Missouri Pac. R.R. v. Commissioner , 22 B.T.A. 267 ( 1931 )

MISSOURI PACIFIC RAILROAD COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Missouri Pac. R.R. v. Commissioner

Docket No. 33301.

United States Board of Tax Appeals

22 B.T.A. 267; 1931 BTA LEXIS 2145;

February 20, 1931, Promulgated

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1. Amounts set up on the taxpayer's books as representing the cost of transportation of men and materials used in connection with betterments and improvements are not under the facts presented deductible as operating expenses.

2. The taxpayer and American Refrigerator Transit Company, held to be affiliated. American Refrigerator Transit Co.,14 B.T.A. 616">14 B.T.A. 616, followed.

3. An amount paid by the taxpayer in 1920 to the Association of Railway Executivesheld to be deductible as an ordinary and necessary expense.

4. Where a railway company issued bonds at a discount which was at the date of issue charged to profit and loss and thereafter the company was reorganized, over 40 per cent of taxpayer's stock being issued to bondholders who had not been stockholders in the old corporation, resulting in a substantial shifting of interest; held, the taxpayer is not entitled to deduct any part of such discount from its gross income.

5. Payments made to Young Men's Christian Associations maintaining their organizations at division points and furnishing eating and rooming facilities and social and recreational activities to the taxpayer's employees, held deductible as business expenses.

6. Where a lump-sum settlement was made with the Director General of Railroads and, after such settlement, the Director General, without the knowledge of the taxpayer, placed upon his books an allocation of the lump sum to various items; held, that such allocation is not binding on the taxpayer, but an allocation made by the Commissioner raises a presumption that must be overcome by the taxpayer and this presumption is not overcome by showing that it was based upon the allocation made by the Director General.

7. The reasonable compensation of a railroad company for the use of its properties during the period of Federal control, awarded to a taxpayer keeping its accounts on an accrual basis, was income for each of the taxable years for which the compensation was allowed, although the precise amount to be paid was not determined until a later date.

8. Where at the end of the period of Federal control the Director General returned to the taxpayer materials and supplies equal in quantity, quality, and relative usefulness to materials and supplies taken over, but of a then greater monetary value, and the taxpayer used such materials and supplies during the taxable year; held, the amount deductible was the cost to the taxpayer of such materials and supplies, and not their value when returned.

9. Where during the period of Federal control property was retired and not replaced and there was a substantial dispute between the taxpayer and the Director General as to the amount of the liability therefor and subsequent to such period such dispute was settled and a certain amount was paid by the Director General; held, the excess of such payment over cost to the taxpayer was income in the year in which the dispute was settled.

10. Interest received by the taxpayer from the Federal Government on quarterly balances is not exempt from tax and is taxable in the year accrued.

11. Deductions of amounts paid in 1920 to maintain railroad property should not be reduced by amounts subsequently received from the Director General on account of undermaintenance of such property during the period of Federal control, where it appears such undermaintenance was not made up during that year.

12. The basis for the computation of deductible loss is cost or the value on March 1, 1913, and there may be no deductible loss based on replacement cost of the property when received back from the Director General.

13. Where the agreement between taxpayer and the Director General provided that costs of additions and betterments should be paid by the taxpayer and that, in addition to be agreed compensation, the taxpayer should be paid a reasonable rate of interest, to be fixed by the Director General, upon the amount of such costs, such interest is income in the years earned and accrued, even though the rate was not determined until after the end of such years.

14. An amount paid to a hospital which was essential to the taxpayer to provide hospitalization for its injured employees, is a deductible business expense.

15. Amounts paid to a railroad under section 209 of the Transportation Act are taxable as income in 1920. Gulf, Mobile & Northern Railroad Co.,22 B.T.A. 233">22 B.T.A. 233, followed.

Edward J. White, Esq., and James M. Chaney, Esq., for the petitioner.

D. A. Taylor, Esq., for the respondent.

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PHILLIPS

On October 28, 1927, the Commissioner mailed to the petitioner notice of the determination of a deficiency of $1,835,723.12 in income and profits taxes for 1920. The notice also disclosed an overassessment of $264,854.14 for 1921 and neither a deficiency nor overassessment for 1922. On December 24, 1927, the petitioner filed its petition with the Board for a redetermination of its tax liability for said years. Thereafter the petition, so far as it assigned errors with respect to the years 1921 and 1922, was dismissed for lack of jurisdiction. The deficiency was determined upon the basis of affiliation between petitioner and several subsidiaries.

The original and supplemental petitions assign 32 errors, numbered consecutively. The petitioner has withdrawn those numbered 9, 10, 18, 19, and 20, while the respondent has conceded error with respect to those numbered 1, 2, and 8. The order of dismissal disposes of the issues numbered 21 to 29, inclusive, while the issue numbered 31 has been settled by stipulation, thus leaving for our consideration those numbered 3 to 7, 11 to 17, 30, and 32 affecting 1920 income, as follows:

3. The reduction of operating costs by $84,983.54 representing the amount thereof charged to additions and betterments as the cost of transporting materials used in new construction.

4. The refusal of the Commissioner to permit petitioner to consolidate its income and invested capital with that of American Refrigerator Transit Company, an affiliated corporation.

5. The refusal of the Commissioner to allow as a deduction the amount of $8,736.27 representing payment of an assessment made by the Association of Railway Executives.

6. The refusal to allow a deduction of an aliquot part of discounts suffered on the sale of securities prior to 1917, said securities being outstanding and not matured in the taxable year. The petition states the amount claimed as $71,351.68, while in the brief of petitioner the amount claimed is $51,230.72.

7. The refusal to allow as deductions amounts paid to Railroad Young Men's Christian Associations at various points on petitioner's lines. The petition claims $19,349.41 as a deduction but in its brief petitioner states that $250 of such amount is no longer claimed.

11. The addition to taxable income of $383,857.37 representing an alleged underaccrual of compensation received from the Director General of Railroads for the use of the property of petitioner and its affiliated corporations during the period of Federal control.

12. The reduction of operating expenses by $3,336,811.29, the difference in the book value of materials and supplies turned over to the Director General on December 31, 1918, and those returned by the Director General on February 29, 1920. The Commissioner has conceded that a part of the materials and supplies was used in addition and betterment work and not charged to operating expenses. To the extent of $380,396.48 the Commissioner concedes error. The balance of the amount disallowed remains in controversy.

13. The addition to income of $161,498.30, as having been received by petitioner and its affiliated companies from the Director General to cover road property retired and not replaced during the period of Federal control. The Commissioner concedes that this amount should be reduced to $96,256.59.

14. The addition to taxable income of $38,925.90 as interest on quarterly balances payable by the Director General.

15. The reduction of operating expenses by $10,687,721.54 as an amount expended to rehabilitate the property of petitioner and its affiliated companies to the extent of the undermaintenance thereof during Federal control.

16. The addition to taxable income of $34,069.91 representing the difference between the payment of liabilities and assets not taken over in the reorganization of June, 1917, but since paid or collected by petitioner.

17. The refusal to allow as a deduction the amount of $700 paid to a hospital by the Western Coal & Mining Company, an affiliated corporation. The petitioner in its brief concedes that to the extent of $200 this disallowance was correct.

30. The failure to exclude from taxable income amounts finally certified by the Interstate Commerce Commission as due to petitioner and its affiliated companies under the provisions of section 209 of the Transportation Act, aggregating $13,560,394.62.

32. The failure to allow as a deduction from gross income $12,362,834.70 as uncompensated losses sustained by petitioner as a consequence of the taking of its properties by the United States and the operation thereof during Federal control and the condition in which said properties were returned to petitioner on March 1, 1920.

In his answer the respondent alleges that there should be added to the net income of petitioner $149,052.42 as interest accrued on the cost of additions and betterments to the properties of petitioner and its affiliated companies during the period of Federal control. Petitioner concedes that $21,058 of such amount should be added. This is referred to hereafter as issue No. 33.

FINDINGS OF FACT.

The petitioner is a Missouri corporation, incorporated March 5, 1917, with its principal office in St. Louis, Mo. During 1920 it owned or controlled all, or substantially all, of the capital stock of the following named corporations: Boonville, St. Louis & Southern Railway Company, Cairo & Thebes Railroad Company, Coal Belt Electric Railway Company, Fort Smith Suburban Railway Company, Iron Mountain Railroad Company of Memphis, Kansas-Missouri Elevator Company, Missouri Pacific Railroad Corporation in Nebraska, Natchez & Louisiana Railway Transfer Company, Natchez & Southern Railway Company, Pueblo Stock Yards Company, Union Railway Company, Western Coal & Mining Company, Arkansas Central Railroad Company, Little Rock Junction Railway Company. Either directly or through its affiliated and subsidiary companies above named the petitioner operated lines of railway in the States of Arkansas, Colorado, Illinois, Kansas, Louisiana, Missouri, Nebraska, Oklahoma, and Tennessee. The petitioner is subject to the act of Congress known as an Act to Regulate Commerce and Acts amendatory thereof and supplementary thereto, and keeps its accounts on the accrual basis, employing therefor the system of accounting prescribed by the Interstate Commerce Commission.

Issue No. 3. The accounting classification promulgated by the Interstate Commerce Commission, which was in effect during all of the year 1920, provides that the operating expense account, "Transportation for Investment - Cr.," shall include fair allowance representing the expense to the carrier of transporting, on transportation trains, men engaged in and material for use in capital construction; and that amounts credited to that account shall be concurrently charged to the appropriate property investment accounts.

In accordance with the foregoing provision, the petition charged to its property investment accounts and concurrently credited to the operating expense account, "Transportation for Investment - Cr.," the sum of $84,983.54 during the year 1920. The amount so charged was estimated.

