Denver & Rio Grande Western R.R. Co. v. Comm'r of Internal Revenue, Docket No. 78861.

• Decision Date: 03 August 1962
• Docket Number: Docket No. 78861.
• Citation: 38 T.C. 557
• Parties: THE DENVER & RIO GRANDE WESTERN RAILROAD CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

38 T.C. 557

THE DENVER & RIO GRANDE WESTERN RAILROAD CO., PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 78861.

Tax Court of the United States.

Filed August 3, 1962.

Stanley Worth, Esq., and Jules G. Korner III, Esq., for the petitioner.

Richard J. Shipley, Esq., for the respondent.

1. Prior to 1954 the petitioner's agreements with its employees provided that if an employee had rendered a specified number of days of service in one year he would be entitled during the following year to a vacation with pay, or pay in lieu thereof, but that no allowance would be due if, prior to the taking of the vacation, his employment should be terminated, except by retirement. Effective with the year 1954 the petitioner's contracts with its employees were amended to provide that if an employee should die before taking his vacation the allowance would be paid to his surviving wife or minor dependent children, if any. Held, that the petitioner, which employs the accrual method of accounting, is not entitled to accrue and deduct vacation pay for the taxable years 1954 and 1955 based upon the qualifying services rendered in those years, but is entitled to deduct only the vacation allowances actually paid in those years.

2. Pursuant to the order of the court in a bankruptcy proceeding, the petitioner, successor to the debtor corporation, was required to reimburse the trustee under a bond indenture for amounts representing costs of foreclosing on certain stock which was not a part of the debtor's property. Held, that such amounts are not deductible as ordinary and necessary expenses paid or incurred by the petitioner in carrying on its business.

3. In 1955, the petitioner made a contribution to a program, the purpose of which was to gain support for and to influence the passage of legislation authorizing the construction of a dam near petitioner's railroad line. Held, that such contribution was made for lobbying purposes, for the promotion of legislation, and for carrying on propaganda related to the promotion of such legislation, and is not deductible as an ordinary and necessary business expense.

4. In 1955, the petitioner transferred a retired narrow gage locomotive to the Gunnison Pioneer Association pursuant to an understanding reached among the petitioner, the Pioneer Association, and the City of Gunnison, Colorado, that the locomotive should be placed in a Gunnison city park on display to the general public as a historical exhibit. Held, that the petitioner is entitled to a charitable deduction in the amount of $6,000 on account of the transfer of the locomotive, as a contribution for the use of the City of Gunnison for exclusively public purposes.

ATKINS, Judge:

The respondent determined deficiencies in income tax for the taxable years 1954 and 1955 in the respective amounts of $324,210.78 and $34,195.07.

By stipulation the petitioner has waived certain of its allegations of error and the respondent has conceded certain errors in his determinations. The issues remaining for decision are whether the respondent erred in (1) disallowing as deductions for the years 1954 and 1955 the amounts claimed by the petitioner as accruals of vacation allowances and allowing only the amounts actually paid in those years, (2) disallowing as a deduction for 1954 as an ordinary and necessary business expense the amount of $300,000 required by order of a bankruptcy court to be paid to certain bondholders in reimbursement of trustee fees, and other costs incurred in a foreclosure proceeding, and disallowing as a deduction for 1955 as ordinary and necessary business expense the amount of $927.92, representing an amount paid to the trustee under the bond issue for distributing to the bondholders a portion of the above amount of $300,000, (3) disallowing for 1955 as an ordinary and necessary business expense, a contribution of $1,000 for the purpose of obtaining legislation authorizing construction of a dam, and (4) disallowing as a deduction for 1955 the value of a retired narrow gage locomotive claimed to have been transferred for the use of the City of Gunnison, Colorado.

FINDINGS OF FACT.

Some of the facts are stipulated and the stipulations are incorporated herein by this reference.

The petitioner is a Delaware corporation operating a common carrier by rail principally in Colorado and Utah, with principal office and place of business at Denver, Colorado. Its income tax returns were filed with the district director of internal revenue for the district of Colorado.

