Mississippi River & Bonne Terre Railway v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 24 May 1939 |
| Docket Number | Docket No. 84282. |
| Citation | 39 BTA 995 |
| Parties | MISSISSIPPI RIVER AND BONNE TERRE RAILWAY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
James M. Chaney, Esq., for the petitioner.
W. H. Schwatka, Esq., and J. Y. Porter, Esq., for the respondent.
This proceeding was brought for a redetermination of deficiencies in petitioner's income tax liability in the sums of $11,545.05 and $1,572.02 for the taxable years 1932 and 1933, respectively.
The questions presented are (1) whether petitioner, a subsidiary, with no taxable net income, can be held for a deficiency due to additional taxable income received by its parent corporation; (2) whether petitioner, lessor, is entitled to a loss deduction on the sale and retirement during the term of the lease of certain leased property; and (3) whether depreciation deductions on leased equipment for the years in question are allowable to either the lessor or the lessee, where the lease provides for the return of the property at the termination of the lease in substantially as good condition as when received.
FINDINGS OF FACT.
The case was submitted on a stipulation of facts and the introduction in evidence of the notice of deficiency and its attached schedules as petitioner's exhibit 1. The stipulated facts are found, as are the facts appearing in the above mentioned exhibit. For present purposes we make the following summary:
The Missouri-Illinois Railroad Co. is a corporation organized under the laws of the State of Missouri, with outstanding capital stock consisting of 22,500 shares of the par value of $100 each.
Petitioner is a corporation organized under the laws of the State of Missouri with capital stock authorized and outstanding in the sum of $3,000,000, consisting of 30,000 shares of par value of $100 each. Of this 30,000 shares 29,992 shares are owned and issued in the name of Missouri-Illinois Railroad Co. and 7 of the remaining shares are qualifying shares issued to directors.
On January 1, 1929, petitioner leased all its railway and other property to the Missouri-Illinois Railroad Co. for a term of 99 years beginning January 1, 1929.
The lease, so far as here pertinent, contains the following provisions:
In the habendum:
Provided always, however, that nothing herein contained shall operate to grant or demise the franchise to be a corporation possessed by the Lessor, or any other right, privilege or franchise which is or may be necessary to fully preserve the corporate existence or organization of the Lessor; * * *
In article two, section 1, the lessee covenanted to pay to the lessor the sums requisite "for the maintenance of its corporate organization, including the salaries of any necessary officers or compensation of its Board of Directors and for other expenses of administration, including the expense of the issue, registration and transfer of its securities."
By section 5 of the same article the lessee further covenanted with the lessor:
SECTION 5. In the manner and as and when the same become due and payable, to pay all interest and sinking fund requirements, if any, on all bonds, notes and other obligations and indebtedness of the Lessor, issued or incurred after the effective date of this lease with the consent of the Lessee and in accordance with the provisions of this lease; provided that such payment may be made as to any and all bonds, notes and other obligations and indebtedness of the Lessor, at the time owned or held by the Lessee or for its benefit, by the surrender of any coupons representing such interest, or by the due endorsement upon such bonds, notes or other obligations of the payment of such interest, or by the execution and delivery to the Lessor of proper acknowledgments of the payment of such interest.
The Lessee shall also pay or cause to be paid all charges of any paying agent or agents, and all other expenses in connection with the payment of said interest and sinking fund requirements. To the extent that the obligors of any such bonds, notes or other obligations and indebtedness may be liable so to do, the Lessee shall pay or retain all sums which may be required to be paid or retained from the interest upon any such bonds, notes or other obligations and indebtedness under state or federal laws or under the terms of any such securities or of the instruments securing the same, and shall pay or refund to the holders of any such securities any and all taxes which by the terms thereof or of any instruments securing the same may be required to be so repaid or refunded.
Anything herein contained to the contrary notwithstanding, any payments made by the Lessee under this Section 5 to meet sinking fund requirements shall be deemed to be advances made by the Lessee to the Lessor, and such advances shall bear interest at the rate of six per cent. per annum.