In determining the taxable net income of the petitioner for the year 1920, the respondent refused to allow petitioner to deduct said amount of $84,983.54 as an operating expense of the year.

Issue No. 4. The findings of fact made by the Board in American Refrigerator Transit Co. v. Commissioner,14 B.T.A. 616">14 B.T.A. 616, are incorporated herein by reference as fully and to the same extent as if set forth herein in full.

The taxable net income of the American Refrigerator Transit Company for the year 1920 was $608,229.67 and the consolidated invested capital for the year 1920 of the petitioner and its affiliated subsidiaries, including the American Refrigerator Transit Company, was $172,912,667.60.

In determining the deficiency of the petitioner for the year 1920, the respondent did not include in the consolidated net income and consolidated invested capital of the petitioner the net income and invested capital of the American Refrigerator Transit Company.

Issue No. 5. The findings of fact made by the Board in Los Angeles & Salt Lake Railroad Co. v. Commissioner,18 B.T.A. 168">18 B.T.A. 168, so far as they relate to the organization and activities of the Association of Railway Executives, are incorporated herein by reference to the same extent as if set forth herein in full. The findings so incorporated are more fully identified as beginning with the sentence reading, "During the year 1920, and for a number of years prior thereto, there was an organization known as the Association of Railway Executives, which was an association of railroad corporations, through their chief executives, owning the greater part of the railroad mileage of the United States," and ending with the sentence reading, "It was believed by the managements of the railroads that such legislation, if adopted without knowledge and appreciation of the problems confronting the railroad corporations, might add greatly to the cost of operation and impair the power of the railroads to furnish adequate transportation service," omitting therefrom the statement that petitioner (in that case) was a member thereof, the amount of its contribution, and the treatment thereof on its books.

The petitioner was a member of said Association of Railway Executives. In 1920 petitioner paid $8,736.27 to said Association, representing its portion of the assessment levied by the Association. In determining the taxable net income of petitioner for 1920 the Commissioner disallowed a deduction of such amount.

Issue No. 6. The MissouriPacific Railway Company was a railroad corporation organized under the laws of the States of Missouri, Kansas, and Nebraska. The St. Louis, Iron Mountain & Southern Railway Company was a railroad corporation organized under the laws of the States of Missouri and Arkansas. The outstanding capital stock of the said St. Louis, Iron Mountain & Southern Railway Company consisted of 443,947 shares of common stock, of which 443,496 shares were owned in the years 1915, 1916, and 1917 by said The MissouriPacific Railway Company and 451 shares by other parties. Such corporations had outstanding certain equipment trust obligations and bonds described as follows:

Issue Equipment trusts

(1) Series 2 issued in the year 1911 by the MissouriPacific Railway Company.

(2) Series II issued in the year 1911 by the MissouriPacific Railway Company.

(3) Series V issued in the year 1913 by the St. Louis, Iron Mountain & Southern Railway Company.

(4) Series 3 issued in the year 1914 by the St. Louis, Iron Mountain & Southern Railway Company.

(5) Series 4 issued in the year 1914 by the St. Louis, Iron Mountain & Southern Railway Company.

Mortgage bonds

(6) River and Gulf Division first mortgage bonds issued in the years 1909, 1910, and 1912 by the St. Louis, Iron Mountain & Southern Railway Company.

In the years 1915, 1916, and 1917 a reorganization of said companies was pending, which was consummated in 1917. B. F. Bush, until then president of said The MissouriPacific Railway Company and also of said St. Louis, Iron Mountain and Southern Railway Company, was, on August 19, 1915, by decree of the United States District Court for the Eastern Division of the Eastern District of Missouri, appointed receiver of all the properties of said companies. Thereafter, foreclosure proceedings were instituted under certain mortgages issued by said companies (other than the mortgage listed above), and, pursuant to decrees rendered in said foreclosure proceedings, all of the properties of said companies were sold at public auction in 1917, and were purchased by parties representing a committee of reorganization managers representing the owners of outstanding securities of said companies, and were in turn conveyed, in 1917, by said purchasers to the petitioner. The petitioner thereby acquired, among other things, all of the property covered by the liens of the equipment trust certificates and mortgage listed above and took same subject to said liens, and has since paid the entire balance of such equipment trust certificates and all interest due on such bonds.

Incident to said reorganization all stockholders in said St. Louis, Iron Mountain & Southern Railway Company (other than said The MissouriPacific Railway Company) were given the option of surrendering their stock in said company and receiving, in return for each share of stock so surrendered, one share of preferred stock in said Missouri Pacific Railroad Company (petitioner herein), of the par value of one hundred dollars per share, and all holders of the outstanding capital stock of The MissouriPacific Railway Company, amounting to $82,839,500 (par value) were given the option of surrendering their stock in said company and receiving in exchange for each share so surrendered one share of common stock in said Missouri Pacific Railroad Company (petitioner herein), of the par value of one hundred dollars per share, and fifty dollars (par value) in General Mortgage Bonds of said Missouri Pacific Railroad Company (petitioner herein), provided, however, that any stockholder in said The Missouri Pacific Railroad Company availing himself of the option last mentioned should also pay to said reorganization managers the sum of fifty dollars in money with each share of stock of said The MissouriPacific Railway Company so exchanged.

The owners of all but 39 shares of the outstanding capital stock of said St. Louis, Iron Mountain & Southern Railway Company (other than the stock therein owned by The MissouriPacific Railway Company) and the owners of $81,678,000 (par value), or more than 98 per cent, of the outstanding capital stock of said The MissouriPacific Railway Company, availed themselves of the options above described and acquired stock in said Missouri Pacific Railroad Company (petitioner herein).

The authorized capital stock of said Missouri Pacific Railroad Company (petitioner herein) consists of $100,000,000 of preferred stock and $300,000,000 of common stock, in shares of $100 each. Of this there has been issued $82,839,500 in common stock and $71,800,100 in preferred stock. Of said common stock $81,678,000 has been issued to former stockholders in The MissouriPacific Railway Company and the balance, or $1,161,500, is held by the reorganization managers awaiting exercise, by holders of stock in said The MissouriPacific Railway Company, of the option for exchange above described.

Said $71,800,100 in preferred stock of The Missouri Pacific Railroad Company (petitioner herein) has been issued as follows:

To holders of $37,255,000 forty year, 4%, Gold Loan Bonds of The MissouriPacific Railway Company, declared due February 1, 1916, (in exchange for said bonds)	$37,255,000
To holders of $29,806,000 First and Refunding Mortgage 5% Bonds of The MissouriPacific Railway Company, declared due February 1, 1916, (in exchange for said bonds)	29,806,000
To holders of $650,000 Lexington Division First Mortgage 5% Bonds of The MissouriPacific Railway Company, due august 1, 1920, (in exchange for said bonds)	650,000
To holders of $520,000 First Mortgage 5% Bonds of The Leroy and Caney Valley Air Line Railroad Company, constituting a lien upon certain track owned and operated by The MissouriPacific Railway Company, due July 1, 1926, (in exchange for said bonds)	520,000
To holders of $1,024,000 First Mortgage 5% Bonds of The Kansas City Northwestern Railroad Company constituting a lien upon terminal properties in Kansas City, Kansas, and Leavenworth, Kansas, originally leased by The MissouriPacific Railway Company from The Kansas City Northwestern Railroad Company and purchased by the Missouri Pacific Railroad Company, said bonds being due January 1, 1933, (in exchange for said bonds)	1,024,000
To holders of $500,000 First Mortgage 5% Bonds of Boonville, St. Louis & Southern Railway Company (1,985 out of 2,000 shares of outstanding capital stock in which was owned by The MissouriPacific Railway Company and all of its property leased to The MissouriPacific Railway Company), due August 1, 1951, (in exchange for said bonds)	500,000
Set aside to cover claims of unsecured creditors of The MissouriPacific Railway Company and St. Louis, Iron Mountain & Southern Railway Company whose claims should be allowed in the receivership proceedings of said companies and who should avail themselves of the right to receive said preferred stock in satisfaction of their said claims in accordance with the decree of the United States District Court in said receivership proceedings	2,000,000
To individual holders of stock (other than The MissouriPacific Railway Company) in the St. Louis, Iron Mountain & Southern Railway Company	41,200
Held by Reorganization managers for account of individual holders of stock in said St. Louis, Iron Mountain & Southern Railway Company who have not yet presented their stock for exchange for said preferred stock of the Missouri Pacific Railroad Company	3,900
Total	71,800,100

Holders of said common stock and said preferred stock of the Missouri Pacific Railroad Company (petitioner herein) are entitled to the same voting powers - one vote for each share of stock, whether common or preferred.

The dates of sale and maturity of the equipment trust notes and mortgage bonds listed above, the amounts sold, and the discounts from par at which sold, were as follows:

Issue 1	Date of sale	Amount sold	Maturity	Discount
1	Nov. 1, 1911	$2,940,000	$147,000 semiannually on May
			1 and Nov. 1	$88,200.00
2	Nov. 1, 1911	2,900,000	$145,000 semiannually on May
			1 and Nov. 1	87,000.00
			12 semiannual payments 1914
			to 1919 of $22,000
3	June 1,1913	399,000	6 semiannual payments 1920
			to 1922 of $22,500	15,960.00
4	Mar. 2, 1914	472,000	$25,000 semiannually on Sept.
			2 and Mar. 2	3,310.67
5	Dec. 1, 1914	400,000	$20,000 semiannually on June
			1 and Dec. 1	32,000.00
	1909	1,052,000	1933	135,538.25
6	1910	1,407,000	1933	196,998.75
	1911	1,500,000	1933	300,000.00

The entire discount of each class of security was charged to profit and loss at the time the discount was suffered. But for income tax purposes, said discount was spread over the life of the security and a proportionate part thereof was charged against the net taxable income of The MissouriPacific Railway Company or the St. Louis, Iron Mountain & Southern Railway Company each year up to May 31, 1917.

