1952 U.S. Tax Ct. LEXIS 34">*34 Decision will be entered under Rule 50.
Petitioner corporation on November 26, 1940, entered into a written agreement wherein petitioner agreed to erect a bus terminal with all necessary terminal facilities, and the bus companies agreed to lease and use the facilities for a period of 15 years and to pay to petitioner as rent amounts to be determined under a prescribed formula. The respective parties entered into a written amendatory agreement on June 14, 1945.
Held:
1. Respondent properly computed petitioner's income for the respective taxable years involved in accordance with the terms of the original agreement until the execution of the amendatory agreement on June 14, 1945, and thereafter in accordance with the terms of the original agreement as amended.
2. Under the aforesaid agreement prior to its amendment, income taxes and/or excess profits taxes asserted against petitioner were payable by the operating bus companies as rent and constituted additional income taxable to petitioner.
3. Depreciation sustained by petitioner and billed to the operating companies as rent constituted taxable income to petitioner in the respective taxable years in question.
19 T.C. 336">*336 This proceeding involves deficiencies in income, declared value excess-profits, and excess profits taxes for the years and in the amounts as follows:
| Declared value | |||
| Year ended July 31 | Income tax | excess-profits | Excess profits |
| tax | tax | ||
| 1945 | $ 18.53 | $ 94.54 | $ 42,001.06 |
| 1946 | 3,879.46 | 1,791.94 | |
| 1947 | 1,373.48 |
The issues involved are:
1. Whether the rental income of the petitioner is to be computed under the provisions of an agreement dated November 26, 1940, as amended June 14, 1945, as determined by the respondent rather than on the1952 U.S. Tax Ct. LEXIS 34">*36 basis of actual billings as reported by petitioner.
2. Whether under the aforesaid agreement income and excess profits taxes asserted against the petitioner were payable by the lessees to the petitioner as rent and constitute additional income taxable to the petitioner.
19 T.C. 336">*337 3. Whether depreciation sustained by the petitioner in the taxable years involved and which was billed to the lessees as rent constitutes income taxable to the petitioner.
Certain facts have been stipulated and they are found accordingly. Other facts are found from the evidence.
FINDINGS OF FACT.
The petitioner is a North Carolina corporation with its principal office in Charlotte, North Carolina. Its returns for the periods involved were filed with the collector of internal revenue for the North Carolina district, at Greensboro. Petitioner kept its books and filed its returns on an accrual basis of accounting.
During the taxable years involved the capital stock of the petitioner was owned as follows:
| Shares | Cost | |
| Queen City Coach, Co., Charlotte N. C | 2 | $ 200 |
| Carolina Coach Co., Raleigh, N. C | 1 | 100 |
| Smoky Mountain Stages, Inc., Asheville, N. C | 1 | 100 |
The petitioner was incorporated for1952 U.S. Tax Ct. LEXIS 34">*37 the purpose of erecting and operating a bus terminal at Charlotte, North Carolina. The three stockholders of petitioner severally owned and operated motor bus lines entering into the city of Charlotte, North Carolina.
On November 26, 1940, petitioner, as lessor, and Queen City Coach Company, Carolina Coach Company, and Smoky Mountain Stages, Inc., as lessees, entered into an agreement and lease under which the petitioner agreed to erect a bus terminal, with all the necessary operating facilities, at Charlotte, North Carolina, and the bus companies agreed to lease and use jointly and in common the terminal facilities for a period of 15 years and to pay as rent the sums specifically provided for therein.
The material covenants pertaining to the rental are contained in sections 9, 10 and 11 of the agreement and read as follows:
Sec. 9. That in order to afford a basis for determining the amount of rental to be paid to Terminal Company by each of said Bus Companies, the Terminal Company will render to each of said Bus Companies on or before the fifth day of each calendar month during the term hereof statements showing the results of its account of and for the preceding calendar month 1952 U.S. Tax Ct. LEXIS 34">*38 as follows, to-wit:
(a) A statement of the total gross receipts for tickets sold by Terminal Company for each of said Bus Companies.
(b) A statement of the sums received by each of said Bus Companies of all tickets and fares received by each of said Bus Companies for transportation of passengers whose journey originated in the tariff zone of Charlotte, North Carolina, during the preceding month and for which no ticket was sold or issued by Terminal Company as provided for in Section 8 of this agreement.
(c) A statement of the total gross receipts of the Terminal Company for rental of its terminal facilities to other bus companies or common carriers.
(d) A statement of the total gross receipts of the Terminal Company for rental of restaurants, barber shops, news stands, telephone and telegraph stations, or 19 T.C. 336">*338 other concessions included in said premises, and such other revenues as may be received by said Terminal Company.
