claims against the carrier is stated as follows: [Page 34.] This tentative set-up of Railroad Administration accounts, prepared for the information of the Director General and his staff in making final settlements, was created under the following conditions; It shows the net maximum amount of all claims of the Railroad Administration against the carriers, including the result of the maintenance studies in the matter of excess expenditures for maintenance, * * * and other charges and claims which it seemed proper to consider in final settlement. In preparing this set-up there were minimum allowances made the carriers on their claims for compensation, * * * and undermaintenance. In the preparation of the set-ups all reasonable doubts as to validity of claims and amounts were resolved in favor of the Governmemt and against the carriers, minimum amounts in favor of the carriers and maximum charges against them being the rule. This situation naturally resulted after full hearing on the merits in modifications where the facts justified it in*1304 the items of these set-ups. [Page 35.] As has been heretofore fully explained, these excess maintenance expenditures, other than in exceptional cases, were not claims that could be strictly enforced as legal liabilities against the carriers, but were set up as necessary information for use in final settlements, and were effectively used in the dosposition of claims presented by the carriers which the Railroad Administration refused to recognize or allow. This part of his report closes with the statement as to the final settlements: [Page 35.] Every change made in this account was the result of investigation and discussion, each separate adjustment being made after full hearing on the merits of the particular claim. It is evident both from the Director General's report and from the testimony before us that there was a protracted controversy in respect of the contractual obligation for maintenance and that the settlement was an adjustment of widely differing claims and contentions. While the petitioner's officers urge their opinion that no allowance for undermaintenance can be recognized in the face of the *1289 Director General's claim for excess maintenance, *1305 such an opinion is at variance with the statements in the Director General's report that this was but a tentative set-up surrounded by doubt and was never definitively insisted u!on or recognized. When the settlement was made, separate and independent accounting entries were made by each on its own books for the $459,356.19, the carrier expressly explaining it as an allowance for undermaintenance and the Director General charging it to his deferred maintenance account, with the allocation of $140,000 to road and $319,356.19 to equipment. Thus the respondent adopted the designation of the amount as undermaintenance and, treating it as accrued in the period immediately following Federal control, applied it against petitioner's maintenance deduction, and determined the resulting deficiency. The petitioner had likewise recognized the amount as undermaintenance and applicable against its maintenance deduction, but in the year 1924 when it was received. With the determination of the present deficiency, however, the petitioner adopted the view now urged that it is not properly applicable against the maintenance deduction of either year, filed its present petition and also filed with*1306 the Commissioner a claim for refund of the alleged overpayment for 1924. While it is not disputed that the amount (independent of its label or allocation) accrued to petitioner in 1920 and was actually received in 1924, the respondent has not treated it as an item of gross income for 1920, and the case here is clear of such question. The issue is made wholly within the field of deductions, Generally speaking, carrier maintenance charges are among ordinary and necessary expenses (sec. 234(a)(1)), losses (234(a)(4)) and depreciation (234(a)(7)). Permanent improvements, betterments, and restoration of previously deducted depreciation are not deductible (sec. 235), nor are expenses, lesses or depreciation the financial burden of which is borne by another, Terminal R.R. Assn. of St. Louis,17 B.T.A. 1135; 61 Fed.(2d) 166; Kansas City Southern Ry. Co.,22 B.T.A. 949; International-Great Northern R.R. Co.,24 B.T.A. 726. The petitioner has, by fulsome and detailed testimony of its own attitude and demands and those of the Railroad Administration during the extended negotiations for settlement of the obligations under the*1307 contract, sought to prove that no part of the settlement payment was intended to cover undermaintenance or was in recognition of undermaintenance, and that, despite both parties' accounting characterizations of the amount as undermaintenance or deferred maintenance, it was really an adjustment of nonmaintenance items, at least to some extent. The contention is that since there was but a lump-sum settlement made after full discussion of many items, *1290 petitioner has the right to break down the ultimate figure according to its own choice, and that such allocation must be recognized as fact by the Commissioner. That the petitioner has the right to choose its own accounting in this respect, within the scope of the Interstate Commerce Commission's supervision, can not be gainsaid by the Commissioner or by the Board; but it is equally clear that no accounting adopted by the petitioner has a sanction greater than the Commissioner's duty to determine its taxable income in accordance with effective revenue law. What a carrier may do in its accounting classification as a private industry or even as a regulated interstate carrier is apart from its subservience as a taxpayer to the*1308 requirements of the revenue law. Old Colony R.R. Co. v. Commissioner,284 U.S. 552. Therefore in this proceeding the significance of the amount in question is not determinable by reference to the views of the petitioner's own officers as to a convenient or satisfactory accounting for the item or their interpretation of the settlement or its component factors, nor with reference to the conversations with the Railroad Administration during the course of the negotiation as to the extent of the controversy. The last were swallowed up in the final lump-sum settlement, and the former are important only in so far as they are supported by substantive evidence. Since the Director General has officially said that the settlement represented no specific allowances, and since it is by the pleadings stipulated here that there was undermaintenance during Federal control, and both parties to the settlement having at that time independently appropriated the amount of $459,356.19 to this account, there is ample justification for the respondent's reliance upon this as a prima facie designation of the item as a basis for his determination. In this respect, Terminal R.*1309 R. Assn. of St. Louis v. Commissioner, supra, is distinguishable. To overcome this determination, it is not sufficient to urge merely an interpretation of the lump-sum settlement which would exclude undermaintenance in the light of a tangled history of its negotiation. If, however, such interpretation by petitioner's officers were a determinant, its weight would still be impaired by the apparent concession of the petitioner in its fourth assignment of error that some portion of the payment applied to depreciation, destruction, undermaintenance, and damage of the Lake Erie's property during Federal control, and also by the testimony of its engineering assistant purporting to show that among the specified items settled were several in substantial amount relating to undermaintenance. The petitioner argues that this issue is unlike those in previous cases decided by the Board holding that a carrier's deductions for maintenance are not allowable in so far as amounts were received *1291 from the Director General for undermaintenance during Federal control. The distinction thus urged is attempted to be supported by the petitioner's interpretation of the settlement founded*1310 upon its officer's statement of the trend of discussion during the negotiations. Specifically, it is said that the earlier cases involved computations of settlement based upon the Director General's formula without departure or variation, whereas here there was an adjustment of the result of the formula, which adjustment was the principal matter of negotiation. It is not clear from petitioner's argument why this should distinguish the cases or indicate that petitioner was not reimbursed for undermaintenance. Nor can it be held, as urged, that because the Director General once set up a claim for overmaintenance of $36,000 instead of undermaintenance, or discussed figures aggregating $140,000 as applied to certain items, which is the same figure as was later allocated to maintenance of road, or because the $319,356.19 exactly fits as a remainder into the round figure of $700,000, there is no basis for what the petitioner calls the "reimbursement rule" in the earlier decisions. The petitioner also contends briefly that the amount in question may not be disallowed since it represents compensation for property taken by Federal requisition, and that, if it was expended as respondent*1311 holds, the situation is within section 234(a)(14). It has been held, however, by the Board that undermaintenance during Federal control and the allowance therefor is not within the contemplation of the statute as an involuntary conversion of property, Terminal R.R. Assn. of St. Louis,17 B.T.A. 1135, and this was unaffected by the opinion on review. The petitioner, however, does not rest upon the foregoing contention alone, but urges that, even if the amount be regarded as an allowance for undermaintenance and within the field of the so-called reimbursement ruel, "still the respondent's action was erroneous, because the Lake Erie's 1920 maintenance deductions included nothing for replacement or restoration of capital assets, destroyed during Federal control, for which it was reimbursed by the Director General's allowance." Upon this proposition was predicated the introduction of elaborate statistical studies and opinion testimony to show that the petitioner's maintenance expenditures during the last ten months of 1920 were no more than can properly be attributed to the current maintenance requirements of the period, and to show further that, since there was undermaintenance*1312 during Federal control, and a proper comparison of maintenance during the two periods shows no greater maintenance in 1920, there was likewise undermaintenance for 1920 and hence no making good of the undermaintenance of the control period. The logic of this argument seems to *1292 assume that the disallowance of the deduction can only be based on the actual use of the $459,356.19 in 1920 to make good such undermaintenance, and that if it can be shown that it was no so used the error of the disallowance of the deduction is established. The soundness of this theory is not discussed and no suthority is cited for it. Petitioner proceeds as if the compensation for undermaintenance were a rehabilitation fund impinging upon the computation of its taxable net income only if and when it is actually used to restore or replace the property which suffered by the undermaintenance, and that this can, as to any year, be disproved by a statistical demonstration, including equated comparisons of labor and material, that the expenditure for maintenance is no more than an assumed normal current outlay. Leaving aside for the moment the practical difficulties in such a view - difficulties*1313 no less than those encountered by the Director General and the Interstate Commerce Commission in the settlement under the Federal control contract and under the guaranty