*2105 1. INCOME - ACCOUNTING - ACCRUAL BASIS. - That portion of charges, in excess of rates provided by State law and orders of the State Public Service Commission, made by petitioner and affiliated companies in the years 1916 to 1922, inclusive, for gas furnished their consumers in those years, such charges being permitted by court order under which the so-called "excess monies" were impounded to await final decision as to their rights to charge the higher rates, such final decision in 1922 holding them to have been entitled to such higher rates, held to have been income to those companies properly accruable in the several years in which the service was furnished for which such charges were made.
2. DEDUCTIONS - TAXES. - State franchise taxes assessed against petitioner and affiliated companies for the taxable years 1910 to 1919 and accrued as liabilities on their books for those years but only paid in part during each year due to contest of the several assessments in the courts, such litigation terminating in each case in later years by reduction of the assessment and payment of the balance due on the assessment as so reduced together with interest due under State law upon such*2106 unpaid balance, held to represent proper accruals as liabilities of the year for which assessed, and the amounts paid on such assessments in later years not to represent proper deductions in determining net taxable income for those years.
3. Id. - Interest accruing each year under State law upon unpaid franchise taxes and accrued by the taxpayer in each year for which imposed, held to represent proper accruals for those years and not subject to deduction in subsequent years in which finally paid.
*507 By these proceedings, consolidated for hearing and decision, petitioner seeks a redetermination of deficiencies in income taxes of $4,950.50 for the calendar year 1917, and $622,416.23 for the year 1922, determined by respondent in respect to the consolidated income of petitioner and five affiliated corporations. The facts are stipulated. The errors assigned are upon respondent's action in the following respects:
(a) Treating as income of the calendar year 1922 that portion of*2107 payments to petitioner and its affiliated companies for gas furnished to their consumers during the calendar years 1916 to 1922, *508 inclusive, as representing amounts in excess of the rates specified by State law and orders of the State Public Service Commission.
(b) Treating certain franchise taxes paid by petitioner and affiliated companies as deductions for the years for which the assessments were made and the taxes accrued upon the corporate books instead of the years in which they were paid following litigation contesting their amount.
(c) Treating interest paid on taxes involved under issue (b) as deductions for the years for which such interest accrued instead of the years in which payment was actually made following termination of the tax litigation.
(d) Disallowance of deductions taken by one of the affiliated companies for 1922 represented by uncollectible bills.
(e) Transfer from income of 1922 to income of 1923, amounts representing the so-called "excess monies" actually received in 1922 by one of the affiliated companies for gas furnished in that year.
(f) Transfer from 1920 and 1921 to the year 1922 of certain bad debt deductions taken by petitioner*2108 and affiliated companies.
(g) Disallowance of deductions in 1922 by petitioner and affiliated companies of $56,110 representing recording taxes upon bond mortgages, $5,000 representing a State tax upon an increase in capital stock, and $8,400.50 representing a Federal stamp tax.
FINDINGS OF FACT.
The Brooklyn Union Gas Company is a corporation organized and existing under the laws of the State of New York with its principal place of business at 176 Remsen Street, Brooklyn, N.Y. During and prior to the period January 1, 1917, to December 31, 1922, petitioner owned the entire outstanding capital stock of five subsidiary corporations likewise organized and existing under the laws of the State of New York, with their principal places of business at 176 Remsen Street, Brooklyn, N.Y. The subsidiary companies are:
The Newtown Gas Company
Richmond Hill & Queens County Gas Light Company
The Jamaica Gas Light Company
The Woodhaven Gas Light Company
The Flatbush Gas Company
For many years petitioner and its subsidiaries have been engaged in the manufacture, distribution and sale of illuminating gas in Brooklyn and other places on Long Island in the vicinity of Brooklyn.
*2109 All of these companies have consistently maintained their books of account upon what is known as the accrual method and filed their income tax returns under the Federal revenue acts, beginning with *509 the Corporation Excise Tax Act of August 5, 1909, in accordance with such methods with certain hereinafter noted exceptions. In their returns under the Act of 1909 the Brooklyn Union Gas Company and subsidiaries accrued all items, including taxes. By letter of June 19, 1913, the Commissioner pointed out that the revenue agent had recommended that deductions for accrued but unpaid taxes be disallowed. Thereafter the companies consistently used the paid basis in respect of taxes under each of the subsequent revenue acts, and, because the item of interest represented largely interest upon special franchise taxes which were in dispute, likewise reported such interest upon the same basis.
Rate Cases No. 1.
For some time prior to May 25, 1916, the Newtown Gas Company, the Richmond Hill & Queens County Gas Light Company, the Jamaica Gas Light Company, and the Woodhaven Gas Light Company have been charging their customers $1 per M cubic feet for gas. Under date of May 25, 1916, the*2110 New York Public Service Commission for the First District issued an order reducing the rate of the Newtown Gas Company to 85 cents per M cubic feet and to 95 cents per M cubic feet in the case of the other three named companies.
Thereupon proceedings under oath were instituted in the Supreme Court of the State of New York on behalf of each of these four companies, contending that the aforesaid orders of the Public Service Commission were confiscatory and hence in violation of both the Federal and State Constitutions, as a result of which on July 27, 1916, that court issued writs of certiorari and stayed the operation of the orders of the commission. Thereafter, on July 28, 1916, the orders of July 27, 1916, in these proceedings were resettled. The companies continued to collect the full amount of their charges in accordance with the rates in force prior to the orders of the commission of May 25, 1916, but when, as shown, the Supreme Court of the State of New York on July 27, 1916, stayed the operation of such orders, it further ordered that the monies collected by the companies since July 1, 1916, in excess of the rates prescribed by the commission and such excess monies to be*2111 thereafter collected by the companies be impounded and held subject to the further order of the court. These writs of certiorari were to come up for hearing from time to time, but were not argued, nor was decision ever rendered thereon.