(e) A statement of the total expenses of the Terminal Company during said month, including the following:
(1) All items of expenses of the Terminal Company for the operation of its terminal facilities, including taxes on furniture, fixtures and equipment, maintenance, 1952 U.S. Tax Ct. LEXIS 34">*39 insurance, renewals, rentals and depreciation, as well as all repairs and extraordinary operating expense, or expenses growing out of operation of the terminal which may be necessary.
(2) One-twelfth of the taxes due the City of Charlotte and Mecklenburg County annually on said terminal facilities and the real estate upon which the same is situate.
(3) The sums paid by Terminal Company to apply on the amortization of mortgage indebtedness, as is herein provided for, of said Terminal Company on said terminal facilities and the real estate upon which the same is situated. (It is understood by and between the parties hereto that Terminal Company, in order to defray the cost and expenses of acquisition of the property and the erection of the terminal facilities herein provided for thereon, will obtain loans aggregating the sum of one hundred and seventy-three thousand dollars ($ 173,000.00). It is further understood and agreed by and between the parties hereto that such indebtedness of the Terminal Company shall be created not more than three months from the date of this agreement, shall not exceed the aggregate principal amount of one hundred and seventy-three thousand dollars ($ 173,000.00), 1952 U.S. Tax Ct. LEXIS 34">*40 which aggregate principal amount shall be secured by a first mortgage loan in the sum of one hundred and forty thousand dollars ($ 140,000.00) bearing interest at a rate not to exceed four and one-half percent (4 1/2%) per annum, payable on an amortization plan, and shall mature in equal annual installments, with equal monthly payments, over a period of thirteen years, which monthly payments shall include principal and interest due on said loan; and by a second mortgage loan not to exceed the aggregate principal amount of thirty-three thousand dollars ($ 33,000.00), bearing interest at a rate not to exceed six percent (6%) per annum, payable on an amortization plan and which shall mature in equal annual installments, with equal monthly payments, over a period of ten years. The first and second mortgage loans provided for herein covering the terminal facilities and the real estate upon which the same is situate, shall be the only indebtedness of the Terminal Company. It is mutually understood and agreed that the Terminal Company is limited to the creation of the mortgage indebtedness, herein referred to, in the total amounts aggregating one hundred and seventy three thousand ($ 173,000.00) 1952 U.S. Tax Ct. LEXIS 34">*41 dollars, and any debt which may be subsequently issued to refund any unpaid balance on said mortgage indebtedness aggregating the sum of one hundred and seventy three thousand ($ 173,000.00) dollars; provided, however, that such refunding of such mortgage indebtedness shall not involve a rate of interest or principal amount in excess of the present rate of interest and the then unpaid principal balance.
(f) A statement showing the net expenses of Terminal Company during said month, the amount of such net expenses to be ascertained by crediting to the total expenses as provided for in sub-section (e) hereof, the receipts of the Terminal Company as provided for in sub-sections (c) and (d) hereof; so computed shall constitute the total rental due the Terminal Company from said Bus Companies, and the amount due from each of said Bus Companies shall be billed to each of said Bus Companies in accordance with the provisions of Section 10 hereof.
(g) The said Bus Companies shall have such access to, and all reasonable facilities for examining the books of the Terminal Company as may be necessary 19 T.C. 336">*339 for checking the details of all of said statements and the verification of the items1952 U.S. Tax Ct. LEXIS 34">*42 thereof.
Sec. 10. Each of said Bus Companies agree [sic] to pay on or before the fifteenth day of each month in which such statements are rendered as rent for the use of the terminal and terminal facilities such proportion of the total rent due, as hereinbefore provided, as the total gross receipts from the tickets sold at said terminal for each of the Bus Companies, together with fares of each of said Bus Companies received according to the provisions of Section 8 hereinabove, during the period for which said rent then due shall be payable, as shown by the statement of the Terminal Company, shall bear to the total gross receipts of tickets sold at the said terminal for said Bus Companies, together with the total fares of said Bus Companies received according to the provisions of Section 8 hereinabove.
Sec. 11. If the amount of any charge for rental to be made against any Bus Company cannot be definitely ascertained and fixed for any month during the term hereof, the board of directors of the Terminal Company shall estimate the same as nearly as may be, and each of the Bus Companies agree [sic] to be bound by such estimate and payment shall be made accordingly; provided, however, 1952 U.S. Tax Ct. LEXIS 34">*43 that if such estimated rental shall exceed the average rental paid by said Bus Companies for the preceding three months then, and in that event, upon request in writing by any of said Bus Companies, the books and records of the Terminal Company shall be submitted to a competent and reliable accounting firm to compute the rental due for such month according to the provisions of Sections 9 and 10 hereof.
The petitioner erected and equipped the terminal at a cost of approximately $ 186,000, of which amount the sum of $ 183,477.39 represented notes and mortgages payable. A construction loan in the amount of $ 138,477.39 was obtained from the American Trust Company, which was paid in full by October 31, 1942.