The discount involved in this issue that had not been amortized prior to 1917 was not brought forward on the books of the Missouri Pacific Railroad Company (petitioner herein), and no part of such discount has ever been included in its income or profit and loss accounts as reported to the Interstate Commerce Commission, nor is such inclusion required by said Interstate Commerce Commission.

There was no change in the equipment trust certificates and mortgage bonds listed above as the result of the reorganization of said The MissouriPacific Railway Company and said St. Louis, Iron Mountain & Southern Railway Company, above described, other than their assumption by petitioner. The Missouri Pacific Railroad Company (petitioner herein) claimed a deduction of $51,230.72 in its income tax return for 1920, representing a portion of the discount upon said securities suffered by the said The MissouriPacific Railway Company and the said St. Louis, Iron Mountain & Southern Railway Company, which deduction was disallowed by the Commissioner. Said deduction, as claimed for the year 1920, has not been claimed or allowed as a deduction, in whole or in part, to petitioner or either of its said predecessor companies in their tax returns for any prior year.

Issue No. 7. During the last ten months of 1920 the petitioner made payments to Railroad Young Men's Christian Associations, as follows:

Horace, Kans	$1,237.50
Hoisington, Kans	3,474.00
Coffeyville, Kans	1,475.50
Poplar Bluff, Mo	1,468.50
Hoxie, Ark	2,476.00
Pueblo, Colo	500.00
McGehee, Ark	1,350.00
Little Rock, Ark	1,309.50
Bush, Ill	1,125.00
Texarkana, Ark	618.75
Ft. Scott, Kans	300.00
St. Louis, Mo	1,916.66
Du Po, Ill	1,350.00
Kansas City, Mo	500.00
Total	19,099.61

Said Young Men's Christian Associations conducted eating houses, rooming facilities and social and recreational facilities at the points mentioned, and all of them were used almost exclusively by the employees of petitioner, with the exception of the Railroad Y.M.C.A.'s at St. Louis, Mo., Kansas City, Mo., and Texarkana, Ark., which were used by the employees of petitioner and of other railroads. The points at which said associations were located were division points on petitioner's railroad, where its road employees lay over between runs and where numerous office, station and yard employees are located. The facilities offered by such Associations served to keep the employees at those points satisfied. Without such associations it would have been necessary for the petitioner to have maintained expensive facilities at those points other than those which it had. The Commissioner refused to allow the petitioner to deduct any part of said payments.

Issues Nos. 11, 12, 13, 14, 15, 32, 33. By proclamation dated December 26, 1917, the President of the United States (acting under the powers conferred on him by the Constitution and laws of the United States, the Joint Resolutions of the Senate and House of Representatives, bearing dates of April 6, and December 7, 1917, respectively) took possession and assumed control at 12 o'clock noon, December 28, 1917, of certain railroads and systems of transportation, including the railroad transportation systems of the petitioner and of certain affiliated companies named in a contract entered into between the petitioner and certain companies and the Director General of Railroads, dated February 28, 1920.

By proclamation of March 29, 1918, the President of the United States, acting under the authority granted to him by the Federal Control Act, and all other powers vested in him by law, authorized the Director General of Railroads to agree with the owners of railroads or systems of transportation upon the amounts to be paid to such owners for the assumption of control, use, maintenance, and operation of such properties, and for the return of such properties to their owners at the conclusion of Federal control.

Under date of February 28, 1920, an agreement was entered into between the Director General of Railroads, acting on behalf of the United States, and the petitioner and its subsidiaries, Arkansas Central Railroad Company, Coal Belt Electric Railway Company, Natchez & Louisiana Railway Transfer Company, Natchez & Southern Railway Company, and Union Railway Company, which recited the circumstances under which the United States had taken possession and assumed control of the railway systems of the companies named and provided the terms under which the companies were to be compensated. The precise terms of such agreement, where material, are set out hereafter. Substantially, the agreement provided that all amounts received by the Director General from operations prior to January 1, 1918, should be credited to the companies; that all operating expenses incurred prior to such date and paid by the Director General should be charged to the companies; that all expenditures made by the Director General for additions and betterments should be charged to the companies; that the Director General shall expend such sums for maintenance, repair, renewal, retirement and depreciation of the property as may be necessary in order that such property may be returned to the companies at the end of Federal control in substantially as good repair and in substantially as complete equipment as it was on January 1, 1918, the companies to be charged with any excess maintenance over normal, an accounting of the amounts due by or to any of the parties to be had at the end of each year and at the end of Federal control; that the companies should be compensated for any loss accruing to them by reason of any additions or betterments not made in connection with the maintenance, repairing, or renewing of the companies' property. The agreement provided for the payment of $14,312,343.81 as the annual compensation granted to the companies under section 1 of the Federal Control Act, subject to any adjustment in such amount thereafter made by the Interstate Commerce Commission as provided in the agreement, such compensation to be paid in equal installments on the last days of March, June, September, and December. The contract provided that the Director General should take over the properties of the companies therein described and all materials and supplies on hand at midnight, December 31, 1917, and at the end of Federal control should return such property, all uncollected accounts received by him from the companies, and also materials and supplies equal in quantity, quality and relative usefulness to the materials and supplies which he had taken over. To the extent that the Director General did not return such materials and supplies he was to account for them at the prices prevailing at the end of Federal control and to the extent that the companies received materials and supplies in excess of those delivered by them to the Director General they were to account for the same at prices prevailing at the end of Federal control, the balance to be adjusted in cash. The agreement provided for the payment of interest upon unpaid balances in the various accounts.

In accordance with the terms of the Act of Congress dated February 28, 1920, referred to as "Transportation Act, 1920," the President of the United States relinquished to the petitioner and its affiliated companies, as of February 29, 1920, the properties then comprising said railroads and systems of transportation.

Subsequent to the relinquishment of said properties, the petitioner, for itself and affiliated companies, filed a claim with the Director General setting out amounts appearing on their books as due to and from the Director General of Railroads and certain other amounts not on their books but claimed to be due from the Director General.

The claim of the petitioner for itself and affiliated companies, as finally presented to the Director General, may be summarized as follows:

	Due MissouriPacific Railroad Co.	Due United States Railroad Administration
Unpaid balances of Compensation	$8,976,314.44
Balances in Open Accounts		$8,681,971.15
Expenditures by the Railroad Administration for Additions and Betterments		5,660,604.79
Adjustment of Materials and Supplies taken over Jan. 1, 1918, and amount returned February 29, 1920	2,739,096.07
Equipment and Fixed Property retired during period of Federal Control	1,063,297.98
Balance in Account "Accrued Depreciation-Equipment"	2,387,005.84
Adjustment of Amount set up for Accrued Depreciation	394,681.93
Maintenance of property during Federal control	14,082,370.66
Value of Additions and Betterments Constructed for war purposes not now required	17,099.48
Amount of depreciation on equipment based on replacement values	2,127,709.35
Adjustment of Values on property retired based on replacement values	2,237,158.45
Adjustment of Interest on balances	1,600,804.59
Balance in Account - Leased rail and fixtures		67,599.28
Balance in Account - Salvage from A. & B. for war purposes		1,934.29
Restoration of Interchange track,-Lake Charles, La	353.00
Total	35,625,891.79	14,412,109.51
Balance due Missouri Pacific R.R. Co		21,213,782.28
	35,625,891.79	35,625,891.79

In 1921 conferences were held between officers of the petitioner and the Director General and his assistants, at which the companies were first offered $6,000,000 in full payment of all claims. This was refused. During the course of the further negotiations for settlement the offer of the Director General was raised, in increases of $500,000 each, to $8,500,000. The Director General offered to pay the latter sum and to leave for further negotiations adjustment of the amount due on account of materials and supplies. Such offers were all rejected and were subsequently increased to $9,000,000, such sum to represent full payment of all claims. This latter offer was accepted by the officers of the petitioner subject to the approval of the directors and was subsequently, in 1921, approved by the directors of the respective companies and formal agreements settling all controversies upon such basis were executed. The settlement represented a compromise of all claims, there being no agreement as to the basis upon which the separate items of the claim would be settled. Some of the amounts claimed, including principally those claimed for "unpaid balances of compensation, " "balances in open accounts," and "expenditures by the Railroad Administration for additions and betterments," were never in controversy, the parties being in agreement upon such items.

The Commissioner of Internal Revenue determined that the payment of $9,000,000 made to the petitioner and its subsidiaries was made up as follows:

	Due petitioner and subsidiaries	Due the Government
Agreed compensation	$30,511.967.25
Less advances		$21,535,652.81
Rental interest on completed additions and betterments	149,052.42
Balances on various open accounts		8,681,971.15
Road property and equipment retired, not replaced	796,734.48
Equipment and road property retired, additional	96,256.59
Restoration of track, Lake Charles	353.00
Interest other than rental	59,821.59
Expenditures by Director General for additions and betterments		5,660,604.79
Additions and betterments constructed for war purposes, less salvage	6,723.16
Leased rails and fixtures		67,599.28
Depreciation of equipment	2,637,198.00
Maintenance:
Way and structures	4,532,809.00
Equipment	6,154,912.54
Net balance due to corporation		9,000,000.00
Total	44,945,828.03	44,945,828.03

Issue No. 11. In compliance with the requirements of section 1 of the Federal Control Act the Interstate Commerce Commission tentatively certified to the President of the United States that the average railway operating income of the petitioner and certain affiliated companies for the test period was $14,312,435.01.

