*1569 The total amount of compensation to a railroad company for the use of its property during the period of Federal control, as finally agreed upon, and also interest on the cost of additions and betterments, received from the United States Government, constituted income for each of the accounting periods for which the allowances were made, although the exact amounts of such compensation and interest, were not determined until a later date.
*918 These proceedings, which were consolidated for hearing and decision, are for the redetermination of deficiencies in income taxes asserted by the respondent as follows:
| Docket No. | Year | Deficiency |
| 13319 | 1920 | $42,811.31 |
| 27768 | 1922 | 20,495.17 |
| 33938 | 1923 | 254,895.16 |
A number of errors were assigned by the petitioner, but most of the issues were eliminated at the hearing by agreement of parties.
Docket No. 13319.
Respondent admitted that he had overstated petitioner's taxable income for 1920 in the following amounts: (a) $1,974.40, *1570 with respect to contributions made by business concerns for the construction of special service railway tracks; (b) $1,544.50, respecting profit received on the sale of town lots; (c) $18,724.81, with respect to increased inventory values of materials and supplies received from the United States Railroad Administration; (e) $142,799.78, representing partial reimbursement for the cost of equipment retired during the period of Federal control; (f) $68,359.78, with respect to expenditures for equipment repairs; (h) $2,348.07, respecting a duplicate credit as to one of petitioner's affiliated companies. Respondent admitted error as to assignment (g) in computing, at the rate of 10 per cent instead of at the rate of 8 per cent, petitioner's income tax upon earnings for the first two months of 1920; and also in allowing as a credit the amount of $10,807.58, representing taxes paid by the Director General of Railroads in behalf of petitioner and its affiliated companies. As to error (d), petitioner conceded that there should be included in its net income for 1920 the amount of $518,591.53, representing expenditures made to rehabilitate its property to the extent of undermaintenance of way*1571 and structures during Federal control.
In the final settlement with the Railroad Administration, in 1923, there was allowed to the petitioner and its affiliated companies, as *919 just compensation for the use of their properties during the period of Federal control, an amount which was $2,368,395.31 in excess of the amount of standard return for those properties as finally certified by the Interstate Commerce Commission. There were also allowed as rentals for some additional properties amounts aggregating $93,001.92. The parties agreed that if the aforesaid sums are not to be considered as taxable income for 1923, and that if portions thereof are to be considered as taxable income for 1920, then the proportionate amounts to be included for 1920 shall be $179,423.89, $9,077.68 and $4,465.97, respectively. Of the larger amount, the respondent has already included $13,254.60 in his determination of deficiency. One issue remains. The Interstate Commerce Commission certified $640,248.24 as the standard return applicable for the use of petitioner's properties for the first two months of 1920. The amount finally allowed for those months was $819,672.13. The question is, *1572 which amount should be included as income for that taxable year.
Docket No. 27768.
Respondent conceded the following errors: (a) Disallowing $32,333.15 from a total of $41,056.05 deducted for uncollectible account; (c) disallowing a deduction amounting to $5,391.18 representing cancellation of a bill against the United States War Department; (f) disallowing a deduction of $57 representing fines paid by petitioner; (g) including as taxable income for 1922 the amount of $14,782.55 representing contributions by private interests for the construction of spur tracks; (h) disallowing a deduction in the amount of $1,840 for contribution to the Y.M.C.A.; (i) in overstating petitioner's taxable income in the amount of $326,314.40 in respect of equipment repairs.
The petitioner conceded that the respondent's determination was correct in (b) reducing the total deduction claimed on account of amortization of discount on bonds, in the amount of $6,301.80; (d) disallowing a deduction of $2,348.07 representing cancellation of a bill against the Main Street Warehouse; (e) disallowing a deduction of $799.94 representing Federal fines and penalties.
No other errors were assigned.
*1573 Docket No. 33938.
The errors assigned were: (a) Adding to petitioner's net income as reported the amount of $2,261,154.25 representing Federal control adjustments; (b) disallowance of a deduction from gross income in the amount of $6,229,966.89 representing loss to petitioner in its settlement with the United States; (c) adding to petitioner's net income *920 as reported the amount of $2,368,395.31 representing compensation from the Railroad Administration; (d) adding to petitioner's net income as reported the amount of $93,001.92 representing rental interest paid to petitioner by the Railroad Administration.
At the hearing the petitioner waived the prosecution of error (a) above, but did not concede the correctness of respondent's adjustments in errors (c) and (d). Petitioner also conceded the correctness of the disallowance of deduction set forth in (b) above.
Errors (c) and (d) are left for decision by the Board.
FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of the State of Missouri, and during the taxable years involved herein was affiliated, within the meaning of section 240 of the Revenue Acts of 1918 and 1921, with the*1574 St. Louis Southwestern Railway Company of Texas, Valley Terminal Railway Company, Gray's Point Terminal Railway Company, Paragould Southeastern Railway Company, Central Arkansas & Eastern Railroad Company, Pipe Bluff Arkansas River Railway Company, Shreveport Bridge & Terminal Company, Dallas Terminal Railway & Union Depot Company, Stephenville North & South Texas Railway Company, Eastern Texas Railroad Company, and Main Street Warehouse Company. The petitioner and its affiliated companies have agreed that the assessment of all the income tax due from the petitioner and its affiliated companies under a consolidated return for each of the years here involved, and all the deficiency in tax or overpayment of tax which may be found upon a redetermination of the income-tax liability of the petitioner and its affiliated companies for each of the years here involved, shall be allocated to the petitioner.
The petitioner and its affiliated companies are engaged in the business of operating systems of transportation and furnishing services incident thereto and were so engaged at all times pertinent to this appeal. They kept their books in accordance with the classification of accounts prescribed*1575 by the Interstate Commerce Commission and returned their income upon an accrual basis and in accordance with the method employed in keeping their accounts, at all times pertinent to these proceedings.
By proclamation dated December 26, 1917, the President of the United States took possession and assumed control of the transportation properties and facilities of the petitioner, St. Louis Southwestern Railway Company, Gray's Point Terminal Railway Company, Paragould Southeastern Railway Company, Central Arkansas & Eastern Railroad Company, Pine Bluff Arkansas River Railway Company, Shreveport Bridge & Terminal Company, *921 Dallas Terminal Railway & Union Depot Company, Stephenville North & South Texas Railway Company, and Eastern Texas Railroad Company. During the period January 1, 1918, to February 29, 1920, both inclusive, hereinafter referred to as the Federal control period, the properties of the petitioner and its aforesaid affiliated companies were in the possession and under the control of the President of the United States, and operated by him and/or by such agents as were appointed by him under the authority of law.
The properties of Valley Terminal Railway Company*1576 were uncompleted as of January 1, 1918. This company had no property in operation during any part of the three-year period ended June 30, 1917. For this reason no ascertainment and certification to the President of the United States of the average annual railway operating income of the said company was made by the Interstate Commerce Commission. The properties of the Valley Terminal Railway Company were taken over by the United States as of August 31, 1918, and continued under the use, possession and control of the United States from that date to and including February 29, 1920. The cost of the properties of the Valley Terminal Railway Company was in excess of $800,000 during the entire period from August 31, 1918, to March 1, 1920.
The petitioner did not, during the period of Federal control, nor prior to July 20, 1923, enter into an agreement with the President of the United States, or the Director General of Railroads or any other agency representing the President, with respect to the compensation to be paid the petitioner for the use of its properties during the Federal control period; nor did any of the petitioner's affiliated companies enter into such an agreement prior*1577 to the said date.
Pursuant to section 1 of the Federal Control Act of March 21, 1918, the Interstate Commerce Commission ascertained and made tentative and final certifications to the President of the United States of the average annual railway operating income of the petitioner and certain of its affiliated companies for the three-year period ended June 30, 1917. The petitioner and the said affiliated companies accepted the final certification of the Interstate Commerce Commission as representing a correct mathematical computation of the average annual railway operating income based upon the railway operating income for the three years ended June 30, 1917, as provided by the Federal Control Act, but they denied that such basis of computation constituted just compensation or was a fair measure of the just compensation to which the corporations were entitled, and at various and sundry times during the period of Federal control and subsequent thereto, they protested to the Director General of Railroads *922 against his acceptance of the amount so certified by the Interstate Commerce Commission as the standard return, as constituting just compensation.
The petitioner and*1578 its affiliated companies, whose properties were under Federal control, refused at all times to enter into any agreement with the President or any of his authorized agencies for the payment and acceptance of an annual compensation equivalent to the standard return so certified by the Interstate Commerce Commission. On or about November 26, 1918, January 1, 1922, and January 29, 1923, respectively, they filed with the Director General of Railroads claims for compensation.
On July 20, 1923, petitioner and its affiliated companies whose properties were under Federal control entered into an agreement and final settlement of accounts with the Director General of Railroads under which $700,000 was paid by the petitioner to the Director General of Railroads. In that settlement petitioner and its affiliated companies whose properties were under Federal control were allowed as compensation for the use of their respective properties during the Federal control period a total amount of $10,819,672.13, this being at the rate of $5,000,000 per annum for the period of Federal control. The amount so allowed was $2,368,395.31 in excess of the standard return as finally certified by the Interstate*1579 Commerce Commission. Of the total compensation allowed, $819,672.13 was for compensation for the first two months of the year 1920.
The Director General of Railroads also allowed, as rental for properties not included in the foregoing settlement, $45,107.48 as interest at the rate of 4 per cent per annum upon the cost of additions and betterments to roadway, and $47,894.44 as interest at the rate of 6 per cent per annum upon the cost of additions and betterments to equipment.
