*1029 A bus company, though wholly owned by a railroad company and organized for the purpose of protecting and supplementing its business, can not be classified as a corporation whose principal business is that of a common carrier by railroad. It is therefore held that such company may not file a consolidated return of income with its parent corporation under section 141, Revenue Act of 1934.
*472 The Commissioner determined a deficiency in petitioner's income tax for the year 1934 in the amount of $2,284. Petitioner alleges that he erred in determining that it was not entitled to file a consolidated return of income with its parent corporation, the Norfolk-Southern Railroad Co. It also asks that a finding of an overpayment in its excess profits tax for the year 1934 be made.
FINDINGS OF FACT.
The petitioner was incorporated on April 24, 1926, under the laws of the State of Virginia, as a subsidiary of the Norfolk-Southern Railroad Co., with its principal place of business in Norfolk, Virginia. Its certificate of incorporation, under the heading*1030 "PURPOSES", provides:
(b) The nature and character of the works to be maintained and operated is the business of a common carrier of passengers and freight by motor bus vehicles or vehicles propelled by internal combustion engines, operated on or *473 over the public highways of the State of Virginia and its political subdivisions and/or the private ways of applicant or others over whose ways applicant may obtain authority or permission to operate the same, the said work to be carried on and maintained in the Counties of Norfolk and Princess Anne and in the City or Corporation of Norfolk, and the Town of Virginia Beach, the purpose being to conduct the business of a common carrier of passengers and freight by motor bus vehicles between the City of Norfolk and Cape Henry, and/or Virginia Beach, and intermediate points, and along the Ocean front of the Atlantic Ocean, with branch lines to such points as may be found desirable, using the public high ways of the State of Virginia and its political subdivisions.
To receive, collect, distribute, deliver, carry and transport persons and passengers, goods, merchandise, parcels, packages, express and mail matter, and to do a general*1031 passenger and freight business by motor vehicle or vehicles propelled with internal combustion engines.
* * *
In addition to the above incorporated powers, the said corporation shall have and may exercise all other powers and privileges which are or may be conferred upon public service corporations, other than railroad corporations, of the same character for which this corporation is formed under and by virtue of the laws of the State of Virginia.
The Norfolk-Southern Railroad Co. is a corporation organized on May 2, 1910, under the laws of the State of Virginia, with its principal place of business in the city of Norfolk, Virginia, and it was and is a common carrier by railroad.
The certificate of incorporation of petitioner provided that its capital stock was to be divided into shares of $100 each, the maximum amount to be $50,000 and the minimum amount $5,000. Fifty shares were originally issued, the railroad company owning outright 45 of them and also owning the 5 shares which had been issued to the directors. The directors' shares had been endorsed in blank and turned over to an official of the railroad company, who filed them among the securities owned by it.
*1032 M. S. Hawkins and S. H. Windholz were duly appointed receivers of the lines and properties of the Norfolk-Southern Railroad Co. on July 27, 1932. On December 21, 1934, certificates for 710 additional shares of the capital stock of petitioner were issued to the receivers and on December 30, 1936, certificates for 250 additional shares were issued to them. During the taxable year 1934 they, as such receivers, owned all of the issued and outstanding capital stock of petitioner.Prior to and during 1934 the railroad company had lines running from Norfolk, Virginia, east to Virginia Beach, north to Cape Henry, and back to Norfolk, referred to as the Virginia Beach "Loop", and generally south from Norfolk, Virginia, to Elizabeth City, Edenton, Plymouth, Washington, and New Bern, and westerly from Washington to Raleigh and Charlotte, with connecting lines to Fayetteville, Durham, Ellerbe, and Ashboro, all in North Carolina, and several other branch lines serving this general territory.
*474 The Virginia Beach "Loop" of the railroad served all villages and towns between Norfolk, Virginia Beach, and Cape Henry. Prior to 1924 the principal mode of travel in the locality was*1033 on the railroad line, the roads being in poor condition. In or about 1924 the State of Virginia started building concrete roads paralleling the "Loop" railroad. The railroad, faced with a possible loss of passenger business to independently organized and operated bus companies, organized the petitioner bus company in 1926 for the purpose of transporting passengers by bus and freight by trucks over the new highways paralleling the railroad. On the Virginia Beach "Loop" the busses supplemented the railroad passenger service and during the winter months were substituted for the railroad service. Trucks operated by petitioner provided pick-up and delivery freight service in this area.