The impounding, as indicated, extended merely to the monies collected in excess of the rates prescribed by the Public Service Commission, and not to the monies collected in accordance with such rates. The liability of the consumers to pay such last mentioned *510 monies was never disputed by them or by the Public Service Commission. The companies received such monies as their own and used them in their business in the regular course. The entire cost of producing and delivering this gas was accrued upon the taxpayers' books in the respective years of production and delivery.
On March 4, 1918, the Public Service Commission voluntarily reopened the cases of the several companies and held hearings in respect of the proper rates for gas to be charged by these companies.
In January, 1919, each of the companies petitioned the Supreme Court of the State of New York for permission to withdraw the excess monies impounded. On April 17, 1919, the*2112 Public Service Commission voluntarily suspended for a period of one year from May 1, 1919, its original orders of May 25, 1916, and in such order provided that a hearing should be held in April, 1920, to determine whether said suspension should be continued. Under date of May 8, 1919, the Supreme Court of the State of New York ordered that during the period of the suspension of the order of the Public Service Commission, viz., from May 1, 1919, to and including April 30, 1920, or until further order of the court the companies involved might collect the rate fixed by statute and were relieved from making deposits in the Bank of Long Island as required by the order of July 27, 1916. The order further provided that it was without prejudice to deposits already made or the rights of the parties to further action by the court in respect of such deposits. The hearing ordered for April, 1920, as aforesaid, was never held and in all respects the expiration of the period of suspension was ignored. Beginning May 1, 1919, there was no further impounding under orders of the courts of the State of New York of any sums paid in respect of gas to these companies. Hence Rate Cases No. 1 did*2113 not involve monies paid for gas after the date aforesaid. Such monies paid after May 1, 1919, were at all times collected and retained by these companies and employed for corporate purposes, and no bonds were ever given in respect of such monies.
Under date of June 30, 1919, the Supreme Court passed orders in these four cases, granting the petitions filed in January, 1919, as aforesaid, by which these companies were authorized "to obtain and use" during the pendency of the proceedings the excess monies impounded from the effective date of the orders of the commission of May 25, 1916, i.e., July 1, 1916, to the date of the suspension thereof, i.e., May 1, 1919, upon condition that a bond be filed with the court by each of such companies, with the Brooklyn Union Gas Company as surety. The said order, inter alia, provided as follows:
* * * the condition of said bond being that the relator and The Brooklyn Union Gas Company, or either of them, shall within twenty days after the final determination has been made upon said writ of certiorari sustaining the order *511 of said Public Service Commission and the rate of gas thereby fixed or modifying said rate and sustaining*2114 the same as so modified, repay to the Bank of Long Island, to be held subject to the further order of this Court in this proceeding, all sums of money collected by The Jamaica Gas Light Company for gas supplied in the Fourth Ward of the Borough of Queens from July 1, 1916, to May 1, 1919, in excess of the amount due therefor at the rate fixed by said Public Service Commission, or at such rate as modified as aforesaid * * *.
It was further provided in said order that:
* * * nothing in this order shall be construed as in any way adjudicating any question arising in this proceeding, the purpose of this order being solely to enable the relator herein to obtain and use during the pendency of this proceeding the moneys deposited pursuant to said order of July 27th, 1916.
The excess monies which had been deposited pursuant to court order with the Bank of Long Island were withdrawn together with accumulated interest, by the companies on July 2, 1919, under the aforesaid order of the court of June 30, 1919, and bonds were duly given as required by said order. The amount of monies and accumulated interest withdrawn on July 2, 1919, are hereinafter shown. With the exception of the names*2115 of the four several companies and the amounts, the bonds were identical.
On August 30, 1922, the Public Service Commission issued orders abrogating as of their original date the original orders of May 25, 1916, in the case of each of these four companies. Such order obviated the necessity of a final decision by the Supreme Court of New York on the pending certiorari proceedings covering the period from July 1, 1916, to May 1, 1919.
Rate Cases No. 2.
The so-called "Eighty Cent Gas Law" was enacted by the Legislature of the State of New York in the year 1906, as Chapter 125 of the Session Laws of that year. On May 1, 1906, the Consolidated Gas Company of New York filed suit in the United States Circuit Court for the Southern District of New York to enjoin the enforcement of this law, as well as an order made by the Gas Commission dated February 23, 1906, relative to the rates for gas in New York City. After a decision by the Circuit Court of the United States for the Southern District of New York declaring this law unconstitutional, an appeal was taken to the Supreme Court of the United States, which reversed the decree of the lower court, and held that the complainant*2116 had failed to sustain the burden of showing that the act in question was in fact confiscatory (). In its opinion the court observed that actual operation under the act might prevent the complainant from obtaining a fair return for its gas, in which event the complainant would have opportunity of again presenting its case to the court.
*512 In the light of this decree the Brooklyn Union Gas Company, together with other corporations in the State of New York, collected but 80 cents per M cubic feet for its gas until the year 1920. On February 25 in that year petitioner obtained an order from the United States District Court for the Southern District of New York pursuant to which, from and after March 1, 1920, the Public Service Commission of the State of New York (successor to the Gas Commission), was enjoined from enforcing the 80-cent gas law. The order further provided that beginning on said date and during the pendency of the injunction, the price of gas should be 97 cents per M cubic feet. Similar orders were entered at later dates on behalf of certain of petitioner's subsidiary corporations which had instituted*2117 similar injunction proceedings. Thereafter from time to time amendments of these orders were made providing for increased rates.