On August 31, 1942, the petitioner borrowed from the Jefferson Standard Life Insurance Company the sum of $ 135,000, which was payable quarterly in the amount of $ 2,025. The obligation was reduced on the dates and in the amounts as follows:
| Year | Amount |
| 1942 | $ 2,025.00 |
| 7 months ended July 31, 1943 | 12,150.00 |
| Fiscal year ended July 31, 1944 | 16,200.00 |
| Fiscal year ended July 31, 1945 | 16,200.00 |
| Fiscal year ended July 31, 1946 | 16,200.00 |
| Fiscal year ended July 31, 1947 | 16,402.50 |
| Total | $ 79,177.50 |
1952 U.S. Tax Ct. LEXIS 34">*44 The balance remaining on the obligation is the sum of $ 55,822.50. The agreement of November 26, 1940, was pledged with the Jefferson Standard Life Insurance Company as security. The loan was repaid in full in July 1951. On December 24, 1940, Queen City Coach Company loaned petitioner $ 33,000, and on July 30, 1941, an additional sum of $ 4,000. Between April 1942 and May 1944 petitioner repaid to Queen City Coach Company the sum of $ 37,000. In August 1941 19 T.C. 336">*340 Smoky Mountain Stages, Inc., and Charlotte Coach Company each loaned petitioner the sum of $ 4,000. These loans were repaid by petitioner during the months of August and September 1942.
The petitioner filed its returns on the calendar year basis for the years 1940, 1941, and 1942, and for the years 1943 and 1944 based on a fiscal year ended July 31, in which it reported income on the basis of 10 percent of all ticket sales, plus miscellaneous rental and concession income, less expenses paid and accrued. These returns reported net income and income and/or excess profits taxes as follows:
| Income and | |||
| Year | Income | declared value | Excess |
| excess-profits | profits tax | ||
| tax | |||
| 1940 | ($ 111.00) | None | None |
| 1941 | (2,515.16) | None | None |
| 1942 | 21,790.81 | $ 3,194.48 | $ 9,007.51 |
| July 31, 1943 | 28,263.14 | 1,141.32 | 19,211.11 |
| July 31, 1944 | None | None | None |
1952 U.S. Tax Ct. LEXIS 34">*45 The aforesaid taxes were billed currently on a pro rata basis and were paid by the operating bus companies.
On March 22, 1945, an internal revenue agent's report was prepared in connection with the examination of petitioner's returns for the calendar years 1940, 1941, and 1942, and for the fiscal years ended July 31, 1943, and 1944, which disclosed the following:
| Year | |||
| Income | |||
| 1940 | 1941 | 1942 | |
| Payment on mortgage | None | None | $ 20,502.39 |
| Income and/or excess profits taxes on prior | |||
| year's income | None | None | None |
| Total income | None | None | 20,502.39 |
| Income or excess profits taxes on above | 11,291.95 | ||
| Previously assessed | 12,201.99 | ||
| Net deficiency (overassessment) | ($ 910.04) |
| Fiscal year ended July 31 | ||
| Income | ||
| 1943 | 1944 | |
| Payment on mortgage | $ 14,150.00 | $ 44,200.00 |
| Income and/or excess profits taxes on prior | ||
| year's income | 11,291.95 | 18,104.70 |
| Total income | 25,441.95 | 62,304.70 |
| Income or excess profits taxes on above | 18,104.70 | 45,150.16 |
| Previously assessed | 20,352.43 | None |
| Net deficiency (overassessment) | ($ 2,247.73) | $ 45,150.16 |
The petitioner agreed to the method of computing taxable income as used by the revenue1952 U.S. Tax Ct. LEXIS 34">*46 agent in his report of March 22, 1945, in determining its tax liabilities.
In arriving at petitioner's taxable net income as set forth in the preceding paragraph, respondent held that the petitioner's taxable net income was to be determined under the provisions of the agreement of November 26, 1940, and that while petitioner was on an accrual basis the rent payable was predicated upon payments theretofore made and was represented by payments on the mortgages and payments of income and excess profits taxes for each prior year.
19 T.C. 336">*341 The large deficiency of $ 45,150.16, as determined against petitioner for the fiscal year ended July 31, 1944, caused the operating bus companies to realize the effect taxwise of the provisions of its agreement of November 26, 1940. Thereupon, the three directors of petitioner, consisting of R. C. Hoffman, Jr., president of Carolina Coach Company; L. A. Love, president of petitioner and vice president and general manager of Queen City Coach Company; and Joel W. Wright, president of Smoky Mountain Stages, Inc., informally discussed the tax situation of petitioner and the payment of deficiencies assessed against it and orally agreed to a modification1952 U.S. Tax Ct. LEXIS 34">*47 of the lease agreement of November 26, 1940.
