Eagle Pass & P. N. Bridge Co. v. Commissioner

*1338 This proceeding is for the redetermination of a deficiency in income tax of $2,419.71 for 1926. The only matter in controversy is whether petitioner is entitled to a deduction as an ordinary and necessary business expense of an amount of $18,750 expended by it during the taxable year in connection with the acquisition of the franchise of and the elimination of the competition of a competitor.

FINDINGS OF FACT.

Petitioner is a Texas corporation, with its principal office at Eagle Pass.

Under the authority of an Act of Congress approved May 29, 1884, the Rio Grande Bridge and Tramway Company constructed a toll bridge across the Rio Grande River, *1722 connecting the town of Eagle Pass, Tex., with the town of Piedras Negras in Mexico. Thereafter the Porfirio Diaz and Eagle Pass Bridge Company became the owner of the bridge and was operating it when it was washed away by high water in June, 1922. Shortly thereafter the petitioner acquired from the Porfirio Diaz and Eagle Pass Bridge Company the permits or franchises held by it, including that granted by the Act of Congress of May 29, 1884. Petitioner's associated Mexican corporation, the Piedras Negras & Eagle Pass Bridge Company, was the holder of a 50-year franchise dated June 6, 1887, from the Mexican Government to operate a toll bridge between the two towns. This franchise also provided that upon its expiration the Mexican Government would pay to the owners of the bridge two-thirds of the value of the bridge. Some time in 1922, after petitioner had acquired the franchises of the Porfirio Diaz and Eagle Pass Bridge Company, if and its associated Mexican corporation proceeded to build a temporary bridge upon the site of the former bridge and to operate it on their joint account.

*1339 About September, 1925, the two companies decided to construct a permanent toll bridge*1723 under the franchises held by them from their respective governments. Accordingly, they made application to their respective governments for permission to build such a bridge at a point about 300 yards down the river from the temporary bridge, submitting plans and specifications with their applications.

In December, 1925, the Mexican Government approved the application made to it and on January 13, 1926, the Secretary of War approved the application made to the Government of the United States. In January, 1926, bids were called for to construct the new bridge. The contract for its construction was let on February 22, 1926, and work was begun four days later. By the end of 1926 the permanent bridge was completed and the temporary bridge which had theretofore been in use during the construction of the permanent bridge was then removed and junked.

In September, 1925, one Muzquiz obtained from the Mexican Government a franchise to build and operate a toll bridge across the Rio Grande River between Engle Pass, Tex., and Piedras Negras, Mexico. This franchise was for a period of 50 years from September 10, 1925. It was granted to Muzquiz on condition that he obtain permission*1724 from the Government of the United States to build a permanent bridge between the two towns and that a permanent bridge be constructed. He also made a deposit with the Mexican Qovernment of $1,000 as a guarantee that he would carry out the provisions of the franchise.

In December, 1925, the corporation which was operating under the Mexican franchise granted to Muzquiz constructed a pontoon bridge between Eagle Pass and Piedras Negras about 100 feet upstream from the temporary bridge then being operated by petitioner and its associated Mexican corporation. This pontoon bridge was, during the same month, opened to the public free of tolls.

Until the pontoon bridge was opened to the public free of charge, petitioner and its associated Mexican company were charging the usual tolls, but from that time on they had to open their bridge to the public free of tolls. This deprived them of any receipts from the use of their bridge. This condition continued for about two months, during which time petitioner and its associated corporation realized that unless the competition afforded by the pontoon bridge could be eliminated, they would have to continue operating their temporary bridge*1725 without any receipts for about a year while the permanent bridge was being built and that this would mean a loss of about $75,000 to them. They also thought that since the two bridges were parallel and the pontoon bridge was upstream, their bridge was likely to be destroyed at any time by the pontoon bridge giving away and washing down against theirs.

*1340 As the result of a contract entered into on January 30, 1926, and in consideration of the payment of $18,750 by each, petitioner and its associated corporation, they acquired from Muzquiz and his associates the franchise granted to Muzquiz by the Mexican Government. It was also agreed that Muzquiz and his associates would close the pontoon bridge to traffic on February 1, 1926, and that within 30 days after the proper transfer had been made of the franchise, they would remove the bridge at their own expense. Although the contract contained a recital of the transfer of a certain "lease contract" and of certain "rights, contracts, agreements or good will" petitioner and its associated corporation really obtained nothing except the promise of removal of the pontoon bridge and the Muzquiz franchise. In order that he would*1726 not have to forfeit the $1,000 deposited by him with the Mexican Government as a guarantee that he would carry out the provisions of his franchise, Muzquiz required that the new permanent bridge to be constructed by petitioner and its associate corporation be constructed pursuant to the terms of the franchise granted to him. Accordingly, the contract provided for the taking of steps for the cancellation of the 50-year franchise dated June 6, 1887, granted by the Mexican Government and then held by petitioner's associated corporation.

During 1926, and before the pontoon bridge was removed by Muzquiz and his associates, the river rose and washed it down stream against the temporary bridge of petitioner and its associated corporation, causing their bridge to be destroyed, and thereby making it necessary for them to construct another temporary bridge.

In its income-tax return for 1926, petitioner took a deduction of $18,750 as a business expense representing the amount paid by it during the year in connection with the acquisition of the Muzquiz franchise and agreement for the removal of the pontoon bridge. In determining the deficiency here involved, the respondent disallowed the*1727 deduction.

OPINION.