The petitioner reported as taxable income for the years 1918, 1919, and 1920, the following amounts:

1918	$14,312,435.01
1919	14,312,256.16
1920	1,927,655.30

The tentative certificate referred to was superseded by a final certificate issued in 1920 which set forth that the average railway operating income of the petitioner and certain affiliated companies for the test period was $14,100,227.29, which amount was accepted as the annual compensation payable by the Director General of Railroads for the use and occupancy of the properties of the petitioner and certain affiliated companies.

In determining the consolidated taxable net income of the petitioner for the year 1920, the respondent included therein 60/366 of $14,100,227.29, or $2,311,512.67, as being that portion of the agreed annual compensation applicable to the period from January 1 to February 29, 1920. The petitioner having included in the reported taxable income of the year 1920 the sum of $1,927,655.20 as compensation received from the Director General of Railroads, the Commissioner increased the reported taxable income of said year by adding thereto the sum of $383,857.37, the difference between the said $2,311,512.67 and the said $1,927,655.30.

The petitioner protests this adjustment, claiming that said compensation for January and February, 1920, should be reduced by the amount of compensation reported as income for the years 1918 and 1919 which was in excess of the amount of annual compensation finally determined.

Issue No. 12. Following the termination of Federal control, and on or about March 1, 1920, the Director General of Railroads delivered to the petitioner and certain of its affiliated companies certain material and supplies to offset the material and supplies which he received from the petitioner and certain of its affiliated companies on or about January 1, 1918.

The actual cost to the petitioner and certain of its affiliated companies of the material and supplies delivered to the Director General of Railroads, on or about January 1, 1918, was $7,981,636.33, at which figure the petitioner and certain of its affiliated companies charged them on their books of account to the Director General of Railroads, who recorded them on his books of account at the same figures. The actual cost to the Director General of Railroads of the aforementioned material and supplies delivered to the petitioner and certain of its affiliated companies on or about March 1, 1920, was $11,318,447.62, at which figure the petitioner and certain of its affiliated companies accepted and recorded them on their books of account.

During the period of ten months ending December 31, 1920, the petitioner and certain of its affiliated companies used and consumed the material and supplies received from the Director General of Railroads, and charged out to operating expenses and to capital (Additions and Betterments) said material and supplies at the recorded value thereof, namely, $11,318,447.62. Of this $11,318,447.62, the excess of $3,356,811.29 over $7,981,636.33 was so charged out to expenses and to capital (Additions and Betterments) as follows:

To operating expenses	$2,956,414.81
To capital (Additions and Betterments)	580,396.46

The respondent, in his determination of the consolidated taxable net income of the petitioner for the year 1920, disallowed, as a part of the claimed expense deduction, the sum of $3,336,811.29 (the difference between the said $11,318,447.62 and the said $7,981,636.33), as representing the excess amount over cost to petitioner and certain of its affiliated companies of material and supplies consumed in the operation of the business of petitioner and certain of its affiliated companies during the year 1920, and claimed as an expense of such operation.

The respondent concedes that the adjustment of $3,336,811.29 was erroneous to the extent of said $380,396.48, the amount charged to additions and betterments.

The agreement dated February 28, 1920, provided under section 2(b) that the Director General take over "all material and supplies on hand at midnight on December 31, 1917." It further provided in section 9(b) as follows:

At the end of Federal control the Director General shall return to the companies * * * materials and supplies equal in quantity, quality and relative usefulness to that of the materials and supplies which he received, and to the extent that the Director General does not return such materials and supplies he shall account for the same at prices prevailing at the end of Federal control. To the extent that the companies receive materials and supplies in excess of those delivered by them to the Director General and they shall account for the same at prices prevailing at the end of Federal control, and the balance shall be adjusted in cash.

The Commissioner determined that in the settlement effected between the petitioner and the Director General neither party was charged or credited with any amount for adjustment of such materials and supplies.

Issue No. 14. In determining the consolidated taxable net income of the petitioner for the year 1920, the respondent increased the amount reported by adding thereto the sum of $38,925.90 representing interest accrued during the year 1920, and due from the Director General of Railroads, in accordance with section 4(a) of the contract dated February 28, 1920, which provided as follows:

SEC. 4(a) All amounts received by the Director General under paragraph (c) of section 2 hereof and all other amounts whether received from the Companies in cash or collected or realized upon by him from current operating assets belonging to the Companies or arising from railway or water line operations prior to midnight of December 31, 1917, shall be credited by him to the Companies; and the Director General shall, to the extent of the cash so received or realized, pay and charge to the Companies all expenses arising out of railway or water line operations prior to January 1, 1918, including reparation claims, and, unless objected to by the Company, may pay and charge to the Companies any of such expenses, including reparation claims, in excess of the cash so received or realized. Balances of the above accounts shall be struck quarterly on the last days of March, June, September, and December of each year, and the cash balance found on such adjustments to be due either party shall be then payable and, if not paid, shall bear interest at the rate of 6 per cent per annum, unless the parties shall agree upon a different rate; except that the rate of interest on any portion of a balance found due to the Companies which is derived from cash in bank to the credit of the Companies on interest, shall be adjusted in each case independently of this contract as the parties may agree.

Paragraph (c) of section 2, referred to above, provided for the collection by the Director General of balances due the companies prior to Federal control.

Issue No. 15. The contract dated December 28, 1920, provided in paragraphs (a), (b), (c), and (d) of section 5 thereof as follows:

SEC. 5(a) During the period of Federal control the Director General shall, annually, as nearly as practicable, expend and charge to railway or water line operating expenses, either in payments for labor and materials or by payments into funds, such sums for the maintenance, repair, renewal, retirement, and depreciation of the property described in paragraph (a) of section 2 hereof as may be requisite in order that such property may be returned to the Companies at the end of Federal control in substantially as good repair and in substantially as complete equipment as it was on January 1, 1918: Provided, however, That the annual expenditure and charges for such purposes during the period of Federal control on such property and the fair distribution thereof over the same, or the payment into funds, of an amount equal in the aggregate (subject to the adjustment provided in paragraph (c) and to the provisions of paragraph (e) of this section) to the average annual expenditure and charges for such purposes included under the accounting rules of the Commission in railway or water line operating expenses during the test period, less the cost of fire and marine insurance included therein, shall be taken as a full compliance with the foregoing covenant.

(b) The Director General may expend such sums, if any, in addition to those expended and charged under paragraph (a) of this section (subject to the adjustments provided in paragraph (c) of this section) as may be requisite for the safe operation of the property described in paragraph (a) of section 2 hereof, assuming a use similar to the use during the test period and not substantially enhancing the cost of maintenance over the normal standard of maintenance of railroad and water line properties of like character and business during said period; and the amount, if any, of such excess expenditures during Federal control shall be made good by the Companies as provided in paragraph (b) of section 7 hereof.

(c) In comparing the amounts expended and charged under the provisions of paragraphs (a) and (b) of this section with the amounts expended and charged during the test period, due allowance shall be made for any difference that may exist between the cost of labor and materials and between the amount of property taken over and the average for the test period, and, as to paragraph (a), for any difference in use between that of the test period and during Federal control which in the opinion of the Commission is substantial enough to be considered, so that the result shall be, as nearly as practical, the same relative amount, character, and durability of physical reparation.

(d) At the request of the Director General or the Company there shall be an accounting of the amounts due by or to any of the parties under paragraphs (a) and (b) of this section at the end of each year of Federal control and at the end of Federal control.

Pursuant to the Terms of said contract dated February 28, 1920, the petitioner, for itself and certain of its affiliated companies, claimed, as due from the Director General of Railroads, the sum of $14,082,379.66 for undermaintenance during the period of Federal control.

For the period from March 1 to December 31, 1920, the Missouri Pacific Railroad Company expended $19,836,556.05 for maintenance of way and structures and $23,772,797.62 for maintenance of equipment. Its subsidiaries expended in the same period $276,241.39 for maintenance of way and structures and $131,574.53 for maintenance of equipment.

In determining the consolidated taxable net income of the petitioner for the year 1920, the respondent reduced the amount of operating expenses claimed as a deduction by disallowing an amount of $10,687,721.54, and stated his reason for such disallowance as follows:

(p) and (q). The expenditures made subsequent to Federal control to rehabilitate your property to the extent of undermaintenance of way and structures and equipment during Federal control, for which you were allowed payment in final settlement with the Director General of Railroads, is held to be an unallowable deduction from gross income. This transaction falls within the provisions of Articles 49, and 50, Regulations 45, with respect to the compulsory conversion of property and also Section 214(a) 12 and Section 234(a) 14 of the Revenue Act of 1921.

The amounts represent allowance by the Director General in final settlement as follows:

(p) Undermaintenance of way and structures	$4,532,809.00
(q) Undermaintenance of equipment	5,154,912.54

The amounts expended by the petitioner and its subsidiaries for maintenance of way and structures and maintenance of equipment from March 1 to December 31, 1920, were substantially equal to the average amounts expended for the same purpose in the ten preceding years, after adjusting such expenditures to reflect the differences existing during such years in the cost of labor and material. The condition of way and structures and of equipment was no better on December 31, 1920, than on March 1, 1920. The properties of the petitioner and its subsidiaries were not in as good a condition of maintenance when returned to them on February 28, 1920, as when taken over by the Director General. No part of the undermaintenance of the Federal control period was made good during the period from March 1 to December 31, 1920.

Issue No. 16. The Commissioner included as income to the petitioner the following:

Collection of bills debited on books of predecessor and not transferred to books of new company	$35,941.77
Proceeds of sale of property formerly owned by C. D. Williams, Superintendent, Kansas-Missouri Elevator Company	3,074.83
Proceeds of sale of various town lots	4,400.82
Total	43,417.42

The first of these items represents accounts outstanding upon the books of the predecessor companies. The collection of such accounts was doubtful. There were also liabilities of the same nature. They were not carried into the books of the reorganized Missouri Pacific Railroad Company. Subsequent to the reorganization some of the assets were collected and some of the liabilities paid. Such collections and payments were credited or debited to an account known as "Assets and Liabilities Not Appraised January 1, 1917," and at the end of each year that account was adjusted by a debit or credit entry to cost of roads purchased. The Commissioner held that some of the amounts so collected were taxable and that others were nontaxable. He also held that some of the liabilities paid were deductible and others nondeductible. By reason of the collection of such items in 1920 the Commissioner added to income the items totaling $43,417.42 listed above and allowed $9,347.51 as deductions therefrom.