On June 14, 1945, the directors of petitioner adopted the following resolution:
WHEREAS, this Company is a party to said agreement dated November 26, 1940; and
WHEREAS, this Company and the other parties to said agreement, named above, desire to amend said agreement in the several respects provided in the proposed amendment submitted at this meeting,
NOW, THEREFORE, BE IT RESOLVED, that the President or any Vice-President of this Company be and each is hereby authorized and directed to execute and deliver for, on behalf and in the name of this Company and under its corporate seal an amendment to said agreement dated November 26, 1940, such amendment to be in the form of the copy submitted at this meeting, said copy being ordered attached to and made a part of the minutes of this meeting; and be it
FURTHER RESOLVED, that the officers of the Company be and they are hereby authorized, empowered and directed in the name and for the account of this Company, to take or cause to be taken any and all such other and further action, and to make any and all such payments, and to execute, acknowledge and deliver any and all such other instruments as, 1952 U.S. Tax Ct. LEXIS 34">*48 in the judgment of such officers, may be necessary, proper or convenient in order to carry out the intendment of these resolutions.
On June 14, 1945, all of the parties to the agreement dated November 26, 1940, executed the following amendment:
THIS FIRST AMENDATORY AGREEMENT made and entered into as of July 31, 1944, by and between Charlotte Union Bus Station, Inc., a North Carolina Corporation (herein called "the Terminal Company"), and Carolina Coach Company, Queen City Coach Company, and Smoky Mountain Stages, Inc., each a North Carolina Corporation (herein called "the Bus Companies"),
WITNESSETH:
WHEREAS, the parties hereto are parties to an agreement dated November 26, 1940, relating to the construction, operation and use of a motor bus terminal in the City of Charlotte, N. C., and
WHEREAS, the parties hereto desire to amend such agreement in the several respects herein provided for;
NOW, THEREFORE, the parties hereto covenant and agree as follows:
Section 9 (e) (1) is supplemented by adding thereto the following:
19 T.C. 336">*342 Such expenses shall exclude all taxes, both Federal and State, on the earnings or income of the Terminal Company, owing by the Terminal Company on or 1952 U.S. Tax Ct. LEXIS 34">*49 after the date of this Amendatory Agreement.
Each of the Bus Companies shall loan to the Terminal Company on or before October 1, 1945, and October 1st of each succeeding year in which the Terminal Company is under a liability for the payment of Federal or State Income Taxes, such loan (a) to be represented on the books of the Terminal Company as open account indebtedness, and (b) to be, with respect to each of the Bus Companies, in the amount representing that proportion of such taxes which each of said Bus Companies would have been required to pay if such sums had been included in the respective periods as items of expenses under Section 9 (e) (1), as it existed prior to the amendment contained in this Amendatory Agreement.
Each of the Bus Companies shall, promptly after the discharge in full of the mortgage indebtedness of the Terminal Company created pursuant to Section 9 (e) (3) of said agreement of November 26, 1940, surrender to the Terminal Company all such open account indebtedness owing to it by the Terminal Company, as a capital contribution to the Terminal Company. The result of such surrender will be that promptly after the discharge of said mortgage indebtedness of the1952 U.S. Tax Ct. LEXIS 34">*50 Terminal Company, the Terminal Company will not be indebted to the Bus Companies or any of them by virture [sic] of the aforementioned annual loans.
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be executed and have affixed their seals as of the date and year first above written.
In accordance with the amendatory agreement petitioner assessed against the operating bus companies the following net deficiencies, as determined for the years 1942 to 1946, inclusive:
| Fiscal year | Fiscal year | ||
| July 31, | July 31, | ||
| 1946 | 1947 | ||
| Deficiency -- fiscal year July | |||
| 31, 1944 | $ 45,150.16 | ||
| Overassessment -- 1942 | (910.04) | ||
| Overassessment -- fiscal year July 31, | |||
| 1943 | (2,247.73) | $ 41,992.39 | |
| North Carolina State to July 31, 1944 | 3,309.29 | ||
| Federal liability -- fiscal year July | |||
| 31, 1945 | 3,801.47 | ||
| North Carolina liability -- fiscal year | |||
| July 31, 1945 | 922.33 | ||
| Federal liability -- fiscal year July | |||
| 31, 1946 | $ 548.39 | ||
| North Carolina liability -- fiscal year | |||
| July 31, 1946 | 140.01 | ||
| Total | $ 50,025.48 | $ 688.40 |
On September 14, 1945, the petitioner assessed the following amounts against the three operating bus companies as their pro1952 U.S. Tax Ct. LEXIS 34">*51 rata share of the aforesaid additional taxes due the Federal Government and the State of North Carolina:
| Name | Amount |
| Queen City Coach Co | $ 29,725.95 |
| Carolina Coach Co | 14,536.03 |
| Smoky Mountain Stages, Inc | 1,039.70 |
| Total | $ 45,301.68 |
19 T.C. 336">*343 These amounts were itemized on the vouchers as "loan for taxes."
In October 1945 petitioner also assessed against the three operating bus companies North Carolina revenue taxes in the amount of $ 922.33 and Federal income taxes for the year ended July 31, 1946, in the amount of $ 3,801.47.
