*2549 1. A municipal corporation entered into a contract with the petitioner, under which the latter was relieved from the payment of local taxes to the former, in consideration for certain services to be rendered and acts to be performed by the said petitioner. No evidence was furnished as to the value of the acts done or service rendered, other than the mutual covenants appearing in the contract. The Commissioner did not include any amount in gross income on account of the acts done or services rendered, nor did he allow deductions on account of the taxes of which the petitioner was relieved. Held, that the Commissioner's action should not be disturbed.
2. The evidence held insufficient to show any bonus value attaching to the aforementioned contract on account of which it might be included in invested capital, and held, further, that even if such bonus value should exist, invested capital could not be increased on account thereof, since it would be in the nature of a gift from the municipal corporation to the petitioner.
*604 This*2550 proceeding is for redetermination of income and profits taxes for the years 1917 to 1919, inclusive. The deficiency determined by the Commissioner is $38,816.18. The amount of deficiency in tax alleged in the petition tobe in controversy is approximately $9,000.
The issue herein relates to the amount of taxes assessed against petitioner for the years 1917, 1918, and 1919, and the effect of their payment in the manner indicated in the stipulation of facts.
The case is submitted on the pleadings and stipulation of facts, from which we make the following findings of fact.
*605 FINDINGS OF FACT.
The petitioner is a Michigan corporation, organized in December, 1909, for the purpose of manufacturing and selling paper products, with its principal office at Watervliet, Mich.
The agreed stipulation of facts between the petitioner, termed party of the first part, and the Village of Watervliet, party of the second part, are as follows:
1. - The taxes in controversy are Federal income and profits taxes for the calendar years 1917, 1918 and 1919 and are in excess of $10,000.
2. - The deficiency in tax as determined by the Treasury Department results in part from the*2551 following adjustments of income and invested capital, viz:
(a) Disallowance by the Commissioner of Internal Revenue of deductions against income claimed by petitioner of $4,125.00 in 1917, $5,250.00 in 1918 and $5,250.00 in 1919 representing real and personal taxes assessed against the petitioner by the Village of Watervliet but which under an agreement with the said village, the petitioner was not required to pay and did not pay.
(b) Disallowance by the Commissioner of Internal Revenue of additions to invested capital claimed by the petitioner amounting to $14,625.00 for the year 1917, $10,500.00 for the year 1918 and $5,250.00 for the year 1919 termed tax bonus receivable and representing the amounts of real and personal taxes assessed against the petitioner but which it was not called upon to pay.
3. - The issue herein relates specifically and only to the question of real and personal taxes before stated.
4. - The Village of Watervliet agreed to pay all local taxes assessed against the petitioner for a period of ten years from March 8, 1910 under an agreement entered into between the said Village and the petitioner under date of August 6, 1912. * * *
5. - The Village*2552 of Watervliet entered on its tax rolls assessments of real and personal taxes against the petitioner amounting to $4,125.00 for the year 1917, $5,250.00 for the year 1918, and $5,250.00 for the year 1919, but did not endeavor to collect any of these assessments.
In lieu thereof the said Village forwarded to the petitioner under the terms of the agreement of August 6, 1912, and by reason of the consideration referred to in the contract of August 6, 1912, receipted tax bills covering the said assessments.
6. - Upon execution of the contract of August 6, 1912, the petitioner made the water connection as provided in said contract and thereafter furnished the water and performed all other conditions of said contract during the term thereof.
7. - During 1917, 1918 and 1919 the petitioner made expenditures for maintenance of its water system. This water system fulfilled two purposes, first; it supplied the water necessary in petitioner's own manufacturing operations and second; it gave to the Village the fire protection provided for in said contract.
8. - No entries were made in the books of account of the petitioner with respect to these assessments of taxes by the Village of*2553 Watervliet for the years 1917, 1918 or 1919 nor were any entries made in the books of account of the petitioner with reference to the agreement with the Village of Watervliet.
* * *
*606 10. - The Commissioner did not increase income on account of the transaction with the Village of Watervliet and did not allow any deductions on account of said transaction.
The portions of the agreement made part of the stipulation and material for consideration, more fully set out, are as follows:
* * * The party of the first part hereby agrees to connect its power plant with the water mains of said village as now installed, and all extensions therefrom, and to furnish power and water for the use of said village of Watervliet for the purpose of fire protection, testing the water mains and hydrants as now installed or hereafter may be installed, in said village as occasion may require and the needs of said village shall demand in using water only for suppressing and extinguishing fires within said village.
