*2146 1. The saving effected by a corporation through the purchase and retirement of a portion of its outstanding bonds at a price less than their par value, is not taxable gain to it.
2. Assessments paid by a railroad corporation to the support of the Association of Railway Executives, held deductible as an operating expense from gross income for the year paid. Los Anaeles & Salt Lake R.R. Co.,18 B.T.A. 168">18 B.T.A. 168, followed.
3. Where a railroad company in its operations in 1920 expended material and supplies which it acquired through exchange of like material and supplies purchased by it in prior years, the invoiced value of the supplies purchased in said prior years is the proper basis for determining the cost to the company of the supplies expended, in determining its taxable income for that year.
4. Determination of the Commissioner in respect to expenditures made by the railroad company on account of maintenance and repair to its ways and structures and equipment reversed.
*303 This is an appeal from the determination of a deficiency of $61,399.54 in income taxes made by the Commissioner of Internal Revenue against the petitioner and its affiliated companies for 1920. In the petition filed assignments of error are set forth as follows:
(a) The Commissioner has erroneously held that $23,083.67, accruing to the petitioner by the acquisition and retirement, during the calendar year 1920, of certain bonds of petitioner, being the difference between the face or par value of said bonds, and the amount for which petitioner, during the calendar year 1920, was able to procure the payment and discharge of said bonds, represents a profit and taxable income.
(b) The Commissioner has erroneously held that $854.22 paid out during the calendar year 1920, to support an association known as the Association of Railway Executives was not a proper charge against gross income.
(c) The Commissioner has erroneously increased the income of the petitioner for the calendar year 1920 in the amount of $87,349.40, representing a portion of the excess of value of the inventory of materials and supplies, returned by the Director General at the*2148 end of Federal control, over the book value of the inventory taken over. The Commissioner erroneously holds that such amount is either a profit derived from such replacement, or that such excess was deducted from gross income during the said year 1920.
(d) The Commissioner has erroneously added to the taxable income of the petitioner, for the calendar year 1920, the amount of $464,689.37, which addition the petitioner believes is based upon the arbitrary assumption that the operating maintenance charges deducted from gross income in the petitioner's tax return included expenditures for the rehabilitation of the property turned back by the Director General in an amount exactly equal to the allowance finally made in 1922 by the Director General to make good his failure properly to maintain such properties during Federal control. The petitioner denies that its operating maintenance charges deducted from gross income during the year 1920, included any amounts for the rehabilitation of the properties turned back by the Director General but, on the contrary, alleges that such operating expenditures were not more than sufficient to take care of the normal maintenance charges to maintain*2149 the property without taking care of any prior deferred undermaintenance. The petitioner further submits that the Commissioner's action in this respect is a mere subterfuge to tax, as income, the capital contribution made by the United States in 1922, in accordance with the terms of the Federal Control Act, approved March 21, 1918. The petitioner denies that said capital contribution, which was not in any way determined or ascertained until November, 1922, constituted income in the year 1920.
*304 At the hearing in this case a written stipulation, with exhibits attached, was placed in the record, whereby the petitioner and respondent agree, as follows:
It is hereby stipulated and agreed by and between the petitioner and respondent, by their respective attorneys of record, that the following facts and exhibits referred to herein and attached hereto may be considered as evidence in determining the issues involved in the appeal referred to under Docket No. 22243, without prejudice, however, to the right of either party to introduce further and additional evidence not inconsistent herewith:
The petitioner is a corporation organized under, and by virtue of, the laws of the*2150 State of Virginia, with its principal office at Norfolk, Virginia. It is engaged in the business of a common carrier, its system of accounting is the accrual basis and is the prescribed by the Interstate Commerce Commission and is subject to the Act of Congress known as the "Act to Regulate Commerce" and the acts amendatory thereof and supplementary thereto.