The petitioner set up "Accounts Payable" (stated to represent "advances" or "loans" from the operating bus companies) on its books and records in the respective names of the operating bus companies and credited such account with its respective amount of the aforesaid additional Federal income and North Carolina state taxes during the fiscal year ended July 31, 1946, totaling $ 50,025.48:
| Balance payable | |
| Name of account | July 31, 1946 |
| Queen City Coach Co | $ 32,825.60 |
| Carolina Coach Co | 16,051.77 |
| Smoky Mountain Stages, Inc | 1,148.11 |
| Total | $ 50,025.48 |
There was also credited to these respective "Accounts Payable" on the petitioner's1952 U.S. Tax Ct. LEXIS 34">*52 books, representing additional Federal income and North Carolina state taxes assessed against the operating bus companies during the fiscal year ended July 31, 1947, the following sums:
| Balance payable | |
| Name | July 31, 1947 |
| Queen City Coach Co | $ 441.75 |
| Carolina Coach Co | 221.11 |
| Smoky Mountain Stages, Inc | 25.54 |
| Total | $ 688.40 |
During the fiscal years ended July 31, 1945, 1946, and 1947, petitioner did not follow the terms of the amendatory agreement in billing the lessee bus companies for rental for such years. The petitioner billed the bus companies for its cash requirements only. In computing its rental income from the three operating bus companies the petitioner considered only actual billings. On the basis of such computation the petitioner reported the following net income and tax liability:
| Income tax | ||
| Year ended July 31 | Net income | liability |
| 1945 | $ 14,449.87 | $ 3,801.47 |
| 1946 | 2,193.55 | 548.39 |
| 1947 | 10,312.39 | 2,271.85 |
In his deficiency notice the respondent computed the petitioner's rental income for the fiscal year ended July 31, 1945, in accordance with the provisions of the agreement of November 26, 1940. For the fiscal years ended July1952 U.S. Tax Ct. LEXIS 34">*53 31, 1946, and 1947, the rental income was computed under the amendatory agreement executed June 14, 1945.
19 T.C. 336">*344 The difference in income, as reported by petitioner and as determined by respondent, is set forth in the following schedule:
| Fiscal year ended July 31 | |||
| 1945 | 1946 | 1947 | |
| (a) Net income per return | $ 14,449.87 | $ 2,193.55 | $ 10,312.39 |
| Depreciation claimed as a deduction | |||
| from gross income, but not reported | |||
| as income | 5,017.48 | 4,752.38 | 4,868.44 |
| Increase in withholding tax reserve | 41.34 | 30.48 | |
| Federal income tax accrued | 45,150.16 | ||
| North Carolina income tax accrued | 3,309.29 | ||
| Decrease in bank balance | 4,039.99 | 492.00 | |
| Paid-in surplus by stockholders | |||
| (expended) | 11,300.00 | ||
| Increase in accrued wages end of year | 225.44 | 882.80 | |
| Increase in ad valorem taxes at end of | |||
| year | 75.23 | ||
| (b) Subtotal (increase income) | $ 53,518.27 | $ 20,348.29 | $ 6,318.47 |
| Less: | |||
| Decrease as valorem taxes | $ 1,262.57 | $ 1,928.85 | |
| Decrease in withholding tax at end of | |||
| year | $ 331.78 | ||
| Decrease accrued wages | 114.90 | ||
| Adjustment prior years Federal and State | |||
| income taxes | 245.74 | ||
| Increase bank balance | 2,607.81 | ||
| Working fund addition | 15.00 | ||
| (c) Subtotal (decrease in income) | $ 4,231.02 | $ 1,928.85 | $ 346.78 |
| (d) Difference income reported per | |||
| returns and notice of deficiency | |||
| (b) minus (c) | 49,287.25 | 18,419.44 | 5,971.69 |
| (e) Income notice of deficiency (a) | |||
| plus (d) | $ 63,737.12 | $ 20,612.99 | $ 16,284.08 |
1952 U.S. Tax Ct. LEXIS 34">*54 In his deficiency notice respondent computed petitioner's taxable net income for each of the taxable years involved as follows:
| Fiscal year ended July 31 | |||
| 1945 | 1946 | 1947 | |
| Rental income represented by: | |||
| Payments on mortgage | $ 16,200.00 | $ 16,200.00 | $ 16,200.00 |
| Capital expenditures | 4,553.00 | 539.82 | |
| Federal income and/or excess profits | |||
| tax for F/Y July 31, 1944 | 45,150.16 | ||
| Deficiency in North Carolina State | |||
| income tax for years ended on or | |||
| before July 31, 1944 | 3,309.29 | ||
| $ 64,459.45 | $ 20,753.00 | $ 16,942.32 | |
| Less: North Carolina State income tax | |||
| deducted on returns | 922.33 | 140.01 | 658.24 |
| Corrected income | $ 63,737.12 | $ 20,612.99 | $ 16,284.08 |
In computing petitioner's income for the taxable years ended on or before July 31, 1944, the respondent determined that Federal income and excess profits taxes, as well as the North Carolina state income tax, were reimbursable by the lessee bus companies as part of their rental under the agreement of November 26, 1940. The petitioner accepted the determination and agreed to the deficiencies and/or overassessment of $ 41,992.39. Deficiencies in state income taxes for the same period amounted to $ 3,309.29, aggregating1952 U.S. Tax Ct. LEXIS 34">*55 the sum of $ 45,301.68.
