*2386 1. Organization expenses of a corporation are not ordinary and necessary expenses deductible from gross income in income-tax returns. Emerson Electric Mfg. Co.,3 B.T.A. 932; Simmons co.,8 B.T.A. 631.
2. In 1921 the petitioner accrued upon its books of account, kept upon the accrual basis, certain charges against the American Railway Express Co. The latter company refused to pay the charges so made against it. The petitioner appealed to the Interstate Commerce Commission, which approved the contentions of the petitioner. After the order of the Interstate Commerce Commission became final the American Railway Express Co. appealed to the courts, which enjoined the carrying into effect of the order of the Interstate Commerce Commission. The litigation was taken to the United States Supreme Court, which reversed the lower court, thereby reinstating the order of the Commission. The American Railway Express Co. then paid the charges made against it by the petitioner for 1921. Held that the charges were properly accruals of the year 1921.
*491 These proceedings consolidated for hearing and decision involve deficiencies in tax as follows:
| Docket No. | Year | Amount |
| 1921 | $511.05 | |
| 24172 | 1922 | 2,942.82 |
| 32373 | 1924 | 7,826.11 |
| 40021 | 1926 | 657.30 |
| 42431 | 1927 | 774.23 |
Two issues are raised by these proceedings, namely:
(1) Whether the petitioner is entitled to a deduction under the head of ordinary and necessary expenses of $31,517.63 incurred during the year 1921; and
(2) Whether an item of $51,300 paid to the petitioner by the American Railway Express Co. in 1924 should be held to be income of 1924 or of 1921.
FINDINGS OF FACT.
The petitioner obtained on October 6, 1920, a charter from the State of Alabama to do an express business. It did not actually begin the transportation of express packages until May 1, 1921.
Before the petitioner could begin business it was necessary for it to complete its organization, open offices in various cities, select officers of several departments, etc. As a result of this preparation expenses of $39,240.88 were incurred from January 1 to May 1, 1921, and the funds to pay these expenses were taken from*2388 the paid-in capital of the company, such capital having been secured from the sale of stock to the public. These expenses were shown on the books under the heading "Organization Expenses," but early in 1922 the accounts were recast and a portion of the amount was charged to buildings acquired and a portion to equipment purchased. The petitioner's books were kept in accordance with the rules and regulations of the Interstate Commerce Commission.
Of the total amount expended in the preliminary period, $7,723.25 was for such organization expenses as the securing of a charter, obtaining subscriptions to capital stock, etc. The balance of $31,517.63 *492 includes the salary of the general counsel for three months, amounting to $1,500, one-half of whose time was devoted to legal work connected with the organization of the corporation. The balance of the $31,517.63 was paid for traveling expenses, postage, stationery, salaries of clerks, and others, and covered many miscelaneous items preliminary to the actual carrying of express packages. The actual organization expenses amounted to $8,473.25.
When the petitioner began business on May 1, 1921, the American Railway Express*2389 Co. closed all existing through routes, with one or two exceptions, between common points and exclusive points on the line of the American Railway Express Co. The petitioner immediately filed complaint with the Interstate Commerce Commission and after various hearings that body rendered a decision to the effect that the petitioner was entitled to have through routes established where the service over through routes was reasonably expeditious as compared with the single line service of the American Railway Express Co. 78 I.C.C. 126, 143; 81 I.C.C. 247. When the order of the Interstate Commerce Commission became final in 1923, the American Railway Express Co. filed a bill in the United States District Court for the Northern District of Georgia seeking an injunction against the petitioner from making charges against it and to have declared void and unenforceable the Commission's order. A three-judge court granted the injunction, one of the members having dissented, 293 Fed. 31, and the petitioner appealed from the grant of interlocutory injunction to the Supreme Court of the United States, which court on June 2, 1924, reversed the decision of the*2390 three-judge court and rendered a decision upholding the order of the Interstate Commerce Commission in respect of through routes. During the pendency of the claim of the petitioner against the American Railway Express Co. before the Interstate Commerce Commission and the courts, the American Railway Express Co., on interline shipments over the disputed routes from May 1, 1921, until a period subsequent to the decision of the Supreme Court of the United States - at which time the through routes sought were actually put into effect, charged its local rate for the distance that shipments might move over its line, refusing to recognize any through rate on joint shipments between common points and exclusive American Railway Express Co. territory; and, in respect of shipments of this character, declined to settle with the petitioner on the basis of a participant in a joint through rate. In the meantime, the petitioner had been keeping account of disputed amounts and, in 1921, accrued as charges against the American Railway Express Co. $51,300 as revenue for that year, and the petitioner paid the income tax shown to be due in its return for 1921, after *493 the inclusion in gross*2391 income of the $51,300 in question. In the audit of the petitioner's returns the Commissioner, in 1926, eliminated the $51,300 from the return for 1921 and included it in the gross income of petitioner for the year 1924, during which year and after the decision of the Supreme Court, the petitioner received from the American Railway Express Co. $208,643.95 in settlement of all charges made by the petitioner against it on account of express matter shipped to the date that the order of the Interstate Commerce Commission was put into effect as a result of the decision of the Supreme Court. Of the amount of $208,643.95, $51,300 was agreed to be in settlement of the petitioner's claim against the American Railway Express Co. for charges made upon its books of account against that company for the yea 1921.