The entire amounts authorized by the courts in the injunction proceedings to be collected from consumers pending the final outcome of such proceedings were collected by the companies, beginning with the dates of such court orders, with the exception of certain uncollectible accounts. However, under the aforesaid order of February 25, 1920, the companies were permitted to retain without restriction only the amounts provided by the statute. The excess monies collected above the 80-cent rate prescribed by the statute of 1906 were deposited with Richard Welling, Special Master, under the aforesaid court orders, who in turn deposited the monies in banks designated by the court. The monies remained in the banks until the United States District Court for the Southern District of New York, on November 26, 1920, upon motion of the Brooklyn Union Gas Company and after notice to all parties, rendered an opinion recognizing that the Brooklyn Union Gas Company had not been able during the pendency of the proceedings and "will not be able in the future to manufacture*2118 and sell gas at the statutory rate except at an actual loss." The opinion further stated that the court was convinced that none of the plaintiffs could make and distribute gas to private consumers for less than $1 per unit of M cubic feet and that some must expend slightly more than $1 per unit. The court further declared that it felt a profit of 10 cents per unit was reasonable. Accordingly the rate was increased, pending final decision, to $1.10 per unit from and after December 1, 1920. The opinion then proceeds:
We are convinced that considering the prevailing rates for money in this community it is not advisable longer to retain the excess over statutory rates where it can earn no more than the interest usually allowed by Banks and Trust Companies on such deposits.
*513 The last but one paragraph of the opinion reads:
To the extent above indicated plaintiffs' motions are severally granted; and in the cases of the Brooklyn Union subsidiaries similar orders may be entered including, however, the declaration (not heretofore made) that Chapter 125 of the Laws of New York of 1906 has become and is at the present time confiscatory; and defendants are enjoined, until*2119 the further order of this Court, from enforcing the same.
The court on that date in accordance with the terms of its opinion entered an order providing that the excess monies theretofore impounded, together with all accrued interest, might be withdrawn by petitioner and its subsidiary companies upon the deposit of approved securities or the giving of surety bond conditioned to repay on demand of the special master the amount received from the special master, together with interest thereon at 6 per cent from December 1, 1920, or to submit to the immediate entry of judgment as by confession. In respect of all sums collected by the Brooklyn Union Gas Company and subsidiaries from private consumers of gas subsequent to December 1, 1920, under said order said companies had the option on January 15, 1921, and the 15th day of each succeeding month, of turning over the excess so collected above the statutory rate to the special master or of depositing securities in lieu thereof or giving surety bond with condition to pay such excess to the special master when and as required by the court and on demand. Pursuant to this order and a further order entered March 2, 1921, such amounts were*2120 withdrawn, and from and after December 1, 1920, to May 13, 1921, were withheld by petitioner and its subsidiaries, the Newtown Gas Company and the Flatbush Gas Company. In each instance the surety bonds called for by the order of the court were given.
During the pendency of the litigation the United States District Court had referred the proceedings to James G. Graham, Special Master, for a report and opinion on the issues involved. In his report dated March 2, 1921, Special Master Graham stated:
I have reviewed the questions presented at considerable length in order that the court might have a full view of the situation in which the plaintiff company finds itself on its application for equitable relief.
I think the evidence shows steady and increasing decrease in the return to the plaintiff on its investment. From the return from operations in 1918 of only 3.50 per cent, calculated on only a portion of its investment, it fell to 0.92 per cent in 1919, and in the first ten months of 1920 showed not only no return, but an actual loss of 2.89 cents on every thousand cubic feet of gas delivered. I have assumed an investment at an amount which I believe to be very greatly below*2121 its actual value in each of the years named. It was so low that the defendants apparently were well content to leave it alone and made practically no attempt to controvert it. Since the various assessments 1*514 were made, the plaintiff company has put into the plants substantially two and a half million dollars for extensions and additions.
While it was testified that this was necessary and fully justified to provide the additional capacity required, I have disregarded it in making up my estimate of the investment. * * *
After resolving every doubt against the plaintiff, it is plain that its property has been confiscated to a very considerable extent and is still being so treated. It is for this reason that I have sought to hasten the submission and determination of this action, before the Master, and have, without further loss of time, prepared and presented a report and opinion, so that the Court might have the matter before it without further delay and be in a position to do justice to all the parties.
This report of Special Master Graham was confirmed by the United States*2122 District Court, which on May 13, 1921, as hereinabove mentioned, gave as its final decision that the so-called "Eighty-cent Gas Law" was and since January 1, 1918, has been "confiscatory and deprives the claimant of its property without process of law, contrary to the Constitution of the United States." The court required of the complainant in that case (petitioner herein) an appeal bond of $5,000,000 conditioned for the repayment to consumers of the complainant, in the event the decree was reversed, of the sums received and collected by the complainant from its consumers in excess of the 80-cent rate. Provision was also made for the giving of further undertakings when the excess amounts so collected on and after May 13, 1921, above the statutory rate, exceeded the sum of $5,000,000, such further undertakings to be given as required until final action in the cause on appeal or the promulgation by the Public Service Commission of the State of New York of a new rate in lieu of the said 80-cent rate in which complainant (petitioner herein) should comply. Thereupon, from and after May 13, 1921, petitioner continued to withhold the excess monies so collected in accordance with provisions*2123 of the undertakings aforesaid.
The amounts so withdrawn and withheld and years of withdrawal or withholding are hereinafter shown. The Richmond Hill & Queens County Gas Light Company, the Jamaica Gas Light Company, and the Woodhaven Gas Light Company withdrew no monies from deposit until Rate Cases No. 2 were finally adjudicated, as hereinafter shown, in the year 1922, in which year the monies, with accumulated interest, were turned over to such companies by court order.
The decree of the United States District Court of May 13, 1921, was affirmed by the United States Supreme Court on March 13, 1922. (.) Pursuant to the mandate of that court on April 10, 1922, the District Court for the Southern District of New York entered orders pursuant to which the bonds heretofore given by petitioner and/or its subsidiary companies *515 were canceled and the special master was ordered to deliver back to said companies all funds then remaining in his hands including cash deposited and accrued interest thereon and the shares of the capital stock of the subsidiary companies. Thereupon, in accordance with such orders, *2124 the special master delivered the shares of capital stock of the subsidiary companies held by him, together with such excess monies, including interest thereon, as remained in his hands at the date of such orders.
