Ry. Express Agency, Inc. v. Comm'r of Internal Revenue

• Decision Date: 13 May 1947
• Docket Number: Docket No. 7886.
• Citation: 8 T.C. 991
• Parties: RAILWAY EXPRESS AGENCY, INCORPORATED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

8 T.C. 991

RAILWAY EXPRESS AGENCY, INCORPORATED, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 7886.

Tax Court of the United States.

Promulgated May 13, 1947.

The stock of the petitioner, organized to conduct an express business, is owned by about 70 railroads. It has individual contracts with about 400 railroads (including the 70) under which it accounts to them proportionately for the net revenues of the business. It issued its own bonds in the amount of $32,000,000 for purchase of property and operating capital. None of the railroads agreed to pay its expenses. The contracts refer to the payments made to the railroads as compensation. Additional property acquired with revenues is not shown to belong to the railroads. Held, the petitioner is not a mere creature of the railroads contracting with it, it had income, and the Commissioner did not err in adding to its income amounts of excessive depreciation deductions; held, further, that the value of petitioner's stock had adjusted declared value of zero for 1937; held, further, that the petitioner was prohibited by written contract executed prior to May 1, 1936, and expressly dealing with payment of dividends, from paying dividends, and is entitled, under section 26(c)(1) of the Revenue Act of 1936, to credit for the amount of its adjusted net income for 1937. Floyd F. Toomey, Esq., and John P. Lipscomb, Jr., Esq., for the petitioner.

Harold D. Thomas, Esq., for the respondent.

This case involves deficiencies in income taxes for the calendar years 1937 and 1938 in the respective amounts of $121,369.66 and $45,943.17 and deficiencies and in excess profits taxes for the same years in the amounts of $46,079.28 and $32,973.56, respectively. The Commissioner determined the above deficiencies by adding to petitioner's reported income for 1937 and 1938, respectively, the sums of $383,994.07 and $274,779.70, as ‘depreciation decreased‘ and ‘excessive depreciation.‘ The petition asks for determination of no deficiency and of overpayment of income tax for 1937 and 1938 in the respective amounts of $93.54 and $13,966.14, and of overpayment of excess profits tax for 1937 and 1938 in the respective amounts of $391.25 and $10,449.89, alleging that the Commissioner erred in treating any portion of the receipts from the business carried on by the petitioner as income, and, alternatively, that there was error in not allowing deduction of excess profits tax, in not allowing credit under section 26(a) and 26(c) of the Revenue Act of 1936, and in not allowing deduction for losses on the sale of property and expenses in connection with retirements of property in 1938. The primary question presented is whether any portion of the receipts of the business conducted by petitioner constituted income of the petitioner subject to income and excess profits tax, which in larger part involves the question whether the respondent erred in addition to the petitioner's income the amounts of depreciation disallowed for the respective years. In his answer the respondent claims an increase of $1,500 in the deficiency in excess profits tax for 1937 on account of his allowance of an amount for adjusted declared value of petitioner's capital stock. Substantially all of the evidence is embodied in a stipulation of facts, which agreed facts are incorporated herein by reference as part of our findings of fact. Portions thereof which we consider necessary for an understanding of the issues are set forth in the findings made from other evidence.

FINDINGS OF FACT.

The petitioner employs an accrual method of accounting prescribed by the Interstate Commerce Commission and known as the Uniform System of Accounts for Express Companies. The returns of petitioner for the taxable years were filed on the accrual basis with the collector for the third district of New York.

After the Federal Government took over the operation of railroads in the United States in December 1917, the Director General of Railroads notified the express companies then doing business that if they would organize one express company he would appoint it his agent to carry on the express transportation business on all the railroad lines under Federal control. Accordingly, the express companies organized a single corporation, the American Railway Express Co. (hereinafter referred to as American) to perform a nationwide express business.

As of June 26, 1918, the Director General entered into a contract with American to conduct, as the sole agent of the United States, the express transportation business on all railroads under Federal control and upon parts or all of such other systems of transportation as in the judgment of the Director General it might be necessary or desirable to include. American operated under the contract until March 1, 1920, when Federal control of the railroads was terminated.

On December 7, 1920, upon application of American, the Interstate Commerce Commission approved the consolidation of express companies. Consolidation of Express Companies, 59 I.C.C. 459. From September 1, 1920, until February 28, 1929, American operated as an independent express company for its own account. Its operations were conducted under uniform contracts, with practically all of the railroads in the United States. Express Contract, 1920, 59 I.C.C. 518. Throughout the period of operation under the contracts, the common interests of the railroads were represented by a committee of the Association of Railway Executives known as the Uniform Express Contract Committee, hereinafter referred to as the express committee. During such period the express committee began a study of the future of the express business of the railroad companies after the contractual relations with American should end on February 29, 1929.

On or about November 17, 1927, the express committee adopted a resolution, in substance, recommending the organization of a new express company under control of the railroad companies, or purchase of the stock of American; also, that the committee determine whether the railroad companies desired to organize the new company or acquire the American stock, and, if so, to negotiate with American. The resolution was approved by the Association of Railway Executives and on March 5, 1928, the express committee appointed a legal committee to prepare a plan which would provide for the purchase of the capital stock of American or for the formation of a new express company.

The plan prepared by the legal committee, hereinafter referred to as the express plan, was submitted to the express committee on June 21, 1928.

The report of the legal committee to the express committee contained the following statement:

The object sought to be attained by the plan is to make the future express agency a railroad-owned joint facility engaging in express transportation in its own name, but nevertheless acting in fact only as the agent of its railroad principals and accounting to them under the terms of the operating agreement (Exhibit D) for all of its revenues after payment of expenses. This relationship will make the railroads transporters of express as they are of freight with a consequent like status before commissions and courts.

To accomplish such object the plan provides for the organization by the agents representing the participating railroads of a new express company to be owned by such railroads and for the acquisition by it of the properties used in express operations of the American Railway Express Company.

The report also contained statements that all of the membership of the Association of Railway Executives should participate in the ownership of the express company but with the privilege available to all other railroad companies then parties to the uniform express contract to become parties to the new agreement; that the shares of the express company, proposed to be formed, were to be allotted to each railroad in the ratio that its receipts from express business bears the gross business of all the participating railroads, and that as capital stock would not constitute the basis for distributing earnings, it was proposed to limit the capital stock of the new company to 1,000 common shares, without par value.

The express plan proposed by the legal committee, provided, among other things, that:

(a) Participation in the plan be limited to the 86 member roads of the Association of Railway Executives as named, because of the impracticability of joining the very large number of other roads, which performed in the aggregate only about 2 per cent of the gross business transacted under the uniform contracts with American.

(b) Certain named individuals be appointed as agents of the railroads participating in the plan, hereinafter referred to as participating railroads, with power to carry the plan into effect, when a prescribed percentage of the railroads signed agreements, in the form attached with the agents.

(c) The participating railroads transfer to the agents all of their interest in substitute article XX of a certain contract, known as the Amended Uniform Contract for Express Operators over rail lines, between the railroads and American, containing the agreement of the latter, in the event it did not continue express operations over the railroads after February 28, 1929, to sell to each railroad, at cost, less depreciation, all property of American used in its express business located on the lines of such railroad.

(d) The agents should cause the organization of a new corporation (petitioner became such corporation) with power to acquire the property of American and to conduct, under contracts effective March 1, 1929, the business then being conducted by it.

(e) The capital stock of the new corporation should consist of 1,000 shares of no par value, and nontransferable except to petitioner or to a successor by consolidation, merger, or purchase, and be allotted to the 86 participating railroads upon the...