provision of section 209 of the transportation act - it is at least doubtful whether the revenue act is to be so construed as to contemplate the annual recurrence of such an issue until a year may be found in which the statistical studies yield a resulting figure of maintenance above an adopted norm. It is also more than doubtful that, regardless of administrative difficulties in ascertaining the facts, the theory is consistent with the annual determination of income. It is not necessary to earmark the carrier's costs of 1920 as those which supply the very maintenance which the Director General should have supplied during Federal control in order to say that the settlement allowance served to reduce the maintenance cost of the accrual period. The significant fact is that in the same period the carrier incurred a given amount of maintenance expense while a smaller amount of maintenance allowance accrued to it from another, thus reducing its financial burden of maintenance pro tanto. In other words, while the*1314 carrier may not, in view of section 235 of the statute, take as deduction an amount spent for replacement of capital assets if the evidence shows the expenditure to be such, a disallowance of such deduction may also be proper if, although the outlay is for current maintenance, it is made out of amounts contributed by another and is therefore not its own burden. It would seem clear that an amount received under such circumstances by a taxpayer on an accrual basis of accounting must have its effect upon taxable net income of the accrual period, either on the side of gross receipts or by way of an offset to accrued outlay. Certainly it must be reflected in the income of some period, which to the petitioner at first appeared to be the period of receipt, 1924. If it be removed from the determination *1293 for 1920, it is hard to see upon what considerations it should be given place in the computation of another year. The respondent, however, challenges the petitioner's evidence on its own grounds. He argues that, even if the deduction were proper in the event that no prior undermaintenance was made good in the last ten months of 1920, yet the evidence fails to show this, but*1315 does show an undue maintenance expenditure for the period, the excess of which is greater than $459,356.19, and thus upon petitioner's own theory the disallowance is justified. That the petitioner, in attempting to show that in fact its maintenance performance for the last ten months of 1920 includes no restoration of the Director General's undermaintenance, has undertaken a difficult task must be conceded. It would obviously be practically impossible to establish by direct, primary evidence of knowledge and observation that the actual maintenance of the last ten months of 1920 was not in any respect that which properly should have been applied in the control period. This difficulty was recognized by the Interstate Commerce Commission, 70 I.C.C. 115. The petitioner has adopted, instead, an analytical, circumstantial method whereby it seeks to demonstrate that respondent's determination is unreasonable and entirely inconsistent with a logical interpretation of the figures. It first compares the man-hours of shop labor applied to locomotive and car repairs for an average ten-month period during Federal control with the man-hours so applied during the last ten months*1316 of 1920, and, finding a lower figure in the later than in the earlier period, infers that the equipment maintenance was no greater than in Federal control; and hence, if, as agreed, there was undermaintenance in Federal control, there must have been undermaintenance in 1920, which, it says, is inconsistent with rehabilitation. As to locomotives, it shows that the pounds of locomotives under repair were less than during an average ten months during Federal control, and this, it says, also indicates an absence of rehabilitation to overcome prior undermaintenance. It says that the number of its own cars which were at home and not on foreign lines was greater on December 31, 1920, than on March 1, 1920, and that this supports an inference that undermaintenance was as great in 1920 as in Federal control, or at least that prior maintenance had not been made good in that period, because a carrier's cars are usually in serviceable condition while on foreign lines, while its bad order cars are usually on its own line in or awaiting shop. It shows, as to maintenance of way, that it is principally composed of ties, rails and wooden bridges or trestles, and that the measure of these applied*1317 in the last ten months of 1920 was less than in an average ten months of Federal *1294 control; which, it says, supports its inference of undermaintenance as great as in Federal control and hence no rehabilitation. It offers the opinion of its assistant chief engineer that the road's condition was no better on December 31, 1920, than on December 31, 1919, and no better on March 1, 1921, than on March 1, 1920, these being, in his opinion, the only comparable dates having seasonal similarity. Furthermore, thermore, it says that there was a shortage of both labor and material in its territory in 1920, and that it had insufficient working capital, from which, although the point is not stated, we assume that the inference is drawn that no rehabilitation could be carried on. Changing its approach, the petitioner then offers a comparison of test period or pre-control maintenance with that of the last ten months of 1920, showing by means of a system of equation that its gross material charges of the latter period were relatively less than during the test period, and its net material charges only negligibly more. Upon this it urges the conclusion that the respondent is in error*1318 in holding that $459,356.19 of the Director General's settlement was actually used to effect a restoration of the undermaintenance during Federal control. The idea that underlies the first part of the foregoing outline of petitioner's argument is in our opinion without force, because it assumes an unproven hypothesis, namely that the undermaintenance recognized by the Director General as to the control period was the same sort of thing measurable by the same factors as that now sought to be established by the petitioner for the subsequent ten months. It has heretofore been shown that the Director General's undermaintenance was undefined, and, other than the fact that it represented part of his contractual liability, there is nothing to indicate a basis for comparison between it and the maintenance of other periods. The factor of its liability under the contract was a comparison of charges and expenses for labor and materials in the control period with those of the test period properly adjusted. By negotiated settlement the control allowance was arrived at without an agreement or announcement as to the formula for its computation. There is therefore no index of comparison. Thus*1319 man-hours of shop labor on equipment, or weight of repaired locomotives, or number of ties, weight of rail, or length of trestles may be less, and yet effectual maintenance of condition and function may be as great; or, indeed, such figures may have been rejected or disregarded in determining what, for purposes of contract settlement, was denominated undermaintenance. The word was quite apparently not used with such definiteness of meaning as to furnish the fulcrum of comparison. Therefore, no matter what such figures for the two periods may show *1295 for other purposes, they do not demonstrate that there was more or less of what for settlement purposes had been accounted for as undermaintenance as a factor of contractual liability. As to the comparison of man-hours of shop labor during an average ten months of the control period and the last ten months of 1920, it fails to reflect the factor of difference in conditions during the two periods. The petitioner's superintendent of motive power testified that such figures were, in his opinion, a competent reflection of maintenance of equipment if conditions in the two periods were shown to be the same. Accepting, arguendo,*1320 this view, it does not appear that the conditions of the two periods were alike. There was heavier operation during the war period of Federal control, and by combining the man-hours applied to locomotive repairs with the weight of such repairs it appears that there were less manhours per pound of repairs in the period of 1920 than during Federal control, a plain indication of different conditions the nature of which is not disclosed. The comparison is also affected by the fact that the Lake Erie & Western was at that time one of the New York Central lines, and as such was in the car-repair pool of the New York Central System, with the consequent inclusion of other system cars and exclusion of its own cars. Whether this would require a substantial adjustment of the figures either way can not be ascertained from the evidence, and thus the comparison to this extent fails. The fact that there were fewer Lake Erie & Western cars (272) on its own line in March, 1920, immediately after Federal control, of which 41 were serviceable, than in December, 1920 (738), of which only 12 were serviceable, adds little or nothing to the weight of petitioner's evidence; not only because of itself*1321 it is but remotely significant, but also because the monthly figures from March to December vary substantially and indicate that the undermaintenance was to some extent made good within the next month or two, that the disparity between March and December is seasonal, and that the 1920 figures reflect no less than the usual and normal current performance of any year. The next index used by petitioner is the number of ties, tons of rail, and linear feet of wooden trestles applied in the last ten months of 1920 in comparison with the last ten months of 1918 and 1919, these materials being financially the most important factors of maintenance of way. Except for sidetrack ties, the figures are lower for 1920 than for the average of the two earlier years. Here again, no account is taken of the difference in operation conditions during the compared periods. It is well known that war operation *1296 imposed severe burdens on the railroads, which to some extent ceased with the end of Federal control. That this may have involved abnormally heavy installation of ties and rail and increased repair and renewal of bridges is not only a plausible assumption, but is consistent with a*1322 comparison of the same figures for the precontrol test period, conceded by the petitioner to be fairly normal, showing more rail and less ties for the post-control than for the pre-control period. The average quantity of new and secondhand rail applied to roadway in the test period, excluding the months of January and February, during which only emergency maintenance work was done, was 3,331.2277 tons. Applying to that figure a factor of 1.01743 (Exhibit 73), for difference in amount of property maintained, as between the two periods, the average for the test period, adjusted for the difference mentioned, is 3,389.2910 tons. Applying to the latter figure a factor of 1.03189, for difference in use of property, as between the two periods, the average for the test period, adjusted for differences in amount and use of property maintained, is 3,497.3755 tons. The total quantity of new and secondhand rail applied to roadway in the last ten months of 1920 is 4,037.2503 tons, which is 539.8748 more tons than the adjusted average for the test period. This gives the petitioner the advantage of an adjustment factor for difference in amount of property maintained, as between the two periods, *1323 although it is not at all clear from the record that the Lake Erie maintained a roadway of any