Boston Elevated Ry. Co. v. Comm'r of Internal Revenue

• Decision Date: 16 May 1951
• Docket Number: Docket No. 12893.
• Citation: 16 T.C. 1084
• Parties: BOSTON ELEVATED RAILWAY COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

16 T.C. 1084

BOSTON ELEVATED RAILWAY COMPANY, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 12893.

Tax Court of the United States.

Promulgated May 16, 1951.

1. Under Massachusetts law petitioner was in effect guaranteed a level of income sufficient to meet its operating costs and to pay dividends to its stockholders at a specified rate. Although petitioner's books disclosed deficits for periods ending in 1941, amounts payable by the Commonwealth of Massachusetts pursuant to the guarantee held not accruable as income in 1941 by reason of the fact that the commonwealth was challenging the legality of the accounting procedures whereby such deficits were computed, and it was not possible to make any reasonable estimate in 1941 as to what amounts, if any, petitioner would eventually receive upon the termination of the dispute. Similarly, no such amounts could be accrued in 1942 or 1943, when the dispute had already been taken to the Massachusetts courts and the issues were being actively litigated.

2. Loss with respect to the Atlantic Avenue section of petitioner's elevated structure held to have been sustained in 1942, when it was demolished pursuant to decision of Massachusetts court rendered in that year, rather than in 1938, when petitioner ceased to use the structure for passenger traffic, but thereafter treated it as a standby facility on which it continued to maintain power and compressed air lines serving other parts of its system. Held further, petitioner is entitled to depreciation on the structure for taxable periods prior to the time of the loss.

3. Petitioner, having paid $1,409.253/35, and given other consideration, for a 28-year extension of the period of public control with its attendant benefits, including a guaranteed income, held entitled to amortize such payment over the life of the extension. Charles W. Mulcahy, Esq., Numa L. Smith, Jr., Esq., and J. Joseph Maloney, Jr., Esq., for the petitioner.

Melvin L. Sears, Esq. and Wm. C. W. Haines, Esq., for the respondent.

The respondent determined deficiencies in income taxes and declared value excess-profits taxes, as follows:

+---------------------------------------+
                ¦     ¦            ¦Declared value      ¦
                +-----+------------+--------------------¦
                ¦Year:¦Income tax  ¦excess-profits tax  ¦
                +-----+------------+--------------------¦
                ¦1940 ¦$15,440.87  ¦                    ¦
                +-----+------------+--------------------¦
                ¦1941 ¦805,165.72  ¦$42,265.10          ¦
                +-----+------------+--------------------¦
                ¦1942 ¦1,100,226.38¦53,037.85           ¦
                +-----+------------+--------------------¦
                ¦1943 ¦734,142.19  ¦                    ¦
                +---------------------------------------+
                

Petitioner claims an overpayment of income tax for the year 1940 in the amount of $269,923.81.

The questions raised by the pleadings are:

(1) Should the petitioner, on the accrual system of accounting, have accrued as income for the calendar year 1941 so-called cost-of-service deficits for which it sought reimbursement from the Commonwealth of Massachusetts, in the amount of $2,341,167.29 for the 12-month period ending March 31, 1941, and $1,311,406.44 for the 9-month period ending December 31, 1941? In the alternative, should the petitioner have accrued either or both of these amounts as income for the calendar year 1942 or 1943?

(2) Was the petitioner's loss with respect to the Atlantic Avenue section of its elevated railway structure sustained either in 1941 or in 1942?

(3) Is the petitioner entitled to deductions of $27,833.08, $27,833.08 and $13,916.53 in the taxable years 1940, 1941, and 1942, respectively, for depreciation on the Atlantic Avenue section of its elevated structure?

(4) Is the petitioner entitled to a pro rata deduction in each of the taxable years 1940 to 1943, inclusive, of an amount ($50,330.47) representing one twenty-eighth of the sum ($1,409,253.35) it paid to the Commonwealth of Massachusetts in 1931, pursuant to Chapter 333 of the Massachusetts Special Acts of 1931?

FINDINGS OF FACT.

The stipulated facts are found accordingly.