The similar proceedings hereinbefore referred to, instituted in the Federal District Courts of New York on behalf of the subsidiaries of petitioner named below, were decided in their favor on the respective dates shown:
| The Newtown Gas Co | Oct. 18, 1921 |
| Richmond Hill & Queens County Gas Light Co. | |
| The Jamaica Gas Light Co. | Sept. 25, 1922 |
| The Woodhaven Gas Light Co. | |
| The Flatbush Gas Light Co. |
Subsequent proceedings in these cases were as follows:
The Newtown Gas Co. - Appeal to the United States Supreme Court dismissed by consent November 8, 1923 ().
In the cases of Richmond Hill & Queens County Gas Light Company, the Jamaica Gas Light Company, the Woodhaven Gas Light Company, and the Flatbush Gas Company there were no appeals taken.
The liability of the consumers to pay the statutory rate to the companies involved in Rate Cases No. 2, as was the case with their liability to pay the rate prescribed by the Public Service*2125 Commission in Rate Cases No. 1, was not disputed either by the consumers themselves or by any State or other agency on their behalf. The companies were permitted to receive such monies as their own and use them in their business in the regular course, and they reported such monies in Rate Cases No. 2 as income in their original returns under the Federal revenue laws. Further, as was also the case with the gas involved in Rate Cases No. 1, the entire cost of producing and delivering this gas was accrued upon the taxpayers' books in the respective years of production and delivery.
The excess monies in both rate cases when turned over to petitioner and its subsidiaries were used by them as their own in precisely the same manner as they had used the undisputed charges previously collected.
The amount of $8,687,303.75, being the sum of the excess monies involved in the two sets of rate cases, which the respondent proposes to tax as income in the year 1922, represents compensation *516 for gas furnished consumers in the following years, in the respective amounts shown:
| Rate Cases No. 1. | |
| Year | Excess monies |
| 1916 | $80,213.64 |
| 1917 | $184,914.83 |
| 1918 | 207,158.03 |
| 1919 | 77,703.93 |
| Rate Cases No. 2. | |
| Year | Excess monies |
| 1920 | 1,970,296.71 |
| 1921 | 6,167,016.61 |
| Total | 8,687,303.75 |
The excess monies in the above amount of $8,687,303.75 involved in the two rate cases were received by the petitioner and its affiliated companies and commingled with their other funds, in the years and in the respective amounts shown below:
| Year | Excess monies |
| 1919 (Rate Cases No. 1) | $549,990.43 |
| 1920 (Rate Cases No. 2) | 1,485,611.64 |
| 1921 (Rate Cases No. 2) | 5,978,418.42 |
| 1922 (Rate Cases No. 2) | $673,283.26 |
| Total | 8,687,303.75 |
The interest earned upon the impounded excess monies during each of the years 1916 to 1921 was as follows:
| Year | Accrued interest |
| 1916 | $61.24 |
| 1917 | 2,900.01 |
| 1918 | 11,920.11 |
| 1919 | $11,302.65 |
| 1920 | 14,177.38 |
| 1921 | 6,500.10 |
In preparing its returns under the Federal income tax law the Brooklyn Union Gas Company (and the same is true of its subsidiaries) did not report as income for the years 1916 to 1919, inclusive, the "excess monies" in Rate Cases No. 1, nor the accumulated interest thereon. In their returns for the years 1920 and 1921, however, these companies did report as income the*2127 amounts of "excess monies" in Rate Cases No. 2, earned in each of such years and the accumulated interest thereon.
Under date of January 31, 1921, the revenue agent made a report covering his field examination of the books and papers of these taxpayers for the year 1917. Thereafter, the Commissioner issued an assessment letter for the year 1917 upon the basis that the excess monies be treated as income in the year when the gas was furnished consumers; disclosing additional taxes for the year 1917 in the amount of $11,268.90, which was paid on February 27, 1923, as follows: $9,067.37 by the Newtown Gas Company, $1,011.91 by the Woodhaven Gas Light Company, $453.31 by the Richmond Hill & Queens County Gas Light Company, and $736.31 by the Jamaica*517 Gas Light Company. In the notice of deficiency for the year 1922 (Docket No. 23380) respondent has included as taxable income of these corporations for the year 1922 all of the excess monies received by them in the four years, 1919 to 1922, inclusive, in the total sum of $8,687,303.75, covering, as above shown, gas furnished from 1916 to 1921, inclusive (and the excess monies in the case of the Newtown Gas Company were determined*2128 by respondent to be income in the year 1923).
Franchise taxes.
By article 2, sections 44 to 49, of the tax law of the State of New York, provision is made for the assessment and collection of taxes upon special franchises. Under the terms of this taxing statute the State Tax Commission is charged with the duty of fixing and determining the valuation of the property of taxpayers and the rate of equalization applicable thereto. The law requires that after determining the final full and equalized valuation of a special franchise the tax commission shall file with the clerk of the city in which the special franchise is subject to assessment a written statement of the valuation as finally fixed and equalized. In the city of New York this statement must be filed with the department of taxes and assessments not later than 30 days before the final completion, verification, and filing of the assessment roll. The charter of the city of New York (Chapter XVII, Title 1, section 907) requires that the certified assessment rolls must be delivered by the board of taxes and assessments to the board of aldermen on the first day of March in each year.