greater length in the last ten months of 1920 than it did in the test period, exclusive of the Northern Ohio's roadway. The factor is based upon an increased investment in way and structures, for the last ten months of 1920, irrespective of whether the increased investment was in structures or in roadway. For the test period, new rail represented 44.417 per cent and secondhand rail represented 55.583 per cent, of the total rail applied to roadway; for the last ten months of 1920, new rail represented 47.990 per cent and secondhand rail represented 52.010 per cent of the total rail applied to roadway. Thus, in the last ten months of 1920, 3.573 per cent more new rail and less secondhand rail was applied to roadway than in the test period. The following statement shows the average percentage of total rail applied to roadway, for an average ten months of the test period, represented by each of the seven grades of rail so applied, the actual percentage of total rail applied in the last ten months of 1920, represented by each of the several grades applied in that period, and the cumulative*1324 percentages for both periods: Test period Last 10 months, 1920 Grade Average Cumulative Average Cumulative 90-pound 3.263 3.263 48.165 48.165 80-pound 44.221 47.484 2.789 50.954 75-pound 26.789 74.273 42.411 93.365 60-pound 3.138 77.411 .413 93.778 56-pound 18.734 96.145 4.580 97.358 52-pound 96.145 .115 97.473 Scrap 3.855 100.000 1.527 100.000 100.000 100.000 *1297 It would seem that not only more than normal maintenance was accomplished in the last ten months of 1920, as indicated by the excess quantity of rail applied to roadway in that period over the average for ten months of the test period, but that the betterments of roadway made in the first mentioned period were much greater than in an average ten months of the test period, as indicated by the ratios of new to secondhand rail applied and the cumulative percentages of the several grades of rail applied, for the two periods. The petitioner's assistant chief engineer stated that he had inspected the railroad according to his periodic wont and found it to be in his opinion in no better condition at the end of 1920 than at the beginning. *1325 This opinion adds little or no force to the petitioner's contention, for, aside from the fact that this is an opinion of an interested person regarded by the Director General as inadequate for official recognition (Director General's Report to the President, supra, p. 17), and not controlling with this Board (Uncasville Mfg. Co. v. Commissioner, 55 Fed.(2d) 893), the physical appearance of the road in general is not shown to disclose whether $459,000 of the year's maintenance expense had been devoted to such restoration of road as the Director General had failed in his contractual duty to maintain. The petitioner's next method of demonstrating that the maintenance charges of the last ten months of 1920 do not include restoration of the prior undermaintenance is a comparison with the cost figures of the test period. Although the evidence upon this is extensive and detailed, the findings herein being a substantial condensation to the essential facts, the petitioner's brief of the proposition is contained in two paragraphs, as follows: The average annual test period maintenance expenses were not only made, by the Federal control contract and by statute, *1326 the norm or standard for measuring the maintenance of the federal control and guaranty periods, but such expenses of the Class I roads of the country as a whole, of those of the Eastern District, and of the Lake Erie alone, were, in fact, not above normal. * * * Cosequently, it is entirely fair and proper to use in these proceedings *1298 appropriate test period figures of the Lake Erie as a basis for measuring the amount of maintenance work performed by it during the last 10 months of 1920, although there is no statutory or contractual provision declaring that such test period figures shall constitute norms under the Revenue Act of 1918. Proper maintenance effects complete physical restoration or reparation. Maintenance accomplished is material in place. Therefore, in comparing, for the purposes of these proceedings, maintenance performed by the Lake Erie in 1920 with that done by it in the test period, the cost ratio or factor for maintenance materials only should be used. Labor price factors, and, consequently, such composite material and labor price factors as were used by the Director General in settling under his formula and the standard Federal control contract, *1327 and by the Interstate Commerce Commission in making, in accordance therewith, its guaranty period settlements, should be disregarded, because they do not provide for physical reparation. A factor, representing the ratio of the prices of maintenance materials used in the last 10 months of 1920 to the prices thereof in the test period, arrived at according to the Commission's methods, does fairly and properly provide for physical reparation and , therefore, is to be used here. That factor is about 2.05. Applying this process, with the use of the factor of 2.05, the actual average test period charge for gross materials (disregarding salvage) becomes an equated figure of $1,577,636.68 in comparison with the 1920 figure of $1,526,242.18, which shows that 1920 maintenance cost was less than the normal test period cost and hence can not include more than current maintenance and necessarily excludes restoration of prior undermaintenance, quod erat demonstrandum. The respondent, demurring generally to the theory of such equation, insists that if an equation is to be recognized it must be that used by the Director General and by the Interstate Commerce Commission and may not exclude*1328 the cost of labor or postulate inefficiency of labor; that such an equation factor is 2.35 instead of 2.05; and its use results in the comparison of an equated figure for the test period of $3,296,033.30 (excluding insurance, depreciation and retirements) with a similar figure for 1920 of $4,642,685.92 and the deduction on the income-tax return of $4,214,490.84; either of the latter figures being greater than the equated test period figure by more than the $459,316.19 in controversy, and therefore justifies his disallowance. Before proceeding to consider the merits of the respective contentions of the parties, it is well to understand the method used by the Commission in determining the amount which was to be included in operating expenses of the guaranty period for maintenance, and the relation of the Commission's determination in that respect, to the issue before us. Under the provisions of section 5(a) of the Federal control standard contract between the Lake Erie and the Director General, the latter agreed to maintain, and at the end of Federal control to return, the carrier's property in substantially as good repair and complete equipment as it was in on January 1, 1918. *1329 It was provided, *1299 however, that the annual expenditures and charges by the Director General for maintenance, renewal, retirement and depreciation of property, of an amount equal to the average annual test period expenditures and charges for those purposes, subject to the adjustments provided in paragraph (c), should be taken as a full compliance with the foregoing covenant. Paragraph (c) provided that in comparing the amounts expended and charges under paragraph (a) with the test period expenditures and charges, due allowance should be made for the differences in amount and use of property maintained, and in the cost of labor and materials, as between the Federal control and test periods, "so that the result shall be, as nearly as practivable, the same relative amount, character, and durability of physical reparation." Upon the termination of Federal control, the Director General issued Accounting Circulars 101 and 109, later amplified and supplemented, which fully set forth the method by which the amount of maintenance expenses allowable for the Federal control period was to be determined. These Accounting Circulars, with supplements, embody the Director General's*1330 interpretation of section 5 of the standard contract. The method provided, among other things, that the factor for equating test period labor costs on the basis of the Federal control period labor costs should be determined by dividing the compensation for hours worked in test period at average rates during Federal control period by total test period compensation. The carriers, including the Lake Erie, objected very strongly to this formula for determining the labor equation factor, arguing to the Director General that, because of its failure to recognize the difference in efficiency of labor as between the Federal control and test periods, the resulting factor would not provide the physical reparation, to which they were entitled under section 5 of the standard contract. The Director General refused to change the formula; but, in "meritorious" cases, he made lump-sum allowances upon final settlement. By section 209(3)(f) of the Transportation Act, 1920, it was provided that the amount to be included in operating expenses of the guaranty period for maintenance should be fixed by the Interstate Commerce Commission; and that the Commission in fixing such amount should apply, as*1331 far as practicable the rule set forth in the proviso in paragraph (a) of the standard contract. In a formal proceeding at which the Director General, the Association of Railway Executives, and certain carriers were represented, the matter of maintenance expenses of the guaranty period, more particularly the question of the correct interpretation of the phrase "cost of labor" in section 5 of the standard contract, was considered *1300 by the Commission. Its decision in the matter, "Finance Docket 1176, Maintenance Expenses Under Section 209," is reported at 70 IC.C. Reports 115. At the hearing, the Director General contended that the phrase meant "only the rates of pay per unit for the recognized varieties of railroad labor," while the carriers contended "that the labor must be related to the accomplishment of a given result, and hence that the words include in their meaning quality as well as wages." The Commission, after extensive discussion and with three dissents, concluded that the words "cost of labor," as used in the standard contract, "do not, we think, open the door to a comparison of the quality or efficiency of labor" and "that differences in the 'cost*1332 of labor,' as these words are used in paragraph (c), do not include changes in the quality or effectiveness of labor but only changes in wages." Following the above decision, the Commission, in "Finance Docket 1606, In The Matter Of Final Settlement Under Section 209," 70 I.C.C. Reports 711, after stating that "the allowances for differences that may exist between the cost of labor and material for the test period and for the guaranty period, respectively, can not practicably be made upon the basis of any rigid rule or formula, but these allowances must be fixed by us in the exercise of a reasonable judgment upon consideration of all the relevant facts and circumstances," announced the following rule: * * * We therefore announce the following rule for adjustment of differences in cost of labor and material in establishing the amounts which will be fixed by us as amounts which shall not be exceeded in charges to operating expenses for maintenance of way and structures and for maintenance of equipment, for the purposes of the guaranty: There shall first be deducted from the maintenance expenses of the test period all amounts included therein for (a) depreciation, (b) *1333 retirements, and (c) insurance. The remainder, after being adjusted for differences in amount and use of property maintained, shall