The deficiencies determined by the Commissioner were based in part upon the disallowance from the gross income of the year 1921 of $39,240.88 claimed by the Commissioner to be organization expenses and not ordinary and necessary expenses deductible from gross income and in part upon the inclusion in gross income of 1924 of $51,300 which the petitioner had returned as part of its gross*2392 income for 1921, but which the Commissioner had transferred to the year 1924.
OPINION.
SMITH: The points in controversy in this proceeding are:
(1) Whether the petitioner is entitled to a deduction under the head of ordinary and necessary expenses for 1921 of $31,517.63, which the respondent has disallowed on the ground that they constitute organization expenses, and
(2) Whether the item of $51,300 paid to petitioner by the American Railway Express Co. in 1924 constitutes income of the petitioner for 1921 and not for 1924, as determined by the respondent.
The Board has held that organization expenses of a corporation may not be deducted as ordinary and necessary expenses of operation. Emerson Electric Mfg. Co.,3 B.T.A. 932; Simmons Co.,8 B.T.A. 631. The petitioner admits that under those decisions it is not entitled to deduct, from the gross income of 1921, $7,723.25 which the evidence shows to have constituted organization expenses or expenses connected with the obtaining of the charter, obtaining subscriptions to capital stock, etc. The evidence further shows that one-half of the general counsel's time for the first three months*2393 of 1921 was connected with the organization of the corporation. His salary for this period was $1,500. We think that one-half of this amount, or $750, should likewise be considered organization expenses. We therefore reach the conclusion that the total organization *494 expenses were $8,473.25. This amount was in our opinion properly disallowed by the respondent as a deduction from gross income. The evidence shows that the balance of the amount disallowed by the respondent as organization expenses, namely, $30,767.63, was spent in salaries of officers and clerks, traveling expenses, printing, stationery, etc., prior to the actual receipt of express packages for shipment. We think that the entire amount of $30,767.63 constituted ordinary and necessary expenses of operation for 1921 and are legal deductions from gross income.
The second question for our consideration is whether an item of $51,300 returned by the petitioner as income for 1921 was income for that year or for 1924. The petitioner kept its books of account upon the accrual basis in accordance with the requirement of the Interstate Commerce Commission. *2394 It apparently accrued these amounts in good faith upon its books and accounted for that income in its income-tax return for 1921. It is true that the American Railway Express Co. resisted the claim but in the end it was forced to pay it. We think that it was properly accrued in the year 1921. In Lucas v. American Code Co.,280 U.S. 445, it is stated:
* * * And the direction that net income be computed according to the method of accounting regularly employed by the taxpayer is expressly limited to cases where the Commissioner believes that the accounts clearly reflect the net income. Much latitude for discretion is thus given to the administrative board charged with the duty of enforcing the Act. * * *
We are of the opinion that no rule can be laid down defining the time when income accrues which will cover all cases. The question as to when an item of income accrues is largely a question of fact. If service has been rendered it is logical to assume that the income to be received from such service accrues with the rendering of the service. Cf. *2395 Western Maryland Ry. Co.,12 B.T.A. 889, in which the Board held that retroactive back mail pay under a prior decision of the Interstate Commerce Commission should be allocated by the railroad, not to the year in which the payment was received, to wit, 1919, but to the years 1916 and 1917, in which the service of transportation was rendered. Cf. Great Northern Ry. Co.,8 B.T.A. 225, in which the Board stated at page 269:
In our opinion the requirement of the Interstate Commerce Commission that interest accrued on funded securities shall not be credited to income accounts prior to actual collection "unless its payment is reasonably assured by past experience, guaranty, anticipated provision or otherwise," is entirely consistent with a system of accounting which is designed to reflect any company's true income. * * *
We are of the opinion that much weight should be given to the books of account of the taxpayer kept in good faith. The petitioner accrued the $51,300 in question on its books of account in 1921 and *495 returned the income for that year. We believe that its return made upon such basis correctly reflected its income upon the*2396 accrual basis, so far as the $51,300 in question is concerned.
In his brief the respondent argues that if the Board were to hold that the $51,300 in question should be allocated to the year 1921, such an allocation would create an anomalous situation, since intervening years are before the Board and a correct decision as to the total recovery would necessarily require a determination of the amounts to be allocated to all prior years and not merely to separate some portion of the total amount for the mere purpose of offsetting the sum that may be found by the Board to be deductible for the year 1921, which forms the basis of the first issue in this proceeding. This argument does not appear to us to be sound. The evidence indicates that for the years 1922 and 1923, the petitioner did not accrue charges against the American Railway Express Co. and it accounted for the difference between $51,300 and the $208,643.95 received from the American Railway Express Co. in 1924 as income for 1924. We perceive no reason why that income should not be returned as income of the year 1924. We are only concerned with the item of $51,300 which the petitioner accrued in the year 1921. We think*2397 that the accrual was proper.
Reviewed by the Board.
Judgment will be entered under Rule 50.
MURDOCK concurs in the result only.