Beginning with the year 1910 and*2129 continuing for a number of years, the Brooklyn Union Gas Company and subsidiaries contested the valuation placed upon their properties by the State Tax Commission for the purpose of the franchise tax, the methods used in obtaining such valuations and the rates of equalization asserted in respect thereof. The amount of special franchise taxes originally asserted by the State Tax Commission for the years 1910 to 1922, inclusive, were as follows:
| Year | Amount of special franchise taxes |
| 1910 | $332,849.03 |
| 1911 | 342,159.53 |
| 1912 | 346,186.81 |
| 1913 | 343,031.39 |
| 1914 | 293,450.97 |
| 1915 | $264,077.41 |
| 1916 | 448,859.05 |
| 1917 | 459,283.97 |
| 1918 | 469,032.81 |
| 1919 | 369,855.52 |
| 1920 | $400,798.98 |
| 1921 | 455,882.76 |
| 1922 | 468,168.30 |
Of the above special franchise taxes complaints before the State Tax Commission and applications for writs of certiorari in the *518 Supreme Court of the State of New York were filed in the several instances shown in the two following tables:
| Proceedings before State Tax Commission | ||
| Companies concerned | Tax year | Complaint to State Tax Commission disposed of in - |
| All companies | 1910 | 1910 |
| Do | 1911 | 1911 |
| Do | 1912 | 1912 |
| All companies but Flatbush | 1913 | 1913 |
| All companies | 1914 | 1914 |
| All companies | 1915 | 1915 |
| Do | 1916 | 1916 |
| Do | 1917 | 1917 |
| Brooklyn Union | 1918 | 1918 |
| All companies | 1919 | 1919 |
| Proceedings in courts | ||
| Companies concerned | Tax year | Writ of certiorari signed |
| All companies | 1910 | July 14, 1910 |
| Do | 1911 | July 14, 1911 |
| Brooklyn Union | 1912 | Apr. 4, 1912 |
| Do | 1913 | Mar. 14, 1913 |
| Do | 1914 | Mar. 12, 1914 |
| Brooklyn Union | 1915 | Mar. 10, 1915 |
| Do | 1916 | Mar. 13, 1916 |
| All companies | 1917 | Mar. 13, 1917 |
| Brooklyn Union | 1918 | Mar. 15, 1918 |
| All companies | 1919 | Mar. 18, 1919 |
The proceedings in respect of the franchise taxes for the years 1910 to 1919 were terminated in the Supreme Court of the State of New York, in the manner and upon the respective dates shown below:
| Companies | Tax | Final action | Date of termination |
| Subcompanies | 1910 | Final order of assessment, Supreme | |
| Court, Albany County, showing | |||
| reduction for all but Flatbush. | Apr. 12, 1911 | ||
| Brooklyn Union | do | Final order of assessment, Supreme | |
| Court, Kings County, showing | |||
| reduction. | Dec. 27, 1917 | ||
| Subcompanies | 1911 | Final order of assessment, Supreme | |
| Court, Albany County, showing | |||
| reduction for all but Flatbush. | Mar. 27, 1912 | ||
| Brooklyn Union | do | Final order of assessment, supreme | |
| Court, Kings County, showing | |||
| reduction. | Dec. 27, 1917 | ||
| (Amended Dec. 28, 1917) | |||
| Do | 1912 | do | Dec. 27, 1917 |
| Do | 1913 | do | Do. |
| Do | 1914 | Discontinued by consent | Jan. 3, 1918 |
| Do | 1915 | do | Do. |
| Do | 1916 | Discontinued on call of calendar | Mar. 8, 1921 |
| All companies | 1917 | do | Do. |
| Brooklyn Union | 1918 | do | Do. |
| All companies | 1919 | Discontinued by stipulation | Mar. 5, 1920 |
*2131 By final order of the Supreme Court of the State of New York, entered on the 27th day of December, 1917, for the year 1911, the assessed valuation of petitioner's franchise was reduced from $17,500,000, as proposed by the State Tax Commission, to $13,128,746; and it was thereupon further -
ORDERED and directed that the officer or officers having custody of the assessment roll or the Tax Roll upon which the above mentioned assessment and any *519 taxes levied thereon have been entered shall forthwith correct the said entries in conformity to this order, and shall note upon the margin of the said roll opposite the said entries that the same have been corrected by the authority of this order.
Such reduction in valuation resulted in a reduction in petitioner's franchise tax in the amount of $76,716.37 as shown by the next succeeding table.
Orders of similar purport were entered on the same date in respect of the years 1910, 1912, and 1913, reducing the valuations for franchise tax purposes, with resultant reductions in franchise taxes in the amounts hereinafter shown.
The amounts of tax finally determined for the years 1910 to 1913, inclusive, as a result of the proceedings*2132 by certiorari, the reductions secured, and the portion thereof paid during the years here involved, were as follows:
| Year | Tax determined by court | Reductions | Portion paid during 1917 1 |
| 1910 | $262,595.25 | $70,253.78 | $47,720.57 |
| 1911 | 265,443.16 | 76,716.37 | 54,910.13 |
| 1912 | 277,623.24 | 68,563.57 | 50,742.43 |
| 1913 | 312,526.39 | 30,505.00 | 124,525.00 |
For the following years, 1914 to 1919, no change in the amount originally asserted resulted from the certiorari proceedings before the Supreme Court of the State of New York. The taxes for those years were paid as follows:
| Company | Tax year | Date of payment | Amount paid | |
| Subsidiaries except Flatbush | 1914 | May 26, 1914 | $24,030.00 | |
| Flatbush | do | May 29, 1914 | 18,260.97 | |
| Brooklyn Union | do | July 22, 1915 | 147,200.00 | |
| Do | do | Dec. 31, 1917 | 103,960.00 | |
| $293,450.97 | ||||
| Flatbush | 1915 | May 27, 1915 | 24,146.30 | |
| Remaining subsidiaries | do | May 28, 1915 | 30,267.11 | |
| Brooklyn Union | do | July 22, 1915 | 153,600.00 | |
| Do | do | Dec. 31, 1917 | 56,064.00 | |
| 264,077.41 | ||||
| Subsidiaries | 1916 | May 25, 1916 | 66,139.05 | |
| Brooklyn Union | do | May 27, 1928 | 228,800.00 | |
| Do | do | June 14, 1922 | 153,920.00 | |
| 448,859.05 | ||||
| Do | 1917 | May 27, 1918 | 227,700.00 | |
| All companies | do | June 14, 1922 | 231,583.96 | |
| 459,283.96 | ||||
| Do | 1918 | do | 469,032.78 | |
| Do | 1919 | do | 369,855.52 |
*2133 The franchise taxes asserted for the years 1920 1922 were not contested. The dates of payment of such taxes were as follows: For 1920 and 1921, June 14, 1922, and for 1922 the taxes were paid one-half on June 14, 1922, and the remaining half on August 30 of that year.