The same fares were charged and the same tickets used from Norfolk to Virginia Beach, Cape Henry, and return. Likewise the same fares were charged and the same tickets used when a person traveled from Virginia Beach to Norfolk, such fares being published with the State Corporation Commission and with the Interstate Commerce Commission and approved by them. The dispatching of both trains and busses was done by officers or employees of the railroad. Schedules were staggered and the ticket purchased*1034 entitled the purchaser to travel either by railroad or by bus. Passengers, after purchasing tickets, generally used the transportation, either bus or rail, which left first in point of time.
In 1931 on the branch from Norfolk to Munden, Virginia, there was one round-trip passenger and one round-trip freight train a day. Bus service replaced the railroad passenger service in 1932 or 1933. Truck service was substituted for freight rail service, the freight train being run twice a week, except during the potato season in the month of June, when it was run daily.
Service by bus and truck was instituted, generally paralleling the railroad from Norfolk south into North Carolina. Because of the fact that there was no highway across Albemarle Sound, the busses ran west from Edenton to Windsor and south from Williamston to Washington, North Carolina. They also ran from Williamston east to Plymouth along the Atlantic Coast Line Railroad and then east to Columbia, paralleling a branch line of the Norfolk-Southern Railroad Co. to Columbia and from Williamston west to Raleigh, under a contract with the Carolina Coach Co., which owned the franchise. Approximately one year after the bus*1035 service was instituted between Norfolk and New Bern, which generally parallels the railroad, the railroad company took off one of its trains which had been making the round trip daily.
Interline tickets purchased and used on Pennsylvania Railroad lines were accepted on the busses as well as on the trains which the *475 railroad company ran over the same route as its bus lines. The Columbia branch of the railroad from Williamston to Columbia, North Carolina, maintained a passenger service from Plymouth to Columbia which was unproductive. This was replaced by bus service, so that by 1934 petitioner operated under franchises busses and some truck lines on public highways parallel to the railroad over a large portion of the territory served by the railroad, with the exception of a comparatively short distance from Edenton west to Windsor and south from Williamston to Washington and from Williamston east to Plymouth.
In 1934 one of the receivers of the railroad was president of the bus company. The general superintendent of the electric lines of the railroad was vice president and general manager of the bus company.
The assistant secretary of the railroad was secretary*1036 of the bus company. Both companies had the same treasurer and general auditor. All the directors of the bus company were officers of the railroad. All officers of the bus company were on the railroad pay roll and their salaries were paid in the first instance by the railroad.
The employees, except the bus drivers and trainmen, were the same for both the railroad and the bus company and the dispatching of both trains and busses was done by officers or employees of the railroad. The railroad in the first instance paid the administrative expenses of the bus company and, inasmuch as the administrative staff served both the railroad and the bus company, this expense was allocated to the bus company in its proportionate share and assumed by the bus company in the amount of approximately $1,000 per month.
The railroad company filed a consolidated income tax return for the calendar year 1934 with the collector of internal revenue for the district of Virginia, including the petitioner as an affiliated corporation. This return showed a loss of $1,174,578.63 for the calendar year 1934, after excluding net income of $27,633.97, reported for petitioner corporation. Petitioner also filed*1037 an information return for the same period.
The deficiency results from the respondent's determination that the net income reported for the petitioner corporation, which the parties now agree is $16,610.92, should be excluded from the consolidated return.
Petitioner paid $1,069.20 excess profits taxes for the calendar year 1934 on March 18, 1935. Petition to the Board in this proceeding was filed on October 26, 1937. Claim for refund of $551.15 of said taxes was filed with the collector of internal revenue on October 27, 1937. In the notice of deficiency the respondent stated that there was an overassessment of excess profits taxes in the sum of $551.15. There was an overpayment of $551.15 in excess profits taxes for the calendar *476 year 1934, which overpayment occurred within three years prior to the filing of the petition herein.
OPINION.
MELLOTT: Section 141 of the Revenue Act of 1934 is applicable. It provides that an affiliated group of corporations shall, subject to the provisions of the section, have the privilege of making a consolidated return for the taxable year in lieu of separate returns. An "affiliated group" is defined as "one or more chains*1038 of corporations connected through stock ownership with a common parent corporation" if three conditions are present. 1 The parties agree that the requirements of (1) and (2) are met, all of the outstanding stock of petitioner being owned by the railroad company, so the sole issue is whether or not the conditions of (3) (A) or (B) exist. No claim is made under (B), so the issue is narrowed to the question "Was petitioner, during the taxable year, a corporation whose principal business was that of a common carrier by railroad?" If so, then it was entitled to file a consolidated return with its parent and there is no deficiency in tax; if not, then it is taxable upon its net income of $16,619.92 and the deficiency determined by the respondent should be approved.
*1039 Petitioner has asked us to find as a fact that its principal business was that of a common carrier by railroad. We have declined to make such finding, preferring to set out the facts shown by the evidence, and from them to determine, as a question of law, the issue raised. That, we think, is the proper approach to the question.
