Court Opinion

ID: 4603295
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:31:39.251902+00
Date Added: 2024-06-11T07:52:49.482583
License: Public Domain

INTERSTATE TRANSIT LINES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Interstate Transit Lines v. CommissionerDocket No. 101692.United States Board of Tax Appeals44 B.T.A. 957; 1941 BTA LEXIS 1254; July 9, 1941, Promulgated *1254  Petitioner, a bus transportation company, has not established its right here to deduct as its ordinary and necessary business expense the operating deficit of its subsidiary, to the payment of which petitioner was committed by contract with the subsidiary.  Henry W. Clark, Esq., and Joseph F. Mann, Esq., for the petitioner.  Henry C. Clark, Esq., for the respondent.  LEECH*957  Respondent determined a deficiency in income taxes of $4,461.53 against the petitioner for the calendar year 1936.  The only issue submitted is whether the petitioner is entitled to a deduction of $28,100.66 as an ordinary and necessary expense of carrying on its business for that year.  FINDINGS OF FACT.  The petitioner is a corporation created by the State of Nebraska, with its executive offices located at Omaha, Mebrasks, where it filed its income tax return for the calendar year 1936.  Since 1929 the petitioner has operated interstate bus transportation lines between Chicago, Illinois, and Los Angeles, California; and between Kansas City, Missouri, and Cheyenne, Wyoming, for the transportation of passengers, mail, and express.  In addition to this interstate*1255  business, petitioner had acquired the right to handle intrastate business in *958  the states along its routes, in the State of Iowa, Nebraska, Kansas, Colorado, Wyoming, Utah, and Nevada.  Petitioner could not then acquire the right to do intrastate business in California because the Public Utilities Act of California required the certificate of the Railroad Commission for conducting a common carrier business on the public highways, and that commission, based on its interpretation of that act, refused to grant certificates for intrastate operations to foreign corporations.  Petitioner, for the purpose of augmenting its income from carrying California intrastate traffic, which could be done without substantial increase in its facilities or expenses, and because of its inability to thus function, in 1930 organized a subsidiary corporation, under the laws of California, under the name of Union Pacific Stages of California, hereinafter called "Stages", which company, by 1932, had secured certificates authorizing it to conduct the desired intrastate operations.  Petitioner furnished all its capital and received all its capital stock.  On February 7 and 8, 1932, respectively, *1256  petitioner and Stages executed two contracts.  The first of these, hereinafter called the "Absorption Agreement", recited that Stages was a wholly owned subsidiary of the petitioner, that it was maintained as an operating subsidiary of the petitioner and its operations conducted solely for the benefit of that company, and that, in order that the petitioner might obtain the greatest benefit from the operations of Stages, it was necessary that Stages operate on such routes and schedules as would most benefit petitioner.  It provided that Stages would operate busses on such routes and schedules as directed by petitioner, in consideration for which petitioner agreed to assume and reimburse Stages for any operating deficits incurred by that company, and that Stages agreed to pay over to petitioner any operating profit resulting from its operations at the end of each calendar year.  The second contract, hereinafter called the "Operating Contract", provided that Stages, in addition to its intrastate business in California, should conduct all of the interstate operations theretofore performed by petitioner in California.  The agreement provided that when the busses crossed the Nevada state*1257  line, they should pass into the custody and possession of the respective companies there operating.  It was further provided that as the respective companies took over the custody and possession of the busses, a payment to the owners of 5 cents per mile run by each bus should be made and the "lessee" would be responsible to the "lessor" for the busses of the "lessor" in the "lessee's" custody and possession.  In operating under this agreement there was no change in the conduct of the business except that intra-California passenger and other transportation was available on the busses thus operating.  No additional expense was incurred except the cost of petitioner keeping the separate accounts for Stages.  At the outset, *959  Stages acquired a local franchise from the Pickwick-Greyhound lines, together with two busses.  The stock of Stages was all owned by petitioner, and these companies had the same directors and officers.  The above contracts were executed by the same persons as officers of the respective companies.  Stages had its own accounting records, employees, busses, directors, and corporate minute book.  Its accounting records were kept at the offices of petitioner*1258  by the officers and employees of petitioner, who kept petitioner's records.  Stages had no bank account.  Petitioner collected all the revenues of Stages and paid all of the bills, pay roll and otherwise, of Stages.  All revenues from operations of both companies were collected by petitioner and all expenses of both companies were paid by the petitioner.  Monthly, petitioner apportioned on the books of the respective companies the revenues of the respective companies on the basis of passenger and traffic miles, compared to the aggregate of the same.  