*520 The Brooklyn Union Gas Company and subsidiaries for the years 1910 to 1922, inclusive, charged the full amount of the assessments as originally made to operating expenses in the years of the assessments and at the same time credits in similar amounts were made to a liability account designated "Reserve for Unpaid Taxes." When reductions of such amounts of tax were secured as a result of the court proceedings, credits in the amount of such reductions were then made in the profit and loss account.
Deductions for franchise taxes in Federal income tax returns were taken when and as payments were made of such taxes, which position was adopted pursuant to a letter of the Commissioner to the Brooklyn Union Gas Company dated June 19, 1913, previously referred to.
The Brooklyn Union Gas Company in preparing its returns for the years 1913 to 1922, inclusive, deducted taxes upon a paid basis with the result*2134 that deductions were taken for franchise taxes paid by the Brooklyn Union Gas Company for the period 1910 to 1922, only in the years 1915, 1917, 1918, and 1922. Likewise, the subsidiary companies in preparing their returns for 1913 to 1922, inclusive, deducted taxes upon a paid basis with the result that the taxes for the years 1914, 1915, and 1916 were deducted in the years when assessed and taxes for the years 1917 to 1922, inclusive, were deducted in the year 1922. Respondent now proposes to treat all such taxes paid by the Brooklyn Union Gas Company and its subsidiaries as deductions from income in the years of the original assessments.
The Brooklyn Union Gas Company paid interest which had accumulated upon the franchise taxes, covered in the preceding finding, in the following amounts and upon the dates shown:
| Tax year | Date of payment | Company | Overdue taxes paid | Interest paid during |
| during period | period involved | |||
| involved | ||||
| 1910 | Dec. 31, 1917 | Brooklyn Union | $47,720.57 | $24,197.60 |
| 1911 | do | do | 54,910.13 | 24,010.02 |
| 1912 | do | do | 50,742.43 | 19,239.03 |
| 1913 | do | do | 124,525.00 | 38,496.98 |
| 1914 | do | do | 103,960.00 | 24,839.78 |
| 1915 | do | do | 56,064.00 | 9,483.26 |
| Total paid in 1917 | 437,922.13 | 140,266.67 | ||
| 1914 | Jan. 25, 1918 | do | 22.15 | |
| 1916 | May 27, 1918 | do | 228,800.00 | 29,135.95 |
| 1917 | do | do | 227,700.00 | 13,056.88 |
| Total paid in 1918 | 456,500.00 | 42,214.98 | ||
| 1916 | June 14, 1922 | do | 153,920.00 | 63,229.49 |
| 1917 | do | All companies | 231,583.96 | 78,934.84 |
| 1918 | do | do | 469,032.78 | 127,023.47 |
| 1919 | do | do | 369,855.52 | 47,277.87 |
| Total paid in 1922 | 1,224,392.26 | 343,465.67 | ||
| Total for all years | 2,118,814.39 | 525,947.32 |
*2135 *521 No interest was accrued on petitioner's books from 1910 to 1913 upon the special franchise taxes asserted by the State of New York for the years 1910 to 1913.
After the year 1913 petitioner and its subsidiary companies accrued annually upon its books interest upon the full amount of the original assessments as the liability therefor arose under the statutes and orders of the State Tax Commission. When reductions in taxes were secured, bringing about reductions in interest due thereon, adjustments were made upon the companies' books in the year of payment of such interest. The interest aforesaid was deducted by petitioner and its subsidiaries in the years paid. Respondent allowed such interest as deductions in the years in which according to the State statute such interest would be due, if the original assessments were correct.
In its 1922 return the Newtown Gas Company deducted the sum of $156.46 which it had charged off to that year as uncollectible and which constituted part of the excess monies in the rate cases above described. Respondent determined that item to be a deduction from income of the year 1923.
During the year 1922 the Newtown Gas Company*2136 delivered gas to consumers, upon which the "excess monies" or charges above the rate then fixed by the Public Service Commission or statute amounted to $34,557.13. Such amount was actually collected from consumers and withheld by the Newtown Gas Company in 1922. Respondent determined that such amount was income of the year 1923, when the appeal of the city of New York was withdrawn.
During the years 1920 and 1921 petitioner and its subsidiaries charged off and deducted in their returns for said years uncollectible gas bills amounting to $54,513, covering gas delivered in such years. Respondent determined that such sum was deductible from income of the year 1922, on the theory that the excess monies in question became income only in that year (except of the Newtown Gas Company, whose case terminated in the year 1923).
During the year 1922 petitioner paid to the State of New York as a tax upon an increase in its authorized capital stock the sum of $5,000. Respondent in his notice of deficiency did not allow deduction for this tax.
During the year 1922 petitioner and its subsidiary companies paid to the United States Government the sum of $8,400.50, under Title XI, sections*2137 1100, et seq., Schedule A, paragraph 1, of the Revenue Act of 1921. Such amount represented a stamp tax at 5 cents for each $100 of face value or fraction thereof of an issue of bonds amounting to $16,801,000. Respondent did not allow such deduction in his notice of deficiency.
*522 During the year 1922 petitioner and its subsidiary companies paid to the State of New York, under section 253 of the tax laws of the State of New York (C.L., ch. 60, Session Laws, 1916, ch. 323), a recording tax upon mortgages given to secure the issue of a portion of the bonds of $16,801,000 mentioned in the preceding paragraph, viz., $11,222,000, such tax amounting to $56,110. Petitioner did not deduct the said full amount of $56,110 from its income for the year 1922. Petitioner has treated such item in said year and in subsequent years as a capital expenditure to be amortized over the life of the bonds, the payment of which was secured by the mortgage, upon which such recording tax was paid. In the petition filed, such recording tax is claimed as a deduction from the income of the year 1922.