Petitioner is a Massachusetts corporation organized in 1894 and having its principal office in Boston, Massachusetts. Its returns for all of the years here involved have been filed in the collection district of Massachusetts upon the calendar year basis and upon the accrual method of accounting. At all times material to this proceeding, petitioner was engaged in the business of a common carrier of passengers in the City of Boston and nearby cities and towns by means of street (surface) railway, elevated railways, subways, and bus lines.

Since July 1, 1918, and until August 29, 1947, petitioner and all of the properties owned, leased, or operated by it were managed and operated by a Board of Trustees (referred to as the Trustees) created by Section 1 of Chapter 159 of the Special Acts of Massachusetts for the year 1918 (referred to as the Public Control Act) in accordance with the provisions of the Public Control Act and amendatory legislation.

Section 2 of the Public Control Act provided that the Trustees ‘shall take and have possession of said properties in behalf of the commonwealth during the period of public operation, and, for the purposes of this act, shall, except as is otherwise provided in this act have and may exercise all the rights and powers of said company and its directors, * * * .‘

Section 4 provided that the stockholders should, as theretofore, elect a board of directors which should, however, during the period of public operation have no control over the management and operation of the street railway system; its duties were confined to maintaining the corporate organization, protecting the interests of the company so far as necessary, and taking such action from time to time as might be deemed expedient in cases where the Trustees could not act in its place.

Section 5 required the company to raise 3 million dollars by the issue of preferred stock, 1 million of which was to be set aside as a reserve fund, hereinafter described:

Section 6 required the Trustees to fix such rates of fare as would reasonably insure sufficient income to meet the ‘cost of the service‘ (also referred to herein as ‘cost of service‘), which was made to include operating expenses, taxes, rentals, interest on indebtedness, such allowance as they should deem necessary or advisable for depreciation of property and for obsolescence and losses in respect to property sold, destroyed or abandoned, all other expenditures and charges properly chargeable against income or surplus, fixed dividends on the preferred stocks of the company from time to time outstanding, and dividends on the common stock of the company from time to time outstanding at the rate of 5 per cent during the first two years 5 1/2 per cent for the next two years, and 6 per cent for the balance of the period of public operation.

Section 8 provided that the reserve fund should be used only for the purpose of making good any deficiency in income, as provided in section 9, or for reimbursing the commonwealth, as provided in sections 11 and 13.

Section 9 provided that, whenever the income of the company was insufficient to meet the cost of service, the reserve fund should be used as far as necessary to make up such deficiency, and whenever, on the other hand, such income was more than sufficient to meet the cost of service, the excess should be transferred to and become a part of the reserve fund.

Section 10 provided for periodical changes in the rates of fare to provide revenue to meet the cost of service.

Section 11, as amended,¹ provided that as of a given day each year (the last day of March for years after 1934, to and including 1941, and thereafter the last day of December, beginning with December 31, 1941) if the amount remaining in the reserve fund should be insufficient to meet any deficiency in the cost of service, the Trustees were required ‘to notify the treasurer and receiver general of the commonwealth of the amount of such deficiency, less the amount, if any, in the reserve fund applicable thereto, and the commonwealth shall thereupon pay over to the company the amount so ascertained.‘ Provision was also made to reimburse the commonwealth for amounts thus paid over if the reserve fund should rise above the level at which it was originally established.

The original period of public control was fixed by section 2 of the Act at 10 years from July 1, 1918. Section 12 provided that the public management and operation of the railway should continue after the expiration of the original 10-year period upon the terms and conditions specified in the Act until such time as the commonwealth should elect to discontinue the same by appropriate legislation passed not less than two years before the date fixed for such termination.

Section 13 required the Trustees to maintain the property in good operating condition and to make such provision for depreciation, obsolescence and rehabilitation, that, upon the expiration of the period of public management and operation, the property be in good operating condition. It provided that, upon the expiration of the period of public management and operation, control of the property should revert to the company, and, if at that time the reserve fund was less than the amount originally established, the commonwealth should restore it to its original amount, and, if the amount in the reserve fund exceeded the amount originally established and any amount required to meet the cost of service to the expiration of such period, such excess should be paid over to the commonwealth.

Section 14 provided that the amount of any deficiency payments which might be made by the commonwealth to the company under the provisions of sections 11 and 13 should be assessed upon the cities and towns in which the company operated by an addition to the state tax next thereafter assessed.

In 1931 the period of public control was...