be multiplied by a factor representing the increase in the general level of cost of labor and material for the territories in which the lines of railway of the carrier are situated. To the product thus arrived at shall be added back the deductions hereinabove provided for, adjusted for differences in amount and/or use of property maintained. The reslting sum will be the amount to be fixed by us as that which shall not be exceeded in charges to operating expenses for the purposes of the guaranty for the aggregate of maintenance of way and structures and maintenance of equipment. * * * Carriers, in presenting their claims or statements of amounts due to or from the United States under the guaranty, will be required to state under oath the increase in cost of labor and material for their respective territories and may support these statements by such statistics and representations as may to them appear proper. In the presentation of such cases it should be borne in mind that the fact that certain prices were actually paid for units of labor or units*1334 of materials in the test period and the guaranty period, respectively, is not conclusive evidence that those prices indicate or measure increases in cost of labor *1301 or material for which "due allowance shall be made." The prices actually paid in either period may be affected by the relative competence of management, by standards of maintenance adopted, or by other causes not attributable to increased cost of labor or material. What we construe the proviso to mean and what we find to be practicable in a settlement of these matters contemplates a determination of changes in the general levels of cost of labor and material beyond the carrier's control. * * * In Finance Docket 1176, supra, the Commission said: We therefore find and conclude that the proviso in paragraph (a) of section 5 of the standard contract sets forth a rule for measuring the compliance of the director general with the covenant of upkeep by reference to the accounts of the carriers, when kept in accordance with our requirements; that the basic measure is the expenditure for maintenance during an average six months of the test period, adjusted to differences in the cost of labor and*1335 materials and in the amount and use of the property, in accordance with the provisions of paragraph (c); and that differences in the "cost of labor," as these words are used in paragraph (c), do not include changes in the quality or effectiveness of labor but only changes in wages. The Assistant Director of the Commission's Bureau of Finance, a witness for the petitioner, testified as to the Commission's procedure in finally determining upon a factor of 2.35 for the Lake Erie, as representing the differences in cost of labor and materials, as between the test and guaranty periods. He testified that a composite or general factor for the entire United States was determined by working out the carriers' returns under the Director General's formula; that it was found the general factor was too high for certain territories and too low for other territories; that the country was then divided into regions, not necessarily upon geographical lines, and labor and material factors determined for each region; that the Lake Erie was assigned to the eastern region; that the findings of the Bureau as to the eastern region were the most controversial of all; that because of this, the returns of*1336 all of the 49 carriers operating in the eastern region were combined in one composite return, which disclosed an average regional factor of 2.34; that the Commission finally decided upon a regional factor of 2.35, as being a reasonable general factor for the eastern region; that said regional factor of 2.35 was not the highest, nor the lowest, and not exactly an average, but a judgment factor; that it is impossible to state the process of reasoning of all of the different people who participated in the selection of that factor, and, consequently, it is not susceptible of precise division into its component parts, but as nearly as a breakdown is possible, the separate and composite labor and material factors for way, structures and equipment are as set out in the findings; that the factor was varied by the Commission, according to the circumstances which the individual carriers could support with proof; that the Price Board, an organization set up *1302 in the Commission's Bureau of Finance to investigate returns of carriers and make recommendations as to the proper factor in each case, reported, in the case of the Lake Erie, that investigation indicated that a higher labor factor*1337 and a lower materials factor, than the regional factors, were justified, but the two considered together indicated that the composite general factor of 2.35 was as nearly right as could be obtained; and that the eastern region factor of 2.35 was finally adopted by the Commission as proper in the case of the Lake Erie. As the test period has been adopted by Congress and by the Interstate Commerce Commission as a normal period of operation for carriers generally, we may assume this without discussion in respect of the Lake Erie. The equation method of comparison has been approved by the Board in prior cases, and will be applied so far as it is available, Missouri Pacific R.R. Co.,22 B.T.A. 267; Norfolk Southern R.R. Co.,22 B.T.A. 302; Kansas City Southern Ry. Co.,22 B.T.A. 949; Chicago & Northwestern Ry. Co.,22 B.T.A. 1407. The question remains whether the petitioner has properly applied the method and whether its adjusted figures may be taken to reflect a sound comparison. Although the Interstate Commerce Commission arrived at an equation factor of 2.35 for maintenance by combining both labor and material*1338 cost, the petitioner, upon the doctrine that "maintenance accomplished is material in place," insists that maintenance of the two periods should be compared by using only equated material cost and disregarding entirely the cost of labor. The justification for this omission is not that labor is not an element of maintenance or that the labor cost figures do not affect the comparison, but that the labor factor used by the Commission as a component of the general maintenance factor is unsound in that it does not reflect differences in the "efficiency" of labor in the two periods. Thus omitting labor from the equation and using only the Commission's factor of material cost, the factor used is 2.05 instead of 2.35. There are several reasons why this method can not be recognized as sound. After a far more informed study than can be made by this board in this proceeding, the Interstate Commerce Commission held that the comparative "efficiency" of labor should not be used in determining the equation factor, and that for several reasons Congress had not intended its use as a measure either of compensation for Federal operation or of the guaranteed income of the following six months. If, *1339 however, it could be supposed that Congress intended such an issue to be open to fresh consideration by this Board in the case of each carrier disposed to attack the Commission's general determination in respect of its own tax deductions, there is no reason to believe *1303 that such an attack could be supported by less evidence as to this carrier than that which was required by the Commission in respect of carriers generally. In contrast with the data upon which the Interstate Commerce Commission based its consideration as disclosed by its report, supra, and by the testimony here, there is but the opinion of petitioner's vice president Colston that the Commission factor is unsound and that the labor factor disregards difference in efficiency. As to the Lake Erie, there is no data whatever before us from which the comparative efficiency could be found or inferred. So far, indeed, as cost of labor in the two periods was affected by the so-called "national agreement," it would seem that the Lake Erie and other New York Central lines were less affected than some other carriers because a substantial part of the terms of the national agreement had already been effective on*1340 that system. Furthermore, it is obvious that even if we were convinced that the labor factor improperly omitted to reflect comparative efficiency, this would not justify the complete exclusion from the maintenance factor of any component for labor. Maintenance without labor is an anomaly. If the general factor of 2.35 were incorrect because of an error in one of its components, it would require correction. A true factor for labor would need to be determined, and this would require evidence, the burden of which would be upon the petitioner, who invokes the comparison and the method. There is, however, not a scintilla here upon which we could base such an adjustment. If, therefore, the 2.35 figure were incorrect, it would result that the entire equation would be incorrect and would necessarily be disregarded. Thus there would be nothing with which to apply the method of equated comparison, and the argument upon the basis of test period figures would fail. We shall, therefore, treat the general factor of 2.35 used by the Commission as a correct determinant of guaranty period income, and from that point proceed similarly to ascertain the equated comparison of the figures of the*1341 test period with the figures of the last ten months of 1920, making the necessary changes from the Commission's determination of the six-month period in order to test the ten-month period. The Commission determined that one-half of the average annual test period expenditures and charges for maintenance, exclusive of expenditures and charges for depreciation, insurance and retirements of property, amounted to $350,262.31 for way and structures, $205,772.70 for locomotives, $254,389.87 for freight train cars, $16,938.60 for passenger train cars, and $4,907.52 for work equipment. These figures are not contested and are found in several exhibits in evidence. Therefore, the average expenditures and charges for maintenance, *1304 exclusive of expenditures and charges for depreciation, insurance and retirements of property, for an average ten months of the test period, are $583,730.52 for way and structures, $342,954.50 for locomotives, $423,983.12 for freight train cars, $28,231 for passenger train cars, and $8,179.20 for work equipment. The Commission also determined that one-half of the average annual test period expenditures and charges for depreciation, insurance and retirements*1342 of property amounted to, in the case of way and structures, $615.48 for insurance and $9,269.42 for retirements, and, in the case of equipment, $58,095.68 for depreciation, $196.89 for insurance, and $15,730.56 for retirements. Therefore, the expenditures and charges for depreciation, insurance and retirements of property, for an average ten months of the test period, are, in the case of way and structures, $1,065.80 for insurance and $15,449.03 for retirements, and, in the case of equipment, $96,826.13 for depreciation, $328.15 for insurance, and $26,217.60 for retirements. The next step requires a determination of the factor representing the differences in cost of labor and materials, as between the test period and the last ten months of 1920. The Commission determined that a proper factor for the guaranty period, which was the first six months of the said ten-month period was 2.35. The Commission's Assistant Director of Finance, to whom reference previously has been made, testified that a proper factor representing the differences in cost of labor and materials, as between the test period and 1921, determined according to the same method by witch the Commission determined*1343 the factor for the guaranty period, would be 2.29; and that a proper factor for the last four months of 1920 would be between 