Interstate Transit Lines v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 101692.

• Decision Date: 09 July 1941
• Docket Number: Docket No. 101692.
• Citation: 44 BTA 957
• Parties: INTERSTATE TRANSIT LINES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

44 B.T.A. 957 (1941)

INTERSTATE TRANSIT LINES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 101692.

Board of Tax Appeals.

Promulgated July 9, 1941.

Henry W. Clark, Esq., and Joseph F. Mann, Esq., for the petitioner.

Henry C. Clark, Esq., for the respondent.

Respondent determined a deficiency in income taxes of $4,461.53 against the petitioner for the calendar year 1936. The only issue submitted is whether the petitioner is entitled to a deduction of $28,100.66 as an ordinary and necessary expense of carrying on its business for that year.

FINDINGS OF FACT.

The petitioner is a corporation created by the State of Nebraska, with its executive offices located at Omaha, Nebraska, where it filed its income tax return for the calendar year 1936. Since 1929 the petitioner has operated interstate bus transportation lines between Chicago, Illinois, and Los Angeles, California; and between Kansas City, Missouri, and Cheyenne, Wyoming, for the transportation of passengers, mail, and express. In addition to this interstate business, petitioner had acquired the right to handle intrastate business in the states along its routes, in the States of Iowa, Nebraska, Kansas, Colorado, Wyoming, Utah, and Nevada.

Petitioner could not then acquire the right to do intrastate business in California because the Public Utilities Act of California required the certificate of the Railroad Commission for conducting a common carrier business on the public highways, and that commission, based on its interpretation of that act, refused to grant certificates for intrastate operations to foreign corporations.

Petitioner, for the purpose of augmenting its income from carrying California intrastate traffic, which could be done without substantial increase in its facilities or expenses, and because of its inability to thus function, in 1930 organized a subsidiary corporation, under the laws of California, under the name of Union Pacific Stages of California, hereinafter called "Stages", which company, by 1932, had secured certificates authorizing it to conduct the desired intrastate operations. Petitioner furnished all its capital and received all its capital stock. On February 7 and 8, 1932, respectively, petitioner and Stages executed two contracts. The first of these, hereinafter called the "Absorption Agreement", recited that Stages was a wholly owned subsidiary of the petitioner, that it was maintained as an operating subsidiary of the petitioner and its operations conducted solely for the benefit of that company, and that, in order that the petitioner might obtain the greatest benefit from the operations of Stages, it was necessary that Stages operate on such routes and schedules as would most benefit petitioner. It provided that Stages would operate busses on such routes and schedules as directed by petitioner, in consideration for which petitioner agreed to assume and reimburse Stages for any operating deficits incurred by that company, and that Stages agreed to pay over to petitioner any operating profit resulting from its operations at the end of each calendar year. The second contract, hereinafter called the "Operating Contract", provided that Stages, in addition to its intrastate business in California, should conduct all of the interstate operations theretofore performed by petitioner in California. The agreement provided that when the busses crossed the Nevada state line, they should pass into the custody and possession of the respective companies there operating. It was further provided that as the respective companies took over the custody and possession of the busses, a payment to the owners of 5 cents per mile run by each bus should be made and the "lessee" would be responsible to the "lessor" for the busses of the "lessor" in the "lessee's" custody and possession. In operating under this agreement there was no change in the conduct of the business except that intra-California passenger and other transportation was available on the busses thus operating. No additional expense was incurred except the cost of petitioner keeping the separate accounts for Stages. At the outset, Stages acquired a local franchise from the Pickwick-Greyhound lines, together with two busses.

The stock of Stages was all owned by petitioner, and these companies had the same directors and officers. The above contracts were executed by the same persons as officers of the respective companies. Stages had its own accounting records, employees, busses, directors, and corporate minute book. Its accounting records were kept at the offices of petitioner by the officers and employees of petitioner, who kept petitioner's records.

Stages had no bank account. Petitioner collected all the revenues of Stages and paid all of the bills, pay roll and otherwise, of Stages.

All revenues from operations of both companies were collected by petitioner and all expenses of both companies were paid by the petitioner. Monthly, petitioner apportioned on the books of the respective companies the revenues of the respective companies on the basis of passenger and traffic miles, compared to the aggregate of the same. Likewise, the expenses were apportioned except those, such as taxes, which were charged to the company liable therefor. The entry of these items was made in an open account of petitioner with Stages. A corresponding open account with petitioner was kept on the books of Stages. These accounts were designated cash accounts.

On the books of each company there was kept another open account with the other company which was used exclusively as a "clearing account" for the entry at the end of each year showing the absorption by the petitioner of the profit or deficit of the operation of Stages...