Kansas City Southern Railway Co. v. Commissioner of Internal Revenue

• Decision Date: 24 May 1929
• Docket Number: Docket No. 12054.
• Citation: 16 BTA 665
• Parties: KANSAS CITY SOUTHERN RAILWAY CO. AND AFFILIATED COMPANIES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

16 B.T.A. 665 (1929)

KANSAS CITY SOUTHERN RAILWAY CO. AND AFFILIATED COMPANIES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 12054.

Board of Tax Appeals.

Promulgated May 24, 1929.

Fred R. Angevine, Esq., for the petitioner.

P. M. Clark, Esq., for the respondent.

Robert N. Miller, Esq., and John E. McClure, Esq., as amici curiae.

This proceeding is for the redetermination of a deficiency in income taxes for 1918 and 1919 amounting to $123,846.26. The errors alleged to have been committed are:

(1) The respondent's finding that the petitioner's income from Federal compensation for 1918 was $3,274,837.64, instead of $3,800,000; and

(2) In finding that its income from Federal compensation for 1919 was $3,274,837.64 instead of $3,800,000; and

(3) His action in including in petitioner's taxable income for the years 1918 and 1919, or for any taxable year whatsoever, interest received from the United States Government on additions and betterments; and

(4) His denial of a deduction of $89,181.72 in the computation of net income for the year 1918, charged to depreciation; and

(5) In denying a deduction in the computation of net income of $89,993.40 for the year 1919, charged to depreciation; and

(6) In refusing to deduct in the computation of net income for the year 1919, $87,942.89 for loss on account of investment in stock of the Mena Land & Improvement Co.; and

(7) His failure to make an additional deduction of $26,158 in the computation of net income for 1918 on account of amortization of bond discount; and

(8) His failure to make an additional deduction in the computation of net income for 1919 of $26,158 on account of amortization of bond discount; and (9) His action in adding to income for the year 1918, $14,741.06 on account of donations; and

(10) His action in adding to income for the year 1919, $12,878.54 on account of donations; and

(11) In his failure to exempt from taxable income for the year 1918, $199,883.92, being interest due from the United States Government; and

(12) In his failure to exempt from taxable income for the year 1919, $327,721.74, being interest due from the United States Government; and

(13) His refusal to deduct in the computation of net income for the year 1919, $26,290.32, for interest on unfunded debt; and

(14) In denying a deduction in the computation of net income for 1918 of $174,165.98, being the amount of interest due to the United States Government from the petitioner; and

(15) In denying a deduction in the computation of net income for 1919 of $326,315.12, being the amount of interest due to the United States Government from the petitioner; and

(16) His action in denying a deduction in the computation of net income for 1918 of $298,300.22 for state, county, and city taxes paid during the year 1918; and

(17) His action in increasing the petitioner's net income for the year 1919 by $53,103.29, representing additional compensation paid by the Post Office Department to it in the year 1921 for services rendered for the period November 1, 1916, to December 31, 1917; and

The respondent alleges affirmatively that errors were committed in that:

(18) For the year 1918 the petitioner reported as taxable income $800.46 under the caption "Income from Lease of Road"; that respondent in adjusting said income erroneously eliminated that amount and he now avers that the said net income should be increased by that amount; and

(19) That as to the issue raised by the petitioner in allegation of error numbered 6, hereinabove, the respondent avers that of this amount $36,065.07 has been allowed as a deduction, and, furthermore, that error was committed in said allowance of $36,065.07 and that no deduction of any amount should be allowed for loss on account of transactions between the petitioner and the Mena Land & Improvement Co., and, furthermore, that he committed error in his failure to include in taxable income for the year 1919 the profit derived by the petitioner in the sale of stock of the Mena Land & Improvement Co. for $40,000, said stock having been acquired during the years 1910 and 1911 at a total cost of $25,000; and (20) That for each of the years 1918 and 1919 discount in the amount of $46,577.57 has been allowed as a deduction from the income of each of said years on account of amortization of bond discount, and he now avers that error was committed in said allowance and that no deduction should be allowed on account of said amortization of bond discount for either of said years.

FINDINGS OF FACT.