No part of the aforesaid sums of $2,368,395.31, $45,107.48 and $47,894.44 was included by the petitioner as income for the taxable year 1923 in the consolidated return filed by the petitioner for said taxable year. In the notice of deficiency for that taxable year respondent included as income the sum of $2,240,264.66, which he later, at the hearing, increased to $2,368,395.31, said amount being a part of the total allowed in final settlement by the Director General as compensation for the use of the properties of the petitioner and its affiliated companies. The respondent has also included as income for the said taxable year the said amounts of $45,107.48 and $47,894.44, determined as aforesaid.
*1580 In the event that the aforesaid item of $2,368,395.31 is not to be considered as taxable income to the petitioner and its affiliated companies for the taxable year 1923 and a portion thereof is to be considered *923 as taxable income to the petitioner for the taxable year 1920, the parties agree that the portion thereof to be included in taxable income for the taxable year 1920 is $179,423.89, being the portion thereof applicable to the two months of 1920 during which the properties of the petitioner and its affiliated companies were under Federal control. In the deficiency letter $13,254.60 of the said item has been included in income for 1920. In the event that the aforesaid items of $45,107.48 and $47,894.44 are not to be considered as taxable income to the petitioner and its affiliated companies for the taxable year 1923, and a portion thereof is to be considered as taxable income to the petitioner and its affiliated companies for the taxable year 1920, the parties agree that the portions thereof to be included in taxable income for the taxable year 1920 are $9,077.68 and $4,465.97, respectively, being the portions thereof applicable to the two months of 1920 during which*1581 the properties of the petitioner and its affiliated companies were under Federal control.
In its income-tax return for 1920, which was a consolidated return for all its affiliated companies, the petitioner included as accrued income the amount of $678,452.65, representing compensation due to it from the Railroad Administration for the first two months of that year. The respondent, after audit, included only $653,502.84 as such compensation.
OPINION.
MARQUETTE: The assignments of error which have been admitted by the respondent necessitate adjustments respecting the deficiencies as follows:
Docket No. 13319.
Taxable income should be reduced by: (1) $1,974.40, contributed to petitioner for construction of spur tracks for private concerns; (2) $1,544.50, with respect of profits on the sale of town lots; (3) $18,724.81, relating to increased inventory values of materials and supplies; (4) $142,799.78, partial reimbursement for cost of equipment retired during the Federal control period; (5) $68,359.78, expenditures for equipment repairs; (6) $2,348.07, a duplicate credit as to one of petitioner's affiliated companies.
Petitioner's tax upon income earned during the*1582 first two months of 1920 should be recomputed, at the rate of 8 per cent.
The amount of $10,807.58 representing taxes paid by the Director General of Railroads on behalf of petitioner and its affiliated companies should not be allowed as a credit against petitioner's tax liability for 1920.
*924 Docket No. 27768.
There should be deducted from petitioner's gross income for 1922: (1) The amount of $32,333.15, representing an uncollectible account; (2) $5,391.18, cancellation of bill against the United States War Department; (3)$57 representing fines paid by petitioner; (4) $14,782.55 contributed to petitioner for construction of spur tracks for private concerns; (5) $1,840 contributed by petitioner to the Y.M.C.A.; (6) $326,314.40, the amount by which respondent in his deficiency determination overstated petitioner's income.
Docket No. 33938
The petitioner contends that the full amount of compensation allowed for the use of its properties during the period of Federal control was accrued, and constituted taxable income for that period, although the exact amount of such compensation was not determined and allowed until 1923. The respondent's contention is that*1583 so much of the compensation allowed as was in excess of the amount certified as a standard could not be accrued during the Federal control period because such excess was not determined until later, after a long controversy between petitioner and the Director General of Railroads. Respondent's theory is that the controversy as to the amount was a legal dispute and he cites decisions to the effect that where a taxpayer disputes an alleged liability against him the amount of that liability, as finally determined, can not be accrued prior to such determination.
We do not concur with respondent's viewpoint. In the present instance the Government did not deny its liability to pay just compensation to the petitioner. That liability was never in dispute. The only question in controversy was one of fact, namely, what amount of money would be just compensation. That question was settled through conferences and negotiations.
The issue here presented has been decided by the Board, adversely to the respondent's contention, in a number of cases. See *1584 ; ; ; affd., ; ; affd., ; ; . In each of those cases, with the possible exception of , there was the same situation as that now before us, viz., a controversy between the taxpayer and the Government as to the amount of compensation to be paid, more or less lengthy negotiations, and a final agreement reached after the Federal *925 control period had ended. In each of the above cited cases it was held that the full amount of compensation as finally determined constituted accrued income pro rata over the period of Federal control. In our opinion, the present proceedings can not be distinguished upon the facts, as respondent contends. We conclude, therefore, that the entire amount of compensation allowed*1585 to the petitioner and its affiliated companies by the Government should be prorated as income over the period of Federal control.
What we have held, and the decisions cited, apply with equal force in respect of interest received from the United States upon the cost of additions and betterments. Such interest constituted a part of the just compensation due the petitioner and its affiliated companies and should be prorated over the Federal control period. ;
Decision will be entered under Rule 50.