LOVE: Petitioner contends that the expenditure of $18,750 made by it in connection with the acquisition of the Muzquiz franchise and the agreement on the part of himself and his associates to close and remove the pontoon bridge constituted an ordinary and necessary business expense and is, therefore, an allowable deduction in determining its net income for the taxable year. The respondent contends that the amount constitutes a capital expenditure and accordingly is not an allowable deduction.

Petitioner urges that it had everything desirable or necessary to build and operate a permanent toll bridge; that the Muzquiz franchise *1341 was not legal and had no value; that Muzquiz did not have any legal right to operate either a free bridge or a toll bridge; that he was a blackmailer and had constructed the pontoon bridge across the river above petitioner's bridge and opened the same to free use for the purpose of damaging the petitioner, and forcing it to pay him money to desist from the operation of the free bridge. Petitioner also insists that the real and only purpose it had in making payment of the $18,750 was to stop the operation of a free bridge*1728 and to remove the danger of having such bridge swept down against its bridge and destroying it, as was actually done.

The facts show that at the time petitioner and its associated Mexican corporation acquired the Muzquiz franchise and the promise of removal of the pontoon bridge, they had obtained approval of the Government of the United States and Mexico for the construction of a new permanent bridge. The franchise held by petitioner's associated Mexican corporation had only until June, 1937, to run, or a remaining life of a little more than eleven years. At the expiration of this time the Mexican Government was to take over the bridge at two-thirds of its value or probably, as stated in petitioner's brief, renew the franchise. We think it is clear from the facts that petitioner and its associated corporation were in a position to proceed with the construction of the permanent bridge when they acquired the Muzquiz franchise.

That the Muzquiz franchise was not legal and was without value is not supported by the record. It is true the record does not show that Muzquiz or his associates had obtained the approval of the Government of the United States for the construction of*1729 a permanent bridge, but that fact alone does not establish the lack of legality or the lack of value of the franchise.

With respect to the contention that Muzquiz did not have any legal right to operate either a free bridge or a toll bridge, the record indicates that neither petitioner nor Muzquize and his associates had submitted the plans and specifications for the bridges they were maintaining across the river to the Chief of Engineers and the Secretary of War, as required by the laws of the United States. What the legal rights of the respective parties were is not determinable from the evidence before us. However, the record indicates that petitioner was unable to enjoin the operation of the Muzquiz bridge by means of legal proceedings instituted by petitioner for that purpose.

What the motive of Muzquiz and his associates was in constructing the pontoon bridge and opening it for use free of tolls, the record does not show. It does show, however, that Muzquiz obtained his franchise at about the same time petitioner and its associated corporation decided to construct a permanent bridge. Which was first *1342 is not clear. It may be that the pontoon bridge was constructed*1730 and opened to use free of tolls for the purpose of deterring petitioner and its associated corporation from going forward with their plans for constructing a permanent bridge and also to render the operation of their temporary bridge a profitless undertaking. But, whatever the purpose was, it constituted a serious challenge to the future business of petitioner and its associated corporation - in fact, so serious that they were willing to pay $37,500 for the Muzquiz franchise, take steps for the cancellation of the old franchise held by petitioner's associated corporation, and proceed under the Muzquiz franchise in constructing the permanent bridge. It was not until after the acquisition of the Muzquiz franchise that the contract for the construction of the permanent bridge was let and the construction thereof begun.

In acquiring the Muzquiz franchise and the promise of removal of the pontoon bridge, petitioner not only eliminated the then existing serious threat to its business arising from the pontoon bridge being open to the public free of tolls, but eliminated any such threat that might arise throughout the remaining life of the franchise or for a period of almost 50 years. *1731 The benefit thus acquired by petitioner was not limited to the taxable year here involved, but is to continue throughout the remaining life of the franchise or until the year 1975. In our opinion the benefit so acquired constituted a capital asset. Consequently the amount expended therefor was not an ordinary and necessary business expense, but an investment of capital, and as such is not an allowable deduction.

While petitioner is not entitled to deduct in 1926 the amount of $18,750 expended by it in connection with the Muzquiz franchise, we think it is entitled to exhaust this amount ratably over the unexpired life of the franchise remaining at the time it was acquired from Muzquiz and his associates. In redetermining the deficiency, a deduction computed accordingly should be allowed from petitioner's gross income. See ; .

Petitioner contends that in addition to the $18,750 having been paid to stop the operation of a free bridge, it was also paid for the purpose of removing the danger of having its temporary bridge destroyed by the pontoon bridge sweeping down against*1732 it in time of high water. However, no attempt was made by petitioner to segregate the portion of the payment applicable to either purpose, and we are unable to make such a segregation from the evidence before us.

Even if a portion of the expenditure in connection with the Muzquiz franchise could be allocated and attributed to the purpose of protecting petitioner's bridge from the danger of the pontoon bridge *1343 above it, we think that such portion would be a capital item. It was a benefit of a permanent character; it remained over the life of the franchise and was not in the nature of an ordinary and necessary expense of carrying on a trade or business during the taxable year. Any portion of the expenditure for this purpose should be spread over the period of the benefits obtained; it is in the nature of a payment in one year for an asset having a life of many years.

While the evidence shows that the temporary bridge of petitioner was destroyed in 1926 by the pontoon bridge washing down against it, no part of the deduction here contended for is claimed to represent the loss resulting from the destruction of petitioner's bridge. So far as we know, the respondent*1733 has already allowed as a deduction the amount of any loss sustained by petitioner in that manner.

Judgment will be entered under Rule 50.