And in sections 11 and 12:
SECTION 11. At its own cost and expense to keep and maintain the physical properties of the Lessor hereby demised, except such parts thereof as may be sold or otherwise disposed of, abandoned or retired as herein provided, in as good order, repair and condition as when received at the beginning of this lease, retiring, replacing or renewing, to the extent deemed expedient by the Lessee in the efficient operation of the demised property, whatever becomes obsolete, defective or worn out from time to time; and to comply with all valid orders of public authorities in connection with the operation and maintenance of the demised property.
SECTION 12. Subject to the right of the Lessee to be reimbursed as provided in Section 9 of Article Three hereof, to return to the Lessor at the expiration or other termination of this lease the demised property, except such portions of said property as during the term hereof may have been sold, abandoned, retired or otherwise disposed of pursuant to the provisions hereof, in substantially as good condition for the uses and purposes of the Lessor as when the Lessee received the same.
In article three, sections 3, 5, 6, 8, and 9, the lessor covenanted with the lessee as follows:
SECTION 3. The Lessor, at the expense of the Lessee, shall and will during the continuance of this lease, subject to the provisions of Section 7 of Article Five hereof, maintain, and, if necessary, from time to time renew, its existence and organization as a body corporate, in due form of law, and as such body corporate shall and will from time to time and at all times when thereto required by the Lessee, do and perform, at the expense of the Lessee, all such acts, matters and things consistent with the rights of the Lessee under this lease, as shall be necessary in the opinion and judgment of the Lessee, or its officers or counsel, to the due preservation and protection of all estates, property, rights, franchises and interests herein demised to the Lessee, and to carry into full effect the true intent and meaning of this lease, and in default thereof the same may be done by the Lessee, its successors or assigns, or its lawful agents, in the name and as the act of the Lessor.
* * * * * * *
SECTION 5. The Lessor shall and will from time to time, if requested by the Lessee and at the expense of the Lessee, proceed to appropriate and condemn by exercising the right of eminent domain such real estate, either as an addition to the main lines, branches or extensions already built, or for any branch that the Lessee hereafter may desire to have built, or for any other lawful railway purpose for which such right of eminent domain may be available, as the convenient exercise of the demised franchises or the operation of the demised property, or the lawful orders of any public authority, may in the opinion of the Lessee render necessary or desirable.
SECTION 6. Upon the written request and at the expense of the Lessee, from time to time, the Lessor will institute and prosecute in its own or other proper name or will permit the Lessee to institute and prosecute in the name of the Lessor, any and all proper proceedings for the purpose of acquiring the right to cross, intersect or connect with any and all other lines of railway, rivers, canals, other waters, or public highways or properties, which it shall or may become necessary or desirable to cross, intersect or connect with, in connection with the operation by the Lessee of the Lessor's transportation system, or the improvement or extension thereof.
* * * * * * *
SECTION 8. At any time during the continuance of this lease the Lessee shall have the right, subject to the provisions of any mortgages or trust instruments from time to time in force upon or with respect of any of the demised property, and to regulation by the proper governmental authorities,
* * * * * * * (c) to sell, lease or otherwise dispose of any part of the demised property or to exchange any part thereof for other property or to abandon or retire any part thereof;
provided in every case that the exercise of any of the rights above set forth in the judgment of the Lessee shall not decrease the value of the demised property as a whole for railway purposes; and provided further that * * * the proceeds of any sale, lease or other disposition of any part of the demised property shall be applied by the Lessee at its option either to the reduction of any outstanding obligations or indebtedness of the Lessor or to betterments or improvements upon or to additions to the demised property * * *.
SECTION 9. The Lessee shall have the right and is hereby authorized from time to time, for the account of the Lessor, during the term of this lease
(a) to make or cause to be made all such additions, betterments, improvements and extensions upon and to the demised property as the Lessee shall deem to be necessary and proper;
(b) to acquire or construct new or additional lines of railway and any and all other property, real and personal, of any nature whatsoever which may in the...
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