Service of a copy of such petition was acknowledged by the Commissioner on February 2, 1927. *2138 The 60 days allowed under the rules of the Board within which respondent might answer expired on April 3, 1927. Pursuant to respondent's motion duly filed on March 29, 1927, the time within which answer might be filed was extended by this Board on April 2, 1927, to June 2, 1927. Under date of June 2, 1927, respondent filed a further motion requesting an extension of time from said date to June 6, 1927, within which to answer or move with respect to the petition. Said order was granted on June 3, 1927. Respondent's answer was filed on June 4, 1927.
OPINION.
TRUSSELL: Prior to the hearing of these proceedings, petitioner filed a motion under Docket No. 23380, which was taken under advisement at the hearing, this motion requesting that judgment of no deficiency be entered for the reason that respondent's answer in that proceeding was filed subsequent to April 3, 1927, the expiration of the 60-day period within which it was required to be filed under Rule 14 of the Board's rules of practice.
The record shows that by formal motion filed within such 60-day period, respondent requested an extension of time within which to answer, this request being granted, and within the period*2139 of such extension requested, in similar manner, a further extension which was granted, the answer being filed within the period as so extended. Petitioner's motion must be denied. The right of the Board to grant, in its discretion, an extension of the time for pleading provided by its rules, even upon a request for extension made subsequent to the expiration of the 60-day period provided, has been upheld. ; Board of Tax Appeals ex rel. ; certiorari denied, .
*523 In respect to items covered by assignment of error (g) representing deductions disallowed for 1922 in amounts of $56,110, $5,000, and $8,400.50, respondent confesses error. Income as determined by respondent for that year should be accordingly adjusted by deduction of these amounts.
By assignment of error (a) is presented the question as to whether certain monies, hereafter referred to as "excess monies," representing that portion of the charges by petitioner and its affiliated companies for gas manufactured and distributed in the years 1916 to 1922, which were in excess of the rates*2140 provided by State law represent income to them in the year in which the gas was sold, the year in which the monies were actually received, or the year 1922, in which was concluded certain litigation whereby their right to charge the higher rates was finally sustained.
Respondent, in computing the deficiencies here in question, has included these excess monies in income for the year 1922. His contention in that not until that year, when the litigation to fix fair rates was determined by final court decree, were these companies unconditionally entitled to these funds, and accordingly so long as they were not possessed of such right no basis existed for their accrual as income, even though the charges represented services rendered in years prior to 1922 and the cost to those companies of this service in each year was accrued as expense of that year.
Petitioner contends that its right and that of its affiliated companies to charge the higher rates and their right to collect, retain, and use the excess monies existed in each of the years in which the charges were made and these monies collected and impounded. It argues that in each of the years in question that right existed under*2141 the law; that for no year did that right accrue by reason of something occurring subsequent to its close; that the final court decree, under which liability bonds in respect to the excess monies were discharged, granted these companies no right but merely recognized and determined the right as having existed in each of the taxable years in question, and that the only postponement of event to a subsequent year was that of receipt of the funds not their right to receive.
Respondent contends that the rule is that only those sums which the taxpayer has a legal right to receive may be accrued as income. He further contends that amounts which are contingent upon the outcome of contested litigation can not be considered as of this character and cites in support of his contention ; ; . These cases are, on the facts, not in point as in each instance the litigation which delayed the receipt of income was brought to enforce distribution by a corporation of a portion of its accumulated *524 surplus, these petitioners*2142 being stockholders. The surplus in question was that of the corporation until distributed. Not until that time did it become income to these stockholders. The right which they had was not a right to the surplus as such, but a right to force a distribution. The question decided by these cases is merely that a stockholder is not taxable on account of corporate surplus until it is distributed to him or in other manner made unqualifiedly subject to his disposition.
We can not agree with the theory that a taxpayer maintaining his accounts on an accrual basis may accrue as income only those uncollected accounts pertaining to the current year in respect of which there is no contested litigation. The enforcement of such a rule would make impossible a regular and consistent method of accrual reflecting income with reasonable accuracy. The contesting of liability by a debtor is often merely for the purpose of delaying collection and in such case, we think, it could not be argued that the liability asserted by a creditor and represented by a bill receivable on his books was not subject to accrual as income in the amount claimed by him to be owing. Nor could it be held that only amounts*2143 which the taxpayer claimed as legally due and which he had in fact a legal right to collect could be accrued, for there would be no way to segregate such items. Their determination must necessarily await in each case the final decision of the court.
Respondent quotes the language of the Supreme Court in , that "generally speaking the income tax law is concerned only with realized losses as with realized gains," and argues that the same principal applies to both deductions and gains and cites many decisions of the courts and of the Board in respect to deductions as showing that a liability which is being contested by the taxpayer and the existence of which was a legal obligation can not be known until the litigation is terminated, does not represent to him an allowable deduction until final determination by the court.
With this view we can not agree. We think that a taxpayer on an accrual basis who renders service in a taxable year and asserts in that year a right to payment in a given amount is then chargeable with income in that amount if, at the close of that year, all of those conditions have been met, all those*2144 things done, which give rise to the right asserted, irrespective of the fact that the right may be contested and ultimate collection may be postponed until some future year. In such case the right to receive the income is a right then perfected and the litigation later concluded merely determines the right as having existed in the former year. We can see no difference in the case of a right to income asserted by a public service company *525 whose charges are regulated by State law. Respondent contends that the excess monies collected and impounded represent illegal exactions and as such were not subject to accrual; that the only amounts which petitioner and its subsidiaries could legally charge were the amounts fixed by State law. This theory overlooks the fact that petitioner's charges are not determined by State law alone, but by that law as limited by the constitutional guarantee against confiscation of property.
