Railroad v. Comm'r of Internal Revenue

• Decision Date: 29 June 1951
• Docket Number: Docket No. 5756.
• Citation: 16 T.C. 1517
• Parties: BOSTON AND MAINE RAILROAD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

16 T.C. 1517

BOSTON AND MAINE RAILROAD, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 5756.

Tax Court of the United States.

Promulgated June 29, 1951.

Bernard J. Long, Esq., Norman D. Cann, Esq., and Raymond J. Bowen, Esq., for the petitioner.

Melvin L. Sears, Esq., for the respondent.

1.In reporting its income for 1939, 1940, and 1941, petitioner claimed deductions to cover the retirement, due to destruction, demolition or abandonment, of various items of roadway property acquired prior to March 1, 1913.Petitioner employed the retirement method of accounting, whereunder items of property carried in the investment account are to be so carried at original cost and upon retirement such cost undiminished by any amount for depreciation sustained is charged to expense or profit and loss.The book cost of petitioner's roadway properties at March 1, 1913, was not original cost of the properties covered and original cost as to most of the properties was unknown and could not be determined.The deductions claimed represented a pro rata part of book cost of petitioner's entire roadway properties at the basic date, the factor applied being derived by relating the Interstate Commerce Commission's inventory value at June 30, 1914, of the properties retired to such inventory value for all of petitioner's roadway properties.The inventory at June 30, 1914, was valued by the Interstate Commerce Commission at reproduction cost new at the inventory date and did not reflect the original cost of the properties inventoried.The inventory was not limited to the items of property carried in the book investment account but covered all of petitioner's existing properties, including items the cost of which had already been charged to expense.The respondent allowed as deductions the inventory value at June 30, 1914, of the items retired less estimated depreciation sustained to March 1, 1913, and less the amounts estimated by the Interstate Commerce Commission to represent engineering costs relating to the particular properties, the basis for elimination of engineering costs being that loss of the properties by retirement did not result in loss of the engineering.Held, that petitioner having failed to show or prove the original costs of the properties retired or that such costs were greater than inventory cost less estimated depreciation to March 1, 1913, the respondent's determination to that extent must be sustained.Held, further, that petitioner has shown that the engineering in the properties lost by retirement did not survive retirement and to that extent respondent's determination is in error.

2.The deductions claimed by petitioner for the properties retired were claimed for the years in which the bookkeeping entries covering the said retirements were made and without regard to the years in which the properties were in fact lost, destroyed, or abandoned.Held, that the dates of making the entries on the books do not determine the dates of deduction and that the deductions are allowable for the years in which the properties were in fact lost, destroyed, or abandoned.TURNER, Judge:

The respondent has determined a deficiency of $436,799.93 in income tax against the petitioner and its affiliated corporations for the year 1941.The issues are (1) whether in computing deductions claimed for 1939, 1940, and 1941, on account of the retirement of items of roadway property, the petitioner has used proper bases for the items of such property owned at March 1, 1913; (2) whether the basis of property acquired prior to March 1, 1913, and retired during the years stated, should include engineering costs; (3) whether deductions claimed by reason of the retirement of various units of roadway property have been claimed for the proper year or taxable period; and (4) whether the petitioner is entitled to a deduction of $438,613.55 as a liability accrued in 1941 for vacation payments to employees.Under Issue (3), all of the claimed deductions except one, that involving the retirement of property by the Franklin & Tilton Railroad, are in issue by reason of affirmative allegations appearing in the respondent's answer, as the basis of a claim for an increased deficiency.The years 1939 and 1940 are involved because of claimed operating net loss carry-overs.Issue (4) has been conceded by the respondent.

General Findings of Fact.

The petitioner is a corporation organized and existing under the laws of the States of Maine, New Hampshire, New York, and the Commonwealth of Massachusetts.On behalf of itself and certain affiliated corporations, it filed consolidated corporation income and excess profits tax returns for 1939, 1940, and 1941, with the collector for the district of Massachusetts.