The party of the first part agrees to keep in good repairs all the pipes and connections that may be needed and required to turn and force the water into said water mains whenever*2554 requested by the proper and duly constituted authorities and to continue to force and furnish the water to be used in suppressing and extinguishing fires so long as may be required and necessary to fully extinguish any and all fires and conflagrations that may occur during the life of this contract.
This contract shall take effect March 8th, 1910, and be and remain in full force for the period of the (10) years therefrom.
In consideration of the above agreement and the performance thereof, the party of the second part hereby agrees to save and keep harmless all the property, both real and personal, of first party from any village, school, highway or other municipal tax, extraordinary as well as ordinary, during the life of this contract and within the time limited by the law to promptly pay any such tax which may be so assessed against first party or against either the real or personal property of first party and no other compensation is to be paid first party for the performance of said services.
It is hereby understood and agreed by and between the parties hereto that first party will install a second machine and appurtenances thereto in its present plant, build and equip*2555 a coating plant and operate same, except on account of strikes, lock-outs, fire, the elements or other causes beyond its control, and provided said plants be not so operated for a period of one year at any one time, then in such case, both parties hereto are released from obligation each to other under the terms of this contract during such period of time as said plant may not be operated.
OPINION.
LITTLETON: From the stipulation of facts, it appears that the petitioner and the village of Watervliet entered into a 10-year contract that was mutually beneficial. The petitioner was, during the term of its contract, to be relieved from the payment of all local taxes, the village of Watervliet paying or giving petitioner credit for such taxes. In consideration of the village of Watervliet's so doing, petitioner was to make necessary expenditures to keep in proper repair and maintenance its water system, so as to give the village the benefit of fire protection called for by the contract. The only taxable years involved are 1917 to 1919, inclusive, during which the stipulation shows petitioner made expenditures for maintenance of its water *607 system, furnished the water, *2556 and performed all other things required of it under its contract.
The first issue to be disposed of is whether the petitioner is entitled to a deduction from gross income on account of the taxes of which it was relieved from paying under the contract in question. Certainly, under the statute, taxes are allowable deductions and we do not see why the mere fact that they were paid by services rendered by the petitioner would in any way prevent their deductibility. On the other hand, the payment for services would constitute a part of petitioner's gross income. If the town had paid for the services and the petitioner had used these, or equivalent, funds in satisfying the taxes which were assessed, it could hardly be argued that the former did not constitute income and the latter a deduction. The stipulation states that "The Commissioner did not increase income on account of the transaction with the Village of Watervliet and did not allow any deductions on account of said transaction." We fail to see why this does not reach the same result as if the consideration paid for the services had been included in gross income and the taxes allowed as a deduction.
Under the second issue*2557 the petitioner contends that this was an advantageous contract which had a value for invested capital purposes to the extent of the value attaching thereto at the beginning of the respective years on appeal, and that this value is measured by the taxes which the petitioner was relieved from paying in these years. That is, the local taxes which the petitioner was not required to pay for 1917, 1918, and 1919 amounted to $14,625, and, therefore, petitioner says that the value of the contract at January 1, 1917, was represented by this amount. Similarly, the value contended for at January 1, 1918, is $10,500, or taxes not required to be paid for 1918 and 1919, and the value at January 1, 1919, $5,250, or the taxes for 1919. In the first place, this contention must be denied for the reason that if the contract had a bonus value at the time acquired or negotiated, this would constitute an asset received by the petitioner in the nature of a gift from the town and could not be considered as having been paid in for invested capital purposes as required by sections 207 and 326 of the Revenue Acts of 1917 and 1918, respectively. *2558 , and . And, in the second place, we fail to see why the taxes of which the petitioner was relieved are any measure of the bonus value attaching to the contract. To sustain this contention would be to say that the petitioner was relieved from paying its taxes without any consideration on its part, whereas from aught that the stipulated facts show the transaction was of an arm's-length character and the consideration flowing from each party was of equal value. At any rate, we have nothing to show that the services to be rendered by the *608 petitioner were of any less value to the town than is represented by the amount of the taxes of which the petitioner was relieved.
Judgment will be entered for the respondent.