Bates Motor Transp. Lines Inc. v. Comm'r of Internal Revenue

• Decision Date: 31 July 1951
• Docket Number: Docket Nos. 18932,20685,20683,20687.
• Citation: 17 T.C. 151
• Parties: BATES MOTOR TRANSPORT LINES INC., A CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.STANDARD FREIGHT LINES, INC., A CORPORATION, TRANSFEREE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.HARRY F. CHADDICK, TRANSFEREE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

17 T.C. 151

BATES MOTOR TRANSPORT LINES INC., A CORPORATION, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.STANDARD FREIGHT LINES, INC., A CORPORATION, TRANSFEREE, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.HARRY F. CHADDICK, TRANSFEREE, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 18932

20683

20685

20687.

Tax Court of the United States.

Promulgated July 31, 1951.

1. During the taxable years, petitioner Bates Motor Transport Lines, Inc., carried freight for the Federal Government under an agreement that its charges would not exceed the lowest land grant railroad rate available to the Government over any combination of carriers between the points of shipment and the points of destination. Its efforts to obtain such land grant rates for the purpose of billing the Government for freight carried were unsuccessful, and it was required to bill the Government for the shipments at its prevailing rates and accept payments therefor in full, pending determination by the General Accounting Office of the amount or amounts it would be required to refund under the agreement. Held, that the excess of the amounts collected over the lowest land grate rate for the shipments in question which it was obligated to refund to the Government did not constitute gross income to petitioner.

2. The facts show that petitioner Standard Freight Lines, Inc., is liable as the transferee of Bates Motor Transport Lines, Inc., for any deficiencies in tax against Bates Motor Transport Lines, Inc., for any deficiencies in tax against Bates Motor Transport Lines, Inc., for both the taxable years 1942 and 1944, plus interest as provided by law, and that petitioner Harry F. Chaddick is liable as such transferee for 1944. Franklin R. Overmyer, Esq., and Donald MacKay, Esq., for the petitioners.

Harold H. Hart, Esq., for the respondent.

The respondent determined a deficiency in excess profits tax against Bates Motor Transport Lines, Inc., for 1942 in the amount of $12,238.94, and deficiencies in income tax and excess profits tax for 1944 in the amounts of $3,360.06 and $1,579.81, respectively. He also determined that Standard Freight Lines, Inc., is liable, as transferee of Bates Motor Transport Lines, Inc., for both 1942 and 1944, and that Harry F. Chaddick is liable, as transferee, for 1944. Aside from the question of transferee liability of Standard Freight Lines, Inc., and Chaddick, the only question for determination is whether Bates Motor Transport Lines, Inc., in computing net income, may deduct or exclude $7,262.91 for 1942, and $14,117.62 for 1944, as representing its ultimate liability under an agreement with the Quartermaster General to protect the Federal Government against costs for transporting commodities in excess of costs which would result from application of the lowest net land grant rate for such shipments.

FINDINGS OF FACT.

Part of the facts have been stipulated, and are found accordingly.

Bates Motor Transport Lines, Inc., sometimes referred to as Bates, was organized in December 1937, under the laws of Illinois, and had its principal place of business in Chicago. Its corporation income and excess profits tax returns for 1942 and 1944 were filed with the collector for the first district of Illinois. The returns were made on an accrual basis.

From the time of its organization until the end of 1944, when its assets were transferred to Standard Freight Lines, Inc., sometimes referred to as Standard, Bates operated as a common carrier by motor transport, pursuant to certificate from the Interstate Commerce Commission. It served approximately 1,200 points in the states of Illinois, Indiana, Ohio, and Kentucky. Standard was organized in April 1936, under the laws of Illinois, and since that time has operated as a common carrier by motor transport, pursuant to certificate from the Interstate Commerce Commission. Prior to 1945 it served points in the states of Illinois, Michigan, and Missouri. Harry F. Chaddick has been president of Standard since 1936. Upon organization of Bates, Chaddick acquired 196 of the 300 shares of its stock issued at that time, and during 1942 and 1944, he was its president. Standard is now a debtor in possession, pursuant to an order of the United States District Court for the Northern District of Illinois.