2.35 and 2.29. He further testified that, as nearly as it was possible to break these two factors down into component factors, the factor of 2.35 represented a material equation factor of 2.04 and a labor equation factor of 2.64, and that the factor of 2.29 represented a material equation factor of 2.10 and a labor equation factor of 2.41. His testimony indicates an increase in the cost of maintenance materials and a decrease in the cost of maintenance labor, as between the guaranty period and 1921; and this is supported by the evidence that there was a shortage of maintenance materials in the Lake Erie's territory in 1920, and that the trend of maintenance materials prices was upward in 1920 and into the following year, while the trend of maintenance labor costs was sharply downward before the close of 1920. The evidence disclosed that the expenditures for materials and the expenditures for labor, in 1920, were in the approximate ratio of 5 to 8, which, if fairly representative of the ratio of 1921 material costs to 1921 labor costs, would corroborate the*1344 reduction in the general factor from 2.35 to *1305 2.29. For instance, if the 1921 material equation factor of 2.10 be multiplied by 5, and the 1921 labor equation factor of 2.41 be multiplied by 8, and the sum of the two products be divided by 13, the resulting general factor would be exactly 2.29. It is clear that some portion of the reduction of .06 in the 1921 general factor, from the guaranty general factor, took place in the last four months of 1920, but the evidence affords no basis for an inference as to just what that portion is. If the reduction be considered as having taken place ratably over the last four months of 1920 and calendar year 1921, sixteen months in all, then the portion of the reduction attributable to the last four months of 1920 would be .15, and a proper general factor, for the said four months, would be 2.335. Giving to the guaranty period general factor of 2.35 and to the general factor for the last four months of 1920 of 2.335, the weights of six and four, respectively, according to the number of months in the periods to which they respectively apply, a general factor of 2.344 is indicated for the last ten months of 1920. Since this factor*1345 is so close to the guaranty period general factor of 2.35, we may adopt the latter as applicable to the entire last ten months of 1920. The next step requires a determination of the factors representing the differences in the amounts of the properties maintained, as between the test period and the last ten months of 1920. This requires the determination of separate factors for way and structures and for the four classes of equipment - locomotives, freight train cars, passenger train cars, and work equipment. In Exhibit 73, the petitioner has computed these factors according to the methods used by the Interstate Commerce Commission in determining like factors for the guaranty period, except in the case of work equipment, for which the petitioner has not computed such a factor and has not submitted proof of the basic facts upon which such a factor could be computed. The methods used by the Commission in computing the factors for the guaranty period are set forth in the findings of facts. Under the circumstances, it appears proper to accept the factors set forth in Exhibit 73. In the case of way and structures, locomotives, and freight train cars, the amount of property maintained*1346 in the last ten months of 1920 was greater than in an average ten months of the test period, and the factors representing the differences are: .01743 for way and structures, .35113 for locomotives, and .28125 for freight train cars. In the case of passenger train cars, the amount of property maintained in the last ten months of 1920 was less than in an average ten months of the test period, and the factor representing the difference is .08281. In the case of work equipment, the Commission allowed *1306 a plus adjustment for the guaranty period of $323.24, for difference in amount of property maintained, as between the test and guaranty periods; and since the amount of the adjustment was determined upon the basic figure of $4,907.52, one-half average annual test period expenditures and charges for maintenance of work equipment, it is apparent that the factor used by the Commission to represent the difference in amount of property maintained was .06587. The petitioner has not proven, or attempted to prove, that the amount of work equipment maintained in the last ten months of 1920 was greater than the amount maintained in the guaranty period; and it can not complain of the*1347 use of the Commission's factor for work equipment, .06587. The next step requires a determination of the factors representing the differences in the use of the properties maintained, as between the test period and the last ten months of 1920. This requires the determination of separate factors for way and structures and for the four classes of equipment - locomotives, freight train cars, passenger train cars, and work equipment. The petitioner has not proven, or attempted to prove, the basic facts upon which such factors could be computed. For the guaranty period, the Commission allowed plus adjustments of $11,357.07 in the case of way and structures, and $166.81 in the case of work equipment; and made minus adjustments of $44,941.69, $6,512.38, and $196.37, in the case of locomotives, freight train cars, and passenger train cars, respectively, for differences in use of property maintained, as between the test and guaranty periods; and since the amounts of these adjustments were determined respectively upon the basic figures of $356,132.71, $5,230.76, $279,140.96, $325,619.03, and $15,535.93, being, in each instance, one-half of the average annual test period expenditures and*1348 charges for maintenance, adjusted for differences in amounts of property maintained, the factors used by the Commission to represent the differences in use of property maintained were apparently .03189 for way and structures, .03189 for work equipment, .16100 for locomotives, .02000 for freight train cars, and .01264 for passenger train cars. As the petitioner has not proved, or attempted to prove, that the use of these facilities in the last ten months of 1920 was greater or less than the use thereof in the guaranty period, the Commission's factors may be treated as applicable to the entire last ten months of 1920. The following, therefore, is a computation of the equated maintenance expenses of an average ten months of the test period, exclusive of expenditures and charges for depreciation, insurance and retirements of property, adjusted for differences in amount and use of property maintained: Ten-twelfths of average annual test period expenditures and charges for maintenance of way and structures, exclusive of expenditures and charges for depreciation, insurance and retirements of property $583,730.52 Add adjustments for: Difference in amount of property maintained 10,174.42 Difference in use of property maintained 18,939.63 Difference in cost of labor and materials 827,340.17 Total equated ten-twelfths of average annual test period expenditures and charges for maintenance of way and structures, exclusive of expenditures and charges for depreciation, insurance and retirements of property, adjusted for differences in amount and use of property maintained 1,440,184.74 Ten-twelfths of average annual test period expenditures and charges for maintenance of equipment, exclusive of expenditures and charges for depreciation, insurance and retirements of property: Locomotives $342,954.50 Freight train cars 423,983.12 Passenger train cars 28,231.00 Work equipment 8,179.20 803,347.82 Add adjustments for: Differences in amount of property maintained: Locomotives $120,421.61 Freight train cars 119,245.24 Work equipment 538.76 240,205.61 Difference in use of property maintained: Work equipment $278.02 278.02 Differences in cost of labor and materials: Locomotives $524,842.96 Freight train cars 718,691.12 Passenger train cars 34,513.98 Work equipment 12,144.57 1,290,192.63 Total additions 2,334,024.08 Deduct adjustments for: Differences in amount of property maintained: Passenger train cars $2,337.80 Differences in use of property maintained: Locomotives $74,603.55 Freight train cars 10,864.57 Passenger train cars 327.29 85,795.41 Total deductions 88,133.21 Total equated ten-twelfths of average annual test period expenditures and charges for maintenance of equipment, exclusive of expenditures and charges for depreciation, insurance and retirements of property, adjusted for differences in amount and use of property maintained 2,245,890.87 Total equated ten-twelfths of average annual test period expenditures and charges for all maintenance, exclusive of expenditures and charges for depreciation, insurance and retirements of property, adjusted for differences in amount and use of property maintained $3,686,075.61 *1349 *1308 The next step requires the determination of a factor for adjusting equipment depreciation, on account of the differences in amount and use of equipment maintained, as between the test period and the last ten months of 1920. One-half of the average annual test period charge for depreciation of equipment amounts to $58,095.68, but the Commission allowed for the six-month guaranty period the sum of $100,795.02, which is 7.472 per cent of the equated one-half average annual test period expenditures and charges for maintenance of equipment, exclusive of expenditures and charges for depreciation, insurance and retirements, adjusted for differences in amount and use of equipment maintained, as between the test and guaranty periods. The petitioner has not proved, or attempted to prove, the basic facts upon which a proper factor for adjustment of depreciation could be computed, to represent the difference in amount and use of equipment, as between the test period and the last ten months of 1920. The combined adjustments which the Commission allowed for the guaranty period, for differences in amount and use of equipment maintained, represent 19.040 per cent of the one-half*1350 average annual test period expenditures and charges for maintenance of equipment, exclusive of expenditures and charges for depreciation, insurance and retirements; while the combined adjustments for the last ten months of 1920, as hereinbefore computed, for the same differences, represent 18.964 per cent of the ten-twelfths average annual test period expenditures and charges for maintenance of equipment, exclusive of expenditures and charges for depreciation, insurance and retirements. The comparison indicates that the combined differences in amount and use of equipment maintained, as between the test and guaranty periods, is greater than the combined differences, as between the test period and the last ten months of 1920; hence, it would appear, in the absence of evidence proving the petitioner's right to any greater adjustment, that a depreciation adjustment, representing the combined differences in amount and use of equipment, as between the test period and the last ten months of 1920, equal to 7.472 per cent of the equated ten-twelfths average annual expenditures and charges for maintenance of equipment, exclusive of expenditures and charges for depreciation, insurance and retirements, *1351 adjusted for differences in amount and use of property maintained, would not be less than fair to the petitioner. Such an adjustment amounts to $70,986.84; and, accordingly, the ten-twelfths average *1309 annual test period charge for depreciation of equipment, adjusted for differences in amount and use of property maintained, as between the test period and the last ten months of 1920, is $167,812.97. The factors representing the differences in