Issue No. 17. In the return of consolidated taxable net income of 1920, filed by the petitioner, a deduction of $700 was claimed for contributions made by its affiliated company, Western Coal & Mining Company. The claimed deduction of $700 was disallowed by the respondent in his determination of consolidated taxable net income of the year 1920. The petitioner withdraws this issue to the extent of $200, leaving $500 in controversy.

The properties of the Western Coal & Mining Company are located in the Pittsburg filed, in which there is but one hospital, namely, the Mt. Carmel Hospital. The Kansas Workmen's Compensation Act requires employers to provide hospital care for their injured employees, and, in conformity therewith, the injured employees of the Western Coal & Mining Company are placed in the Mt. Carmel Hospital for medical attention. During the year 1920 the Western Coal & Mining Company contributed $500 to the Mt. Carmel Hospital to aid it in the purchase of an X-ray machine, which contribution was disallowed by the respondent on the ground that it did not represent an ordinary and necessary business expense of the petitioner.

The Mt. Carmel Hospital facilities are available to the general public.

Issue No. 33. During the period of Federal control the Director General of Railroads made additions and betterments to the roadway and structures and to the equipment of the petitioner and such of its affiliated companies as were under Federal control for which compensation was provided by section 4 of the Federal Control Act and by section 7(d) of the contract of February 28, 1920, which provides as follows:

(d) Upon the cost of additions and betterments, less retirements in connection therewith, and upon the cost of road extensions, made to the property of the Companies during Federal control, the Director General shall, from the completion of the work, pay the Company a reasonable rate of interest, to be fixed by him on each occasion. In fixing such rate or rates he may take into account not merely the value of money but all pertinent facts and circumstances, whether the money used was derived from loans or otherwise, provided that to the extent that the money is advanced by the Director General or is obtained by the Companies from loans or from the proceeds of securities the rate or rates shall be the same as that charged by the Director General for loans to the Companies or to other companies of similar credit.

The rate of compensation for the use of such additions and betterments was finally determined by the Director General of Railroads in 1920 at which time he determined as reasonable compensation the rate of 4 per cent on the cost of completed additions and betterments to way and structures and the rate of 6 per cent on the cost of completed additions and betterments to equipment. Rental interest computed, at the rates so determined, upon additions and betterments completed during the year 1918, from the dates of completion thereof to the end of 1918, is $28,587.30.

Rental interest computed for the year 1919, at the rates so determined, upon additions and betterments made during the year 1918, and upon additions and betterments completed during year 1919, from the date of completion thereof to the end of the year 1919, is $99,407.12.

Rental interest computed for the months of January and February, 1920, at the rates so determined, upon additions and betterments completed during the years 1918 and 1919, and upon additions and betterments completed during said months of January and February, 1920, from the date of completion thereof to February 29, 1920, is $21,058.

Petitioner received the aforesaid rental interest aggregating $149,052.42.

The petitioner included no part of such rental interest as income in its tax returns for 1918, 1919, or 1920. It concedes that $21,058 should be included as income for 1920. The respondent in his answer alleges that error was committed in failing to include the entire amount of $149,052.42 in income for 1920.

Issue No. 30. The Missouri Pacific Railroad Company, Union Railway Company, Arkansas Central Railway Company, Coal Belt Electric Railway Company, and Natchez & Southern Railway Company accepted all of the provisions of section 209 of the Transportation Act, 1920.

The aforementioned companies filed their claims in accordance with the provisions of said act and received in settlement of said claims the amounts shown below:

The Missouri Pacific Railroad Company	$13,243,448.75
Union Railway Company	285,545.06
Arkansas Central Railway Company	23,578.31
Coal Belt Electric Railway Company	17,024.11
Natchez & Southern Railway Company	10,998.41
Total	13,560.394.62

The claims were not settled until some time after December 31, 1921.

The respondent in his determination of the petitioner's consolidated taxable net income for the year 1920, included in said income the said $13,560,394.62.

OPINION.

PHILLIPS: The petition in this proceeding, as amended, raises 32 issues, each of which was numbered. The answer raised an issue which has been numbered 33. So far as seemed possible the facts have been set out under each numbered issue, but in several instances the same facts affect two or more issues. In such cases the facts are included under the earlier number and not repeated. We discuss the issues in the order in which they are numbered, except that all issues arising out of the Federal control settlement and grouped.

Under issue No. 3 the petitioner claims that the Commissioner committed error in reducing its deduction for operating expenses by $84,985.54. This is an amount which was set up on its books of account as representing the cost of transporting men and materials used in connection with betterments and improvements chargeable to capital account. The rate charged is a matter of estimate, but subject to control by the Interstate Commerce Commission. This issue was raised and fully discussed by the Board in Great Northern Railway Co.,8 B.T.A. 225">8 B.T.A. 225, and by the Circuit Court of Appeals for the Eighth Circuit in Great Northern Railway Co. v. Commissioner, 40 Fed.(2d) 272; 282 U.S. 855">282 U.S. 855. The case made by this petitioner is no better than that made in the case cited and on authority of that decision the action of the Commissioner in respect of this issue is sustained.

Issue No. 4 involves the question as to whether petitioner was affiliated with American Refrigerator Transit Company during the year 1920, and entitled to include the income and invested capital of that corporation in a consolidated return under section 240 of the Revenue Act of 1918. This same question was before us upon petitioner filed by American Refrigerator Transit Company, Docket No. 19019, in which proceeding the petitioner herein was permitted to intervene. There it was held that the two corporations were affiliated. American Refrigerator Transit Co.,14 B.T.A. 616">14 B.T.A. 616. In the present proceeding the parties have stipulated into the evidence a transcript of the evidence introduced in that proceeding. We have incorporated into our findings in this proceeding the findings made in the prior proceeding. Since both the parties now before us were parties in the case mentioned, we consider our decision there as binding on them.

Issue No. 5, involving the right of petitioner to deduct payments made to the Association of Railway Executives, is presented in a similar manner. The evidence on this point consists of the testimony of a witness as given in a prior proceeding and cross-examination of the same witness in a later proceeding, all incorporated into the record here by stipulating a transcript of such testimony. The cross-examination adds nothing to the record first made. We have incorporated as our findings those made in such prior proceeding (Los Angeles & Salt Lake Railroad Co.,18 B.T.A. 168">18 B.T.A. 168) upon the same testimony and upon authority of our decision in that case hold that the petitioner is entitled to deduct as an expense the amount contributed to the Association.

The sixth issue raises the question of the right of petitioner to deduct annually a part of the discount at which bonds had been issued by predecessor corporations, secured by property which was acquired by petitioner upon reorganization. Payment of such bonds was assumed by the petitioner. The respondent relies upon our decision in Western Maryland Railway Co.,12 B.T.A. 889">12 B.T.A. 889, while the petitioner relies upon the decision of the Circuit Court of the Fifth Circuit reversing that decision, Western Maryland Railway Co. v. Commissioner, 36 Fed.(2d) 695.

It is conceded that the obligations in question, consisting in part of equipment trust notes and in part of mortgage bonds, were sold at a discount and that the corporations issuing such bonds were entitled to deduct annually an aliquot part of such discount in computing their income for income tax purposes. Chicago, Rock Island & Pacific Railway Co.,13 B.T.A. 988">13 B.T.A. 988; Western Maryland Railway Co. v. Commissioner, supra. The petitioner claims that since it succeeded to the properties and obligations of the companies which issued the bonds, it may deduct the same amount which those companies might have deducted, while the respondent contends that so far as this petitioner is concerned it assumed payment of the bonds in full as a part of the terms under which it acquired the properties of the predecessor companies; that presumably it received full value for its assumption of such obligations and that it suffered no loss or gain by reason of bonds of the predecessor companies issued at a discount or at a premium.

It will be noted that in the present case over 40 per cent of the stock of the petitioner was issued to those who were not stockholders of the predecessor companies but bondholders or creditors. The reorganization involved a very substantial shifting of interests and under the decision of the Supreme Court in Marr v. United States,268 U.S. 536">268 U.S. 536, it would appear that for tax purposes, as well as for other purposes, regard must be had for the fact that petitioner is a new entity, separate and distinct from its predecessors, although succeeding to their properties and obligations.

The Circuit Court of Appeals in its decision laid some stress upon the fact that in that case there was, among the assets shown by the books of the predecessor, the amount set up as bond discount; that the Interstate Commerce Commission required the unextinguished discount to be carried on the balance sheet of the company and be amortized by a charge against income for the remaining life of the bonds; and that such deduction was to be allowed as a basis for ratemaking and for determining the rights of the Government under the recapture clause of the Transportation Act. In the present case it appears that the discount was charged off immediately upon sale of the bonds and was not carried upon the books of the company. This treatment of this item was likewise in accordance with the regulations of the Interstate Commerce Commission, wherefrom it would appear that the Commission permits the item of discount to be either charged off immediately or over the life of the bonds. Here the first alternative was adopted for the purpose of accounting to the Interstate Commerce Commission and the petitioner is without the advantage, if any, enjoyed by the Western Maryland Railway Company by reason of its method of accounting for this item.

