*844 Excess of costs over receipts of the operation of a transportation line deducted on returns for earlier years of operation held not properly included in the basis of gain from disposal of the line in a later year.
*111 The Commissioner determined a deficiency of $25,289.85 in income tax and $9,609.39 in excess profits tax of petitioner for 1936, refusing to allow the operating losses of prior years to be included in the basis for determining profit realized from a sale.
FINDINGS OF FACT.
Petitioner, a California corporation with its principal office in Oakland, was organized in 1923. It took over from four individuals, who became its only stockholders and who were four of its five directors, the operation of a bus transportation system between Oakland, Palo Alto, San Jose, and Santa Cruz which the four individuals had been operating under a certificate of the California State Railroad Commission.
The area between Oakland and Hayward contained orchard and tomato lands. For several years before 1931 a street*845 car line had been *112 operated between those points. At that time petitioner had given intermediate bus service as part of its intercity service between Oakland and San Jose. Petitioner considered two alternative plans for providing the area with transportation - one, a skeleton service which would merely take care of the existing demand, and the other, a more frequent service at 20-minute intervals. Petitioner adopted the latter plan and in 1931 established a local service in addition to the intercity service. The busses stopped to take on or discharge passengers at any corner. The area developed rapidly.
In 1933 petitioner filed with the State Railroad Commission an application for authority to extend the local bus service to the Castro Valley and San Lorenzo areas. Authority was granted, and in 1934 the new service was instituted on a 20-minute frequency. This service was coordinated with the existing local service, thereby giving 10-minute service to certain areas.
In 1931-1935 the miles traveled, the passenger and express receipts, and the loss from operation of the new local service, computed by deducting from transportation revenues the transportation expenses, *846 self-insurance charges, and depreciation adjustments, were as follows:
| Miles | Receipts | Loss | |
| 1931 | 282,127 | $48,356.91 | $15,613.54 |
| 1932 | 328,860 | 58,230.04 | 11,230.94 |
| 1933 | 342,513 | 63,355.05 | 516.47 |
| 1934 | 753,967 | 101,640.22 | 39,459.22 |
| 1935 | 839,046 | 108,550.72 | 52,885.41 |
| Total | 119,705.58 |
In 1935 petitioner's directors contemplated abandoning the new local routes to another transportation company, and on January 14, 1936, made such a contract, including the sale of 15 busses. The consideration was $180,000 plus $30,000 as reimbursement for petitioner's local service operating deficit from April 1 to December 31, 1935, and a sum equal to petitioner's local service operating deficit from January 1, 1936, to the date of actual abandonment of the local service.
On its income tax returns for 1931-1934, petitioner deducted the losses from operation of the new routes. On May 21, 1936, amended returns were filed for these years, and on them and on the return for 1935 these losses, aggregating $119,705.58, were treated as having been capitalized.
OPINION.
STERNHAGEN: On its return for 1936 petitioner reported a capital gain of $92,334.14, by*847 including in its basis the $119,705.58 aggregate losses from the operation of the services from Oakland to Hayward, Castro Valley, and San Lorenzo. These amounts for each year through 1934 had been used by petitioner as deductions in computing *113 its taxable income, either as operating expenses or losses. The Commissioner increased the gain from the transaction in 1936 by excluding the $119,705.58 from the basis, saying "there is no authority under the provisions of section 113(b), Revenue Act of 1936, to capitalize as the cost of the franchise the operating losses of the years 1931 to 1935, inclusive." Petitioner contends that the general excess of operating expenses over operating receipts from the new routes were capital expenditures not properly deductible in the year of operation.
The Commissioner's determination is correct. So far as the evidence shows, the losses in question were entirely operating expenses and petitioner properly took deductions for them in the respective years of operation. The fact that the new operation resulted in greater expenses than receipts is not alone reason to capitalize them. Had there been expenditures which could be identified*848 as not attributable to current operation but directly and clearly to capital, there might be some ground for permitting or even requiring a taxpayer to omit them from current deductions and charging them to "capital account" as contemplated by section 113(b)(1)(A). This has been held in respect of the cost of solicitation of new business and of free service given to build good will. ; cf. ; . But nothing in the evidence would have supported such treatment in the years of expenditure, and nothing supports such treatment in the later year when the business was discontinued. The excessive cost of current operation would not be regarded as invested capital for the purpose of measuring excess profits under the earlier statutes.
Decision will be entered for the respondent.