Pittsburgh & Lake Erie R.R. v. Commissioner

*259 This proceeding is for the redetermination of deficiencies in petitioner's income tax for 1920 and 1923 in the respective amounts of $511,178.20 and $41,800.30. The pleadings as amended raised several issues which have been disposed of by confession of error, withdrawal of the allegation, and agreement. The due effect of *260 these actions will be considered under Rule 50 settlement. The only issues for our determination are (1) whether rental interest on completed additions and betterments allowed by the*1154 Director General of Railroads in the final settlement for the period of Federal control constitutes income in the year of allowance (1923) or in the respective years for which the allowance is made; and (2) whether certain back mail pay received by the petitioner in 1920 and 1921 constitutes income in 1920. The respondent duly asserted claim to any increase in the deficiencies that may result from our redetermination.

FINDINGS OF FACT.

The petitioner is a corporation, organized under the laws of the State of Pennsylvania, with principal offices at 466 Lexington Avenue, New York City.

The petitioner's properties were operated by the United States Government during the period of Federal control pursuant to the provisions of the Federal Control Act. In the year 1923 a final settlement was effected with the Director General of Railroads and the petitioner was allowed therein the sum of $197,926.83, representing rental interest on completed additions and betterments. The petitioner included $98,016.49 of this amount in its taxable income as reported in its 1923 return. The Commissioner has added $99,910.34 to the amount reported, thereby including the total amount of $197,926.83*1155 in the petitioner's taxable income for 1923.

Of the sum of $197,926.83 representing rental interest on completed additions and betterments allowed by the Director General of Railroads in the final settlement for the period of Federal control, $24,390.92 is the portion thereof applicable to the two months of January and February 1920, during which the properties of the petitioner were under Federal control.

During the years 1920 and 1921, the petitioner received and accrued upon its books the sums of $10,233.45 and $190.56, respectively, in consequence of Decision 9200 of the Interstate Commerce Commission, Railway Mail Pay,56 I.C.C. 1, interpreting the provisions of sections 5 and 6 of the Act of Congress approved July 28, 1916, Post Office Appropriation, 39 Stat. 412, 425. The said Decision 9200 of the Interstate Commerce Commission was decided December 23, 1919, but was not served on the interested parties or made public until January 15, 1920.

In the amended income and excess profits tax return filed by the petitioner for the year 1920 there was reported as taxable income *261 the above amount of $10,233.45 received during the year 1920, and in*1156 the income and profits tax return filed by the petitioner for the year 1921 there was reported as taxable income the above amount of $190.56 received by the petitioner during the year 1921. The respondent eliminated the amounts from taxable income as reported by the petitioner in its returns for the years 1920 and 1921 on the ground that these amounts constituted taxable income for the year 1919, and the net taxable income reported by the petitioner in its amended income and profits tax return for the year 1920 was reduced by the respondent by the amount of $10,233.45 in arriving at the net taxable income shown in the notice of deficiency for the year 1920.

The petitioner kept its accounts on the acrual basis during the year 1919 and other years affected by this proceeding.

The books of petitioner for the year 1919 were closed on or about March 20, 1920.

OPINION.

SMITH: On brief the respondent admits that the first issue is similar to that decided by the Board in the case of Texas & Pacific Ry. Co.,9 B.T.A. 365, which has been followed consistently in numerous decisions, wherein it was held that the allowance for interest on completed additions and betterments*1157 did not constitute income in the year of final settlement with the Director General of Railroads but was income during the period of Federal control. The respondent submits that under the decision mentioned and those following it, net taxable income for the year 1920 as shown in the notice of deficiency should be increased in an amount of $24,390.92 in accordance with his alternative plea contained in his amended answer to the petitioner. The parties have agreed that, of the sum allowed, $24,390.92 was allowed for the two months of January and February 1920, during which the properties of this petitioner were under Federal control. The Board has consistently held that such payments to railroads on the accrual basis constituted income of the period of Federal control. We accordingly hold that the respondent erred in including $197,926.83 representing rental interest on completed additions and betterments in petitioner's 1923 income, and that the amount of $24,390.92 applicable to the two months in the taxable year 1920 under Federal control should be treated as income in 1920. See *1158 Union Pacific R.R. Co.,26 B.T.A. 1126, 1132; International-Great Northern R.R. Co.,24 B.T.A. 726, 747.

