Fifth Ave. Coach Lines, Inc. v. Comm'r of Internal Revenue

• Decision Date: 27 February 1959
• Docket Number: Docket No. 61646.
• Citation: Fifth Ave. Coach Lines, Inc. v. Comm'r of Internal Revenue, 31 T.C. 1080 (T.C. 1959)
• Parties: FIFTH AVENUE COACH LINES, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

31 T.C. 1080

FIFTH AVENUE COACH LINES, INC., PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 61646.

Tax Court of the United States.

Filed February 27, 1959.

Paul R. Russell, Esq., and Lloyd I. Paperno, Esq., for the petitioner.

William T. Holloran, Esq., and Paul D. Barker, Esq., for the respondent.

1.Petitioner's past president had served petitioner for many years and during a period of severe difficulties, when the petitioner attempted to acquire bus franchises, without a salary increase.He played a prominent role in securing bus franchises for petitioner; the petitioner's bus operation resulted in large profits for the petitioner, which had been suffering heavy losses for years.Thereafter, the president received a substantial wage increase.Neither the president nor his wife owned any of petitioner's stock.Held, payments by the petitioner to its past president's widow equal in amount to 31 months of the past president's increased salary were ordinary and necessary business expenses.

2.Held, further, wage increases to the petitioner's employees granted by arbitrators' awards in 1947 and in 1949, retroactive to each previous year, respectively, were not deductible in those previous years, even though in those years the petitioner estimated accurately the amounts to be granted, because liability for those amounts had not been established, but was being contested in the arbitration proceedings.

3.Held, further, interest on petitioner's tax deficiencies for the years 1943 through 1947 was deductible in 1948, when this Court's decision, which was entered in 1948 and with respect to which the time for appeal did not expire until sometimes in 1949, established certain facts which indirectly determined the deficiencies for those years.

TRAIN, Judge:

The respondent determined deficiencies in the petitioner's income and excess profits taxes for the years and in the amounts as follows:

+-------------------------------+
                ¦Year¦Tax            ¦Deficiency¦
                +----+---------------+----------¦
                ¦1943¦Income         ¦$50,410.12¦
                +----+---------------+----------¦
                ¦1943¦Excess profits ¦18,556.06 ¦
                +----+---------------+----------¦
                ¦1944¦Income         ¦239,430.21¦
                +----+---------------+----------¦
                ¦1945¦Income         ¦190,512.50¦
                +----+---------------+----------¦
                ¦1946¦Income         ¦184,481.18¦
                +----+---------------+----------¦
                ¦1947¦Income         ¦73,379.29 ¦
                +-------------------------------+
                

The issues to be decided are:

(1) Whether the petitioner is entitled to deductions for the taxable years 1944 through 1948 for payments made to the widow of a deceased former officer, in the amount of $7,500 per annum, as further compensation for past services rendered by that official;

(2) Whether petitioner is entitled to deduct in 1946 and 1948 wages for services rendered by employees in those years in the amounts of $83,226.52 and $112,600, respectively, the amount of $83,226.52 being finally determined by arbitration in 1947, and the amount of $112,600 being finally determined by arbitration in 1949;

(3) Whether petitioner is entitled to a deduction in 1948 for interest in the amount of $109,802.30 on tax deficiencies for the years 1943 through 1947 resulting from a decision of this Court involving prior years, and which had not become final by the end of the taxable year 1948.

The assignments of error contained in the petition concerning excess profits credit carrybacks and operating loss carrybacks will be disposed of as stipulated by the parties.

No deficiencies were determined for the taxable year 1948 and any consideration herein of facts relating to that year is made only as is necessary to determine correctly the deficiencies for the years which are before the Court.Sec. 272(g),I.R.C. 1939.¹

FINDINGS OF FACT.

Some of the facts are stipulated and are hereby found as stipulated.

The petitioner is a corporation organized and existing under the laws of the State of New York and has its principal office in New York City.It filed its income and excess profits tax returns for the years 1943 through 1948 on a calendar year accrual basis with the collector of internal revenue for the third district of New York.

The petitioner's history is set forth in detail in New York City Omnibus Corporation, a Memorandum Opinion of this Court dated November 30, 1948, incorporated into these findings by stipulation and will only be summarized briefly here.Petitioner's history began in 1925 with the Manhattan Surface Coach Company, which merged with the New York City Omnibus Corporation in 1930, the petitioner being known by the latter name until May 1956.The New York City Omnibus Corporation(hereinafter referred to as Railways).In 1926, all of Railway's capital stock was acquired by Fifth Avenue Coach Company organized in 1896.Through transactions not here relevant, Railways became the operating company of an integrated street railway system in the Borough of Manhattan under city franchises.