By Proclamation, dated December 26, 1917, the President of the United States, acting under the powers conferred on him by the Constitution and laws of the United States (especially by section one (1) of the Act of Congress, approved August 29, 1916, entitled: "An Act Making Appropriations For The Support of the Army, for the Fiscal Year Ended June 30, 1917, and for Other Purposes," and the joint resolutions of the Senate and House of Representatives, bearing date April 6, 1917, and December 7, 1917, respectively, declaring a state of war to exist against the Imperial German Government, and against the Imperial and Royal Austro-Hungarian Government,) took possession and assumed control, at 12.00 o'clock, noon, December 28, 1917, of certain railroads and systems of transportation, including the transportation system of the petitioner*2151 and its subsidiaries, as described and set out in a certain contract with the Director General of Railroads, (hereinafter referred to as Director General), dated December 29, 1919, made under the authority contained in the Act of Congress, approved March 21, 1918, generally designated and hereinafter called, "The Federal Control Act," and the Proclamation of the President, made under the authority of the said Act on March 29, 1918. A copy of said proclamation of December 26, 1917, and the statement thereto attached and therein referred to, is attached hereto, marked Exhibit A, and made part hereof.
Copy of said contract, dated December 29, 1919, between petitioner and its subsidiaries and Director General, is hereto attached, marked Exhibit B, and made part hereof.
In accordance with the terms of an Act of Congress, approved February 28, 1920, as amended, commonly called the "Transportation Act of 1920", the President, on March 1, 1920, relinquished possession of the system of railroad of the petitioner and its subsidiaries, as described in said Exhibit B, and turned back to the petitioner and its subsidiaries all of the properties then comprising said system.
That the petitioner*2152 and the Director General executed as of November 4, 1922, formal final settlement of all questions growing out of Federal control, copy of which is attached hereto as Exhibit C; that Exhibit D attached hereto shows in parallel columns the claim of petitioner and its subsidiaries and the amount allowed on each item as set up on the books of the Director General.
ALLEGED PROFIT ON ACQUISITION AND RETIREMENT OF BONDS. - That as of February 1, 1911, Norfolk Southern Railroad created its first and refunding mortgage secured by an issue of 50-year 5% Gold Bonds, with a par value of $1,000.00 *305 each; that on January 1, 1920, there was outstanding in the hands of the public a large number of these bonds; that during the year 1920, the petitioner purchased from the public and retired 45 of the said 50-year 5% Gold Bonds, paying therefor the sum of $21,916.33; that the petitioner returned as taxable income in the year 1920 the sum of $23,083.67, representing the difference between the par value of said bonds and the cost of acquiring the same for retirement; that the said sum of $23,083.67 has been included by the respondent in the taxable income of the petitioner for said year*2153 1920; that said 45 bonds were actually issued and sold at the following times and for the following amounts, which sums were duly received by the petitioner.
| April 11, 1911, 5 bonds | $4,550.00 |
| February 10, 1913, 35 bonds | 32,900.00 |
| February 10, 1913, 4 bonds | 3,760.00 |
| January 28, 1914, 1 bond | 940.00 |
that the petitioner has received through amortization of the discounts during the life of said bonds while outstanding the following amounts:
| 5 bonds sold April 11, 1911 | $84.44 |
| 35 bonds sold February 10, 1913 | 328.14 |
| 4 bonds sold February 10, 1913 | 39.20 |
| 1 bond sold January 28, 1914 | 8.32 |
that said data appears in detail in the schedule attached hereto as Exhibit E.
PAYMENT OF EXPENSES OF THE ASSOCIATION OF RAILWAY EXECUTIVES. - That the petitioner, during the months of May and September, 1920, paid to an organization known as the Association of Railway Executives, the amount of $1,366.75, all of which amount was charged in the petitioner's return for the year 1920 against its gross income as a part of petitioner's expenses; that $854.22 of said amount so claimed was disallowed by the respondent. [In connection with this question, it was*2154 stipulated at the hearing that the findings of fact on the same questions in , should be included herein by reference as the findings of fact of the Board in this proceeding.]
