Page 475
3 T.C. 475 (1944)
TWIN CITY RAPID TRANSIT CO. (MINNESOTA), PARENT; AND MINNEAPOLIS STREET RAILWAY COMPANY, THE ST. PAUL CITY RAILWAY COMPANY, TWIN CITY MOTOR BUS COMPANY, AND THE MINNEAPOLIS AND ST. PAUL SUBURBAN RAILROAD COMPANY, SUBSIDIARIES, PETITIONERS,
v.
COMMISSIONER of INTERNAL REVENUE, RESPONDENT.
TWIN CITY RAPID TRANSIT COMPANY (NEW JERSEY), PARENT; AND MINNEAPOLIS STREET RAILWAY COMPANY, THE ST. PAUL CITY RAILWAY COMPANY, THE MINNEAPOLIS AND ST. PAUL SUBURBAN RAILROAD COMPANY, AND TWIN CITY MOTOR BUS COMPANY, SUBSIDIARIES, PETITIONERS,
v.
COMMISSIONER of INTERNAL REVENUE, RESPONDENT.
Nos. 109388, 109389.
United States Tax Court
March 15, 1944
Held, the evidence does not establish that petitioner corporations were ‘ in an unsound financial condition‘ and entitled to exclude from gross income the gain realized on the retirement of their own bonds. Sec. 215, Revenue Act of 1939, amending section 22(b), Internal Revenue Code.
Page 476
Leland W. Scott, Esq., for the petitioners.
Edward C. Adams, Esq., for the respondent.
The respondent determined deficiencies in income tax against Twin City Rapid Transit Co. (New Jersey) and its subsidiaries for the period January 1 to December 7, 1939, and against Twin City Rapid Transit Co. (Minnesota) and its subsidiaries for the period December 7 to December 31, 1939, in the respective amounts of $8,724.40 and $15,309.74. The sole issue is whether, under section 215 of the Revenue Act of 1939[1] (amending section 22(b) of the Internal Revenue Code by adding subsection 9 thereto), the gain realized by the petitioners upon the reacquisition of their bonds during the periods June 30 to December 7, 1939, and December 7 to December 31, 1939, is excludable from their gross income. The parties have stipulated that if the gain so realized is determined to be nontaxable, the allowance depreciation set forth in the respective notices of deficiency is excessive in the amount of $1,791.53 in Docket No. 109388 and in the amount of $1,956.03 in Docket No. 109389.
FINDINGS OF FACT.
The facts, consisting in large part of exhibits, were all stipulated by the parties, and are found to be as stipulated. For our purposes the following statement will suffice to present the question:
The petitioner, Twin City Rapid Transit Co., a New Jersey corporation, was organized prior to January 1, 1939, and until December 7, 1939, was the parent of seven subsidiary corporations. By merger and consolidation, effective December 8, 1939, the petitioner, Twin City Rapid Transit Co., a Minnesota corporation, succeeded the New Jersey corporation as parent of the same subsidiaries. The only change effected by the merger was the change of the name of the
Page 477
parent corporation and of the state of its incorporation. Both corporations had the same assets and liabilities and the same capital stock. The principal office of each petitioner was at 1 South 11th Street, Minneapolis, Minnesota, and a return was filed by each for the period with the collector of internal revenue for the district of Minnesota. By reason of the above facts and the fact that the companies are for practical purposes identical, we sometimes refer to the two petitioners herein as ‘ the petitioner.‘
The business of the petitioners and their subsidiaries was the ownership and operation of a public transportation system in the area consisting of the cities of Minneapolis and St. Paul, Minnesota, and adjacent territory.
During the period in controversy the petitioner had issued and outstanding 250,000 shares of capital stock divided into 30,000 preferred shares, with a par value of $100 per share, and 220,000 common shares of no par value but with an aggregate stated value of $11,000,000. The preferred stock bore 7 percent cumulative dividends. On December 31, 1939, dividends on this stock were in arrears in the sum of $35 per share, representing five years' dividends and a total of $1,050,000. No dividends have been paid on the petitioners' common stock since 1930. Petitioners paid dividends of $210,000 on their preferred stock in 1942 and $105,000 on July 1, 1943.
Petitioners' secured first lien and refunding 5 1/2 percent gold bonds, series A, in the principal amount of $18,000,000, were issued on December 1, 1927, at $91.50 for each $100 principal amount, a total discount of $1,530,000. Petitioners' secured first lien and refunding 5 1/2 percent gold bonds, series B, in the principal amount of $64,200, were issued in 1934 at par and without discount. In addition, certain of petitioners' subsidiaries had outstanding bond issues, not here in controversy, upon which petitioners were liable, and as of December 31, 1936, the petitioner's bonded indebtedness amounted to $21,200,600.
Petitioners' series A bonds were listed and sold on the New York Curb Exchange at prices well below their issued price. Their average price was 85 15/16 in 1936, 79 5/8 in 1937, 56 1/3 in 1938, and 59 1/2 in 1939. The average during the years 1930 to 1940, both inclusive, was 56. During the years 1934 to 1940, both inclusive, the series B bonds were sold on the New York Curb Exchange and, while not traded in substantial numbers of shares, showed an average price of three or four points below the series A bonds. The petitioners' preferred stock was sold on the New York Stock Exchange at an average price per share of 87 in 1936, 66.5 in 1937, 30 in 1938, and 26.4 in 1939. The average price of the same stock for the years 1930 to 1940, both inclusive, was 37.8 per share. The average price per share of the common stock was 12 3/4 in 1936, 10 1/8 in 1937, 4 5/16 in 1938, and 2 7/8 in 1939.