amount of property maintained, as between the test period and the last ten months of 1920, are .01743 for way and structures, and .29160 for equipment. Ten-twelfths of the average annual test period expenditures and charges for insurance amounts to $1,065.80, in the case of way and structures, and $328.15 in the case of equipment. Therefore, the average expenditures and charges for insurance for ten months of the test period, adjusted for differences in amount of property maintained, are $1,084.38 in the case of way and structures, and $425.32 in the case of equipment. The factors representing combined differences in amount and use of property maintained, as between the test period and the last ten months of 1920, are .04988*1352 for way and structures, and .18964 for equipment. Ten-twelfths of the average annual test period expenditures and charges for retirements amounts to $15,449.03 in the case of way and structures, and $26,217.60 in the case of equipment. Therefore, the average expenditures and charges for retirements for ten months of the test period, adjusted for differences in amount and use of property maintained, are $17,304.01 in the case of way and structures, and $31,189.51 in the case of equipment. Accordingly, the total equated ten-twelfths of average annual test period expenditures and charges for all maintenance, adjusted for differences in amount and use of property maintained, is $3,902,807.42, computed as follows: Total equated ten-twelfths of average annual test period expenditures and charges for all maintenance, exclusive of expenditures and charges for depreciation, insurance and retirements of property, adjusted for differences in amount and use of property maintained, as heretofore computed in this report $3,686,075.61 Additions: Ten-twelfths of average annual test period charge for depreciation of equipment, adjusted for difference in amount and use of property maintained 167,812.97 Ten-twelfths of average annual test period expenditures and charges for insurance, adjusted for differences in amount of property maintained: Way and structures $1,084.38 Equipment 425.32 1,509.70 Ten-twelfths of average annual test period charges for retirements of property, adjusted for differences in amount and use of property maintained: Way and structures $16,219.63 Equipment 31,189.51 47,409.14 Total equated ten-twelfths of average annual test period expenditures and charges for all maintenance, adjusted for differences in amount and use of property maintained $3,902,807.42 *1353 *1310 The total expenditures and charges for maintenance charged to operating expenses in the last ten months of 1920, and claimed by the Lake Erie as a deduction in computing taxable net income in its return for 1920, amounts to $4,401,355.90, which is $498,548.48 in excess of the total equated ten-twelfths of average annual test period expenditures and charges for all maintenance, adjusted for differences in amount and use of property maintained. Thus a full consideration of the merits of petitioner's contention, from the standpoint of its rational theory and from the standpoint of an analysis of the facts brought forward to support it, leads to the opinion that the respondent properly disallowed from the 1920 deductions for maintenance the amount of $459,356.19, and the determination in this respect is sustained. It is contended by the petitioner that the respondent erred: In not allowing as a deduction from the Lake Erie's gross income a loss of not less than $1,500,000, sustained by the Lake Erie during the taxable year and not compensated for by insurance of otherwise, which losses resulted from the depreciation, destruction and undermaintenance of and damage*1354 to the Lake Erie's property (including the Fort Wayne, Cincinnati and Louisville Railroad and the Northern Ohio Railway) while under federal control. In brief, the petitioner contends that such loss was $2,103,621.84, and that the Lake Erie was only compensated therefor by the Director General to the extent of less than $459,356.19. The petitioner computes the total loss of the Lake Erie as follows: Amount necessary to restore equipment wholly or partially consumed during Federal control: Lake Erie $1,465,496.72 Northern Ohio 26,092.08 $1,491,588.80 Road property retired and not replaced - normal: Lake Erie $148,810.26 Northern Ohio 12,058.42 98,902.85 Loss on gravel sold, Lake Erie only 4,385.62 Material purchased under hold-over contracts, Lake Erie only 67,248.63 Losses on additions and betterments: Lake Erie $148,810.26 Northern Ohio 12,058.42 160,868.68 Loss on ties, both Lake Erie and Northern Ohio, not possible of allocation as between the two 273,294.45 Transportation on deficit material, both Lake Erie and Northern Ohio, not possible of allocation as between the two 7,332.81 Total loss 2,093,621.84 *1355 *1311 The petitioner further contends that of the Director General's allowance of $459,356.19, for disputed items in the Lake Erie's claim for settlement of Federal control, about $50,000 "clearly was not for any of the foregoing losses," Issue II, supra, but that "the remainder of it undoubtedly was." The amount of the alleged total loss, less the net amount of the Director General's allowance alleged to be applicable thereto, is greater than the loss alleged to have been sustained by the Lake Erie, in the assignment of error. The respondent defends upon the grounds, that whatever loss, if any, was sustained was deductible in 1924, the year in which final settlement for Federal control of the Lake Erie was made with the Director General, and not in 1920, Chicago & North Western Ry. Co.,22 B.T.A. 1407; and that the evidence does not show that the Lake Erie sustained a deductible loss, arising out of Federal control and operation of its properties, at any time. All of the items embraced in the claimed loss deduction were the subject of claims made by the Lake Erie against the Director General, although the amounts may have been different. *1356 In Chicago & North Western Ry. Co., supra, identically the same question was presented, and in disposing of it, in accordance with the respondent's first ground of defense in this case, the Board said: The second question for our consideration is whether the petitioner sustained a deductible loss from gross income in 1920 by reason of the return to it on March 1, 1920, of its railroad properties in a seriously undermaintained condition. The petitioner contends that the amount of this loss is approximately $25,000,000, or, more accurately, the difference between its claim for undermaintenance, filed with the Director General in 1920, of $34,918,823.30 and the $8,191,905.37 allowed in the lump-sum settlement of 1921, or $26,726,917.93. The provision of law invoked in making this contention is section 234(a)(4) of the Revenue Act of 1918, which permits a corporate taxpayer to deduct from gross income "Losses sustained during the taxable year and not compensated for by insurance or otherwise." This provision of law was under consideration by the Supreme Court in *1357 United States v. White Dental Mfg. Co.,274 U.S. 398, in which the court stated: The case turns upon the question whether the loss, concededly sustained by the respondent through the seizure of the assets of the German company, in 1918, was so evidenced by a closed transaction within the meaning of the quoted statute and treasury regulations as to authorize its deduction from gross income of that year. The statute obviously does not contemplate and the regulations (Art. 144) forbid the deduction of losses resulting from the mere fluctuation in value of property owned by the taxpayer. * * * But with equal certainty they do contemplate the deduction from gross income of losses, which are fixed by identifiable events, such as sale of property (Art. 141, 144), or caused by its destruction or physical injury (Art. 141, 142, 143) or, in the case of debts, by the occurrence of such events as prevent their collection (Art. 151). *1312 Assuming that the petitioner's properties were undermaintained during the period of Federal control to the extent contended for by the petitioner and that the undermaintenance was not made good in the lump-sum settlement to the*1358 amount of $26,726,917.93, what was the "identifiable event" of 1920 that fixed the loss as one sustained in that year? The petitioner contends that it was the return of the properties by the Director General to it in that year. But the fact is that under its contract with the Director General of Railroads of September 10, 1918, it was provided: SEC. 5. (a) During the period of Federal control the Director General shall, annually, as nearly as practicable, expend and charge to railway operating expenses, either in payments for labor and materials or by payments into funds, such sums for the maintenance, repair, renewal, retirement, and depreciation of the property described in paragraph (a) of Section 2 hereof as may be requisite in order that such property may be returned to the Companies at the end of Federal control in substantially as good repair and in substantially as complete equipment as it was on January 1, 1918: * * * Clearly under the contract the petitioner had a right to recover from the United States any valid claim which it might have by reason of undermaintenance of its properties during the period of Federal control. The petitioner knew that it had such a right*1359 under its contract and filed its claim with the Director General of Railroads for undermaintenance upon the basis thereof. The Director General never denied liability under the contract. The petitioner's claim was not settled in 1920. It was an outstanding claim at the close of 1920 and remained a live claim until it was finally settled by the closing agreement of 1921. The closing agreement provided in part: The purpose and effect of this instrument is to evidence 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, * * * If any loss was sustained upon the settlement it was a loss sustained as a result of the settlement in 1921, and not a loss that is allocable to the year 1920. There was no determinable loss until the claim against the United States for undermaintenance was acted upon. The petitioner has submitted a mass of evidence in support of its claim that it sustained a loss in 1920 as a result of the undermaintenance of its properties during the period of Federal control which was not made good by the lump-sum settlement of 1921. It has argued before the Board*1360 the validity of its claim for undermaintenance filed with the Director General of Railroads in 1920. It contends that the Director General of Railroads did not give sufficient weight to its contention for the "inefficiency of labor" during the period of Federal control in the adjustment of its claim. It presses upon the Board the merits of numerous formulae by which it arrived at the amount of its claim for undermaintenance as contrasted with formulae used by the Director General of Railroads in arriving at the amount of undermaintenance. We are of the opinion that no useful purpose will be served by a discussion of this evidence. It may furthermore be pointed out that the claim for undermaintenance is largely predicated upon the cost of labor and cost of materials during and at the end of the Federal control period and not upon the cost of labor and materials at December 31, 1917. We think that any capital loss deductible from gross income must be predicated upon the fair market value of the lost or destroyed property on March 1, 1913, or its cost if acquired subsequent to that date. The evidence does not establish such value or cost. We are of the opinion that if any loss*1361 was sustained as a result of the lumpsum *1313 settlement that loss does not pertain to the year 1920, which is the only year before