MATERIAL AND SUPPLIES. - That included among the assets taken over by the Director General as of January 1, 1918, the beginning of Federal control, was an inventory of material and supplies on hand at that time of $467,056.75; that the Director General, after the end of Federal control, and during 1920, pursuant to the terms of the contract, heretofore attached and marked Exhibit B, returned to the petitioner material and supplies amounting to $581,761.48; that the material and supplies so returned were accepted by petitioner as being in excess of material and supplies of equal quantity, quality and relative usefulness to those turned over in the amount of $16,943.79, at the prices prevailing at the end of Federal control as to such excesses; (said $16,943.79 was one of the items in the final settlement set out in Exhibit D) that the balance of said material and supplies, so returned, which were equal in quantity, quality and relative usefulness*2155 to those taken over at the beginning of Federal control, had a value of $564,817.94, at prices prevailing at the end of Federal control, resulting in an excess in the value of said material and supplies so returned and equal in quantity, quality and relative usefulness to those taken over by the Director General of $97,760.94.
That the Commissioner of Internal Revenue, in determining the net taxable income of the petitioner for the year 1920, determined that the portion of said material and supplies which included $10,411.54 of said excess value was used by the petitioner in making additions and betterments to its property and *306 determined that the balance of said materials and supplies, was used in operations in 1920, and charged on petitioner's books to its operating expense account at an amount which included the said excess of $87,340.40; that the Commissioner disallowed said excess of $87,340.40, as a deduction from operating expenses; that the portion of said materials and supplies which included $59,673.39 of said excess value was used by petitioner in making additions and betterments to its property and the balance of said materials and supplies which included*2156 $38,087.55, of said excess was used in operations and charged to its operating expense account during the year 1920; that the Commissioner erred in his failure to allow as a deduction for operating expenses all of said sum of $59,673.39; that petitioner's net taxable income, as determined by the Commissioner, therefore, should be decreased by the sum of $49,351.85; the difference between said amount of $59,673.39 and said amount of $10,411.54; that the petitioner reserves the right to object to the action of the Commissioner of Internal Revenue in disallowing the said balance of said $97,760.90, or $38,087.55, upon the ground that the said $38,087.55, should be accounted for in the year 1922, the year in which final settlement was made; that nothing herein contained shall be construed to prevent the petitioner from showing the time when the agreement was arrived at as to material and supplies returned by the Director General being in excess of an equal quantity, quality and relative usefulness to those taken over by him, nor to prevent petitioner from showing at what time or times, during 1920, the material and supplies returned were delivered to it by the Director General, subject, *2157 however, to the right of the respondent to object to such showing upon the grounds of relevancy, materiality or competency.
UNDERMAINTENANCE. - That the Director General, in his final settlement with the petitioner above referred to, allowed to the petitioner and its subsidiaries, Kinston Carolina Railroad Company, Carolina Railroad Company and Carthage and Pinehurst Railroad Company, the sum of $464,689.37, for undermaintenance of way and structures and equipment, which sum was accepted by the petitioner and, with the agreement and consent of the petitioner, credited by the Director General against liabilities on other accounts owing from the petitioner to the Director General; that the Commissioner of Internal Revenue, in determining the petitioner's net taxable income for the year 1920, disallowed as a deduction for operating expenses, accounts for maintenance of way and structures, and maintenance of equipment, a sum equal to said sum of $464,689.37; that the average annual expenditures by the petitioner, and its said subsidiaries for maintenance of way and structures and equipment during the test period was $1,272,388.90; that the annual expenditures by the Director General*2158 for maintenance of way and structures and equipment for the years 1918, 1919, and for the months of January and February of the year 1920, were as follows:
| 1918 | $2,381,067.32 |
| 1919 | 2,581,796.80 |
| 1920 (Jan. & Feb.) | 538,806.65 |
that the expenditures by the petitioner for maintenance of way and structures and equipment for the last ten months of the year 1920 and the years 1921 and 1922 were as follows:
| 1920 (last ten months) | $2,741,737.06 |
| 1921 | 2,441,449.32 |
| 1922 | 2,479,253.57 |
AMORTIZATION OF BONDS. - That the contention of the petitioner regarding the question of amortization of bonds as set forth in its amended petition under *307 the above heading in paragraph (5), subparagraphs (v), (w), (x), (z) and (a-a) is hereby abandoned and the action of the Commissioner of Internal Revenue in disallowing as a deduction from gross income the sum of $4,173.36, amortization of bonds sold at a discount, should be sustained.