Petitioner contends that inasmuch as its operation of busses and trucks was intended to, and did, protect, supplement, feed, and coordinate the railroad service, this fact establishes that its principal business was that of a common carrier by railroad. Respondent concedes that petitioner was organized for the purpose of protecting, *477 supplementing, and feeding the business of the railroad and that the two are closely coordinated in service, policy, management, and personnel. He denies, however, that these facts bring it within section 141(d)(3)(A), supra.
Petitioner's certificate of incorporation empowers it to engage "in the business of a common carrier of passengers and freight by motor bus vehicle or vehicles * * * on or over the public highways of the State of Virginia." It further provides that petitioner "shall have all other powers*1040 * * * conferred upon public service corporations, other than railroad corporations." Any attempt by petitioner to engage in the business of a common carrier by railroad or any other business not specifically conferred upon it by its articles of incorporation would probably be beyond the sphere of its corporate powers and ultra vires. . But we do not choose to decide the issue merely on this ground; for, as petitioner points out, the statute merely requires that the affiliating corporation be "a corporation whose principal business is that of a common carrier by railroad." It may be, therefore - though we refrain from making any such holding - that it is more important to consider the powers actually exercised and the business actually conducted than it is to scrutinize too carefully the powers conferred by the certificate of incorporation.
Petitioner argues that if Congress had meant that only railroad corporations could be affiliated it would have said so in simple and direct Ianguage; that in any event it comes within the wording of the statute because its business was essentially that*1041 of a common carrier by railroad; and that if any doubt exists as to whether or not it is such a corporation as Congress intended to include in the legislation, such doubt may be and is dispelled when the legislative history and Congressional debates are considered in connection with the enactment of the section under consideration. It cites the language of the Supreme Court in , that "In order to fully understand the force and scope of any statute or body of statutes we must have regard to the conditions and circumstances for which the legislation was intended and under which it is to become operative", and other cases applying the same principle of law.
It is doubtful that there is such ambiguity in the language of the statute under consideration that the legislative history in connection with its enactment should be considered; for "Unless the contrary appears, statutory words are presumed to be used in their ordinary and usual sense, and with the meaning commonly attributable to them." *1042 . Cf. , *478 and cases cited. But notwithstanding the doubt which we have, careful consideration has been given to such history. It will be referred to briefly.
When the Revenue Act of 1934 was reported out by the House Ways and Means Committee the provision generally for affiliated companies to file consolidated returns was retained. 2 In its report the Committee stated that if consolidated returns were abolished it "would be especially burdensome to many corporations such as the railroads which are frequently obliged to maintain separate corporate structures in the several states in which they operate, although for all ordinary business and accounting purposes the subsidiaries form a single operating system." 3 The Senate Finance Committee, in its report, 4 concurred in the conclusions of the House Committee with regard to consolidated returns. On the floor of the Senate an amendment was offered and adopted to strike out section 141 because of the unfair advantage which certain large holding companies had obtained in the past from the filing of consolidated returns. *1043 5 The act was submitted *479 to the Conference Committee, where consolidated returns in general were abolished and the present section 141 inserted, providing for the filing of consolidated returns by corporations "whose principal business is that of a common carrier by railroad." 6
*1044 This, in brief, is the legislative history relied upon by petitioner as supporting its contention that Congress intended to permit a bus or truck company to file a consolidated return of income with a railroad company owning 95 per centum of its stock; but we are unable to spell out of it any such intention on the part of Congress. Apparently Congress only intended to retain so much of the law permitting the use of consolidated returns as would enable a railroad company to consolidate its income with a subsidiary engaged in the same business. The use of the word "each" suggests the interpretation "each * * * is a corporation whose principal business is that of a common carrier by railroad." It would be an anomaly to say that a bus company, incorporated under the laws of the state as "a common carrier of passengers and freight by motor bus" was a "common carrier by railroad", and we decline to make any such holding. If Congress had intended to include a bus or truck company we think it would have done so in unequivocal language.
Petitioner cites Scott Brothers, Inc., Collection and Delivery Service,I.C.C., M.C. 2744, as authority for holding that a bus or truck company*1045 may be classified as "a common carrier by railroad." In that proceeding the Interstate Commerce Commission held, under the facts before it, that the applicant, which was organized for the purpose of operating a collection and delivery service for the Pennsylvania and Long Island Railroads in the boroughs of Manhattan, Queens, Brooklyn, Bronx and Jersey City, New Jersey, was subject to part I of the Interstate Commerce Act because the business conducted by it was essentially that of a common carrier by railroad. This conclusion was reached by the majority of the Commission (three of the members dissenting) because the act defined "railroad" as including "all bridges, car floats, lighters, and ferries used by or operated in connection with any railroad" and also "terminal facilities of every kind used or necessary in the transportation of the persons and property designated" therein. Assuming for the purposes of this case that the decision of the majority is correct, it furnishes but slight aid to us in determining the question at issue.