In 1936, Railways was reorganized under section 77B of the Bankruptcy Act.The reorganization was virtually consummated on December 24, 1936, when Omnibus, upon being recapitalized, transferred its stock to Railways in exchange for all the properties and assets of Railways.The reorganization was finally terminated on July 23, 1937, by the entry of an appropriate order of the District Court.

The petitioner, therefore, is the successor of several corporations which had previously engaged in street railway transportation in Manhattan.It commenced operating motor coaches in 1936 over routes upon which the predecessor street railway corporations had operated streetcars.

Issue 1.

Hugh J. Sheeran(hereinafter referred to as Sheeran), the then president and a member of the board of directors of the petitioner, died on February 24, 1938, at the age of 53.He had been an officer of the petitioner or its predecessors since 1933.His career began in 1900 when he started as a clerk with the Metropolitan Street Railway Company.In 1924, Sheeran succeeded Joe E. Hedges as the receiver of the New York Railways Company; this company was reorganized as Railways in 1925, at which time Sheeran was elected its president.In 1925, Sheeran was also elected president of Manhattan Surface Coach Company, formed for the purpose of making applications for bus franchises, and which in 1930 changed its name to New York City Omnibus Corporation.

From 1925 through 1933, Sheeran worked actively with John A. Ritchie, president of the Fifth Avenue Coach Company(not the petitioner here) and the Chicago Motor Coach Company, on the procuring of bus franchises from the City of New York to replace the existing street railway franchises.As a result of their efforts, the negotiations with the City of New York culminated successfully in 1935 in the acquisition of franchises to operate motor buses over the routes formerly served by the predecessor street railway companies.Sheeran continued in office during the difficult period while motorization of the street railway lines was being completed.He played a prominent role in and was given great credit for the success of the negotiations and subsequent motorization.

Sheeran was also appointed the president of Madison Avenue Coach Company in 1933 and Eighth Avenue Coach Company in 1935, two corporations which commenced bus operations in 1935 and became subsidiaries of Omnibus under the reorganization in 1936.

New York Railways Corporation operated at a loss, consistently, from 1927 to 1935, as follows:

+-------------------+
                ¦1927¦$1,042,816.06 ¦
                +----+--------------¦
                ¦1928¦1,079,071.49  ¦
                +----+--------------¦
                ¦1929¦1,359,233.99  ¦
                +----+--------------¦
                ¦1930¦1,436,422.81  ¦
                +----+--------------¦
                ¦1931¦974,700.94    ¦
                +----+--------------¦
                ¦1932¦1,283,283.94  ¦
                +----+--------------¦
                ¦1933¦1,202,902.65  ¦
                +----+--------------¦
                ¦1934¦947,287.70    ¦
                +----+--------------¦
                ¦1935¦1,290,010.24  ¦
                +-------------------+
                

Petitioner, as motorized bus service gradually replaced street railway operations during the 5 months from February to June 1936, operated profitably, even during the year in which the change was effected, as follows:

+------------------+
                ¦1936¦$576,752.39  ¦
                +----+-------------¦
                ¦1937¦1,824,447.70 ¦
                +----+-------------¦
                ¦1938¦2,214,117.84 ¦
                +------------------+
                

From May 1925 to November 1937, Sheeran's salary as president of the petitioner was $28,500 per annum.In November 1937, it was increased to $35,000 and remained at that figure until his death 4 months later.Sheeran devoted his full time to the petitioner and its affiliates.

Services rendered by employees of petitioner for the predecessor street railway companies were treated as services for petitioner in determining seniority privileges.

After Sheeran's death on February 24, 1938, his widow was left with four children of school age to support.At a meeting of the board of directors of petitioner held on March 7, 1938, it was resolved that Sheeran's salary of $35,000 per annum be continued ‘by making monthly payments to Mrs. Sheeran beginning with the month of March and extending through the month of June 1938, and thereafter to make monthly payments to Mrs. Sheeran at the rate of $7,500 per annum,‘ such payments to continue until other action was taken.The minutes of that meeting disclose that the chairman suggested that the board consider ‘what action should be taken in regard to making provision for aiding in the support of the wife and four children’ of Sheeran, explained that Sheeran's estate would realize only a nominal amount, and informed the board of the amount of life insurance Sheeran's widow would receive.The chairman further stated that Sheeran's salary:

had continued without increase through the years when he was called upon to perform services of extraordinary character in connection with bringing about the motorization of the street railway lines and that it was not until November 1, 1937, some time after...