ISSUE RAISED BY RESPONDENT. - That the consolidated return filed by the petitioner for the year 1920, showed a net loss of $42,365.23, which consisted of a net income for the two months of January and February, 1920, in the*2159 amount of $16,401.74, and of a net loss for the ten months from March 1 to December 31, 1920, in the amount of $58,766.97; that the Commissioner made adjustments to the income reported and determined the consolidated taxable net income of the year 1920 to be $615,995.37, of which $44,569.95 applied to two months of January and February, 1920, and $571,425.42 applied to the ten months from March 1, to December 31, 1920; that of the adjustments made by the Commissioner, the petitioner has appealed from those which are identified as Undermaintenance, $464,689.37, Material and Supplies, $87,349.40, and Association of Railway Executives, $854.22" all of which adjustments are included in the said amount of $571,425.42, taxable net income applicable to the period from March 1, to December 31, 1920.
It is agreed that should the Board determine that the taxable net income of the petitioner has been erroneously determined by the Commissioner as a result of the above said adjustments, then the taxable net income for said period, from March 1 to December 31, 1920, should be corrected to that extent.
It is agreed that should the Board determine that the petitioner erroneously included the*2160 sum $23,083.67, or any part thereof, in its taxable income for the year 1920, as a result of purchasing and retiring its own bonds, then, in that event, the taxable net income for the period from March 1 to December 31, 1920, should be reduced by said amount.
It is agreed that the deficiency should be determined by computing the tax at the rate of 8% on the taxable net income, as found by the Board, for the months of January and February, 1920, and at the rate of 10% on the taxable net income, as found by the Board, for the ten months from March 1, to December 31, 1920, provided, of course, that a net loss, if any, determined for the ten-months period shall be applied against the net income determined for the two-months period.
In addition to the stipulation, oral and documentary evidence was adduced at the hearing, from which we make the following findings of fact.
FINDINGS OF FACT.
When the petitioner and its subsidiaries repossessed their properties at March, 1, 1920, roadbeds and tracks were in bad condition, due, in part, to the fact that the roadbeds were ballasted with dirt which had become sofe and sunken in places as a result of lack of drainage caused by the filling*2161 up of ditches in rights of way. There was also a very substantial deficiency of sound supporting crossties. In the taxable period the petitioner made certain repairs and renewals in the track and roadbed which, among other things, included the imbedding of 299,473 crossties at an average cost of $1.447 each. The proper rehabilitation of the track would have required the imbedment of 364,224 crossties. The average cost of crossties during the three years preceding January 1, 1918, was 48.4 cents each.
*308 On March 1, 1920, the petitioners owned 3,530 cars, with 262 in shop, unfit for service or out of service. At December 31, 1920, they owned 3,536 cars, of which 468 were in shops awaiting or undergoing repairs. At March 1, 1920, the petitioner and its subsidiaries owned 90 locomotives, of which 75 were serviceable and at December 31 of that year owned 105, of which 76 were serviceable.
In the accounting system used by the Director General during Federal control, in order to equate his expenditures on account of labor and material during each accounting period to the cash basis of the test period, using the prewar purchasing power of $1 as the basic cost, unit factors*2162 to show increased cost during Government operation were worked out and adopted as follows: For 1918, 195.07 per cent; for 1919, 228.75 per cent; and for 1920, 258.99 per cent.
Effective as of May 1, 1920, the United States Railway Labor Board increased the rate of pay of railway labor. During the four months from May 1 to August 31, the increased pay for labor for maintenance of way, structures and equipment for these petitioners amounted to $34,877.75 per month, or 33 1/3 per cent more than the average for such purpose during the test period.