us with respect to which the respondent has determined a deficiency. The contentions of the petitioner upon this point are not sustained. Cf. Missouri Pacific Railroad Co.,22 B.T.A. 267. Following the precedent of this decision, it must be held, as the respondent contends, that the loss, if any, was not deductible in 1920. We have, however, gone further and considered the merits of each of the items of alleged loss which comprise the total deduction claimed in order that there may be a full apprehension of the nature of the claim, its facts and its theory. Some of the items, such as that of the carrier's omission to show on its accounts the credit for the transportation of the alleged deficit materials which the Director General failed to apply in maintenance of road, are so palpably unsound and without color that it seems curious that they should be seriously presented. Standing alone, such a claim would be dismissed out of hand, and there is no more reason for including it among numerous others having more or less plausibility. *1362 The effect is rather to cast doubt upon the claim in its entirety. The alleged loss of $1,491,588.80, on account of "Amount necessary to restore equipment wholly or partially consumed during Federal control," is made up as follows: Locomotives $471,352.50 Freight train cars 1,318,002.36 Passenger train cars 80,867.79 1,870,222.65 Less: Allowance by Director General in final settlement, for depreciation, retirements and fire losses 378,633.85 Net loss claimed 1,491,588.80 The processes of the petitioner's computations as to all three classes of property were the same; hence, a description of the computation in the case of locomotives will apply as well to the computations in the case of freight and passenger train cars. The statistical number of locomotive years expired during Federal control was divided by 25, alleged average service life of a locomotive, to find the equivalent statistical number of locomotives consumed during Federal control; the equivalent statistical number of locomotives consumed during Federal control was multiplied by the average cost of one locomotive, to find the statistical cost of locomotives consumed during Federal control; *1363 the statistical cost of locomotives consumed during Federal control was multiplied by a factor (different factors being used, according to whether the locomotive was acquired before or during Federal control), to equate the said statistical cost to value as of 1920, *1314 the date of return of the property to the Lake Erie by the Director General. In the case of freight train cars, the alleged average service life is 22 years, and 30 years in the case of passenger train cars. The theory underlying the petitioner's contention that there is a deductible loss in 1920, under section 234(a)(4) of the Revenue Act of 1918, is substantially this: That each class of equipment which the Lake Erie turned over to the Director General had a definite and determinable service life, from date of acquisition, which would be realized, under normal conditions, by proper maintenance; that a portion of the estimated service life of each class of equipment was consumed or used up during Federal control, not through lack of proper maintenance, but through the efflux of time; that the Director General was obligated, under the Federal control contract, to make good the used up service life of the*1364 equipment, or to compensate the Lake Erie therefor; that the Director General failed either to make good such used up service life, or, in the final settlement, to fully compensate the Lake Erie for his failure in that respect; and that the measure of the Lake Erie's loss is the difference between the post-Federal-control cost of a number of units having an aggregate service life equal to the total service life used up during Federal control and the amount of compensation alleged to have been allowed or paid by the Director General in the final settlement. The contention is plainly unsound. In the first place, the Lake Erie, during the test period, in accordance with the regulations of the Interstate Commerce Commission, annually charged to railway operating expenses a prorata portion of the ledger value of each unit of equipment, determined in accordance with its service life. That charge is reflected in the average annual railway operating income of the test period, which, by the provisions of the Federal Control Act and the terms of the standard contract, was fixed as the measure of the compensation to which the Lake Erie was entitled for the Federal control period. Thus the*1365 Lake Erie has presumably been compensated in full for the consumption of service life of equipment during Federal control. But if the presumption be wrong, the lump-sum settlement precludes an enumeration of the items the Director General paid or made allowances for in the final settlement, and, therefore, the evidence does not warrant the conclusion that the Director General did not make full settlement for such alleged consumption of service life of equipment. Secondly, the evidence as to the average service life of each class of equipment is unsatisfactory. It consists entirely of a statement by petitioner's engineering assistant to the president of his conclusions, *1315 without any of the supporting facts. The following is a summary of his direct testimony: That the average life of locomotives was determined after consideration of various data available and the results of discussions at various times with locomotive men and engineers, and some compilations he made himself several years ago and particularly during Federal control, in which he made a compilation of every unit of equipment of the Nickel Plate that had been retired, from the date it started in operation*1366 until the date of the compilation, in an effort to determine what was the average life of a locomotive; that the average life of a locomotive is 25 years; that the average life of a freight car is 22 years; that 30 years is the fair average life of a passenger car; and that his opinion as to the average life of all of this equipment is a matter of his own judgment, and not the result of the application of any authoritative view. On cross-examination he testified that he did not know that the Lake Erie adopted any period as the established life of its locomotives; that it has adopted an arbitrary rate of 4 per cent of accrual; that he thinks they accrued 2 1/2 per cent during the test period; that he guesses they went back to 4 per cent in 1920, after March 1; and that 4 per cent would represent a life of less than 25 years - figuring 15 per cent salvage, it would represent a life of 21 1/4 years. There are no facts in that testimony which will enable us to exercise any independent judgment, or to demonstrate the reasonableness of this witness' conclusions, as to the average life of the three classes of equipment. See *1367 Uncasville Mfg. Co. v. Commissioner, 55 Fed.(2d) 893. Without satisfactory proof as to the average service life of each of the three classes of equipment, we could not say what portion of such service life was consumed or used up during Federal control. Thirdly, the quantum of the loss, if any, would not be determinable, for tax purposes, upon the basis of post-Federal control costs. Were it not for the intervention of Federal control, with the Government assuming the burden of exhaustion, wear and tear of the requisitioned property, the Lake Erie would have been entitled, under section 234(a)(7), to deduct from gross income of each of the taxable years embraced within the Federal control period, a reasonable allowance for exhaustion, wear and tear of the property used in its business; and such an allowance would have been determinable upon the basis of the March 1, 1913, value or cost of the property, accordingly as the property was acquired before or after that date. This deduction is expressly prescribed by the statute as that to be applied to the gradual consumption of service life. Its measure is annual exhaustion. It can not be increased by a statistical*1368 contrivance of treating the aggregate time units of numerous *1316 items of property as if they were the equivalent of a fewer number of items of property, and thus finding, contrary to fact, that such number of items has been completely exhausted and hence the subject of the loss deduction. Since exhaustion of service life is the subject only of the depreciation deduction, the quantum of such deduction depends upon evidence of basic cost or 1913 value, probable life, and the modification to be made in the usual rate by reason of extraordinary conditions in the year under consideration. The next item included in the claimed loss deduction is $98,902.85, for "Road property retired and not replaced - normal," which is made up as follows: Reproduction cost of property retired during Federal control, less depreciation, as of end of Federal control in 1920 $129,535.40 Deduct: Allowance made by Director General in final settlement: Salvage recovered $36,582.61 Less: Cost of demolition 5,950.06 30,632.55 Net loss claimed 98,902.85 Much that has been said with respect to the preceding item applies with equal force to this item. Furthermore, *1369 since these were normal retirements, it must be apparent that the 113 items of road property involved were within at least 2 1/6 years, the length of the Federal control period, of the end of their service life when the Director General took them over. Of the whole number of items involved, 56, or approxinately one-half, were acquired by the Lake Erie and the approximately one-half, were acquired by the Lake Erie and the century. The average date of acquisition was 1889. Taking December 31, 1919, as the average date of retirement, the indicated average service life was 30 years. Thus, when the Director General took the properties over, the average service life remaining was not more than of the original service life. The cost of the properties was $61,734.01, the salvage recovered was $36,582.61, leaving $25,151.40 to be recovered through depreciation charges over the 30-year life, and only $1,676.76 to be so recovered when the Director General took the properties over. To the latter figure should be added the cost of demolition, $5,950.06; so that the loss, based upon cost, could not exceed $7,626.82. Assuming that the wirness' estimate of reproduction cost at 1914 prices reflects*1370 the March 1, 1913, value of the properties, the loss based upon such value could not exceed $9,517.96. But, for reasons stated in the discussion of the preceding item, the evidence does not warrant the conclusion that the Director General did not make full settlement for this item. *1317 The next item included in the claimed loss deduction is $4,385.62, for "Loss on gravel sold." It appears that the Lake Frie owned a gravel pit, from which the Director General sold, during Federal control, 87,712.33 cubic yards of gravel, for $4,386.62. The cost to the Lake Erie of the gravel sold was $4,096.40. The March 1, 1913, value of the gravel sold, based upon the Lake Erie's contract with the Lewisburg Stone, company, entered into in April, 1913, was equal to the proceeds realized by the Director General from the sales during Federal control. Here, also, for the reasons stated in the discussion of the first item, the evidence does not warrant the conclusion that the Director General did not make full settlement for this item. The next item included in the claimed loss deduction is $67,248.63, for "Material pruchased under hold-over contracts," which is made up as follows: *1371 Cost to Director General of materials purchased under contracts entered into by Lake Erie prior to Federal control, at contract prices $254,537.35 Estimated cost of materials had they been bought