ULSTER AND DELAWARE RAILROAD COMPANY v. COMMISSIONER OF INTERNAL REVENUE
| Citation | 25 BTA 109 |
| Decision Date | 08 January 1932 |
| Docket Number | Docket No. 28927. |
| Parties | THE ULSTER AND DELAWARE RAILROAD COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
James W. Carmalt, Esq., and A. Kaplin, Esq., for the petitioner.
E. C. Algire, Esq., for the respondent.
The respondent has asserted deficiencies in the income taxes of this petitioner in the amounts of $3,560.55 and $1,647.77 for the calendar years 1920 and 1921, respectively.
The petitioner has assigned several errors in respondent's determination of said deficiencies, but has withdrawn all but the following: (1) respondent's erroneous inclusion in income for 1920 of the amount of $47,086.62 as profit or income derived from the adjustment made with the Director General of Railroads on account of materials and supplies; (2) respondent's erroneous disallowance of a deduction of $160.01 from gross income for 1920, alleged to represent payment made to the Association of Railway Executives; (3) respondent's erroneous disallowance of a deducation of $20,998.14 from gross income for 1921, alleged to represent expenses incurred in that year in securing a final settlement of its claims against the Director General due to Federal control and which amount petitioner failed to charge to operating expense. Petitioner also claims an overpayment of $257.01 for the year 1921. By his amended answer, the respondent alleges, in the alternative, that if the Board find from the evidence that a profit was realized through the settlement with the Director General of Railroads during 1921 for materials and supplies converted by him during Federal control, such profit should be included in petitioner's gross income for 1921 and the amount of $47,086.62 disallowed as a deduction by respondent for 1920 on account of materials and supplies charged to expense in excess of cost to petitioner should be reduced accordingly, provided, however, that the adjustment of $2,187.78 allowed by respondent for materials and supplies charged to additions and betterments should be adjusted to 4.44 per cent of the amount in excess of cost to petitioner of materials and supplies returned in kind by the Director General of Railroads and which were used and charged to petitioner's accounts during 1920.
FINDINGS OF FACT.
The petitioner is a New York corporation, with its principal office at Kingston.
During the period of Federal control of railroads, the railroad properties and transportation system of the petitioner were taken over and operated by the Director General of Railroads from January 1, 1918, to March 1, 1920. Included in the property turned over to the Director General were the materials and supplies which petitioner had on hand on December 31, 1917, inventoried at cost aggregating $189,725.48. Such amount was charged to the Director General on the petitioner's books.
The petitioner's inventory was taken into the Director General's accounts as the cost to him of such materials and supplies and during the Federal control period all purchases of materials and supplies were taken into his accounts at the cost thereof to him. The materials and supplies used by the Director General were charged to operating expense at cost.
At the termination of Federal control on March 1, 1920, the Director General returned to the petitioner its transportation system and railroad properties, including the materials and supplies which he had on hand and which were inventoried as of that date at cost aggregating $173,548.36, exclusive of fuel. That inventory was taken from the Director General's stock books and included materials and supplies purchased by the Director General during Federal control, some unused materials and supplies purchased by the petitioner prior to Federal control, and also overages, i. e., a quantity of similar units in excess of those taken over on January 1, 1918, and a quantity of units unlike any of the units taken over from the petitioner.
As of March 1, 1920, the Director General's inventory, aggregating $173,548.36, was taken into the petitioner's accounts and entered in its stock books. Subsequent to March 1, 1920, all materials and supplies purchased by the petitioner were entered in its stock books at the cost price thereof and all materials and supplies used were charged to operating expense at such cost. The materials and supplies, exclusive of fuel, issued by petitioner and charged to expense during the period March 1, 1920, to December 31, 1920, aggregated not less than $128,804.72.
The petitioner did not enter into a contract with the Director General for his use of its properties and transportation system during the Federal control period and subsequent thereto a controversy arose regarding the petitioner's claim for compensation. That controversy was submitted to a board of referees, which made an award to petitioner for compensation for the use of the railroad on the basis of the standard form of contract provided for by the Federal Control Act. Such award was not accepted by the Director General and the petitioner brought an action in the United States Court of Claims to recover the compensation claimed and also certain other amounts claimed to be due it on account of depreciation, undermaintenance, timber, material and supply shortages, and interest on deferred payments of compensation.
After the petitioner had submitted its evidence to the said court and at the request of the Director General, the parties entered into negotiations for a settlement on the basis of the standard form of contract, and during the final negotations held in May, 1921, the Director General agreed to the petitioner's claims, aggregating $320,993.12, for lease of the road, depreciation of equipment, undermaintenance, and depletion of petitioner's timber tract. The parties also agreed that the amount of $20,033.66 was due from the petitioner to the Director General on open accounts, leaving an agreed net amount of $300,959.46 due the petitioner. The Director General refused to pay any amount as interest on deferred payments of compensation or the amount of expenses incurred by petitioner in negotiating a settlement. The only remaining item in dispute on May 4, 1921, was petitioner's claim of $119,951.90 as the net amount due it for shortages in materials and supplies returned in kind by the Director General. A comparison of the petitioner's inventory of December 31, 1917, and the Director General's inventory of March 1, 1920, showed that the actual shortages by units at March 1, 1920, prices aggregated $160,207.72, and that the overages by units at March 1, 1920, prices aggregated $40,255.82, leaving a net balance of $119,951.90 due the petitioner for shortages on the basis of a settlement pursuant to the terms of the standard form of contract. The actual shortages in units at the December 31, 1917, inventory prices aggregated $99,426.09.
On May 5, 1921, the Director General and the petitioner agreed to a lump-sum settlement of $390,000. They had agreed that the net sum of $300,959.46 was due petitioner on certain of its claims and the balance of $89,040.54 was paid by the Director General in settlement of petitioner's net claim for shortages in materials and supplies returned in kind. The petitioner paid for the overages at March 1, 1920, prices by being given a credit for $40,255.82 by the Director General when he paid petitioner $89,040.54 in cash in settlement of petitioner's net claim of $119,951.90 for shortages.
The petitioner was not advised that the Director General distributed the said lump sum on his accounts in amounts other than those agreed upon and that he entered the amount of $98,000 as the sum paid in settlement of the materials-and-supplies account. The respondent has used that figure in his computation of the deficiency in question.
The petitioner's books carried suspense accounts for the several claims made against the Director General and the lump-sum settlement of $390,000 was credited to those accounts in the amounts agreed upon, except as to the materials and supplies suspense account. Instead of crediting $89,040.54 to the last named account, the petitioner credited $68,042.40 thereto and credited $20,998.14 to the suspense account, "government settlement expense," which petitioner now admits to be erroneous. The sum of $20,998.14 constituted petitioner's expense incurred in negotiating the final settlement, but it was not charged to operating expenses by the petitioner or deducted from gross income in its return for the year 1921.
The check made of the actual units of materials and supplies which the Director General had on hand on March 1, 1920, disclosed that units aggregating $4,121.21 included in that inventory were missing and that items aggregating $28,427.27 included in that inventory constituted signal, bridge and other materials left along a right of way by the petitioner prior to Federal control but not included in the petitioner's inventory of December 31, 1917. The respondent has made allowance for those items by reducing the March 1, 1920, inventory value from $173,548.36 to $140,999.88.
In determining petitioner's taxable income for the year 1920 the respondent has disallowed $47,086.62 of the amount claimed as a deduction for materials and supplies used during that year, as representing the amount charged to expense in excess of the cost of such materials to the...
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