Court Opinion

ID: 4491814
Source: CourtListenerOpinion
Date Created: 2020-01-17 22:03:04.569359+00
Date Added: 2024-06-11T15:03:56.867858
License: Public Domain

Smith,
dissenting: I dissent from the opinion of the Board upon the issues numbered (6) and (7).
The issue numbered (6) relates to the correctness of the disallowance by the Commissioner of the deduction of $809,773.83 of the maintenance expenses of the petitioner for 1920. The Board has confirmed such disallowance in the amount of $429,821.89. The confirmation is based solely upon the fact that-in 1923 the petitioner’s claim for undermaintenance of ways and structures during the period of Federal control was allowed in the amount of $809,773.83.
*967During tRe period of Federal control the petitioner’s properties were operated by the Director General of Railroads and its books of account were kept by that official. On March 1, 1920, the petitioner received back from the Director General of Railroads all of its properties, together with its books of account. The properties were undermaintained during the period of Federal control. The books of account did not reflect this undermaintenance. The capital accounts were in nowise affected by such undermaintenance. The petitioner, with most other railroads, filed with the Director General of Railroads claims for undermaintenance during the period of Federal control. The Director General considered these claims and in many cases made counterclaims for overmaintenance. The petitioner’s claim for undermaintenance was adjudicated in 1923 and the petitioner recovered, in a lump-sum settlement of all its claims against the Director General of Railroads, $1,500,000. A breakdown of the lump-sum settlement shows that petitioner’s claim for under-maintenance of ways and structures was allowed in the amount of $809,773.83 and that its claim for undermaintenance of equipment was totally disallowed.
The petitioner’s books of account were kept during the period of Federal control and subsequently upon the accrual basis in accordance with rules and regulations prescribed by the Interstate Commerce Commission. In such books of account all payments for maintenance were charged as expense. In its return for 1920 the petitioner claimed the deduction from gross income of the total amount of the maintenance expenses shown by its books of account. During 1920 the petitioner had no assurance that any part of its claim for undermaintenance would be allowed. In November, 1923, the claim was finally adjusted and the petitioner was allowed its claim for undermaintenance of ways and structures in the amount above stated.
The Commissioner in auditing the petitioner’s returns for 1920 and subsequent years has assumed, erroneously in my opinion (see Burnet v. Sanford & Brooks Co., 282 U. S. 359, that the amount received for undermaintenance was not income of the petitioner in the year of its receipt, but, recognizing the fact that the petitioner had a gain of $809,773.83 as a resut of such allowance, has assumed that the undermaintenance of the period of Federal control was made good during the period March 1 to December 31, 1920, and upon such assumption has disallowed the deduction of a portion of the petitioner’s maintenance expenses for 1920 and in this way has included in the petitioner’s taxable income for 1920 the amount of $809,773.83.
The Commissioner has proceeded in the case of this petitioner the same as he has proceeded in the case of the other railroad companies. *968We had the same point before us in Terminal Railroad Association of St. Louis, 17 B. T. A. 1135, and sustained the Commissioner because the petitioner was unable to establish, or failed to establish, before the Board that undermaintenance during the period of Fed-' eral control was not made good during the last ten months of the calendar year 1920. In the course of our opinion we stated:
The petitioner’s first position is that the amounts expended for maintenance should not be decreased by any payment or allowance made by the Director General for undermaintenance; if this be declared indefensible, his secondary defense is that no such allowance was made.
It may be conceded that whatever payment or allowance was made to the petitioner for undermaintenance does not constitute income to it; it represents no more than a return to it of its original capital investment. * * *
We are of the opinion that th$ Commissioner must prevail in his contention. The statute (sec. 214, Revenue Act of 1918) provides that in computing net income of a taxpayer there shall be allowed as deductions all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. We do not understand that this would permit the deduction of expenses paid or incurred by the taxpayer for which he is reimbursed. In such a case the expenses are not his, nor are they paid or incurred by him within the meaning of the statute. The taxpayer is allowed the expenses of its business borne by it and is taxed only upon its net income after its expenses have been deducted.
There is no difference in substance between a situation where the property had been properly maintained by the lessee and one where, having been under-maintained by the lessee^ such undermaintenance is overcome by the lessor at the expense of the lessee. If the Director General of Railroads had expended the amount here in question and had thereby been enabled to return the properties to the petitioner free of any undermaintenance, there would be no claim that petitioner might deduct the amount so expended. Instead, the property is returned to the lessor in a condition of undermaintenance, brought into condition by such lessor and the cost thereof paid by the lessee.
In Norfolk Southern Railroad Co., 22 B. T. A. 302, and Missouri Pacific Railroad Co., 22 B. T. A. 267, we reversed the action of the Commissioner in disallowing a portion of the maintenance expenses for 1920, but solely upon the ground that the evidence tended to show that the undermaintenance during the period of Federal control had not been made good during the last ten months of the calendar year 1920.