19 T.C. 336">*345 During the fiscal year ended July 31, 1946, the petitioner was advanced sums necessary to pay the deficiencies, aggregating $ 45,301.68, and the reported liabilities due for Federal and state income taxes for the fiscal year ended July 31, 1945, in the amounts of $ 3,801.47 and $ 922.33, respectively. During the fiscal year ended July 31, 1947, the petitioner was advanced $ 688.40 to pay reported Federal and state income taxes of $ 548.39 and $ 140.01, respectively, for the fiscal year ended July 31, 1946. The respondent included the so called advances of $ 41,992.39 and $ 3,309.29 in determining rental income due from the bus companies for the fiscal year ended July 31, 1945.
During June 1946 the stockholders of petitioner contributed cash in the amount of $ 11,300, which was credited to paid-in surplus. Pursuant to a resolution of the stockholders of petitioner, dated October 31, 1947, one hundred sixteen shares of petitioner's stock, representing a stated value of $ 11,600, were issued for the $ 11,300 paid-in surplus and additional cash contributions of $ 300, as follows:
| Number of | |||
| Name | shares | Par value | Cost |
| Queen City Coach Co | 59 | $ 5,900 | $ 5,650 |
| L. A. Love (president of Queen City Coach Co.) | 1 | 100 | 100 |
| Carolina Coach Co | 29 | 2,900 | 2,825 |
| R. C. Hoffman (president of Carolina Coach Co.) | 1 | 100 | 100 |
| Smoky Mountain Stages, Inc | 29 | 2,900 | 2,825 |
| J. W. Wright (president of Smoky Mountain | |||
| Stages, Inc.) | 1 | 100 | 100 |
1952 U.S. Tax Ct. LEXIS 34">*56 For the fiscal year ended July 31, 1945, petitioner billed the three bus companies monthly for their pro rata share of depreciation sustained on its building and equipment. Depreciation was computed at the rate of $ 418.13 per month, or a total of $ 5,017.56.
In assessing the operating bus companies quarterly for the amount due and payable on the petitioner's mortgage principal indebtedness during the fiscal year ended July 31, 1945, there was deducted from the quarterly principal payments on the mortgage of $ 4,050 three months' depreciation of $ 418.13 per month, or $ 1,254.39. Thus, only the net amount of $ 2,795.61 was billed as principal payments due on the mortgage. The total amount deducted by petitioner as depreciation from the quarterly mortgage principal payments payable and so billed during the fiscal year was $ 5,017.48, the amount deducted by petitioner as depreciation on its return for 1945.
For the fiscal year ended July 31, 1946, petitioner billed the three operating bus companies monthly for their pro rata share of depreciation sustained on its building and equipment. Depreciation was computed at the rate of $ 418.13 for the month of August, $ 373.93 for the month1952 U.S. Tax Ct. LEXIS 34">*57 of September, and $ 396.03 for the remaining 10 months, or a total of $ 4,752.38.
19 T.C. 336">*346 In assessing the three operating bus companies quarterly for the amount due on the mortgage principal indebtedness during said fiscal year there was deducted from the quarterly principal payment of $ 4,050 three months' depreciation at the rate of $ 396.03, or a total of $ 1,188.09. Thus, only the net amount of $ 2,861.91 was billed as principal payment due on the mortgage by the operating companies. The total amount deducted as depreciation from quarterly mortgage payments payable and so billed during said fiscal year totaled $ 4,752.38, the amount deducted by petitioner on its return.
For the fiscal year ended July 31, 1947, petitioner billed the three operating bus companies monthly for their pro rata share of depreciation at the rate of $ 396.03, or a total of $ 4,752.36. In addition thereto depreciation in the amount of $ 116.08, computed on the new equipment acquired during such year, was deducted by petitioner on its return but was not billed to the three operating companies.
