*1958 1. The respondent's determination as to the amount at which certain tracts of land acquired by the petitioner in 1869 for shares of its capital stock should be included in invested capital for 1920 and 1921, sustained.
2. The petitioner during the years 1901 to 1919, inclusive, did not charge off from the book value of its depreciable assets any amount for depreciation, but more than offset depreciation actually sustained by improvements, replacements, and repairs, the cost of which was charged to expense. Held, that the petitioner's invested capital for 1920 and 1921 should not be reduced by the amount of said depreciation sustained during the years 1901 to 1919, inclusive. H. Northwood & Co.,4 B.T.A. 697">4 B.T.A. 697, followed.
3. Amounts paid to the petitioner in 1920, representing interest accrued in 1918 and 1919 on Federal compensation and quarterly balances due the petitioner for the use of its property while under Federal control, were not income to the petitioner for 1920.
4. Amounts paid by the United States to the petitioner, pursuant to the guaranty provisions of the Transportation Act of 1920, constituted income to the petitioner. Gulf, Mobile & Northern Railroad Co.,22 B.T.A. 233">22 B.T.A. 233.*1959
*1313 This proceeding is for the redetermination of deficiencies in income and profits taxes asserted by the respondent in the amount of $57,410.78 for the year 1920 and $61,982.31 for the year 1921. The petitioner alleges that the respondent erred (1) in excluding from invested capital for 1920 and 1921, part of the cost of certain land that the petitioner purchased in 1869 for shares of its capital stock; (2) in reducing invested capital for 1920 and 1921 on account of depreciation claimed by the respondent to have been sustained but not deducted in prior years; (3) in failing to include in invested capital for 1920 and 1921 amounts claimed by the petitioner to have been expended in prior years for dredging and filling and charged to expense; (4) in including in income for 1920 the amount of $16,353.25 paid to the petitioner in that year by the United States and representing interest accrued in 1918 and 1919 on quarterly balances of Federal compensation for the use of petitioner's property during the period of Federal control; and (5) in including*1960 in petitioner's income for 1920 the amount of $170,742.96 paid to the petitioner by the United States in 1922 for the six-month period from February 29, 1920, to August 31, 1920, under the guaranty provisions of the Transportation Act of 1920.
FINDINGS OF FACT.
The petitioner is and has been since 1854 a Texas corporation, with its principal office and place of business at Galveston, Tex. It is a common carrier and its property consists of wharfs, docks, piers, warehouses, a short railroad, and general wharfing and elevator facilities occupying about two miles of water front on the channel or harbor of Galveston. It is subject to the Interstate Commerce Act, and for the years involved herein its books of account were kept, as required by law, in accordance with the Interstate Commerce Commission's system of accounting, which is on the accrual basis.
In February, 1869, the petitioner acquired from the city of Galveston certain land, being the street ends extending from Avenue A north to the channel line and from 10th to 31st Streets, both inclusive. The acquisition of this land was accomplished by a decree of the District Court of Brazoria County, Texas, denominated "Decree*1961 of Compromise of 1869," entered on April 1, 1869, in an action styled "The Mayor, Aldermen and Inhabitants of the City of Galveston, vs. Galveston Wharf Company." Said decree is in part as follows:
Thereupon, it is considered, ordered, adjudged and decreed by the Court, that the present capital stock of the Galveston Wharf Company, consisting of twelve thousand four hundred and forty-four shares of stock of one hundred dollars per share, amounting in the aggregate to one million two hundred and *1314 forty-four thousand four hundred dollars, shall be increased the full one-half thereof, viz: by six thousand two hundred and twenty-two shares of one hundred dollars each, amounting to the sum of six hundred and twenty-two thousand two hundred dollars, which said stock of said sum of six hundred and twenty-two thousand two hundred dollars shall be the property of the Mayor, Aldermen and Inhabitants of the City of Galveston * * *.
In May, 1869, the petitioner purchased from the Galveston City Company the submerged land in the city of Galveston between 10th and 14th Streets and extending north from Avenue A to the channel line, and paid therefor 2,000 shares of its capital stock*1962 of the par value of $200,000. The purchase of this land was made pursuant to a resolution adopted by the stockholders at a meeting held on May 8, 1869, authorizing the board of directors to make such purchase "at a price not to exceed Two Hundred Thousand Dollars in the stock of this Company at par * * *." A deed conveying said land to the petitioner was executed by the Galveston, City Company on May 26, 1869. The deed recites a consideration of "* * * two thousand shares of the stock of said Galveston Wharf Company (valued at one hundred and twenty thousand dollars) * * *." United States revenue stamps in the amount of $120 were placed on the deed and canceled.
