New York & H. R. Co. v. Commissioner

NEW YORK AND HARLEM RAILROAD COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. New York & H. R. Co. v. Commissioner Docket No. 20022. United States Board of Tax Appeals 28 B.T.A. 478; 1933 BTA LEXIS 1128; June 20, 1933, Promulgated *1128 The lessee of the petitioner's railroad properties assumed the obligation upon an issue of petitioner's bonds in the amount of $12,000,000, upon condition that the petitioner would refund these bonds if requested to do so at maturity. In 1900 the bonds matured, were retired, and replaced by an issue of new bonds in an equal amount. At all times this bond issue was carried upon the petitioner's books as a liability. Held, that the petitioner's invested capital should not be increased by the amount of the bonds. C. C. Handy, Esq., Charles C. Paulding, Esq., and Leo Manville, Esq., for the petitioner. E. C. Algire, Esq., for the respondent. SMITH *478 The Commissioner determined deficiencies in the petitioner's income and profits taxes for 1920 and 1921 in the respective amounts of $7,206.09 and $163,105.01. The petitioner alleged, and the respondent admits, error in disallowing certain deductions in each year. The only issue for our determination is whether - (d) The Commissioner erroneously determined that the invested capital of petitioner for the years 1920 and 1921 was but $10,743,554.81, instead of $22,743,554.81. FINDINGS*1129 OF FACT. The petitioner is a corporation organized under the laws of the State of New York, with principal office at 466 Lexington Avenue, New York City. In 1873 the petitioner leased certain railroad properties to the New York Central & Hudson River Railroad Co. for a period of 401 years from that date. Under the terms of the lease, as amended by supplemental agreements, the lessee agreed to pay the interest upon the petitioner's bonds and to pay the principal of such bonds at maturity upon condition that the petitioner reissue and refund such bonds upon demand and request of the lessee. The lease contracts were faithfully performed, and in 1900 the lessee paid the petitioner's 7 percent consolidated mortgage bonds of the aggregate amount of $12,000,000, and the petitioner issued and delivered to the lessee new bonds of the principal amount of $12,000,000, such issue being designated as petitioner's 3 1/2 percent gold bond mortgage. These bonds are still outstanding and since issued have been carried as a liability upon the petitioner's books, which were kept upon the accrual basis. *479 The Commissioner has not included the amount of $12,000,000, representing*1130 the principal of the bonds refunded in 1900, in the petitioner's invested capital for the taxable years 1920 and 1921. OPINION. SMITH: The petitioner contends that there was a "complete and absolute assumption of the obligation of the $12,000,000 Consolidated Bond issue" by the lessee "and its payment thereof in 1900 created an item of invested capital that the taxpayer should be allowed to set up in its tax returns." We have carefully examined the agreements between the lessor and the lessee with respect to these bonds, and fail to find any such assumption of the obligation on the bonds as is here claimed. The facts negative the idea of the lessee assuming the obligation upon the bonds, for, upon the payment of the principal of any of the bonds in question, the petitioner agreed to reissue and refund such bonds as were paid by the lessee. In 1900 this was done. Even assuming that upon the lessee's payment of the $12,000,000 consolidated bonds, the petitioner realized a "profit," which increased its surplus; it offset such "profit" by the issuance of the $12,000,000 gold bonds which are still outstanding and are carried as a liability upon its books. We do not agree with*1131 the petitioner's argument that: * * * The primary responsibility for the obligation of these bonds rests upon the New York Central, binding it not only to the Harlem company but also to the bond-holders of the Harlem, and the latter company is subject only to remote secondary liability with its property pledged as security for the bonds. We submit that the assumption and payment of the obligation by the New York Central constituted a profit to the Harlem which became a proper credit to surplus and should be allowed as invested capital of that company. Nor do we find any support for that argument in either (relied upon by the petitioner), or . In both cases, there was an unconditional assumption of the liability for the payment of the lessor's bonds by the lessee. The transaction in 1900 by which one issue of the petitioner's bonds was retired and a new issue in an equivalent amount took its place, did not constitute a "realized profit" that increased the petitioner's surplus for invested capital purposes. See*1132 ; . Judgment will be entered under Rule 50.