Opinion ID: 1563910
Heading Depth: 1
Heading Rank: 1

Heading: Restoration of Undermaintenance.

Text: Section 234 (a) of the Revenue Act of 1918, c. 18, 40 Stat. 1057, 1077, authorized the taxpayer, in computing its taxable income, to deduct all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.    The Director General took over the property of the taxpayer on January 1, 1918, and operated the property until March 1, 1920, when it was turned back to the taxpayer. It sought from the Director General an allowance of $1,710,038 on account of undermaintenance sustained during the period of federal control. Of this amount, $553,408 was asked for undermaintenance of way and structures, and $1,156,630 for undermaintenance of equipment. In its final settlement with the Director General, $809,773.83 was credited to the taxpayer on account of undermaintenance of way and structures. No amount was allowed or credited on account of undermaintenance of equipment, and the Director General did not concede that there was any such undermaintenance. From March 1, 1920, the time when its property was restored to it, to December 31, 1920, the taxpayer expended, on account of maintenance of way and structures, $2,535,786.12, and on account of maintenance of equipment, $3,494,811.24, or a total of $6,030,597.36, all of which was charged to maintenance expense on its books of account and deducted from its gross income in its tax return for the year 1920 as ordinary and necessary expenses. The Commissioner disallowed the deductions so claimed to the extent of $809,773.83, the amount allowed to the taxpayer by the Director General on account of undermaintenance of way and structures. This was done upon the ground that to that extent the taxpayer had been reimbursed by the government for undermaintenance sustained during the period of federal control. Upon review, the Board of Tax Appeals found that the taxpayer, during the year 1920, had expended $429,821.89 for the restoration of undermaintenance sustained during the control period, for which it was entitled to reimbursement by the Director General, and was later reimbursed. The Board reduced the deduction as claimed by the taxpayer by that amount. The basis for the Board's conclusion was this: It found that the taxpayer's expenses for the maintenance of way and structures during 1920 were $216,295.54 less than normal, indicating that undermaintenance or deferred maintenance of way and structures was greater December 31, 1920, than it was on March 1, 1920; that the taxpayer expended for the maintenance of equipment $646,117.43 more than was normal; and that therefore the difference between the amount by which ways and structures were undermaintained and the amount by which equipment was overmaintained, or $429,821.89, was to be regarded as the amount by which undermaintenance sustained during the period of federal control was restored during the year 1920. Since the findings of the Board and the evidence upon which they were based show that undermaintenance of way and structures was increased in 1920, instead of being restored, the taxpayer clearly expended nothing on that account for which it was reimbursed by the Director General, and all expenditures that were made for maintenance of way and structures during 1920 were from the funds of the taxpayer. The allowance made by the Director General was a reserve for the restoration of undermaintenance of way and structures, Commissioner v. Norfolk & Southern R. Co. (C. C. A. 4) 63 F.(2d) 304, 306; Southern Railway Co. v. Commissioner (C. C. A. 4) 74 F.(2d) 887 (opinion filed January 8, 1935), but there was no restoration during 1920, and the reserve remained intact at the end of the year. Had undermaintenance of equipment during federal control been conceded or proved, and had an allowance been made by the government on that account, there would be a foundation for the claim that to the extent of $646,117.43, the amount by which the equipment of the taxpayer was found to have been overmaintained in 1920, there had been a restoration of the undermaintenance of equipment sustained during the federal control period; but, since there was no evidence of undermaintenance of equipment during that period, and no allowance therefor, all sums expended by it on that account were its own funds. Conceding, therefore, that the applicable rule is, as the government claims, namely, that the taxpayer should not be allowed any deduction for the expense of restoring undermaintenance in the year in which the undermaintenance was restored, when the cost of restoring it is borne by the Director General, New York, C. & St. L. R. R. Co. v. Helvering, 63 App. D. C. 247, 71 F.(2d) 956, 959, it clearly appears that this taxpayer was entitled to the full deduction claimed, no undermaintenance having been restored in 1920 the expense of which was to be borne by the Director General or paid out of any allowance made by him. Tunnel R. R. of St. Louis v. Commissioner (C. C. A. 8) 61 F.(2d) 166, 170; Commissioner v. Norfolk Southern R. Co. (C. C. A. 4) 63 F. (2d) 304, supra; Chicago & N. W. Ry. Co. v. Commissioner (C. C. A. 7) 66 F.(2d) 61; New York, C. & St. L. R. R. Co. v. Helvering, supra; Southern Railway Co. v. Commissioner (C. C. A. 4) 74 F.(2d) 887, supra.