In assessing the three operating bus companies quarterly for the amount due and payable on the mortgage principal1952 U.S. Tax Ct. LEXIS 34">*58 indebtedness during the fiscal year ended July 31, 1947, there was deducted from the quarterly mortgage principal payments of $ 4,050 three months' depreciation at the rate of $ 396.03, or $ 1,188.09. Only the net amount of $ 2,861.91 was billed as principal payment due on the mortgage principal by the operating bus companies. The total amount deducted by petitioner as depreciation from quarterly mortgage payments payable and so billed during such fiscal year totaled $ 4,752.36, which amount, plus the $ 116.08 depreciation on new equipment, equals the sum of $ 4,868.44, deducted by the petitioner as depreciation on its return for such year.
The agreement and lease dated November 26, 1940, was in effect and governed the rights, privileges, and obligations of the respective parties thereto until the amendatory agreement was executed on June 14, 1945. Subsequent to June 14, 1945, the agreement and lease of November 26, 1940, as modified by the amendatory agreement executed on June 14, 1945, was in effect and governed the rights, privileges, and obligations of the respective parties thereto.
OPINION.
The primary question presented is whether the income of petitioner is to be computed1952 U.S. Tax Ct. LEXIS 34">*59 under the provisions of the agreement and lease dated November 26, 1940, as modified by an amendatory agreement executed June 14, 1945, as the respondent determined, or on the basis of actual billings, as reported by petitioner.
The contention of petitioner appears to be that the agreement of November 26, 1940, was one which the parties could alter, amend or abrogate by parol at any time, and that the parties by parol agreements 19 T.C. 336">*347 and conduct contrary to its provisions, in effect, abandoned the agreement and substituted therefor a new agreement of monthly billings.
The petitioner is a North Carolina corporation organized for the purpose of erecting and operating a bus terminal with appropriate facilities. All of its capital stock issued at the time of its incorporation was owned by three operating bus companies. Petitioner is a separate taxable entity. Where business is conducted through separate corporate entities separateness will be recognized in matters relating to taxation regardless of the disadvantages entailed. ; .1952 U.S. Tax Ct. LEXIS 34">*60
On November 26, 1940, petitioner and the three operating bus companies entered into a written agreement under which petitioner agreed to erect a terminal with the necessary facilities, and the operating bus companies agreed to use such facilities for a period of 15 years and to pay, as rent, an amount to be determined under a prescribed formula. Such agreement refers to the respective parties as "lessor" and "lessees." The payments to be made thereunder are denominated "rent." In many of its provisions the agreement is referred to as a "lease." Whether the agreement in question is in fact a lease is not, for present purposes, necessary for us to determine, since, in our opinion, the agreement touches an interest in realty or concerns realty and is one required to be in writing. General Statutes of North Carolina, 1943, sec. 22-2. ; . According to the weight of authority, a written contract within the statute of frauds cannot be varied by any subsequent agreement of the parties, 1952 U.S. Tax Ct. LEXIS 34">*61 unless such new agreement is also in writing. ; ; Stowell v. Robinson, 3 Bing. N. C. 927.
If the agreement is one which the statute requires to be in writing any material modifications or alterations resting in parol would be ineffective to the extent they were unexecuted.
This record establishes that the first written amendatory agreement was executed on June 14, 1945. The parties have attempted to make it retroactive to July 31, 1944. If the original agreement is one required to be in writing, to permit the amendatory agreement to be made retroactive, we think, would in effect annul the statute.
Assuming that we are in error in concluding that the original agreement was one required to be in writing and that it could be altered or modified at the will of the parties, this record does not establish with sufficient clearness what the parol modifications were or a definite time when they were entered into. The respondent has given recognition 19 T.C. 336">*348 to the written amendatory agreement as of the date of its1952 U.S. Tax Ct. LEXIS 34">*62 actual execution on June 14, 1945.
We think the agreement of November 26, 1940, as amended by the amendatory agreement of June 14, 1945, fixed the rights, privileges, and obligations of the respective parties thereto and that the respondent properly computed the income of petitioner under its terms and provisions.
The second issue involves the question whether, under the agreement of November 26, 1940, the income and excess profits taxes asserted against petitioner were to be reimbursed to it by the three operating bus companies, and constituted rental income of petitioner.
It is contended by petitioner that the agreement of November 26, 1940, makes no specific mention of income and excess profits taxes and that it was the intention of the operating bus companies that petitioner should be operated on a nonprofit basis and was to earn no income that would subject it to income and excess profits taxes. The respondent contends that under section 9 of the agreement the operating bus companies were to pay to petitioner as rent all net expenses determined, as provided therein. Section 9 of the agreement is set forth in full in our findings of fact and need not be repeated here.
The term1952 U.S. Tax Ct. LEXIS 34">*63 "expenses" is a word of broad meaning. It has no fixed definition. It is comprehensive enough to include a wide range of disbursements. . We think the use of the term "expenses" renders the agreement ambiguous. Where ambiguity exists the construction given by the parties will be given great, if not controlling, influence. . As said in the case of , there is no surer way to find out what the parties meant than to see what they have done.