By reason of the large amount of stock issued by the petitioner to those who were not stockholders in the predecessor company and because of its system of accounting, the petitioner appears to be in a less favorable position to claim the deduction here involved than was the Western Maryland Railway Company. Having in mind that appeals from our decisions lie to eleven Courts of Appeal and that one of the judges of the Court dissented in Western Maryland Railway Co. v. Commissioner, supra, and having also in mind that the grounds advanced in the prevailing opinion in that case are substantially the same as were rejected by the Supreme Court in Marr v. United States, supra, we respectfully adhere to the decision reached by us in Western Maryland Railway Co., supra. The action of the Commissioner in refusing to allow any deduction for amortization of discount upon bonds issued by the preceding owner of the property now owned by petitioner is approved.

The seventh issue raises the question of the right of petitioner to deduct, as a part of its ordinary and necessary expenses, payments made to railroad Young Men's Christian Associations maintaining their organizations at division points of the petitioner's railroad and furnishing its employees with eating and rooming facilities and social and recreational activities not otherwise available. The testimony is to the effect that the officers of the petitioner considered some such facilities to be necessary at division points, that they served as a means of keeping local employees satisfied at those points, and that if it had not been for the payments made by the petitioners to such Y.M.C.A.'s it would have been necessary for it to have maintained similar facilities. In like circumstances we held that such payments were a part of the ordinary and necessary expenses of operating the railroad in Indiana Harbor Belt Railroad Co.,16 B.T.A. 279">16 B.T.A. 279, and Terminal Railroad Association of St. Louis,17 B.T.A. 1135">17 B.T.A. 1135. The action of the Commissioner in refusing to allow such deductions is reversed.

Next we consider the questions which arise out of the settlement made by the Director General of Railroads for the period of Federal control. Pursuant to law, the President of the United States, acting through the Director General, took possession and assumed control of the railroads and transportation facilities of the petitioner and its affiliated companies on December 28, 1917, although for purposes of economy it was subsequently agreed that settlement should be made as of midnight December 31, 1917. By an act known as "The Federal Control Act," approved March 21, 1918 (40 Stat. 451), Congress provided that the President be authorized to enter into agreements for the payment of just compensation for the use of the properties taken over, such payments to be made from time to time in reasonable installments. The act also provided that such agreements make provision for maintenance, repair, renewals and depreciation of the property at the expense of the Director General, and for the reimbursement of the United States for the cost of additions and betterments not properly chargeable to the United States, as well as many other details not here material. On February 28, 1920, the petitioner and its subsidiaries entered into such an agreement with the Director General, acting on behalf of the President. On March 1, 1920, the railroad properties were surrendered and turned back to their owners. Thereafter negotiations were entered upon to settle the accounts between the petitioner and its affiliated companies and the Director General. The petitioner filed its claim showing an amount of $21,213,782.28 to be due it. Included in such claim were several large items concerning which there was no dispute between the parties, and other large items upon which the parties were in disagreement. The undisputed testimony is that, while in the early negotiations there was discussion of the various items making up the claim, there was no attempt to settle the claims item by item. The negotiations, starting with an offer of $6,000,000 to be paid by the Director General, resulted in a settlement of all claims upon the basis of a payment of $9,000,000 to the petitioner.

For our purpose the items which went to make up the sum total of the settlement are divisible into three classes: (1) those which are clearly income; (2) those which are clearly of a capital nature and which do not affect the computation of the taxable income; and (3) those which involve both capital and income items. In the first class are the unpaid balances due upon account of the agreed compensation for the use of the properties, adjustment of interest upon balances, and the so-called rental interest on completed additions and betterments. In the second class are the balances due upon open accounts, and the expenditures made by the Director General for additions and betterments. In the third class fall such items as road property and equipment retired, adjustments upon account of materials and supplies taken over and either not returned in kind or returned in an excessive amount, and the very substantial claim for undermaintenance of the properties.

Since the lump-sum settlement reflected both items of income and items of capital, it seems necessary that it be broken down in some manner for the purpose of determining what income the companies received or what losses they sustained. It is manifest that the situation would not be met by requiring the amount paid by the Director General to be returned as income or permitting any amount paid by the companies to be deducted as a loss. It well might be the settlement would result in a payment to the Director General because of the expenses of additions made to the railroad property in an amount greater than the agreed compensation, or because of advances made to the companies or bonded indebtedness paid on their account. On the other hand, there might be a large sum due the companies by reason of the retiring and scrapping of portions of their property. We see no escape from the conclusion that some means must be adopted to determine what effect the settlement has upon income.

The first difficulty comes when the attempt is made to put the principle into practice. The Commissioner has been under the necessity of making the allocation in auditing the income tax returns of the railroads. It has appeared in similar cases which we have previously had before us, as it did in this case, that after the settlement was reached between the parties the Director General had placed upon his books an allocation of the settlement to the various items of the claim. This was done without consulting with the railroads and for several years they were denied any information as to the allocation made. In such previous cases, as in this case, it has appeared that the Commissioner has followed the break-down made by the Director General and entered upon his books. In Terminal Railroad of St. Louis, supra, the petitioners urged that since the entries upon the books of the Director General were made ex parte and represented no more than the opinion of the Director General and his staff as to a proper allocation, they were not binding upon the railway and therefore might not be received in evidence to show the basis of the settlement. There the contention of the petitioner was sustained and the petitioner permitted to show by evidence what would be a proper allocation. A like contention is made here and is also sustained. There is, however, a presumption that the adjustments made by the Commissioner in determining the income of the petitioner are correct, and this presumption is not overcome by showing that the information upon which it was based was an ex parte statement not binding upon the taxpayer. The taxpayer may overcome the presumption by proof, but to the extent that the presumption is not overcome the determination of the Commissioner must be accepted. The Commissioner has determined that the settlement made in 1921 should be allocated as follows:

	Due petitioner and subsidiaries	Due Government
Agreed compensation	$30,511,967.25
Less advances		$21,535,652.81
Rental interest on completed additions and betterments	149,052.42
Balances on various open accounts		8,681.971.15
Road property and equipment retired, not replaced	796,734.48
Equipment and road property, additional	96,256.59
Restoration of track, Lake Charles	59,821.59
Expenditures by Director General for additions and betterments		5,660,604.79
Additions and betterments constructed for war purposes, less salvage	6,723.16
Leased rails and fixtures		67,599.28
Depreciation of equipment	2,637,198.00
Maintenance:
Way and structures	4,532,809.00
Equipment	6,154,912.54
Net balance due to corporation		9,000,000.00
Total	44,945,828.03	44,945,828.03

The record discloses that there were no differences of opinion between the Director General and the companies with respect to such items as the agreed compensation, the advances on account thereof, balances in open accounts, and expenditures made by the Director General for additions and betterments. The adjustment of interest on balances was a mathematical computation which could be made after an agreement had been reached on the other items.

The principal differences between the parties were with respect to the adjustment to be made upon account of materials and supplies and for undermaintenance of the properties. There was also the question whether the carriers were entitled to depreciation on equipment based on replacement values, and to be recompensed at replacement cost for property retired.

The evidence submitted by the petitioner does not establish that the allocation made by the Commissioner of the lump sum paid in settlement is not proper; indeed, his evidence tends to support it as reasonable.

Having arrived at some basis on which the lump sum settlement may be apportioned, it becomes necessary to consider the various items and determine how each affects the income and in what year it is to be reflected in the computation of taxable income.

The issue numbered 11 raises a question as to the year in which compensation received from the Director General for use of the property of petitioner and its affiliated corporations should be returned as income. This property was taken over by the Director General on January 1, 1918. By the terms of the Federal Control Act, the President was authorized to enter into agreements with such roads for the payment, as compensation for their use, of an annual sum not exceeding the average annual railway operating income for the three years ended June 30, 1917. The act provided for the ascertainment of such income by the Interstate Commerce Commission, and the method to be used in certain cases. Sections 2 and 3 made provision for compensation where such an agreement was not made.

It appears that in the instant case the Interstate Commerce Commission gave a certificate which tentatively fixed the annual income during the test period at $14,312,435.01, and substantially this amount was returned as income by the companies in 1918 and 1919. Subsequently, in 1920, the tentative certificate was superseded by a final certificate fixing the annual income for the test period at $14,100,227.29. The Commissioner computed the income for 1920 from this source upon the basis of the amount fixed by the final certificate. The petitioner contends that such amount should be reduced by the excess amounts returned by it as income in 1918 and 1919. This is substantially the same question which was involved in Illinois Terminal Co.,5 B.T.A. 15">5 B.T.A. 15; New Orleans, Texas & MexicoRy. Co.,6 B.T.A. 436">6 B.T.A. 436; Texas & Pacific Railway Co.,9 B.T.A. 365">9 B.T.A. 365; Kansas City Southern Railway Co.,16 B.T.A. 665">16 B.T.A. 665; and Old Dominion Steamship Co.,16 B.T.A. 264">16 B.T.A. 264; affd. 47 Fed.(2d) 148. In those cases it was pointed out that the railroads were entitled to compensation for the use of their property, that such compensation was earned and accrued in the years during which the properties were used by the Federal Government, and, on the accrual basis of reporting income, was income in those years. The action of the Commissioner in computing income in this manner is affirmed.

Issue 12. The petitioner complains of the action of the respondent in allowing it to deduct only $7,981,636.33 as the cost of materials and supplies consumed during 1920 in the maintenance of its properties. The evidence discloses that on January 1, 1918, the Director General took over the materials and supplies then on hand. These had cost the petitioner $7,981,636.33. At the close of the period of Federal control the Director General returned to the petitioner materials and supplies which the petitioner entered upon its books at $11,318,447.62. It is stipulated that these materials and supplies were used by the petitioner during the taxable year and the single question involved is whether petitioner may deduct the larger amount.

