Helvering v. Terminal R. Ass'n of St. Louis

• Decision Date: 19 April 1937
• Docket Number: No. 10771.,10771.
• Parties: HELVERING, Com'r of Internal Revenue, v. TERMINAL R. ASS'N OF ST. LOUIS.
• Court: U.S. Court of Appeals — Eighth Circuit

89 F.2d 739 (1937)

HELVERING, Com'r of Internal Revenue, v. TERMINAL R. ASS'N OF ST. LOUIS.

No. 10771.

Circuit Court of Appeals, Eighth Circuit.

April 19, 1937.

Warren F. Wattles, Sp. Asst. to Atty. Gen. (James W. Morris, Asst. Atty. Gen., Sewall Key, and Helen R. Carloss, Sp. Assts. to Atty. Gen., on the brief), for petitioner.

James M. Chaney, of St. Louis, Mo. (T. M. Pierce, of St. Louis, Mo., on the brief), for respondent.

Before STONE, GARDNER, and WOODROUGH, Circuit Judges.

STONE, Circuit Judge.

This is a petition brought by the Commissioner of Internal Revenue to review a decision of the Board of Tax Appeals disallowing a determination of a deficiency tax by the Commissioner.

The taxpayer is a corporation conducting a terminal railroad business at St. Louis, Mo. It owns the outstanding capital stock of the St. Louis Merchants Bridge Terminal Railway Company and of the Wiggins Ferry Company, which last company owns all of the outstanding capital stock of the St. Louis Transfer Railway Company and of the East St. Louis Connecting Railway Company. The taxpayer, for itself and the above-affiliated companies, filed consolidated income tax returns for the years 1926 to 1929, both inclusive. By agreements between all of the companies the entire tax was to be assessed against the Terminal. The Commissioner determined deficiencies in each of the above years, and the taxpayer appealed to the Board. In the amendments to answers filed before the Board by the Commissioner he asked affirmative relief alleging that he had erroneously allowed certain deductions for each of the years on account of depreciation and sought to have the deficiencies increased by the rectification of these claimed errors.

To understand the issues before the Board and here and the determination of the Board, it is necessary to state the relation between the taxpayer and its affiliates who joined in the consolidated return. In 1925, the taxpayer leased the properties of the St. Louis Merchants Bridge Terminal Railway Company, of the East St. Louis Connecting Railway Company, and of the St. Louis Transfer Railway Company for a period beginning January 1, 1926. The term of the leases was ninety-nine years, subject to termination, however, by either party on thirty days' written notice. These leases were executed at the suggestion of a member of the Interstate Commerce Commission, in view of some difficulty in consolidating the companies under section 5 of the Interstate Commerce Act, as amended by the Transportation Act 1920 (41 Stat. 456, 480, § 407, 49 U.S.C.A. § 5), and were designed to effect (in a practical sense) a consolidation for operating purposes under the Terminal. The properties leased consisted of railways, bridges, structures, depots, shops, locomotives, cars, and all other properties comprising the entire railroad systems owned by the lessors. The required rental consisted solely of the taxes, assessments, and other like charges imposed upon the respective lessor companies and, as to one of the companies, interest on its outstanding bonds. Each lease contained the provision following: "The Lessee Company shall and will maintain and keep the premises hereby delivered, and every part thereof, in good condition, and make all necessary repairs and renewals of the same, and operate and use the same for the purposes for which the Lessor Company holds the same, and shall and will indemnify and save harmless the Lessor Company from any and all claims for damages arising out of such operation and use."

During the above years, the properties were operated by the taxpayer in accordance with the leases. The various expenditures made by the taxpayer in the payment of interest, taxes, assessments, repairs, renewals, maintenance, etc., as required by the leases, were returned and deducted as expenses from gross income. These deductions were allowed. In addition thereto, the taxpayer claimed and the Commissioner allowed deductions for depreciation on the properties of the lessors in specified sums. It is these deductions for depreciation which the Commissioner contended in his amended answers had been improperly allowed and should be added to gross income. It is for the taxes thereon that these deficiencies were determined.

Before the Board the Commissioner contended that the taxpayer had no capital investment in the properties and, therefore, had nothing to recover by way of depreciation thereof; that the taxpayer had been allowed all deductions to which it was entitled, including all expenses of repairing and maintaining the property in good condition and all costs of renewals; and that the lessors suffered no loss from depreciation on their properties and were not entitled to deductions therefor. His argument in support was that the loss from depreciation cannot fall upon the lessee because it owns none of the properties and that it cannot fall on lessors since the lessee is required to maintain every part of the properties in good condition and make all necessary repairs and renewals thereof. Therefore, he concluded that since neither the taxpayer nor the lessors were entitled to depreciation he had erred in allowing any such.

A majority of the Board determined that the taxpayer lessee was not, in its own separate right, entitled to any deduction for depreciation on the properties, because it did not own them and that such depreciation would fall upon the lessor owners. However, that since the lessors and the lessee had joined in a consolidated return for the years involved and since the taxpayer is liable for the total tax on the net income, including any depreciation,...