The petitioner and its subsidiaries kept their accounts and rendered their income tax returns on the accrual basis.
OPINION.
LANSDON: Petitioner's first assignment of error related to the taxable gain, if any, realized by it in the purchase and retirement in the taxable year of $45,000 per value of its bonds for $23,083.67 less than their face value. This amount, which the petitioner included in its gross income in its return for the year, it now seeks to have eliminated therefrom upon authority of our decision in *2163 , and other Board and Court cases cited in its brief. We do not think that our decision in the Independent Brewing Co. appeal, supra, supports the contentions of the petitioner, since the facts in that proceeding are different in many respects and no liquidation of bonds was involved. The same may be said of other cases cited by the petitioner, including that of . This Board, however, in cases where the facts involved were similar, has repeatedly held that such a transaction did not result in taxable income to the taxpayer within the meaning of the taxing statutes. The rule applicable to the facts herein we therefore consider to be well settled, and we sustain this contention of the petitioner. ; ; ; ; *309 *2164 ; and .
Petitioner's next assignment of error relates to the respondent's disallowance of deductions claimed on account of assessments paid to the Association of Railway Executives. The parties have stipulated that the evidence and findings of fact in , shall be incorporated in the record of this proceeding by reference. Upon authority of our decision in that case, the determination of the respondent as to this issue is reversed.
The petitioner's third assignment of error relates to the inventory increase on account of material and supplies returned by the Director General. It is stipulated that the material and supplies returned by the Director General to the petitioner in 1920, which equaled in quantity, quality, and relative usefulness the material and supplies taken over in 1917, had a value when returned in 1920 of $97,760.94 in excess of the cost to petitioner of the property it replaced. The petitioner used all of the property so returned in 1920, and charged it out on its books at the greater*2165 value. The respondent contends that the petitioner is entitled to charge against operating expenses for the year only the inventory value at time of delivery to the Director General of an agreed quantity of like property which the property so used replaced in the settlement, and not the increased value of 1920.
The single question for determination here, as we see it, concerns only the cost to petitioner of the material and supplies which it expended in the operation of its railroad in the taxable year. This question is in no way concerned with, or affected by, the date of the petitioner's final accounting with the Director General. ; ; ; ; ; . Clearly the cost to the petitioner of these returned supplies was the cost of the replaced supplies delivered to the Director General. *2166 At the time of such delivery, December 31, 1917, the petitioner invoiced its supplies to the Director General at $467,056.75, which amount it charged against him on its books, under the head of "deferred assets." This amount, then, was the cost to the petitioner of the material and supplies expended in the operation of its railroad in 1920, and the action of the respondent in so holding must be sustained. .
The remaining assignment of error challenges the action of the respondent in disallowing the petitioner's claim for a deduction from its gross income on account of maintenance to the extent of *310 $464,689.37, which exactly equals the credit which was allowed for undermaintenance in the final settlement between the Director General and the petitioner. The petitioner's first contention as to this issue is that inasmuch as final settlement with the Director General was made on November 4, 1922, and as it received no payment on account of undermaintenance in the taxable year, either by cash or credit, the tax problem, if any, resulting from the adjustment of its claim therefor must relate to the year in which*2167 such settlement was made. The question presented is not whether the petitioner realized a gain or sustained a loss as a result of the Federal settlement. The issue is as to the amount to be allowed as a deduction in the year before us and this must be determined in the light of the contract on the part of the Government to reimburse the petitioner for all undermaintenance.