The agreement provided that at the close of Federal control the Director General should return materials and supplies equal in quantity, quality and relative usefulness to those taken over. It has been held that where the Director General returned a smaller quantity than he took over and paid for the shortage, there was taxable gain measured by the difference between the cost of the materials and supplies not returned and the amount paid therefor to the company. Lehigh & Hudson River Railway Co.,13 B.T.A. 1154">13 B.T.A. 1154. It has also been held that to the extent that the materials and supplies returned equal in quantity, quality and relative usefulness those taken over, there is no taxable gain. Indiana Harbor Belt Railroad,16 B.T.A. 279">16 B.T.A. 279. This is so regardless of the fact that, because of price changes, the property returned has a greater monetary value than the equivalent property had when taken over. The property returned merely takes the place of the property previously owned. It follows as a corollary that the cost of the property returned is the cost of the property which it replaces.

The Commissioner has determined that the materials and supplies returned at the end of the period of Federal control were equal in quantity, quality and relative usefulness to those delivered to the Director General at the close of 1917, and that in the final settlement the petitioner was neither charged nor credited with any amount upon account of either a failure to return an amount equal to those taken over or because of an excess amount returned. The petitioner takes the position that the materials and supplies returned did not equal those turned over. Both parties agreed that the material and supplies returned did not exceed those surrendered, and the proof is sufficient to establish this as a fact. We therefore have the situation where the petitioner delivers to the Director General materials and supplies which cost it $7,981,636.33, received in lieu thereof materials and supplies which it entered upon its books at a value of $11,318,447.62, which it used during the taxable year and upon account of the use of which it seeks a deduction of the increased amount. Since the materials and supplies returned did not exceed those taken over and since there is no evidence to indicate that the petitioner paid anything in the final settlement because of any excess of materials and supplies turned over, it seems clear that the cost to the petitioner of the materials and supplies used during 1920 was $7,981,636.33. It seems equally clear that the petitioner is entitled to deduct only the cost of such materials and supplies, not the increased value at which they were placed upon its books. The petitioner is in no better position than it would have been had it continued to own the materials and supplies which were taken over by the Director General and have increased their value upon its books. The determination made by the Commissioner with respect to this item is approved in principle. Terminal Railroad Co., supra. It has been conceded, however, that a part of such materials and supplies were not used by the petitioner in maintenance or repair work, but upon new construction and improvements. The materials and supplies so used were not charged as a part of the deduction claimed by the petitioner for maintenance and repairs and to the extent that the Commissioner assumed that they had been charged as an expense at the increased value, he confesser error. The amount by which he had understated the deduction to which the petitioner is entitled because of this error is conceded to be $380,396.48.

Issue No. 13 involves the addition to income for 1920 to $161,498.30 as an amount received by the petitioner and its affiliated companies from the Director General upon account of property retired and not replaced during the period of Federal control. The Commissioner concedes that this amount should be reduced to $96,256.59. There is some discrepancy with respect to this item between the statements appearing in the body of the notice of deficiency and in Schedule A attached thereto, which schedule sets out the Commissioner's determination of the manner in which the amount of the lump-sum settlement shall be allocated. Considering the whole record, however, it seems clear that what the Commissioner proposes to include as income to the petitioner is the amount which is described in the record as "equipment retired, additional $26,149.38" and "road property retired, additional $70,107.21," a total on account of property retired, additional, of $96,256.59. The items of "equipment retired, additional" and "road property retired, additional" are described by the witnesses as amounts in excess of the cost of the property retired. It is the testimony that when property was retired an entry was made upon the books of both the corporation and the Railroad Administration and that there was no dispute as to the amount of property retired. It appears, however, that there was a dispute as to whether the Director General was required to reimburse the companies for such property at its original cost or at replacement cost. The railroad took the position that there was such an obligation to pay the replacement value and in its claim it computed the additional amount at $2,237,158.45. The petitioner concedes in its brief that if the amount here in dispute was paid to it as compensation for its property in excess of the cost thereof, such amount is taxable in some year. It urges, however, that since the Commissioner's determination as to the amount so paid is based upon the ex parte allocation of final settlement by the Director General, it can not be sustained, and also that in any event the amount was not income in 1920. The first contention is disposed of by what we have said above. The second contention appears to be well founded, for the situation presented falls squarely within the decision of the Board in Lehigh & Hudson River Railway Co., supra.There the Director General failed to return material and supplies equal to those taken over, and paid the company an amount in excess of the cost of the property not returned. There was a substantial dispute between the parties as to what adjustment, if any, should be made of the claim for shortage, which was not settled until a lump-sum settlement of all claims was made. There we held that, to the extent that the payment made exceeded the cost of the property not returned, there was income taxable in the year in which the settlement was made. The situation here is no different except that it applies to a claim for the replacement value of a different type of property. That there was a substantial dispute as to the amount is established by petitioner's claim for over $2,000,000, and the determination of the Commissioner that some $96,000 was paid in the settlement. We consider the decision in that case as controlling in this.

Issue No. 14 raises a question as to the correctness of the action of the Commissioner in adding to the taxable income for the year 1920 the amount of $38,925.90 representing interest on quarterly balances payable by the Director General to the companies. There is no dispute between the parties that this amount accrued in 1920 and appears to have been definitely ascertained in that year. The petitioner points out in its brief that the amount of income involved is really $95,784.88, since the record shows that the amount of $38,925.90 was arrived at by deducting $56,858.98, the interest payable to the Government for one quarter of 1920, from $95,784.88, the interest due the companies from the Government for two of the other quarters of 1920. The claim is that this $95,784.88 was exempt from taxation under the provisions of the Revenue Act as interest upon an obligation of the United States. At the same time the petitioner claims the right to deduct the amount of interest which was payable from it to the Government for one of the quarters.

The question whether such interest was taxable was considered at length in Kansas City Southern Railway Co., supra, and our decision in that case is controlling here. The action of the Commissioner in including the amount in dispute in taxable income for 1920 is approved.

Issue No. 15 raises the question whether the Commissioner correctly reduced the operating expenses claimed by the petitioner for maintenance of way and structures and maintenance of equipment during the year 1920. The agreement under which the Director General operated the properties provided in substance that they should be maintained in such condition as would permit their return to the carriers in as good condition of maintenance as when taken over. When the petitioner came to present its claim to the Director General it took the position that the Director General had failed to fulfill this obligation and that by reason thereof it was entitled to receive $14,082,370.66. The Commissioner determined that in the lump-sum settlement the companies had been allowed $4,532,809 for undermaintenance of way and structures and $6,154,912.54 for undermaintenance of equipment. He further determined that the petitioner had expended these amounts during 1920 in restoring the properties to their previous condition of maintenance and held that the amounts so expended were not deductible. In Terminal Railroad of St. Louis, supra, we had before us a similar situation. There we reached the conclusion that the amount paid for undermaintenance was in reality a payment to the petitioner for its property and was not income except perhaps to the extent of the excess of payment over cost. It is by no means clear that a payment for undermaintenance would be taxable even to that extent but that question was not before us for decision either in that case or in this. In the same case we held that while the company was entitled to deduct its maintenance expenditures, ordinarily and necessarily incurred during the year, it was not entitled to deduct also expenditures made to restore the undermaintenance of the Federal control period. The fact that the railroad and the Director General were not in agreement as to the amount to be allowed for undermaintenance was wholly incidental, the amount allowable as a deduction for tax purposes being the amount which was expended for maintenance as distinguished from amounts spent to restore undermaintenance of the Federal control period. ¹ In the case cited the proof was insufficient to show that the amount allowed as maintenance expense by the Commissioner was not proper and we found it necessary to affirm his action. In the case now before us, the proof establishes that the best that the petitioner could do in 1920, due to shortage in labor, the difficulty of securing materials and its financial condition, was to keep its road in substantially as good repair as when received back from the Director General. The record leaves no doubt that the undermaintenance which occurred during the period of Federal control was not made up to any extent during 1920. In such circumstances the Commissioner was in error in determining that any part of the amount expended by the petitioner for maintenance was, in fact, expended to make good undermaintenance.

The proof upon this issue is very lengthy and we do not propose to discuss it in detail. The petitioner produced as witnesses the men whose duty it was to oversee the maintenance of the properties, men who were thoroughly familiar with the petitioner's properties at the time they were taken over, at the time returned, and during all of 1920. Their testimony was in substance that the average condition of maintenance of the properties at the close of 1920 was no better than on March 1, 1920. In detail they explained what was done and why more was not done. Counsel for the Commissioner points out that their testimoney discloses that many of the worst conditions existing when the roads were returned were corrected as soon as possible. While this was done, the testimoney is that it was at the expense of less pressing items of current maintenance. Amounts availabe for maintenance were expended where most needed. Primary lines were improved while the secondary lines suffered still further undermaintenance. It is quite evident that the question can not be solved merely by looking at particular items of maintenance or undermaintenance. The real question is whether the average condition of maintenance was improved during 1920. The testimony of these witnesses was supported by detailed statistical studies which disclosed that after adjusting the purchasing power of the dollar in terms of labor and materials and giving effect to the increase in traffic, the amount expended for maintenance in 1920 was practically the same as the average amount expended for the period 1910 to 1920 and was less than the average amount expended in the years designated in the Federal Control Act as the test period. The principal attack which the Commissioner makes upon this supporting evidence in made upon the use by the witness of the "All Commodity Price Index" as prepared by the United States Department of Labor for the purpose of determining the relative cost of materials and supplies used in maintenance throughout the years. The propriety of using the index in the case of this taxpayer has been supported to same extent by comparative cost data taken from purchases made by the petitioner. Comparative labor costs are derived from the records of the petitioner's own costs. While there are some factors involved which are not susceptible of exact valuation, we can accept these statistical studies as confirmatory of the opinions expressed by those who had personal knowledge of the condition of the property. The same is true of the testimony of an employee of the Interstate Commerce Commission who made a study for that Commission of the expenditures of the petitioner during the three years ended June 30, 1917, and during the year 1920, upon the basis of which he expressed an opinion as to the factor to be used in converting expenditures made during the earlier years into an amount which would represent the equivalent in labor and materials in the later years. Perhaps the strongest confirmation of the opinion expressed by those in charge of maintenance is evidence which shows that the total number of hours of labor devoted to maintenance in 1920, the tonnage of new rails laid, and the number of crossties laid were all less than the average of a ten-year period although traffic had increased in 1920. Rails and crossties represent the largest single item of materials and supplies used in maintenance work. It is upon the testimony of those in charge of maintenance work during the taxable years, based upon their personal knowledge of the property and its physical condition, supported by the other evidence mentioned above, that we reach our conclusion that no part of the expenditures made during 1920 is to be accounted for as made to overcome undermaintenance of the Federal control period. The action of the Commissioner in refusing to allow as a deduction the full amount expended for maintenance of way and structures and maintenance of equipment is reversed.