The petitioner has at all material times kept its books on an accrual method of accounting in accordance with the requirements of the Interstate Commerce Commission.

The petitioner has had agreements, through labor unions, with its nonoperating employees since 1942 and with its operating employees since 1949, under which each employee was entitled to an annual vacation of a specified number of workdays with pay, or pay in lieu thereof, provided the employee had rendered service of a specified number of days in the preceding calendar year. The number of days of vacation to which an employee was entitled varied with the number of years the employee had worked for the company.

Such agreements provided that vacations might be taken from January 1 to December 31, and that due regard, consistent with requirements of service to the public, should be given to the desires and preferences of the employees in seniority order when fixing the dates for their vacations. While the manner of computing the amount of such vacation pay varied, in general it was to be based upon the rate of compensation existing during the vacation or immediately prior to the taking of the vacation or pay in lieu thereof (in the case of operating employees the vacation allowance was to be a specified fraction of the compensation earned during the calendar year preceding the year in which the vacation was to be taken, but in no event less than an amount computed at the rate of pay for the last service rendered).

Up to the end of the year 1953 these agreements provided that no vacation with pay, or payment in lieu thereof, would be due an employee whose employment had terminated, other than by retirement under the Railroad Retirement Act, prior to the taking of his vacation (in the case of operating employees the provision is ‘prior to the scheduled vacation’).

By agreements dated August 21, 1954, in the case of the nonoperating employees, and August 17, 1954, in the case of the operating employees, both agreements being effective as of January 1, 1954, the original vacation agreements were amended. It was provided that if a nonoperating employee who had performed the necessary qualifying service in the year prior to the year of his death, or in the year of his death, should die before receiving his vacation or payment in lieu thereof, payment of the allowance for such vacation would be made to his surviving widow, or if none, then on behalf of dependent minor children, if any. It was provided that if an operating employee who had performed the necessary qualifying service in the year prior to the year of his death should die before receiving his vacation or payment in lieu thereof, payment should be made to his widow.¹ The amending agreements also provided, effective with the year 1954, for an additional week of vacation each year with pay, or pay in lieu thereof, in the case of qualifying employees who had had 15 years' service and who had rendered a specified number of days of service in the preceding year and prior years.

Prior to the year 1954, notwithstanding that the petitioner employed an accrual method of accounting, the amounts paid to its employees by reason of vacations were taken as deductions from gross income both in its books and in its income tax returns for the years in which such payments were made, no provisions for accruing such allowances being made either in its books or in its returns, by reason of the uncertainties in its contracts with its employees as to the employees' rights to such vacations.

The petitioner in its 1954 accounts set up in December 1954 an accrual for vacation allowances in the amount of $1,529,738.61 by a charge to an account ‘P & L Miscellaneous Debits' and a credit to an account ‘Other Unadjusted Credits.’ Such accrual was in addition to the amounts actually paid petitioner's employees during the year 1954 as vacation allowances which were deducted as operating expenses in petitioner's books. This accrual was based, at least in part, upon the actual vacation pay allowances paid in 1954.

The petitioner keeps records which show, among other things, payments of vacation pay where employees have died. Such records include the names of employees who have died and left either a widow or children, and the names of those whose allowances were forfeited because the employee was not survived by a wife or dependent minor children. It kept such records in 1954 and 1955, but such records for those years have been destroyed with the permission of the Interstate Commerce Commission. The earliest records which the petitioner now has showing vacation payments and forfeitures due to death are for the year 1957. In that year there were five cases in which the vacation benefits were forfeited for the reason that there was not left a widow or children. There was no change between the years 1954 and 1955 and the year 1957 in the vacation pay agreements between the petitioner and its employees. The total number of petitioner's employees was 6,010 in 1954, 6,047 in 1955, and 5,871 in 1957.

In its income tax return for the taxable year 1954 the petitioner claimed as a deduction from gross income the amount actually paid as vacation allowances during that year and also the amount of the above accrual of $1,529,738.61. In the return this amount was set forth in two items, namely, $1,265,055.10 as ‘Estimated Vacation Allowances— 2 Weeks,‘ and $264,683.51...