Court Opinion

ID: 4492979
Source: CourtListenerOpinion
Date Created: 2020-01-17 22:03:42.191511+00
Date Added: 2024-06-11T15:03:58.703330
License: Public Domain

Lansdout,
dissenting: I am unable to agree with that part of this report which sustains disallowance by the respondent of the amount of $11,966,199.35 as a deduction from the income of the petitioner in the taxable period as ordinary and necessary expenses and which overrules our opinion in the Missouri Pacific R. R. Co., 22 B. T. A. 267.
In its income tax return for the taxable period the petitioner claimed a deduction from income on account of maintenance in the amount of $55,556,415.21. Upon audit the respondent disallowed this claim to the extent of $11,966,199.35, which is the exact amount that was credited to the petitioner by the Director General in final settlement as undermaintenance. This disallowance was based on the theory that to the extent thereof maintenance in the period involved was paid for by the United States. There is no controversy over the facts. The parties agree that the amount claimed was spent by the petitioner for maintenance in the taxable period and that the part disallowed is the amount of credit for undermaintenance accumulated during the period of Government control.
In railroad accounting all expenditures for maintenance are chargeable to expense regardless of the time when the physical condition of the property called for the repairs. This is good accounting and is required by the Interstate Commerce Commission. It is perfectly obvious that no going railroad can ever be in perfect condition at the beginning of any accounting period. It is impossible to break down any aggregate disbursement for maintenance into amounts that were paid for repairs and noncapital replacements *723needed at the beginning of a period and those representing similar expenditures, the occasion for which originated within the period. Except in cases such as the proceeding now at bar, this is recognized by the taxing authorities and amounts proved to represent maintenance are uniformly allowed as deductions from income. It would seem, therefore, that the agreement of the parties that the entire amount claimed by the petitioner was paid for maintenance during the taxable period is sufficient to shift the burden of proof to the respondent.
The facts found in this proceeding prove undermaintenance of the petitioner’s properties in the taxable year as compared with the test period in the amount of approximately $1,300,000 and that they were in a worse condition at the close than at the beginning of such year. Here the statistical method and the evidence adduced by the records and oral testimony are in agreement. The petitioner spent less money than was necessary to maintain its properties in the taxable period and its claim for deduction represents only the amounts actually expended.
The basis for our conclusion in Missouri Pacific R. R. Co., supra, is that a railroad is entitled to deduct maintenance from its income in any year or period in an amount at least equal to the average expenditure for the so-called test period, properly equated to conform to conditions in the period in controversy. In that report we held that it is immaterial that some of the payments were for maintenance postponed from a prior year if it is shown that current needs were postponed for that purpose. This conclusion harmonizes with the nature of maintenance and of accounting therefor as set out above. Eelying on this rule, the petitioner stipulated that during the taxable period it repaired many of the worst conditions of under-maintenance in its ways and structures and equipment existing when the properties were returned, and that it charged the cost of such repairs to operating expenses and deducted the same from taxable income.
The effect of the majority opinion is to hold that the petitioner stipulated itself out of court because what was so spent was paid for by the Director General in the credit for undermaintenance and that without proof of the amounts thereof it must be held that the whole credit was so used. I can not agree with that conclusion. In the first place the petitioner used only its own money in payments for maintenance during the taxable period. By the very terms of the standard contract the credit for undermaintenance was made to restore the petitioner’s capital structure impaired during the period of Federal control. Whether paid in cash or by credit the *724amount allowed went into the capital of the petitioner at the date of the final settlement between the Director General and the railroads. It was not an earmarked fund and was available thereafter for any proper corporate purpose. It was in the nature of a capital transaction. Terminal R. R. Assn. of St. Louis, 17 B. T. A. 1135.
If the payment for undermaintenance was a capital transaction, it follows then that it has no bearing on the issue here in controversy. The only proper basis upon which any part of the expenditure of $55,556,415.21 can be disallowed is that some part of it represents capital outlay rather than operating expense. The respondent makes no such contention. He does not dispute that the whole sum was paid for maintenance in the taxable year, but contends that a part of it was paid by the Director General. In the face of the fact, now well settled, that the whole credit for undermaintenance was a capital transaction, this contention, in my opinion, is without merit. This Board has held in several proceedings that if the amounts paid out for maintenance in the ten-month period under review are no more than normal as compared with the test period, deductibility is established.
The majority report questions the soundness of the statistical method for determining normal maintenance during the period under review. A sufficient answer to such criticism it seems to me is the fact that the standard contract prescribes exactly this method for determining the amount of undermaintenance during the period of Federal control and that the payment to the petitioner for that purpose was so computed. Congress also prescribed the same method for determining the amounts due railroads under the guaranty provisions of section 209 of the Bailway Act of 1920. These seem to me to be ample precedents for so determining normal maintenance for the period from March 1 to December 31, 1920. The Government recognized that actual proof of the physical condition of the railroads at the beginning and end of the period of Federal control would be impossible, since it would require the survey and valuation of each of the multitude of items included in the physical structure of a railroad. Possibly it may have had in mind the long continued and extraodinarily expensive effort of the Interstate Commerce Commission to determine by actual survey the capital value of the railroads of this country, a job that has already cost many millions of dollars and that is still uncompleted. There are situations where practicability must prevail over mathematical exactitude and this is especially true in taxation. If railroads, in controversies like this, are to be required to prove the exact physical condition of all elements of their properties at the beginning and end of a taxable period, a burden is imposed that none can carry and the determinations of *725the Commissioner are given the force and effect not of presumption, but of law. On the record I believe that the issue relating to under-maintenance here involved should be decided in favor of the petitioner, in conformity with Missouri Pacific R. R. Co., supra; Norfolk Southern R. R. Co., 22 B. T. A. 802; Kansas City Southern Ry. Co., 22 B. T. A. 949; and Chicago & North Western Ry. Co., 22 B. T. A. 1407.
Smith, dissenting: The taxing statute permits the deduction of “ all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” Section 234 (a) (1) of the Revenue Act of 1918. The amount spent by the petitioner in 1920 for maintenance was a legal deduction from gross income, even though such maintenance expenses may in part have served to overcome undermaintenance during the period of Federal control. In Kansas City Southern Ry. Co., 22 B. T. A. 949, 966-971, are set forth additional reasons why, in my opinion, the deduction should not be disallowed.
Leech did not participate in the consideration of or decision in this proceeding.