The standard contract under which the petitioner's property was operated by the Government contains the following:
SEC. 5. (a) During the period of Federal control the Director General shall, annually, as nearly as practicable, expend and charge to railway operating expenses, either in payments for labor and material or by payments into funds, such sums for the maintenance, repair, renewal, retirement, and depreciation of the property described in paragraph (a) of section 2 hereof as may be requisite in order that such property may be returned to the Companies at the end of Federal control in substantially as good repair and in substantially as complete equipment as it was on January 1, 1918: Provided, however, That the annual expenditure and charges for such purposes during the period of Federal control*2168 on such property and the fair distribution thereof over the same, or the payment into funds, of an amount equal in the aggregate (subject to the adjustments provided in paragraph (c) and to the provisions of paragraph (e) of this section) to the average annual expenditure and charges for such purposes included under the accounting rules of the Commission in railway operating expenses during the test period, less the cost of fire insurance included therein, shall be taken as a full compliance with the foregoing covenant.
(b) The Director General may expend such sums, if any, in addition to those expended and charged under paragraph (a) of this section (subject to the adjustments provided in paragraph (c) of this section) as may be requisite for the safe operation of the property described in paragraph (a) of section 2 hereof, assuming a use similar to the use during the test period and not substantially enhancing the cost of maintenance over the normal standard of maintenance of railroads of like character and business during said period; and the amount, if any, of such excess expenditures during Federal control shall be made good by the Companies as provided in paragraph (b) of*2169 section 7 hereof.
(c) In comparing the amounts expended and charged under the provisions of paragraphs (a) and (b) of this section with the amounts expended and charged during the test period, due allowance shall be made for any difference that may exist between the cost of labor and materials and between the amount of property taken over and the average for the test period, and, as to paragraph (a), for any difference in use between that of the test period and during Federal control which, in the opinion of the Commission, is substantial *311 enough to be considered, so that the result shall be, as nearly as practicable, the same relative amount, character, and durability of physical reparation.
* * *
In conformity with the above provisions the Director General, in his final settlement, allowed the petitioner a credit in the amount of $464,689.27, which represented the extent to which he had failed to satisfy the conditions of paragraph (a) of the standard contract. Both parties now regard this credit as a payment to the petitioner for the undermaintenance of its properties during the period of Federal control, and hereinafter it is so considered. In our opinion in*2170 , we said: "It may be conceded that whatever payment or allowance was made to the petitioner for undermaintenance does not constitute income to it; it represents no more than a return to it of its original capital investment." Neither of the parties here now contends that the payment was income to the petitioner in the taxable year or at any other time. Apparently they agree that as of March 1, 1920, it was a payment for property used, destroyed, or impaired during the period of Federal operation. It follows, therefore, that no income was realized by the receipt of such payment unless the amount thereof exceeded the cost to the petitioner of the capital assets thus involuntarily converted, and, since this question is not in issue, no discussion thereof is required.
Upon repossession of its property on March 1, 1920, petitioner reassumed all the burdens of maintaining its way, structures and equipment in usable condition and for that purpose expended the amount of $2,741,737.06 within the ten months ending December 31, 1920. In its income tax return for that period it deducted such sum from its gross income. The*2171 Commissioner disallowed this deduction in the amount of $464,689.37. The basis for this disallowance is the respondent's determination that to that extent maintenance for the period in question was paid for by the Government out of cash or credit allowed to the petitioner in the final settlement. No part of the credit allowed was required to be earmarked or segregated for use in replacing undermaintenance sustained during the period of Federal control. No suspense account was opened for that purpose. As of March 1, 1920, the payment in question was merged into the capital of the petitioner and, thereafter, and without limitation, was available to it for any proper corporate use.
There is no question that the entire $2,741,736.07 was expended in the taxable period for purposes regarded by the petitioner as current maintenance of way, structures and equipment. Such payments are chargeable to expense and deductible from gross income for Federal tax purposes unless they include amounts used for capital replacements, *312 for betterments, or for other purposes not included within statutory deductions from gross income. The basis for the disallowance, then, is the theory*2172 that the cost of restoring capital property for which petitioner has been previously reimbursed is not deductible as maintenance. The controversy, therefore, is one of fact only. The Commissioner has asserted a deficiency based upon the disallowance of a certain amount charged to expense as maintenance and deducted from income in the taxable year. Regardless of the basis of his determination, he has the benefit of the presumption that the amount of the deficiency is correct and it is the petitioner's burden to overcome that presumption by evidence. It must prove that the expenditures in question included nothing for capital additions or for the replacement of destroyed capital property for which it had been previously reimbursed.