Page 478
During the years 1930 to 1940, both inclusive, the average price of this stock was about 7 1/4 per share.
The petitioners' net operating income (or loss) and their surplus as at the close of the years designated, shown by their annual reports to their stockholders, were as follows:
| Year |
(loss) |
Surplus |
Year |
(loss) |
Surplus |
| 1936 |
$649,486.89 |
$2,883,242.39 |
1940 |
$111,582.76 |
$3,640,775.14 |
| 1937 |
459,961.27 |
3,134,504.87 |
1941 |
237,301.74 |
3,984,349.90 |
| 1938 | (43,842.19) |
3,011,044.18 |
1942 |
1,071,036.85 |
5,049,630.96 |
| 1939 |
149,552.22 |
3,456,229.91 |
|
|
|
The petitioners' consolidated balance sheet for 1939, together with comparative figures for 1938, was as follows:
| |
Dec. 31, 1939 |
Dec. 31, 1938 |
| Road and equipment[*]
|
$56,470,169.77 |
$56,765,394.35 |
| Deposits in lieu of mortgaged property sold or destroyed |
1,026.74 |
1,026.74 |
| Deposit with trustee for sec. div. notes: |
|
|
| First lien and ref. 5 1/2% series B bonds |
11,800.00 |
12,800.00 |
| Miscellaneous physical property |
5,681.29 |
5,681.29 |
| Other investments (at cost) |
411,481.09 |
417,114.89 |
| Cash |
$1,837,319.53 |
$679,472.26 |
| Loans and notes receivable (employees) |
1,651.25 |
1,872.50 |
| Interest receivable |
2,779.92 |
2,985.75 |
| Miscellaneous accounts receivable |
56,993.87 |
62,077.40 |
| Material and supplies (at cost) |
740,387.51 |
787,917.85 |
| |
2,639,132.08 |
2,534,325.76 |
| Injuries and damages reserve fund |
118,665.90 |
108,683.40 |
| Deferred assets, including rents and insurance paid in advance |
38,261.82 |
19,099.62 |
| Discount and expense on funded debt in process of amortization |
785,446.50 |
893,783.80 |
| |
60,481,665.19 |
60,757,909.85 |
| Capital stock-authorized and outstanding: |
|
|
| Common stock-220,000 shares (no par value) |
$11,000,000.00 |
$11,000,000.00 |
| Preferred stock-30,000 shares (par value $100 each) 7% |
|
|
| $100 each) 7% cumulative |
3,000,000.00 |
3,000,000.00 |
| Funded debt unmatured |
15,997,600.00 |
16,874,900.00 |
| Secured dividend notes not presented |
11,800.00 |
12,800.00 |
| Audited accts. and wages payable |
82,751.38 |
37,594.87 |
| Miscellaneous accounts payable |
4,217.81 |
15,280.75 |
| Accrued interest (not due) |
85,192.01 |
89,435.73 |
| Tax liability |
864,655.67 |
993,408.18 |
| |
1,036,816.87 |
1,135,719.53 |
| |
Dec. 31, 1939 |
Dec. 31, 1938 |
| For injuries and damages |
274,779.33 |
243,666.16 |
| For depreciation |
16,806,275.59 |
16,586,737.79 |
| Unadjusted credits (unredeemed tokens and tickets) |
179,438.82 |
174,317.52 |
| Capital surplus (created by reduction in capital) |
8,718,724.67 |
8,718,724.67 |
| Profit and loss |
3,456,229.91 |
3,011,144.18 |
| |
60,481,665.19 |
60,757,909.85 |
Page 479 On May 1, 1939, for taxation purposes, the Minnesota State taxing authorities determined the true and full value of the real and personal property of the petitioners' principal subsidiaries, Minneapolis Street Railway Co. and the St. Paul City Railway Co., to be as follows:
| Minneapolis Street Ry. Co |
$9,644,184 |
| The St. Paul City Ry. Co |
5,191,917 |
The Minnesota Railroad & Warehouse Commission's depreciated values for rate making purposes of the properties of the Minneapolis Street Railway Co. and the St. Paul City Railway Co., together with the petitioners' original cost of these same properties, according to their corporate records, are shown in the following tables, as of the date therein stated:
| Minneapolis Street Ry. Co. |
| Description |
Original cost |
Commission valuation |
| 1/1/25 undepreciated value |
$25,119,688.82 |
$30,393,726.44 |
| 1/1/39 " " |
26,369,243.95 |
30,621,280.73 |
| 1/1/40 " " |
26,237,337.08 |
30,426,038.96 |
| Commission depreciation as of 1/1/25 |
|
3,606,498.50 |
| Depreciated value |
26,108,366.25 |
26,819,540.46 |
| Increase in depreciation accrual since 1/1/25 to 1939 |
|
1,456,564.00 |
| Depreciated value Jan. 1, 1940 |
|
25,362,976.46 |
| 1/1/25 undepreciated value |
$15,496,630.52 |
$18,246,722.11 |
| 1/1/39 " " |
15,798,098.12 |
17,984,294.16 |
| 1/1/40 " " |
15,567,901.15 |
17,806,896.24 |
| Commission depreciation as of 1/1/25 |
|
2,050,631.62 |
| Depreciated value |
|
15,756,264.62 |
| Less increase in depreciation reserve balance |
|
|
...
