DOBIE, Circuit Judge.
This appeal is a review of a decision of the United States Board of Tax Appeals (hereinafter called the Board) in a proceeding in which the Kansas City, St. Louis and Chicago Railroad Company (hereinafter called the Lessor) sought: (1) the allowance of a claim for refund for overpayment of income taxes for the year 1933 in the amount of $19,398.44, and (2) the reversal of the Commissioner of Internal Revenue's determination of a deficiency in the Lessor's income taxes for 1933 in the amount of $32,845.61.
The Board (1) disallowed the claim for refund, and (2) determined a deficiency of $28,875. There is no further contention before us as to the Board's disallowing the Lessor's claim for refund. See United States v. Joliet & Chicago Railroad Company, 315 U.S. 44, 62 S.Ct. 442, 86 L.Ed. 658. The remaining question for our consideration, then, is whether the deficiency of $28,875, as determined by the Board, is proper. In other words, did the Board err in deciding that the rental income accruable to the Lessor in 1933, by virtue of the indenture of lease to the Chicago and Alton Railroad Company (hereinafter called the Lessee), included a sum of money equal to the dividends paid or payable by the Lessee, pursuant to the lease, to the Lessor's stockholders on all classes of the Lessor's outstanding stock?
There is no real difficulty as to the facts in this case, virtually all of which were stipulated. We append the statement of facts, as found by the Board:
"The petitioner is a corporation, organized April 10, 1877, and existing under and by virtue of the laws of the State of Missouri, with its principal office at 340 West Harrison Street, Chicago, Illinois. It was incorporated for the purpose of constructing, acquiring, maintaining, and operating a railroad for public use. Its books and records were maintained and its Federal income tax return for the year 1933 was filed on the accrual basis of accounting.
"On March 15, 1878, petitioner and the Chicago & Alton Railroad Co., an Illinois corporation, entered into a written indenture, by the terms of which petitioner sold and transferred to the Chicago & Alton Railroad Co., its successors, and assigns $3,000,000 of its bonds dated March 15, 1878, maturing May 1, 1903, and $1,500,000 of its 7 percent preferred stock; and by this indenture petitioner demised and leased to the Chicago & Alton, its successors, and assigns, forever, all the property then owned or thereafter to be acquired by it. The Chicago & Alton agreed thereunder that it would acquire at its own expense necessary additional right of way and would construct, furnish with rolling stock, and forever operate the railroad so demised and leased as a part of its main line, and keep the same in proper repair. The material provisions of the indenture are as follows:
"`And the said party of the first part, the petitioner herein for and in consideration of the covenants and agreements hereinafter contained, hereby sells and transfers unto the said party of the second part the Chicago & Alton Railroad Co., and its successors and assigns, the said bonds of the party of the first part hereinbefore mentioned, amounting in the aggregate to Three Millions of Dollars, with the coupons thereto attached, and the preferred stock hereinbefore mentioned, amounting in the aggregate to One Million Five Hundred Thousand Dollars, and also the proceeds of all subscriptions for capital stock and all subscriptions made by any and all persons or corporations of money or property for the purpose of aiding in the construction of said road or any portion thereof.
"`And the said party of the first part hereby demises and leases to the said party of the second part, its successors and assigns, forever, all and singular the right of way, railroad track, bridges, * * * and property of every kind, name and nature of the said party of the first part now owned by it, or which may be hereafter acquired by the same: To Have and to Hold the said bonds, coupons and preferred stock of the party of the first part, and the proceeds of the said subscriptions to the said party of the first part, and also all and singular the said right of way, railroad track, bridges, * * * and property of every kind, name and nature of the said party of the first part, now owned by it, or which may be hereafter acquired by the same, unto the said party of the second part, its successors and assigns forever, * * *
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"`And the said party of the second part hereby further agrees that it, the said party of the second part will pay unto the said party of the first part, as an annual rental for the use of said demised premises, half-yearly payments, to be made on the first days of May and November in each year, a sum which shall be ascertained by a computation based upon the gross earnings of the preceding year ending on the 31st of December, as follows, that is to say:
"`From the gross earnings of said railroad during each year ending on the 31st of December, shall first be deducted sixty-five per cent. thereof for operating expenses, renewals and repairs, which shall be retained by said party of the second part. Second, All taxes and assessments of every description; and after deducting all Federal, State, county and municipal taxes and assessments from thirty-five per cent. of said gross earnings, the residue of the same shall constitute the rental for the calendar year, subject to the limitation hereinafter stated.
"`* * * and for the purpose of ascertaining the gross earnings of the railroad hereby demised, it is agreed that all rates common to the road of the party of the first part and the road of the Louisiana and Missouri River Railroad Company, or properly to be divided between them, shall be divided between said parties pro rata according to mileage; Provided, That from all rates for traffic which shall have crossed the Missouri River at or near Glasgow, said second party may, at its option, deduct a reasonable sum for bridge or ferry tolls before such division of rates between the party of the first part and the Louisiana and Missouri River Railroad Company is made, and the amount so deducted shall be considered part of the gross earnings of the property of the party of the first part herein referred to, and it is hereby agreed that the party of the second part shall at all times pay out of said rental the coupons issued with the said bonds of the party of the first part, and all dividends upon its preferred stock guaranteed to be paid by the said party of the second part, and the annual rental for each calendar year shall never be less than the coupons issued with said bonds outstanding and falling due in such year, and the dividend or dividends on the said preferred stock guaranteed to be paid by the party of the second part in such year.
"`And it is further agreed, that the annual rental for each calendar year shall never be more than the outstanding coupons falling due in such year, and a dividend in that year of seven per cent. upon the preferred and common stock of the party of the first part then outstanding.
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"`And Whereas, the party of the second part may desire to convert the bonds of the party of the first part hereby sold to the party of the second part into the preferred stock of the party of the first part hereinbefore mentioned, it is therefore agreed that the said party of the second part, may at its option exchange any or all of said bonds for preferred stock herein provided to be issued for said bonds upon the terms herein mentioned, and that upon such exchange, the party of the first part will issue certificates for such stock in the usual form, and deliver the same to the said party of the second part, transferable in the same manner as other stock of the party of the first part is allowed to be transferred.
"`And the said party of the second part may guarantee the absolute payment of a dividend of seven per cent. for each calendar year ending the 31st day of December, free of all United States taxes, on the aggregate amount of preferred stock not exceeding One Million Five Hundred Thousand Dollars, and upon request shall be entitled to certificates therefor in the usual form; and the holders of said preferred stock so guaranteed as aforesaid, shall be paid the said dividend out of the net earnings of the said party of the first part, if sufficient for that purpose, after paying coupons, taxes and assessments before any dividends shall be paid upon the residue of the preferred stock of the said party of the first part.
"`And the said party of the second part hereby further agrees that it will at all times pay all taxes and assessments hereafter, whether Federal, State, county or municipal, which are, or may be imposed against the premises hereby demised at the time when said taxes may be due and payable. * * *
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"`And the said party of the first part hereby covenants and agrees that it will at all times hereafter maintain its corporate organization and existence under the laws of Missouri; * * *'
"The action so taken by the petitioner had been authorized by its board of directors at a meeting held March 5, 1878, and by its stockholders at a meeting held the following day. At these meetings corporate action was also taken to authorize an issue of $3,000,000 face value of 7 percent bonds and an issue of $3,000,000 par value of 7...