The record indicates that when properly equated with reference to the decreased purchasing power of the dollar resulting from very substantial increases in the costs of labor and material in 1920, the amount expended for maintenance in the taxable period was below the average of similar expenditures for any corresponding terms of the test period. It is stipulated that the average annual cost of maintenance in the test period was $1,272,388.90, which*2173 indicates an average for any ten months therein of $1,060,324. Application of the equating factor to this amount gives $2,746,239, which is so near the amount charged by the taxpayer in the taxable period in 1920 dollars that the difference may be ignored. Since this result is reached by exactly the same method which the standard contract provides for the computation or determination of under or overmaintenance, it seems to us that it conclusively establishes the contention of the petitioner.
Respondent objects to the soundness of the equating method unless it can be shown that the properties were equally used in the several periods. The petitioner's property was a railroad in active operation during the test period, the period of Government operation and the taxable year. In the light of all the facts of record and of the historic events within the field of common knowledge, we may safely assume that any difference in use between the test period and the taxable year was of such a nature as to increase the amounts required for maintenance in that period.
The conclusion which we have reached by what may be called the comparative or accounting method is well supported by the*2174 evidence adduced as to the actual physical condition of the petitioner's properties at the beginning and end of the taxable period. Responsible officers of the petitioner testified that way, structures and equipment were in a worse condition at December 31, 1920, than at *313 March 1, of that year. This testimony is supported by documentary evidence of record as exhibits which show facts as to equipment in considerable detail. All agreed that undermaintenance accelerated substantially during the period in question. While this evidence standing alone may not be conclusive, it is certainly very persuasive and is strongly corroborative of the results reached by a comparison of accounts.
That some small portions of the payments for maintenance during the taxable period may have reduced some item of physical undermaintenance that existed at the beginning thereof is not material. The credit in question was not allowed as payment for actual physical loss resulting from using up or destroying definitely identified and inventoried assets of the petitioner, but was an amount ascertained by comparing the costs of maintenance during the period of Federal control with the payments*2175 for such purpose during the test period. It is an accounting result representing impairment or destruction of a mass of capital property which is presumed to have occurred because as compared with the test period an insufficient amount was paid for maintenance. To ask the petitioner to show that no item of its tangible property that was in disrepair at March 1, 1920, was rehabilitated during the ten-month period under review is, in the circumstances here, to impose an impossible condition. The evidence shows that the total expended is a proper deduction from petitioner's gross income for the taxable period as a part of the ordinary and necessary expenses of the petitioner.
The respondent also argues that it is only natural for a railroad first to make the repairs that are essential to its safe and profitable operations and he seems to assume that the undermaintenance existing at March 1, 1920, was all of that nature. Here he again ignores the fact that the credit was not allowed for the purpose of restoring deteriorated, impaired, or destroyed assets definitely determined by count, weight, measure, and value. Even if the undermaintained assets, if any, could be identified, *2176 there is no reason to believe that their immediate replacement was essential to the operation of the property. The government was using this railroad at the date of its return to its owners. If there is any presumption as to its condition, then it is that the Director General had kept it in good condition and that the deferred repairs, if any, were not essential to continued and successful operation. The undermaintenance determined solely by a comparison of expenditures may have resulted largely from failure to paint structures and cars, to keep weeds out of the right of way, or on account of any one of many other conditions not essential to the safe and profitable operation of the property. When the petitioner reassumed the burden of maintenance and was without *314 adequate funds for the complete rehabilitation of its railroad, it is certain that it must have made such ordinary repairs as were necessary to operation, but there is no reason to presume that any part of the money so expended restored all or any substantial part of the undermaintenance at March 1, 1920, which was determined by a mere accounting method. On this issue the determination of the respondent is*2177 overruled.
Reviewed by the Board.
Decision will be entered under Rule 50.