The petitioner, Kansas City Southern Railway Co., is a Missouri corporation, and its subsidiaries are incorporated under the laws of the following states: Texarkana & Fort Smith Railway Co., Texas; Arkansas Western Railway Co., Arkansas; Kansas City, Shreveport & Gulf Terminal Co., Louisiana; Poteau Valley Railroad Co., Oklahoma; Port Arthur Canal & Dock Co., Texas; K. C. S. Elevator Co., Missouri. All of said companies have their offices in Kansas City, Mo.

The petitioner and its subsidiary companies, during the whole of the years 1918 and 1919 and for a number of years prior thereto, constituted a railway system doing an interstate business, and filed operating returns with the Interstate Commerce Commission annually. During the said years in question the petitioner kept its books and records of account on the accrual basis, using the calendar year as an annual accounting period.

Under a provision contained in the Army Appropriation Act of August 29, 1916, the President, on behalf of the United States Government, on January 1, 1918, took possession and assumed control of the properties of the petitioner and certain of its said affiliated companies, viz, Texarkana & Fort Smith Railway Co., Arkansas Western Railway Co., Kansas City, Shreveport & Gulf Terminal Co., Poteau Valley Railroad Co., and Port Arthur Canal & Dock Co., and, through the Director General of Railroads, used and operated said properties during the 26-month period from January 1, 1918, to February 29, 1920, both dates inclusive.

Federal Compensation

The petitioner and its subsidiary and affiliated companies were entitled to just compensation for the use of their facilities under the provisions of the Federal Control Act as amended March 21, 1918 (40 Stat. 451).

The petitioner and its said affiliated companies and the Director General of Railroads did not enter into either an agreement or the standard form of contract for the use of their properties by the Federal Government.

The petitioner, subsequent to September 30, 1921, filed a claim with the Director General of Railroads for compensation during the 26-month period of Federal control in the amount of $9,518,125.87.

The petitioner and its affiliated companies set up on their books of account an accrued income, as just compensation from the Director General for the use of their properties, an amount of $3,495,584.85 for each of the years 1918 and 1919, this amount being based on the original certification of the Interstate Commerce Commission as well as the petitioner's calculation of their average railway operating income for the three years ended June 30, 1917.

In making its consolidated corporation income and profits-tax return for the year 1918, the petitioner stated its income from Federal compensation to be the said amount of $3,495,584.85, on which basis the tax was paid.

In making its consolidated corporation income and profits-tax return for the year 1919, the petitioner stated its income from Federal compensation to be the said amount of $3,495,584.85, but paid its tax on the basis of the Federal compensation actually received in cash from the Director General of Railroads, to wit: $2,463,000.

In its final certification to the President, the Interstate Commerce Commission ascertained the average annual railway operating income of the petitioner and its affiliated companies to be $3,274,837.64.

The petitioner did not accept the amounts ascertained and certified by the Interstate Commerce Commission. Negotiations were had with the Director General, and on November 14, 1923, a final settlement agreement covering the 26-month period of Federal control was effected. By the terms of this agreement all claims of the Director General against the petitioner, and all claims of the petitioner against the Director General arising out of the operation of the properties of the petitioner and its affiliated companies by the Director General during the Federal control period, were liquidated and settled.

In a schedule prepared by the Director General of Railroads supporting the final settlement agreement, it is disclosed that the petitioner and its affiliated companies were allowed as compensation for the use of their properties during the 26 months of Federal control the amount of $8,222,950.82. This latter amount, when prorated over the period of Federal control, is the equivalent of $3,800,000 annually.

The respondent in his deficiency letter of December 18, 1925, sets up as "Income from lease of Road" for each of the years 1918 and 1919, the amount of $3,274,837.64, being the amount finally certified by the Interstate Commerce Commission as the average annual railway-operating income for each of those years, as set forth above, and proposes to tax said amounts in lieu of the amounts as returned by the petitioner as aforesaid.

The respondent inadvertently eliminated from taxable income in the year 1918 the amount of $800.46, due to the fact that respondent assumed that the entire amount reported in the tax return as "Income from lease of road, $3,496,385.31" was received from the Director General of Railroads, whereas $800.46 of said amount was received from the Central Coal & Coke Co.

Interest on Additions and Betterments

For the years 1918 and 1919 neither the petitioner nor any of its affiliated companies accrued any amount whatever as income receivable from the Director General on account of...