No case has been cited by either party, and we know of none, in which the precise question involved herein has been passed upon by a court or judicial*1046 tribunal. However, in , the Supreme Court, in construing the language of the Employers Liability Act providing that "every common carrier by *480 railroad" shall be liable in damages for the injury or death of its employees under the circumstances specified in the act, said:
In our opinion the words "common carrier by railroad," as used in the act, mean one who operates a railroad as a means of carrying for the public, - that is to say, a railroad company acting as a common carrier.
Whether a similar construction of the language of section 141(d) (3)(A), supra, should be made need not presently be determined. We are of the opinion, and hold, that the respondent did not err in determining that petitioner's tax liability should be determined on the basis of a separate return of income.
Judgment will be entered under Rule 50.
Footnotes
1. SEC. 141. CONSOLIDATED RETURNS OF RAILROAD CORPORATIONS.
* * *
(d) DEFINITION OF "AFFILIATED GROUP". - As used in this section an "affiliated group" means one or more chains of corporations connected through stock ownership with a common parent corporation if -
(1) At least 95 per centum of the stock of each of the corporations, (except the common parent corporation) is owned directly by one or more of the other corporations; and
(2) The common parent corporation owns directly at least 95 per centum of the stock of at least one of the other corporations; and
(3) Each of the corporations is either (A) a corporation whose principal business is that of a common carrier by railroad or (B) a corporation the assets of which consist principally of stock in such corporations and which does not itself operate a business other than that of a common carrier by railroad. For the purpose of determining whether the principal business of a corporation is that of a common carrier by railroad, if a common carrier by railroad has leased its railroad properties and such properties are operated as such by another common carrier by railroad, the business of receiving rents for such railroad properties shall be considered as the business of a common carrier by railroad. ↩
2. The Revenue Act of 1934 (H.R. 7835, Rept. No. 558). ↩
3. Report of the House Ways and Means Committee, 73d Cong., 2d sess., Rept. No. 704, at page 17. ↩
4. Report of the Senate Committee on Finance, 73d Cong., 2d sess., Rept. No. 558. ↩
5. On April 12, 1934, in the Senate, Senator Borah moved to strike out section 141 of the bill because in his opinion consolidated returns giving the advantage to the large holding companies was a great disadvantage to all independent corporations paying taxes and pointed out that it puts many independent corporations under a handicap which in some instances makes it impossible to continue in business. (Congressional Record, Vol. 78, Apr. 12, 1934, page 6666.) He pointed out the advantage that the aviation holding companies and public utility holding companies had by virtue of the consolidated returns and saw no reason in justice and practice why these corporations should not make separate returns and then all corporations would be on the same basis and each dealt with upon a fair principle. Senator Harrison at page 6667, pointed out that the Committee thought that it was necessary in some cases that consolidated returns be filed and stated:
* * * It was pointed out by the railroads, for instance, that it was necessary for them to file consolidated returns, and it must not be forgotten by the Senate that certain states have laws respecting the doing of business by corporations, which make it necessary that a corporation doing business in a State must organize under its laws.
Senator Couzens (at page 6667) agreed that there were some reasons for a consolidated return in the cases referred to by Senator Harrison but that the bill in its then form permitted the filing of consolidated returns for other than allied industries and thereby promoted an unfair competitive condition and stated that if Senator Borah's amendment was agreed to a provision could be drafted in conference which would exempt those corporations which were engaged in noncompetitive business and which are required by the statutes of the states to take out separate articles of incorporation. On the second day of the debate on Senator Borah's amendment (while the Senate had under consideration Senator Hasting's motion to reconsider the vote by which the Borah amendment had been adopted), Senator Gore cited the example of the Southern Pacific Railroad as the type of case for which special provision permitting consolidated returns should be made, the reason being the requirement of State laws that the Southern Pacific incorporate separately in many States. Senator Gore stated (at page 6761, Congressional Record, Vol. 78, Apr. 13. 1934) as follows:
* * * I agree with the Senator about the vertical, integrated concerns where one is pyramided upon the other. I think they ought to be disintegrated so far as taxation is concerned. On the other hand, it does seem to me that the railroad situation might constitute an exception.
Sen. Borah agreed that the matter should go to conference and expressed himself as not opposed to certain exceptions to the abolition of consolidated returns. (page 6762) ↩
6. House Rept. No. 1385, 73d Cong., 2d sess. ↩