The petitioner was organized in 1841, and in 1843 began the operation of its first section of railroad, which was between Wilmington, Massachusetts, and South Berwick, Maine, and about 70 miles in length.During the years involved herein, it operated in the States of Maine, Massachusetts, New Hampshire, Vermont, and New York.In 1948, it operated 1.757 miles of railroad and employed approximately 13,450 employees.

For the year 1941, the petitioner paid income taxes on the dates and in the amounts as follows:

+-------------------------------+
                ¦March 24, 1942     ¦$88,000.00 ¦
                +-------------------+-----------¦
                ¦June 17, 1942      ¦107,903.02 ¦
                +-------------------+-----------¦
                ¦September 29, 1942 ¦97,951.51  ¦
                +-------------------+-----------¦
                ¦December 18, 1942  ¦97,951.52  ¦
                +-------------------+-----------¦
                ¦Total              ¦$391,806.05¦
                +-------------------------------+
                

Issues (1) and (2)— Depreciation and Engineering Costs Prior to March 1, 1913.

FINDINGS OF FACT.

Since the creation of the Interstate Commerce Commission, in 1887, petitioner has been subject to the rules and regulations prescribed from time to time by that agency.With the approval of the Commission, petitioner and its affiliated corporations have employed a method of accounting commonly known as the retirement method of accounting.

The petitioner's books as now kept and as kept during 1939, 1940, and 1941, were set up pursuant to an order of the Interstate Commerce Commission which became effective July 1, 1914.By this order, its properties which are devoted to transportation service were classified under the heading Investment in Road and Equipment, which in turn was divided into three general accounts as follows: I Road, II Equipment, and III General Expenditures.The general account designated Road was divided into 47 primary accounts.¹

To guide the railroads in setting up and maintaining the various primary accounts under the classification Investment in Road and Equipment, the Commission issued detailed instructions.Under General Instructions, the introductory paragraph was as follows:

The carrier's records shall be kept with sufficient particularity to show fully the facts pertaining to all entries made in the accounts provided herein for Investment in Road and Equipment.Where the full information is not recorded in the general books, the entries therein shall be supported by other records in which the full details shall be shown.Such general book entries shall contain sufficient reference to the detailed records to permit ready identification, and the detailed records shall be filed in such manner as to be readily accessible for examination by representatives of the Interstate Commerce Commission.

Under items to be charged, it was provided that the appropriate account should be charged with ‘the cost of original road, original equipment, road extensions, additions, and betterments; also the estimated values at time of acquisition of right of way and other road and equipment property donated to the carrier, except that unless authorized by the Commission no charges shall be made to these accounts after July 1, 1914, for donations received previously to that date.‘If the total cost of additions or betterments to any class of fixed improvements, except tracks, considered as a whole should be less than $200, the carrier was to have the option of charging the amount so expended to the appropriate account in Operating Expenses.²It was specified that ‘Costs shall be actual money costs to the carrier,‘ with a subsequent provision, under Basis of Charges, that ‘When the consideration given for the purchase or the improvement of property the cost of which is chargeable to the accounts of this classification is other than money, the money value of the consideration at the time of the transaction shall be charged to these accounts, and the actual consideration shall be described in the record in sufficient detail to identify it.The carrier shall be prepared to furnish the Commission, upon demand, the particulars of its determination of the actual cash value of the consideration, if other than money.‘

With respect to Property Retired and Replaced, it was provided that the ledger value of the retired property should be credited to the appropriate primary account.The amount so credited was then to be applied as a charge to the credit balance in the accrued depreciation balance-sheet account with respect to the property thus retired and ‘the remainder (less salvage and insurance recovered, if any), together with the cost of demolishing the property,‘ was to be charged to the appropriate operating expense account.If, however, the property retired was of minor importance and was replaced in kind without betterment, the cost of replacement was to be charged to operating expense accounts without any adjustment in the primary Road accounts.If authorized by the Commission, a carrier was privileged to charge the cost of any extraordinarily large item directly to Profit and Loss, instead of Operating Expenses.

In the case of Property Retired and not Replaced, it was provided that the ledger value thereof should be credited to the appropriate...