During the early years of railroad development, the Federal Government made grants of land to, or otherwise aided, certain railroads and, by reason thereof, became entitled to a lower freight charge of rate than that charged the public generally. Such reduced charges or rates are known as land grant rates and they range from 5 to 50 per cent below the usual charge. Other carriers, which never received any land grants or other aid from the Federal Government, in an effort to obtain traffic and the resultant revenue, entered into agreements allowing the Government land grant rates on property hauled for it.

Shortly after December 1941, the motor carriers of the country were asked to sign agreements to allow land grant rates to the Federal Government. For several years prior to 1942, Bates and Standard had had on file with the Interstate Commerce Commission their respective tariffs showing charges for the various commodities which they transported. On May 4, 1942, Chaddick, as president of Bates and Standard, signed an instrument addressed to The Quartermaster General, War Department, Washington, D.C., designated ‘Standard Motor Freight Land-Grant Equalization Agreement,‘ which became effective on May 19, 1942, when it was accepted for the Quartermaster General. This instrument contained the following provisions:

1. The undersigned carrier agrees or, if more than one are undersigned, they agree jointly and severally, in connection with any shipment of Government property transported from origin to destination exclusively by him or by any one or more of them, to protect the Government of the United States against any cost in excess of the lowest net land-grant charge lawfully available on such shipment from origin to destination at time of movement derived from lawful rates of common carriers filed with the Interstate Commerce Commission or appropriate State Commission.

2. This agreement becomes effective on the date of acceptance by The Quartermaster General, but not earlier than . . . , and will remain fully in effect during the remainder of the current calendar year ending December 31, and thereafter from year to year unless entirely withdrawn upon ninety days written notice signed by any undersigned carrier and received by The Quartermaster General: Provided, that no withdrawal of this agreement shall be valid to affect the operation of any other effective agreement, tender, contract, or traffic arrangement between the Government of the United States and any undersigned carrier.

3. This agreement, upon acceptance, cancels all previous freight land-grant equalization agreements, if any, which by their terms and participants are wholly encompassed within this agreement.

In executing the foregoing land-grant rate agreement, Chaddick understood that Bates was agreeing to transport property for the Government at the lowest rate available to it over any combination of carriers, even though the use of the route in such a combination might not be the most direct route between the point of shipment and the point of destination.

After signing the above-mentioned agreement, Chaddick made several trips to Washington and had discussions with a number of army officials in an attempt to ascertain what the land grant rates were so that Bates and Standard could use them in billing the Government for their transportation charges. He was advised that it was impossible for them to furnish such rates. He was further advised that such rates could be obtained by those carriers submitting their bills at their prevailing tariffs and the General Accounting Office, on an audit of the bills, would determine the applicable land grant rates, advise Bates and Standard accordingly and demand repayment to the Government for any excess charges. The General Accounting Office does not furnish carriers with the applicable land grant rates prior to an audit of their bills. However, it does furnish such information to Government agencies upon request.

After entering into the above-mentioned agreement, Bates transported Government properties during 1942 and 1944. The shipments tendered to Bates during those years were listed on Government bills of lading. After accepting the shipments and completing delivery, Bates forwarded its bill with the attached bills of lading, showing transportation charges computed at its prevailing tariffs, to the proper Government disbursing officer, who, after payment, forwarded the bills, together with the bills of lading, to the General Accounting Office for audit.

The payments to Bates by the disbursing officers were made, on an average, about six months after Bates submitted its bills. These payments were received by Bates without restriction as to their use. They were deposited in its general funds without any segregation in trust or otherwise, and were subject to check for any purpose Bates desired.

After Bates had been operating for five or six months under the land grant rate agreement mentioned above, Chaddick, from certain information he had obtained, concluded that the rates under such an agreement would average about 17 per cent less than those contained in Bates' prevailing tariffs. Thereupon he sought to file, in lieu of the land grant rate agreement previously filed, an agreement which would give the Government a rate 17 per cent below Bates' prevailing tariffs and which rate Bates would use in submitting future bills. However, his proposal was rejected by the Government officials concerned.

In computing its 1942 taxable income, Bates reduced its gross operating revenues by $7,262.91, or 17 per cent of its total billings for the...