In the calendar year 1916, the cost to petitioner and its subsidiaries of furnishing service to its customers had increased to such a point that it amounted to as much or more than the charges then permitted by State law and orders of the State Public Service*2145 Commission. Under such condition the enforcement of the prescribed rates resulted in the confiscation of the property of these companies, and being entitled under the constitutional guarantee to higher rates, they asserted such right by proceedings in court, secured a restraining order against the enforcement of the confiscatory rates, and by permission of court charged and collected higher rates, the court impounding the excess monies over and above the rates permitted by State law until, after proof, decision could be reached upon petitioner's asserted right. After several years, during which the higher rates were charged, final decision was rendered in 1922, holding in each of the years in question, the prescribed rates were confiscatory and that petitioner is such years was entitled to collect the higher charges as made.
By this decision petitioner and its affiliated companies acquired no right. The decision merely determined the right to have existed in each of the prior years. In each of those years these companies manufactured and distributed the gas for which these charges were made, at all times asserted a right to collect and collected for this service these amounts, *2146 including the so-called excess monies, and, in each of such years, actually possessed the right to receive these amounts in excess of the charges prescribed by State law. By nothing which occurred subsequent to the close of these years was petitioner's right to the excess monies for such years perfected. It was a right in each year existing at the close thereof and later determined by the court to have then existed, this determination being upon the basis of conditions existing and facts transpiring within such year.
We can see no material difference between this question and that presented in the so-called Federal Control Cases, in which properties of railroad companies were taken for public use under act of Congress (40 Stat. 451) providing that just compensation be paid for such use. In each of those cases the amount of the compensation *526 was disputed and not determined until several years subsequent to return of these properties to the owners. In respect to the rentals so determined and paid, it was insisted, as in this case, that they could not be accrued as income of the years for which paid, as the act under which the properties were taken did not fix*2147 their amounts, and no amount could be considered as due and owing until determined, and consequently these amounts were only accruable in the later years when determined. In these cases we held that the right to just compensation guaranteed to the owners by the act in question as well as by the Federal Constitution was complete in each year of use, and only the determination of exact amount and payment were postponed and, accordingly, the rentals represented income to the companies accruable for the years in which the Government's obligation to make and the taxpayer's right to receive payment arose. ; ; ; ; ; . See also ; *2148 ; and , in respect to the proper accrual in the year the service was rendered of sums determined in amount and received in subsequent years from the Government for carrying the mails.
The rule announced by respondent and applied in determining the deficiencies here in question has manifestly resulted in the distortion of income, a large part of the return from gas manufactured and distributed in the years 1916 to 1922, inclusive, being thereby allocated to the latter year, most of this income having been actually received in prior years, and as we said in : "No method which fails to clearly reflect income has any justification or sanction under the law." We hold that the so-called excess monies involved herein represented income properly accruable in the years in which the service was rendered for which the charges were made and collected.
The conclusion reached on this issue also disposes of assignments of error (d), (e), and (f), the action taken by respondent in each instance and questioned by those assignments*2149 being merely the result of his action in allocating as income to the calendar year 1922 (and in the case of the Newtown Gas Company to 1923) the excess monies received and representing charges for service furnished in prior years. The action of respondent in respect to these items, in disallowing the deductions representing uncollectible accounts, is disapproved.
*527 In respect to assignments of error (b) and (c) it is shown that New York State Franchise taxes assessed against petitioner and affiliated companies for the years 1910 to 1919, inclusive, were accrued by these companies as liabilities for those years, but due to litigation instituted by the companies in the courts to reduce the valuation used as the basis of the several assessment were paid only in part upon assessment. In subsequent years, upon final decisions of the several proceedings, such additional taxes as shown to be due, on the valuations determined by the court, were then paid. For each of the several years during which these taxes remained unpaid, interest accrued under State law upon the unpaid portions of the assessments, this interest being accrued by these companies in each year for which imposed*2150 and payment being made at the time the balance of the tax was determined and paid. Respondent has, in determining the deficiencies here in question, treated such taxes and interest as accruing in the several years for which imposed. Petitioner seeks their allowance as deductions in each case of the years in which paid.
Petitioner contends that the deductions representing property taxes and interest thereon are different in character from other deductions and that when disputed and litigated as to amount, even though accrued on the books for the year in which assessed, they represent proper deductions only in the year in which the litigation is finally concluded. Both parties cite ; ;, and agree that the rule is clear, that the accrual of a tax of this character is proper even prior to assessment if all of the events have occurred prior to the close of the year which fix the amount of the tax and determine the liability of the taxpayer to pay it. Respondent contends that the application of this rule*2151 to the facts as stipulated shows these taxes as accruable in the several years from which assessed.
Petitioner insists that this being a property tax, an attack in court upon the valuation used as a basis of the assessment postpones until final determination by the court the fixing of the valuation upon which the liability for the tax is based and that this is postponement of an event necessary to a determination of liability, and accordingly accrual under such circumstances can be properly made only in the year of such final action by the court.
Upon careful consideration we can not agree with petitioner's theory. The litigating of the assessment by petitioner was purely a question of the determination of the amount of the tax, not of the liability. Events necessary to a final determination of the questions *528 both as to liability for tax and the amount thereof existed at the close of the year for which in each case the tax was assessed. These events were the ownership of certain rights and privileges and the value thereof. These were facts existing in the year for which assessment was made and the action by the court in later years merely determined these*2152 facts or events as so existing.
We hold that these franchise taxes represent proper accruals as liabilities of the years for which assessed and not to represent allowable deductions of the later years in which determined in exact amount and paid. ; ;
We further hold that the rule laid down with respect to the taxes in question applies to the interest accruing under State law upon that portion of the tax delinquent, such interest having been properly accrued by these companies in the year for which imposed. This interest may not be deducted in the later years in which it was actually paid.
Reviewed by the Board.
Judgment will be entered pursuant to Rule 50.