*262 The other issue is whether the back mail pay received by the petitioner in 1920 and 1921 pursuant to a decision of the Interstate Commerce Commission on December 23, 1919, but not served on the interested parties or made public until January 15, 1920, constitutes taxable income for 1920. We have no information as to the year or years for which this back mail pay was allowed. Neither have we any explanation of or reason for two payments, one in 1920 and one in 1921, instead of a single payment of 1920. The respondent submits that the entire amount is taxable in 1920 under our decision in International-Great Northern R.R. Co., supra.We there considered the question of when a similar payment under the same Interstate Commerce Commission decision constituted income to the taxpayer on the accrual basis. There, the respondent contended that the back mail pay constituted income in neither 1919 nor 1920, but in 1916 and 1917, for which years the additional compensation was paid. Here, the petitioner insists that the payments*1159 in 1920 and 1921 constituted income of 1919, even though it reported these payments as income of the years in which they were received.

We have reexamined our decision on this point in the International-Great Northern R.R. Co. case, particularly in view of the possible effect of the decisions of the Supreme Court in United States v. Anderson,269 U.S. 422; Continental Tie & Lumber Co. v. United States,286 U.S. 290, to which reference has been made by the petitioner. The underlying principle of these cases is that the earnings of a particular taxable period should be offset by the expenses incident to producing those earnings. In the earlier case, the taxpayer's books showed the accrual of munitions taxes in 1916 and the Court held that the amount of such taxes was deductible in computing the income tax for that year. Some point is made by the petitioner in the instant proceeding that the deduction of the accrued taxes in the Anderson case, supra, was allowed pursuant to a Treasury decision promulgated in January 1917 and by analogy contends that the promulgation of the Interstate Commerce Commission decision authorizing the*1160 back mail pay here involved warrants the accrual of the amount of such back mail pay in 1919. It is to be noted that this taxpayer did not accrue the amounts of the back mail pay upon its books in any year prior to the receipt of such payments. In the later case it was held that a payment made to taxpayer, also on the accrual basis, constituted income in 1920 when the right to the payment became fixed by the Transportation Act of 1920, and not in a subsequent year when the award was actually made.

*263 In International-Great Northern R.R. Co., supra, we said:

The only compensation which the carriers had assurance of receiving for the transportation of mail was that named in the Act of Congress [approved July 28, 1916] and which was the amount accrued upon the petitioner's books prior to 1920, in accordance with the accounting requirements of the Interstate Commerce Commission. The income-tax returns for years prior to 1920 were made upon the accrual basis and we think correctly made when made in accordance with the books of account. That no possible basis existed for any other accrual is plainly indicated by the report of the Interstate Commerce Commission*1161 in Docket 9200, Railway Mail Pay,56 I.C.C. 1. That a dispute existed can not be doubted since the Post Office Department and the railroads contended for bases of compensation widely different (56 I.C.C. 1).

Interstate Comerce Commission Decision 9200 extended the provisions of the Act of 1916 to carriers other than those selected by the Postmaster General. In effect, that decision ordered compensation for transporting the mails to be made upon the space system but it did not even approximately determine the mail pay of any particular railroad. Subsequent proceedings were doubtless necessary to determine the application of the space system to carriers theretofore compensated upon some other basis.

The petitioner argues that the accounting regulations of the Interstate Commerce Commission do not govern the issue before this Board. We recognized the force of this argument in New York, Chicago & St. Louis R.R. Co.,26 B.T.A. 1229, 1290, where we said that:

* * * 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*1162 requirements of the revenue law. Old Colony R.R. Co. v. Commissioner,284 U.S. 552. * * *

See also Kansas City Southern Ry. Co. v. Commissioner, 52 Fed.(2d) 372, 377.

In the circumstances of the instant proceeding, we are of opinion that the accounting regulations of the Interstate Commerce Commission as applied to the items under consideration are reasonable and more nearly reflect this petitioner's true income than would the accrual of these items in 1919. The petitioner has treated these items as income in the manner provided by the Interstate Commerce Commission regulations and there is nothing in this record to warrant a departure from our holding in International-Great Northern R.R. Co., supra.

Judgment will be entered under Rule 50.