Brooklyn City Railroad Co. v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 16 November 1932 |
| Docket Number | Docket No. 20353. |
| Citation | 27 BTA 77 |
| Parties | THE BROOKLYN CITY RAILROAD COMPANY AND BROOKLYN & QUEENS TRANSIT CORPORATION, AS SUCCESSOR BY MERGER AND CONSOLIDATION TO THE BROOKLYN CITY RAILROAD COMPANY, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
R. B. Goodell, Esq., and S. B. Olney, Esq., for the petitioners.
Chester A. Gwinn, Esq., for the respondent.
This is a proceeding for the redetermination of a deficiency in income and profits taxes determined by the respondent for the calendar year 1921 in the amount of $154,227.38. In the "amended and supplemental petition" it is alleged that the respondent erred in his determination of the deficiency "in that he has determined the income and excess profits tax without reference to the established fiscal year of The Brooklyn City Railroad Company and instead of determining the tax for the twelve months ending June 30, 1921, has based his determination upon the return filed by The Brooklyn City Railroad for the twelve months ending December 31, 1921, and asserted a deficiency for that period." It is also alleged in said petition (2) that the respondent erred in failing to allow as a deduction from gross income a reasonable amount for exhaustion, wear and tear of the physical properties of said railroad company, and (3) in denying an application for special assessment of the profits tax; all of said allegations of error being denied by the respondent.
Upon agreement of counsel that decision for the petitioners on the first issue above set out would render the second and third issues academic, and in such event it would become unnecessary to consider or decide in this case said last mentioned issues, the hearing was limited to the first issue.
The petitioners by this appeal specifically request "a redetermination of the deficiency set forth by the Commissioner of Internal Revenue in his notice of deficiency * * * dated August 6, 1926," which deficiency is for the calendar year 1921, but the amended petition concludes with the prayer, among other things, that this Board "direct the Commissioner, pursuant to Rule 50, to redetermine the tax either for the fiscal year ending June 30, 1921, or for the calendar year ending December 31, 1921, whichever the Board may determine to be the taxable year of The Brooklyn City Railroad Company * * *."
At the hearing the respondent moved to dismiss the appeal as to "any year other than the calendar year 1921," on the ground that the Board has no jurisdiction to redetermine the tax liability of the petitioners for any year other than said calendar year. The motion was taken under consideration for decision upon submission of the case.
The Revenue Act of 1926 provides in section 274 (g) that, in redetermining a deficiency in respect of any taxable year, this Board shall consider such facts with relation to the taxes for other taxable years as may be necessary to redetermine the amount of such deficiency, but in so doing shall have no jurisdiction to determine whether or not the tax for any other taxable year has been overpaid or underpaid.
The deficiency which we are called upon to redetermine in the instant case is for the calendar year 1921, and the issue raised by the parties in that connection, as hereinabove set out, can be decided by us within the jurisdictional limitations of the statute. The petitioners have not appealed from the determination of a deficiency for any other taxable year, and hence it is unnecessary to dismiss this appeal in respect of a year not before us. Respondent's motion accordingly is denied.
The original petition in this proceeding was filed in 1926 by The Brooklyn City Railroad Company, hereinafter for convenience called the railroad company, which company was thereafter in 1929 merged with the Brooklyn & Queens Transit Corporation, and the latter corporation now appears as copetitioner.
The parties stipulated the following facts:
The Brooklyn City Railroad Company was organized as a corporation under the laws of the State of New York on December 16, 1853.
The Brooklyn City Railroad Company at all times prior to the year 1930 filed its Federal income tax returns upon the basis of the calendar year. It never at any time prior to 1929 filed an income tax return for a period of less than a year, nor did it ever request or receive permission of the Commissioner of Internal Revenue to file its return upon the calendar year basis or to change from a calendar year basis to a fiscal year basis.
The consolidated net taxable income of The Brooklyn City Railroad Company as determined by the Commissioner for the twelve months ending December 31, 1920 and 1921, was as follows:
12 months ending December 31, 1920, a loss of $662,633.98. 12 months ending December 31, 1921, a net income of $1,624,435.55.
The Brooklyn City Railroad Company filed on or about March 15, 1922, a consolidated income and profits tax return covering the twelve months ending December 31, 1921; said return showed income tax for that period of $125,905.15; said amount was assessed against The Brooklyn City Railroad Company and paid by it.
The only inventories taken by The Brooklyn City Railroad Company are of its materials and supplies, of which a running or continuous inventory is kept, which enters into the computation of net income for tax purposes only through deductions for costs of operation and maintenance.
In addition to the stipulated facts the evidence shows that in 1890, pursuant to a statute of the State of New York, the executive committee and board of directors of the railroad company adopted resolutions fixing its fiscal year as the year ending June 30, and the by-laws of the corporation were amended accordingly. The fiscal year so fixed and adopted by the railroad company was not changed prior to the year 1929.
From and after 1890, the said railroad company made annual reports on the basis of the fiscal year ended June 30 to the state regulatory body, designated variously as the Railroad Commission, Transit Commission and Public Service Commission. The annual reports of the railroad company to its stockholders, including income statements and balance sheets, were during said years all on the basis of a fiscal year ending June 30. Also, the books of account were closed and all possible adjustments made each year as of June 30.
In addition to the annual reports the railroad company made quarterly reports to the Transit Commission of certain of its operating figures. In connection with the rendering of those reports certain operating accounts were balanced quarterly, and the balances carried to profit and loss, but the profit and loss account was balanced annually on June 30. In making the reports above mentioned, the railroad company stated that its basis of accounting was the fiscal year ending June 30.
After introduction of much of the evidence offered at the hearing by the petitioner, counsel for the respondent made the following concession:
The MEMBER: What I wanted to find out was, is there any controversy as to whether these books were closed on a fiscal year basis, June 30?
Mr. GWINN: I would not say there is a controversy about that. I concede that the books were ruled down, and that the books were closed as at June 30 of each year * * *.
That the basis of the railroad company's annual accounting period for many years prior and subsequent to 1921 was the fiscal year ending June 30, we think, is clearly established by the evidence, as well as conceded by the respondent, and we so find the fact to be.
However, the respondent contends that, after having made its income tax return for 1921 on the basis of the calendar year, the railroad company could not thereafter change to the basis of a fiscal year without first having obtained from the Commissioner permission to make such change. The respondent further contends that the railroad company's books of account were so kept that the income could be correctly and readily determined at the end of the calendar year, as well as at June 30, and that, since the return was made on the basis of the calendar year, the deficiency should be redetermined on that basis.
As we view the case, respondent's position is untenable. If the basis of the railroad company's annual accounting period had been the calendar year and on that basis it had properly made its annual tax returns, and subsequent to 1921 had changed to the basis of a fiscal year, without permission from the Commissioner, an entirely different question would be presented. But here we have no question of changing the basis of the annual accounting period. The railroad company did not request permission to make such a change, did not in fact make any change in its accounting period, and so far as the record discloses had no desire to change its basis, prior to 1929. The issue is whether or not the respondent, without a request for a change of basis, has legal authority to determine the tax liability of the railroad company on the basis of a calendar year where the regularly established and long continued basis of its annual accounting period was a fiscal year ending June 30, and its tax returns were filed on the basis of the calendar year.
The pertinent provisions of the Revenue Act of 1921 read as follows:
SEC. 212. (b) The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income. If the taxpayer's annual accounting period is other than a fiscal year * * * or...
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