To dispose of the issue arising out of the Federal control settlement, we next take up for discussion the issues numbered 32 and 33. The first of these is the claim of the petitioner that it sustained uncompensated losses as result of Federal control, which it is entitled to deduct in 1920. The petitioner arrives as the conclusion that it sustained a loss computed as follows:

Amount of its claim as shown in findings of fact	$35,625,891.79
Add: Rental interest on computed additions and betterments	149,052.42
Total	35,774,944.21
Amounts admitted to be due to Director General as shown in its claim (the same amount was used by the Commissioner in his set up of the settlement)	14,412,109.51
Balance due petitioner	21,362,834.70
Amount paid in settlement	9,000,000.00
Loss claimed as a deduction	12,362,834.70

The basis for the computation of a deductible loss, for income tax purposes is the cost or March 1, 1913, value of the property. Where property is disposed of the loss is the difference between the amount realized and such basis.

A substantial part of the claim filed with the Director General is based upon the claim that the railroad is entitled to be repaid at replacement values. As we understand the situation there was no substantial dispute as to the right of petitioner to be compensated for depreciation of its equipment upon the basis of cost or to be paid on that basis for property retired. Its claim includes these amounts and also includes, as separate items, additional amounts based upon the replacement values of equipment and of property retired. There could be no loss for tax purposes because the Director General failed to pay such claims. These two total $3,364,867.80. The claim for undermaintenance of the property, amounting to $14,082,370.66, was also based in substantial part upon replacement costs. The item of interest on balances, set out in the claim at $1,600,804.59, was a claim for an item which, if paid, would be income. Failure to pay would not be a deductible loss for tax purposes. The taxpayer would lose nothing which it had previously had; it would simply fail to collect income, and would be required to report only the amount collected. It is thus demonstrated that if we take the settlement as a whole and compare the amount received with that portion of the claim which is shown to be based upon costs to the petitioner, no deductible loss is established. If, however, we accept the breakdown of the settlement made by the Commissioner, as we must do in the absence of evidence that it is incorrect, there is some evidence that the petitioner did in fact sustain a loss in the settlement made upon materials and supplies. While the Commissioner has treated the materials and supplies returned as being the equivalent of those taken over, it is doubtful if this was so in fact. If those returned were less than those taken and petitioner was not compensated for the cost of those not returned, it sustained a loss in the amount of such cost. Such a loss would be deductible.

It appears, however, that the petitioner has already been permitted to deduct as a part of its expenses of maintenance the entire cost of the materials turned over to the Director General, on the assumption that they were all returned in kind, and were to be expensed at cost. If in fact there was a shortage in the materials returned, for which a loss should be allowed, the Commissioner was in error in allowing the petitioner to deduct, as cost of such materials when used, the cost of all materials turned over to the Director General. The petitioner could claim only the amount which represented the cost to it of materials and supplies equal to those which it received back and used. The amount of the loss would be the cost of the materials delivered to the Director General and not returned in kind. The cost of materials used would have to be reduced by the same amount. The taxable income would remain unchanged. The petitioner has been allowed as a deduction the cost of the materials and supplies turned over and is in no position to claim a part of the same item as a loss.

We do not think it necessary to pass upon the question whether, if there had been any loss, it would accrue or be incurred in 1920 or in 1921.

Issue No. 33. The agreement of February 28, 1920, provided that costs of additions and betterments should be paid for by the railroad companies and that, in addition to the agreed compensation, the railways should be paid "a reasonable rate of interest," to be fixed by the Director General, upon the amount of such costs. The rate of interest was not finally determined until 1920. The amount so to be paid is described throughout the record by the term "rental interest." It is the present position of the Commissioner that, since the amount of such rental interest could not be determined until the rate was fixed in 1920, the entire amount, whether accrued for 1920 or for prior years, is taxable as 1920 income. In his amended answer the Commissioner prays that the income for 1920, as determined by him, be increased accordingly. The petitioner admits that it is liable to return as income for 1920 the rental interest computed for the months of January and February, 1920. Its counsel points out that the contention now made by the Commissioner, that the rental interest which was earned in 1918 and 1919 should be returned as 1920 income, is inconsistent with the position taken by the Commissioner with respect to issue No. 11. Counsel urge that the Commissioner can not be right as to both and contends that the error lies in the position of the Commissioner with respect to issue No. 11. We have already held that the action of the Commissioner in respect of such issue should be affirmed, basing our conclusion upon a number of prior decisions of the Board and the Circuit Court.

The contention of the petitioner is that in both cases the amount of compensation to be paid for the use of its property was uncertain until finally determined. The line of distinction between such cases as United States v. Anderson,269 U.S. 422">269 U.S. 422; Fawcus Machine Co. v. United States,282 U.S. 375">282 U.S. 375; Commissioner v. Old Dominion Steamship Co., supra, and the cases cited under issue No. 11, on the one hand, and Lucas v. American Code Co.,280 U.S. 445">280 U.S. 445, and Burnet v. Sanford & Brookd Co.,282 U.S. 359">282 U.S. 359, on the other, is not, and perhaps can not be, clearly marked. We believe that it can be properly stated as a general rule, which may have its exceptions, that where the item of income or deduction is of an annually recurring nature such as rent, interest, or taxes, and there is no dispute as to the liability therefor, the item must be accrued in the year in which earned or, if an expense, in the year in which incurred, even though the amount to be accrued may not be definitely ascertainable before the close of the taxable year. The statute provides a period of limitation within which adjustment may be made to reflect the correct amount as subsequently ascertained and a method by which such period may be extended when necessary. To permit annually recurring income or expenses of a business to be accumulated would only serve to distort the annual income. The income here involved was earned from the use of the petitioner's property. The payment was provided for by section 4 of the Federal Control Act and was to be added to the amount of adjusted compensation, payable in installments from time to time. We are of the opinion that the amount should be accrued in each of the years in which it was earned and that there should be added to the income of the petitioner for 1920 the amount of $21,058.

Under issue No. 16 the petitioner alleges that the Commissioner committed error in including in its income amounts collected by it from assets standing upon the books of the predecessor companies and not entered upon its books at the time of the reorganization. The items so included are set out in our findings of fact. The petitioner admits that the Commissioner correctly included the second item and concedes as to the third that the record fails to show the cost or March 1, 1913, value of the property. The testimony with respect to the first item is that it represents amounts collected upon accounts due to predecessors of petitioner, which accounts were not transferred to the books of petitioner because they were uncertain as to collectibility. The basis of the petitioner's contention is that these were all items which entered into the income of the predecessor companies, that the petitioner stands in the shoes of its predecessors and should not be required to return these collections as income. The circumstances with respect to reorganization are set out in connection with issue No. 6. The respondent points out that the evidence with respect to such items is very indefinite, that even if petitioner's contention is sound there is no showing of the cost to the predecessor companies and also urges, as he did under issue No. 6, that the petitioner was a new corporation for tax purposes, that it acquired the assets of the predecessors by purchase and has not shown the cost of such assets to it. The record is insufficient to permit us to disturb the action of the Commissioner.

Issue No. 17 involves the right of a subsidiary company, Western Coal & Mining Company, to deduct $500 paid by it to the Mount Carmel Hospital in the Pittsburg field where the properties of the mining company were located. That company was required by the Workmen's Compensation Act to provide hospital care for its injured employees. Without the facilities offered by the hospital it would have been under the necessity of providing such facilities at its own expense. The payment was made, not from the standpoint of philanthropy, but rather of self interest. We are of the opinion that in the circumstances the payment is properly treated by the mining company as a part of its ordinary and necessary expenses and not as a charitable contribution. The deduction claimed should be allowed. Franklin Mills,7 B.T.A. 1290">7 B.T.A. 1290; Sugarland Industries,15 B.T.A. 1265">15 B.T.A. 1265; Corning Glass Works v. Commissioner, 37 Fed.(2d) 798.

Issue No. 30 raises the question whether amounts certified by the Interstate Commerce Commission as due to the petitioner and its affiliated companies under the guarantly provisions of section 209 of the Transportation Act are taxable as income in 1920. This question was before the Board in Gulf, Mobile & Northern Railroad Co.,22 B.T.A. 233">22 B.T.A. 233, decided this day. Our decision there is controlling in this case and the action of the Commissioner in including the guaranty payments as income is affirmed.

Reviewed by the Board.

Decision will be entered under Rule 50.

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Footnotes

• 1. A description of each issue of notes or bonds is set out opposite the corresponding numbers in the list on page 272. ↩

• 1. An amount spent for maintenance is deductible as an ordinary and necessary expense of the business. Amounts spent to improve the property, to replace or restore property destroyed or damaged and for the destruction or damage of which taxpayer has been or is to be recompensed by another can not be so classified. ↩