Likewise, the expenses were apportioned except those, such as taxes, which were charged to the company liable therefor.  The entry of these items was made in an open account of petitioner with Stages.  A corresponding open account with petitioner was kept on the books of Stages.  These accounts were designated cash accounts.  On the books of each company there was kept another open account with the other company which was used exclusively as a "clearing account" for the entry at the end of each year showing the absorption by the petitioner of the profit or deficit of the operation of Stages for the year.  For the calendar year*1259  1936, involved here, Stages incurred an operating deficit of $28,100.66, as shown by its books.  As of December 31, 1936, that amount was charged to petitioner in the "clearing account" of Stages with petitioner, and, as of the same day, that amount was credited to Stages in the "clearing account" of petitioner with Stages.  As of December 31, 1936, before the foregoing entries were made, Stages on all open accounts was indebted to petitioner in a net amount of about $34,000, so that the foregoing entry reflecting the so-called "absorption" of the alleged deficit of $28,100.66 of Stages for that year merely reduced the net indebtedness of Stages to petitioner, otherwise existing, by the amount of that alleged deficit, and left Stages indebted to petitioner in an amount exceeding $5,000.  For the years 1932 and 1933, during which returns of affiliated companies were permitted, such returns were filed for petitioner and Stages.  Several years after 1936, because of an amendment to the California Public Utility law or a modification of the Railroad Commission of California's interpretation of it, removing the inability *960  of petitioner to obtain authority to condut intrastate*1260  business in California, Stages was dissolved and liquidated and its assets, leases, and franchise transferred to petitioner, with the approval of that commission.  The accounts of both petitioner and Stages have at all times been kept on an accrual basis.  OPINION.  LEECH: The petitioner seeks to deduct $28,100.66, the amount of the operating deficit of Stages for the year 1936, as shown on the respective books of petitioner and that company, as an ordinary and necessary expense in carrying on its business during that year.  Sec. 23(a), Revenue Acts of 1934 and 1936.  Respondent, by his contested determination, denies not only the right of the petitioner to deduct the item as an ordinary and necessary business expense, but apparently says also that the mechanics used do not constitute an accrual in fact of these items, since no cash settlement of the accounts between petitioner and Stages was made until the dissolution of the latter in a year subsequent to 1936.  We decide the issue on the first ground and pass the second.  Deductions are permissible, of course, only by legislative grace and, to avail itself of their benefit, the taxpayer must conform squarely with the legislation*1261  authorizing them.  . It is not necessary that either respondent or we characterize this accrual from an accounting standpoint.  ; affd., ; . Thus, to succeed here, petitioner has the burden of establishing that the contraverted accrual was an ordinary and necessary expense of its business.  Stages was a separate, juristic taxable entity.  ; . Its business was that of furnishing intrastate transportation within California.  That was not and could not have been the business of petitioner, which, so far as California was concerned, was restricted to interstate business.  The bus business of Stages, limited as it was to the State of California, did not become that of petitioner by virtue of petitioner's sole ownership of the stock of Stages.  All *1262 ; certiorari denied, ; ; . Stages was not organized, its stock was not acquired, and the contested accrual thereunder was not made by petitioner to increase the profits of the business of petitioner.  Those facts were deliberately brought about petitioner *961  to augment its income by increasing the income of Stages, its wholly owned subsidiary, from the intra-California business of the latter company in which petitioner could not engage.  The accrual in controversy thus may well have been in the nature of a capital expenditure and not an expense at all.  Cf. . Moreover, whether any or all of the operating deficit of Stages for the taxable year was attributable to the intra-California business of that company is not disclosed.  Whether that business was necessary to profitable operation of petitioner's interstate business in California does not even appear.  In fact the opposite conclusion is at least inferable.  Profit*1263  to its subsidiary in the California intrastate business was the motive which moved petitioner.  The contested accrual was made pursuant to the contract of February 7, 1932.  All the capital stock of Stages, one party to that contract, was owned by petitioner at the time of the acquisition of that contract and throughout the life of the former company.  Stages was therefore always entirely under the control of petitioner.  Assuming therefore that the item in question was an expense of petitioner's business, on this record, including the absence of evidence as to the ordinary and necessary expense of furnishing interstate transportation to and from within California, we do not think the petitioner has sustained its burden of establishing that any part of the operating deficit of Stages for the taxable year was an ordinary and necessary expense of the petitioner in the operation of its interestate business.  . Cf. Respondent is sustained.  Decision will be evtered for the respondent.