Income taxes paid by petitioner for the calendar year 1942 and for the fiscal year ended July 31, 1943, were included and billed to the operating bus companies in computing rentals due for the fiscal years ended July 31, 1943, and 1944, respectively. In view of the interpretation given to the provisions of the agreement of November 26, 1940, by the conduct of the parties, we think the agreement is to be construed as requiring the operating bus companies to pay1952 U.S. Tax Ct. LEXIS 34">*64 to petitioner, as a part of their rent, the income and excess profits taxes asserted against petitioner.
The record shows that petitioner first realized in March 1945 that it would have to include as taxable income to it for the current fiscal year all additional taxes accrued for the prior fiscal year. Such knowledge gave rise to the desire of the parties to amend the agreement so as to specifically provide that income and excess profits taxes 19 T.C. 336">*349 were not to be included as an expense. The written amendatory agreement executed June 14, 1945, so provided. The petitioner contends that the parties had orally agreed to a modification of the original agreement with respect to the payment of such taxes and that the written agreement was predated to the time when such oral agreement was entered into. As heretofore stated, we think the amendatory agreement could not be made retroactive. If any retroactive effect is to be given to it, such retroactive effect should not be carried back to a time preceding the making of the alleged parol agreement with respect to the payment of income and excess profits taxes, which is shown by the evidence to have occurred about March 1945.
The 1952 U.S. Tax Ct. LEXIS 34">*65 additional Federal income taxes of $ 45,150.16 and North Carolina income tax of $ 3,309.29, asserted against petitioner for the fiscal year ended July 31, 1944, accrued on October 15, 1944, as a debt payable by petitioner. Under the agreement of November 26, 1940, petitioner was entitled to reimbursement of such amounts as rent. As of the beginning of the fiscal year July 31, 1945, the petitioner had the right to receive as rental income for that year the income taxes payable on income earned in the preceding year. ; ; ; .
The respondent has recognized the amendatory agreement as of June 14, 1945, and has not included in petitioner's taxable income for the fiscal years ended July 31, 1946, and 1947, the additional income taxes asserted for the respective taxable years ended July 31, 1945, and 1946.
The amendatory agreement of 1952 U.S. Tax Ct. LEXIS 34">*66 June 14, 1945, contains a provision to the effect that the operating bus companies would "loan" the petitioner the money to pay taxes then due and to make similar loans for succeeding years, all of which loans were to be made by the operating bus companies in the amount representing that portion of such taxes which such companies would have been required to pay if such sums had been included in the respective taxable periods as items of expenses under section 9 (e) (1), as it existed prior to the amendment contained in the amendatory agreement.
The respondent contends that the attempt to treat as "loans" the payments to cover income taxes for prior years which accrued during the taxable year was in violation of the agreement of November 26, 1940, and a tax avoidance scheme which should not be recognized for tax purposes.
We find it unnecessary to characterize the motives which prompted the parties to make such agreement. Unless retroactive effect is to be 19 T.C. 336">*350 given to the amendatory agreement, which we have declined to do, income taxes of petitioner which accrued and were payable to it by the operating bus companies as rent under the agreement prior to its amendment constitute1952 U.S. Tax Ct. LEXIS 34">*67 income taxable to petitioner notwithstanding the parties have treated the payments as loans. To hold otherwise, in our opinion, would permit petitioner to distort its income.
The final issue involves the question of depreciation as representing taxable income of petitioner. The total depreciation sustained by petitioner on its buildings and equipment in the fiscal years ended July 31, 1945, 1946, and 1947, in the respective amounts of $ 5,017.48, $ 4,752.38, and $ 4,868.44, has been included by the respondent in petitioner's income for such respective years. All the aforesaid amounts, except the sum of $ 116.08 for the fiscal year ended July 31, 1947, were billed to and paid by the operating bus companies to petitioner on a prorated basis as rent. Depreciation is specifically mentioned in section 9 (e) (1) of the agreement of November 26, 1940, as one of the items to be included in the statement of total expenses of the terminal company, petitioner herein.
Petitioner contends that the inclusion of the term "depreciation" in the agreement was the result of a mutual mistake. This record, however, does not show, nor does petitioner contend, that the agreement was amended in such1952 U.S. Tax Ct. LEXIS 34">*68 respect either orally or in writing prior to or during the taxable years involved. Nor have the parties ever instituted any proceeding to have the agreement reformed to express their real intention. In the absence of any such affirmative action, we think, the agreement is to be given effect as written. We hold, therefore, that depreciation sustained by petitioner which was billed to and paid by the operating bus companies as rent constituted income taxable to petitioner in each such fiscal year.
Therefore, we hold that the income of petitioner in the respective taxable years involved is to be computed in accordance with the terms of the agreement of November 26, 1940, until the execution of the amendatory agreement on June 14, 1945, and thereafter in accordance with the terms of such agreement as modified, and not on the basis of actual billings as reported by petitioner.
Decision will be entered under Rule 50.