I am of the opinion that the Terminal Railroad Association of St. Louis case lays down an entirely erroneous principle. It is that the amount received by a railroad company in settlement of its claim for undermaintenance during the period of Federal control does not constitute income in the year of receipt and that amounts charged as maintenance expenses which serve to make good the undermain-tenance during the period of Federal control are not legal deductions from income. The income taxing statutes are entirely unworkable from such a standpoint. The Commissioner, proceeding *969upon that theory, was sustained by the Board in the Termined Railroad Association of St. -Louis case, but solely upon the ground that the evidence before the Board did not rebut the assumption made by the Commissioner that the undermaintenance was made good in 1920. The Commissioner was not sustained in the case of Norfolk Southern Railroad Co., supra, or in that of the Missouri Pacific Railroad Co., supra. In this situation the Commissioner is absolutely at a loss to guess the year in which the disallowance from maintenance expenses shall be made. Thus, in the case of the last two companies, shall he guess that a portion of the maintenance expenses for any particular year subsequent to 1920 shall be disallowed ? And is the burden on the railroad company to show that the undermain-tenance for the period of Federal control in any particular amount was not made good in the tax year for which the Commissioner has disallowed a portion of the maintenance expenses?
It appears to me that the books of account of the railroad companies as kept under the regulations of the Interstate Commerce Commission reflect the true situation in these cases. They show the maintenance expenses made in any particular year. The railroad companies have a right to contend that they are legal deductions from gross income, the statute permitting the deduction from gross income of all the ordinary and necessary expenses of carrying on any trade or business. Likewise, the books of account reflect in their income the amounts which the railroads recover from the Director General of Railroads for undermaintenance. Why should not income shown from that source be included in the taxable income? Is there any provision of the taxing statute which exempts such income from tax? Section 212 of the Revenue Acts of 1918 and 1921 provides that “ the net income shall be computed upon the basis of the taxpayer’s annual accounting period * * * in accordance with the method of accounting regularly employed in keeping the books of such taxpayer.” Those books of account are not to be disregarded in the making of income tax returns unless “ the method employed does not clearly reflect the income.” The courts have many times stated that taxation is eminently practical and that it is not concerned with theoretical conceptions of income and expenses. Eisner v. Macomber, 252 U. S. 189; Weiss v. Wiener, 279 U. S. 333; Tyler v. United States, 281 U. S. 497. Clearly, in this case the Commissioner is resorting to theoretical conceptions of deductions from income in disallowing a part of petitioner’s maintenance expenses upon the theory that a part of those maintenance expenses was recovered in a subsequent year. Even if it be conceded that the amount which is recovered from the Government for under-maintenance of ways and structures and equipment during the period *970of Federal control is for the purpose of reimbursing the petitioner .for expenditures already made or to be made to make good the under-maintenance during the period of Federal control, I am still of the opinion that the amount recovered is nevertheless a part of the taxpayer’s gross income.
In 1920 the petitioner did not know whether any part of its claim for undermaintenance during the period of Federal control would be allowed. It could not await the action of the Director General of Railroads upon its claim to file its return of income for 1920, and I am of the opinion that that income tax return may not be corrected by hindsight. There can be no question but that the petitioner would be entitled to deduct from the gross income of 1920 the full amount of its maintenance expenses had there been no recovery from the Director General of Railroads. No such contention is made by the Commissioner. I am of the opinion that the deduction for maintenance expenses of 1920 is not affected by what happened in 1923.
As was noted by the Supreme Court in Burnet v. Sanford & Brooks Co., supra:
All the revenue acts which have been enacted since the adoption of the Sixteenth Amendment have uniformly assessed the tax on the basis of annual returns showing the net result of all the taxpayer’s transactions during a fixed accounting period, either the calendar year, or, at the option of the taxpayer, the particular fiscal year which he may adopt. * * *
Considering the taxable year 1920 by itself, can it be doubted that the petitioner has the legal right to deduct from its gross income the total amount of its maintenance expenses?
In the instant case it is to be noted that upon the adjudication in 1923 of its claim for undermaintenance during the period of Federal control no part of its claim for undermaintenance of equipment was allowed and that the only allowance for undermaintenance was in respect of ways and structures. The Board finds that there was no overmaintenance of petitioner’s ways and structures during the year 1920 based upon the amounts spent for maintenance of ways and structures during the test period, but there was only an ovennainte-nance of equipment. Why, then, should any part of the petitioner’s expenditures for maintenance of equipment in 1920 be disallowed as a deduction from gross income by reason of the fact that in 1923 the petitioner recovered back from the Director General of Railroads an amount in respect of undermaintenance of ways and structures during the period of Federal control? Does an overmaintenance of equipment correct an undermaintenance of ways and structures? This simply goes to show the arbitrariness, the theoretical character, and the unworkability of the rule laid down by the Board for the *971purpose of arriving at the correct net income of the petitioner for 1920.
With respect to issue numbered (7) it is to be noted that for many years the established accounting practice of the petitioner has been to accrue and report its income on an estimated basis. This means only that overlapping items of one month are corrected in the following month. Thus, the overlapping items of 1920 are corrected in the year 1921. I fail to see wherein the petitioner’s books of account do not accurately reflect its income over a period of years. In my opinion there is no justification for rejecting the petitioner’s books of account in the manner indicated in the opinion. It requires a restatement of the petitioner’s tax returns for a period of years without any certainty as to whether the restatement will redound to the benefit of the Government or to the taxpayer. I think the books of account of the taxpayer upon the basis, kept correctly, reflect its net income.
Murdock dissents as to issue No. 20.