and paid for at the prices at which the Lake Erie settled with the Director General, for supplies and materials turned over by the latter at the end of Federal control 340,344.76 Difference 85,807.41 Deduct: Estimated cost of material purchased by Lake Erie under contracts entered into by the Director General during Federal control, had they been bought and paid for at prices prevailing at end of Federal control $171,906.80 Less: Cost to Lake Erie, at contract prices 164,481.20 7,425.60 Adjustment by Director General of prices of materials used for additions and betterments during Federal control 11,133.18 18,558.78 Net loss claimed 67,248.63 The theory underlying the petitioner's contention that this alleged loss is deductible from the Lake Erie's 1920 gross income, under section 234(a)(4) of the Revenue Act of 1918, is substantially this: That during Federal control, the Director General took advantage of certain material purchase*1372 contracts entered into by the Lake Erie prior to Federal control; that the Director General used all of the materials so purchased, and, consequently, did not turn over any of such materials to the Lake Erie at the end of Federal control; that in order to meet its post-Federal control requirements, the Lake Erie *1318 was forced to go into the open market and purchase materials at open market prices, which, in the aggregate, were $85,807.41 higher than it would have paid for the same materials under the contracts; that after Federal control, the Lake Erie took advantage of certain material purchase contracts entered into by the Director General during Federal control; that had the Lake Erie found it necessary to purchase the same materials in the open market, it would have paid $7,425.60 more than it actually paid; that in the final settlement, the Director General made an adjustment of charges against the Lake Erie, in the amount of $11,133.18, for materials used in additions and betterments to the Lake Erie's property during Federal control; and that its loss from the aforesaid transactions is as shown by the computation above. Apparently, for some reason, the Lake Erie was*1373 unable to take advantage, in the post-Federal control period, of the material purchase contracts which it had entered into prior to Federal control. There is no statutory loss in this item. In the first place, the petitioner's theory must necessarily include the assumption that the Lake Erie actually purchased in the open market, in the post-Federal control period, materials of the same kinds and in the same quantities as were purchased by the Director General during Federal control under hold-over contracts, and that the Lake Erie paid for those materials, at the prices at which it settled with the Director General for similar materials and supplies turned over to it by the latter at the end of Federal control; and the assumption is wholly without any foundation in the evidence. Second, even if the assumption were true, the actual cost to the Lake Erie of the materials purchased in the post-Federal control period is a proper charge against operating expenses and a proper deduction in computing taxable net income, as and when such materials are actually used; and there is no evidence that the petitioner's accounting practice has not conformed with the rule. Third, it is clear*1374 from the evidence that some, and possibly all, of the materials purchased by the Director General during Federal control under hold-over contracts were used in maintaining the Lake Erie's properties during Federal control; hence the Lake Erie has not suffered by reason of the Director General having taken advantage of the hold-over contracts, except to the extent that the Director General may have used some of those materials for the benefit of another carrier, and that is not shown by the evidence. Fourth, as in the case of all preceding items, the evidence does not warrant the conclusion that the Director General did not make full settlement for this item. The next item included is $160,868.68, for "Losses on additions and betterments," which is made up as follows: Cost of reproduction in kind, as of Federal control period, of road properties retired and replaced by the Director General during Federal control $278,699.04 Less: Actual cost to Lake Erie and Northern Ohio of the road properties so retired and replaced, which cost was allowed by the Director General as a credit against the charges which he made to the Lake Erie for additions and betterments of the Federal control period 117,844.23 Net loss claimed on this item 160,868.68 *1375 *1319 The theory of the petitioner's contention is that the Director General, in charging the Lake Erie for additions and betterments made during Federal control, should have allowed credit, not, as he did, for the original cost or ledger value of the road properties retired and replaced by additions and betterments, but for the cost of reproduction in kind, as of the Federal control period, of the road properties retired; and that to the extent that the credit allowed is less than such reproduction cost, his charges for additions and betterments against the Lake Erie are excessive and the latter suffered accordingly. In the first place, the evidence is entirely inadequate to show cost of reproduction in kind, as of the Federal control period, of road properties retired and replaced by the Director General. It consists entirely of testimony of the engineering assistant substantially as follows: That the amounts shown in column 6 of Exhibit 84 are the amounts which were shown in the claims of the company against the Director General; that he did not prepare the claims, nor has he ever inspected or seen any of the properties retired; column 6 shows the reproduction value*1376 of the several facilities as of the time of their respective constructions; and that the reproduction values in column 6 did not appear on the company's books. That is all of the evidence there is bearing on the point; and it certainly falls far short of its purpose. Second, the Director General allowed the Lake Erie the full cost of the retired facilities, notwithstanding that the Lake Erie had used those facilities for some time previously. Thus the Lake Erie was required to pay for the additions and betterments only the difference between the cost thereof and the cost of the retired properties unreduced by any exhaustion, wear and tear. We can not see in that situation how the Lake Erie sustained any loss. By allowing the full amount of original cost of retired facilities as a credit, the Director General fully compensated the Lake Erie, and precluded any possible loss. The next item included in the claimed loss deduction is $273,294.45 for "Loss on ties," divided into two parts, "zinc chloride ties, $60,158.80" and "Shortage of ties, $213,135.65." As to the first part of the item, the petitioner says that during the Federal control *1320 period, the Director General*1377 applied to the Lake Erie's roadway 116,068 zinc chloride ties, instead of creosote treated ties which the Lake Erie and Northern Ohio had used previous to Federal control; that the average service life of a zinc chloride tie is 3.2 years less than that of a creosote treated tie; that for each zinc chloride tie so applied, the Lake Erie has sustained a loss of the mathematical coefficient efficient of value of 3.2 years in terms of the market value of the creosoted tie; and that the market value of a creosoted tie, as of the end of Federal control, was $2.30. We see no merit whatever in the petitioner's contention as to the first part of the item. Apparently, when the Director General took over the Lake Erie's system of railroads, the condition of 116,068 creosoted ties in the roadway was such that he found it necessary to replace them before the end of Federal control. The remaining service life in those ties, when the Director General took over the property, was, at most, two years. When the Director General returned the properties to the Lake Erie, the 116,068 creosoted ties had been replaced by a like number of zinc chloride ties with a remaining service life of approximately*1378 eleven years. Wherein is there any loss in that situation? The petitioner says that it will have to replace the zinc chloride ties about 3.2 years sooner than would have been the case had the Director General used creosoted ties. But what of it? When it does replace the zinc chloride ties, it may take its proper tax deduction for this item of maintenance. Second, the contention that the market value of a creosoted tie, as of the end of the Federal control period, was $2.30 is not sufficiently supported by the evidence. It is entirely based upon the engineer's statement that "the price of $2.30, at the end of Federal control, is about the price that we were paying for ties at that time." Another witness for petitioner testified, in connection with the preceding issue, that the average price for treated ties in the guaranty period was $1.49085 per tie; and there is evidence in the record that the trend of material prices was upward through all of 1920, at least to November. As to the second part of the item, the petitioner says that the Director General replaced proportionately less ties during Federal control than were replaced by the Lake Erie during the test period; and that*1379 the resulting loss to the Lake Erie and the Northern Ohio is the cost of purchasing and installing, as of the end of Federal control, sufficient ties to make up the alleged net shortage. This cost the petitioner says is $213,135.65. While the evidence indicates that the Director General did replace proportionately less ties during Federal control than were replaced by the Lake Erie during the test period, it can not be said on this record that the Director General did not make full settlement for any Federal control undermaintenance resulting from any deficiency in tie replacements. *1321 The last item included in the claimed loss deduction is $7,332.81, for "Transportation on Deficit Material." This is the colorless claim to which we have already referred. The petitioner is evidently contending that this is the amount of additional revenue which the Lake Erie would have accounted for as realized from the transportation of ties, over its own lines, had it not been for the Director General's deficiency in tie replacements during Federal control. In other words, in the preceding item the petitioner contends that the Director General during Federal control consumed and failed*1380 to restore some 84,000 treated and untreated ties and 376,000 feet, board measure, of switch and bridge ties; and the petitioner says that, had the Director General bought and installed the said ties during Federal control, the amount of revenue which it would have accounted for as if received, for transportation of said ties over its own lines, would have been $7,332.81; and, therefore, that the Director General's failure to so purchase and apply the said number of ties resulted in a loss of that amount to the Lake Erie and the Northern Ohio. The mere statement of the proposition ought to be sufficient to show that it is without merit. There is no provision which will permit a taxpayer to take a loss deduction for its failure to realize an accounting credit which might have inured to it if things had not happened as they did. The deduction claimed in this issue is thus found to be entirely without merit, and leaves the respondent's determination of deficiency unaffected. Judgment will be entered under Rule 50. Footnotes 1. The ratios of the test period are based upon the actual expenditures for the fiscal years ended June 30, 1915 and 1916, and one-half of the expenditures of each of the calendar years 1916 and 1917 to represent the fiscal year ending June 30, 1917. ↩