Thompson Scenic Ry. v. Commissioner

L. A. THOMPSON SCENIC RAILWAY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Thompson Scenic Ry. v. Commissioner Docket Nos. 10315, 9679. United States Board of Tax Appeals 9 B.T.A. 1203; 1928 BTA LEXIS 4279; January 12, 1928, Promulgated *4279 1. Amounts set aside by the petitioner out of its annual income for self insurance are not ordinary and necessary business expenses and therefore are not deductible in computing net taxable income. 2. Where property of the nature here under consideration is dismantled and removed the cost of such dismantling and removal is an ordinary and necessary business expense and therefore a proper deduction in the computation of net taxable income. V. C. Cormier, Esq., for the petitioner. M. N. Fisher, Esq., for the respondent. MORRIS *1203 This is a proceeding for the redetermination of deficiencies in income taxes for the years 1920 and 1921 amounting to $12,790.61 and $6,415.97, respectively. Upon motion, Docket Nos. 10315 and 9679, covering the years 1920 and 1921, were consolidated for hearing and consideration. The allegations of error are: (1) The disallowance of deductions for 1920 and 1921 as ordinary and necessary expenses of amounts set aside by the petitioner in those years for self insurance. (2) The disallowance for 1920 of a deduction of $3,672.49, the cost of dismantling and removing the "Land of O-z." (3) The reduction*4280 of invested capital for 1920 by $8,028.48, being the amount of income and excess-profits taxes due for the preceding taxable year. *1204 (4) The disallowance of a deduction for 1920 of $165.67 paid by the petitioner for the purpose of aiding in securing the patronage of the Orangemen's Association. (5) The addition to income as reported by the petitioner for 1920 of $304.17, being a return of accrued interest paid at the time of purchase of certain Canadian Pacific bonds. (6) The addition to income for 1920 of $750, which represented a reduction to market value of certain Canadian Pacific bonds owned by the petitioner but never in fact deducted from its income. FINDINGS OF FACT. The petitioner is a corporation organized and incorporated under the laws of the State of New Jersey in 1898. It is engaged in the business of constructing and operating scenic railways and other amusement devices at a number of the leading amusement parks in the United States. Losses resulting from fire during the period 1918 to 1922 inclusive at amusement parks amounted to $4,000,000. Owing to this extreme fire hazard and the risk involved no insurance company would accept insurance*4281 liability upon such properties owned by the petitioner. During the years 1920 and 1921 the petitioner, being unable to obtain insurance, set aside out of its income certain amounts representing the minimum premiums which the petitioner would have been obliged to pay if an insurance company had taken the risk at the minimum premium. Among the amusements owned and operated by the petitioner was the "Land of O-z," which is an old mill water ride with a wooden flume constructed on sills, through which water is propelled by a water wheel operated by a motor. There were scenes at various points throughout the ride based upon the story of Alice in Wonderland. This entire structure was built and operated on leased premises under a lease which provided for removal of the device upon compliance with the terms of the lease after termination thereof. In 1920 an examination of this amusement device disclosed that the wood sills and a great deal of the flume structure were so badly dilapidated, and some of the mechanical devices so out of order, that it could no longer be profitably operated. The structure of the Land of O-z was dismantled in 1920, and 20 boats, 1 conveyor and 5 of the scenes*4282 were removed to Rockaway Beach, N.Y. The petitioner expended $3,672.49 in dismantling and removing the useful parts of this device and deducted that sum in the computation of its net income for 1920, which deduction the respondent disallowed. *1205 Petitioner purchased, on November 12, 1920, $25,000 worth of Canadian Pacific Railway 6's, due March 2, 1924, at $95.50 and interest. The amount of accrued interest on these bonds at the date of purchase was $304.17, computed at 6 per cent per annum from September 2, 1920, to November 14, 1920. That amount plus the principal of $23,875, made the total cost of these bonds to the petitioner $24,179.17. On March 3, 1921, petitioner received $750 interest on these bonds, which sum included the amount of $304.17, hereinabove referred to. In 1920 the petitioner paid the sum of $165.67 to its landlord, the Woodside Real Estate Co., which sum its landlord in turn paid to the Orangemen's Association as an inducement to have its annual picnic at Woodside Park. Petitioner, being one of the concessionaires at this park, paid this portion as a share of its gross receipts to that Association for the purpose of augmenting its income. *4283 OPINION. MORRIS: The first allegation of error urged by the petitioner is with respect to the deductibility of amounts set aside out of its income in 1920 and 1921 for self insurance. This issue was submitted by the petitioner for consideration on the record made in the , wherein the identical issue was raised and it was decided that the amounts set aside in a reserve for self insurance do not constitute ordinary and necessary business expenses within the meaning of the taxing statutes. That decision is controlling in the instant proceedings. The second issue presented for consideration is whether the respondent committed error in disallowing as a deduction certain expenses incurred by the petitioner in dismantling and removing the Land of O-z. The petitioner contends, and we believe very properly, that the cost of dismantling and removing the properties of the Land of O-z was a deductible expense under the provisions of section 234 of the Revenue Act of 1918, which provides: (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions: *4284 (1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * * Convinced, as we are, that the expense of dismantling and removing the properties here under consideration is a proper deduction, we sustain the petitioner in its contention. The third issue raised by the petitioner relates to the action of the respondent in reducing its invested capital for 1920 by the amount of income and excess-profits taxes due for the preceding taxable year. *1206 This issue was not pressed at the hearing nor was any evidence introduced thereon. The respondent's determination on this point is therefore approved. In respect to the last three issues raised by the petitioner, the record does not show what action was taken by the respondent. The adjustments of income made in the notice of deficiency are based on a 30-day letter in which additions to income as disclosed in a revenue agent's report, of certain amounts representing depreciation, increase in reserve for insurance, and dismantling expenses are made. We are satisfied that the expenditure of $165.67 made by the petitioner for the purpose of inducing the Orangemen's*4285 Association to hold its annual picnic at Woodside Park at which the petitioner was one of the concessionaires, was an ordinary and necessary expense, and should be allowed as a deduction, if such allowance has not already been made. The amount of $304.17 representing the accrued interest on Canadian Pacific bonds which the petitioner paid at the time of purchase and recovered at the next interest date is not income, and the respondent was in error if he included it therein. As no evidence was introduced on the sixth allegation of error, the determination of the respondent is approved in respect thereto. Judgment will be entered on 15 days' notice, under Rule 50.