In May, 1869, the petitioner purchased from the Houston and Galveston Wharf and Press Company the submerged land in the city of Galveston between 31st and 41st Streets, extending north from Avenue A to the channel line, and paid therefor 5,500 shares of its capital stock of the par value of $550,000. The articles of agreement which were entered into by the petitioner and the Houston and Galveston Wharf and Press Company, and approved by the stockholders of the petitioner on May 8, 1869, provided that:
The Houston and*1963 Galveston Wharf and Press Company agrees to sell, and the Galveston Wharf Company agrees to buy, the said property for Five Hundred and Fifty Thousand Dollars ($550,000) of the stock of the Galveston Wharf Company, to be issued and delivered to the Houston and Galveston Wharf and Press Company and upon delivery by the Houston and Galveston Wharf and Press Company to the Galveston Wharf Company of a duly executed and Stamped Conveyance (by a special Warranty Deed) of the property hereinbefore described.
On May 13, 1869, a deed conveying said land to the petitioner was executed by the Houston and Galveston Wharf and Press Company. The deed recites a consideration of "Five Thousand and five hundred shares of the stock of the said Galveston Wharf Company (valued at Three Hundred and Thirty Thousand Dollars, United States currency) * * *." United States revenue stamps in the amount of $330 were placed on the deed and canceled. This tract or parcel of land had been purchased by the Houston and Galveston *1315 Wharf and Press Company from one H. de St. Cyr on March 27, 1867, for a stated consideration of $400,000.
The three tracts or parcels of land mentioned have been carried*1964 on the petitioner's books at $622,200, $200,000, and $550,000, respectively.
The net income of the petitioner for the period March 1, 1869, to November 30, 1875, inclusive, was:
| 1869 | $70,492.87 |
| 1870 | 169,471.88 |
| 1871 | 201,946.53 |
| 1872 | 211,442.21 |
| 1873 | $216,848.29 |
| 1874 | 207,958.72 |
| 1875 | 103,392.15 |
The outstanding capital stock of the petitioner during said period was 26,266 shares.
During the years 1901 to 1919, inclusive, the petitioner did not take any depreciation on its structures. These structures, as distinguished from equipment, included piers, warehouses, elevators, marine ways, tracks, engine houses, etc., and all parts thereof were capable of replacement. The petitioner during said years kept the structures at full standard efficiency at a total cost of $2,416,968.51, all of which was charged to expense, although a considerable part of the expenditures was made for longer piling, sheet piling, flooring and decking, heavier rails, etc., which should have been capitalized. These expenditures also included the cost of repairs, replacements and reconstruction, in the amount of more than $700,000, made necessary by storms occurring in 1900 and 1907, *1965 and their effect was to offset the normal depreciation of the structures and to maintain them at full value when considered as a whole.
In the year 1920 the petitioner adopted the practice of charging maintenance and repairs to expense, capitalizing additional improvements and replacements, and taking depreciation on the structures.
Prior to the year 1920 the petitioner did, or caused to be done, considerable work in dredging and deepening the channel on which its properties are located, and in filling certain parts of its land. The total expenditures for such work from the beginning of the petitioner's operations to and including the year 1901, as shown by its books, were $497,158.97, of which amount $222,096.05 was capitalized and $275,062.92 was charged to expense.
In the year 1920 the United States paid to the petitioner the amount of $16,353.25, representing interest accrued in 1918 and 1919 on Federal compensation and quarterly balances due the petitioner for the use of its property while under Federal control.
The petitioner accepted the guaranty provisions of the Transportation Act of February 28, 1920, covering the six-month period February 29 to August 31, 1920. *1966 Full settlement was made with *1316 the petitioner under said act in 1922, the petitioner being paid $170,742.96 by the United States.
The respondent, upon audit of the petitioner's returns for the years 1920 and 1921, allowed as invested capital on account of the said three pieces of land purchased in 1869, the amounts of $346,050, $120,000, and $330,000, respectively; reduced invested capital as shown by the petitioner's books in the amount of $1,427,110.62 for 1920 and $1,549,985.07 for 1921 on account of depreciation determined by the respondent to have been sustained but not taken in prior years; included in income for 1920 the amounts of $16,353.25 and $170,742.96 received by the petitioner from the United States as above set forth, and determined deficiencies in tax in the amount of $57,410.78 for 1920 and $61,982.31 for 1921.
OPINION.
MARQUETTE: This proceeding presents five issues, which will be discussed and decided in the order in which they are set forth in the preliminary statement herein.
The first relates to the amount which should be included in the petitioner's invested capital on account of the three tracts or parcels of land which it acquired in*1967 1869 for shares of its capital stock. The petitioner contends that the amount to be included is the par value of the stock, or $622,200 for the first tract, $200,000 for the second tract, and $550,000 for the third tract. The respondent has allowed the amounts of $346,050, $120,000, and $330,000, respectively.
The petitioner is entitled to have included in invested capital for 1920 and 1921 on account of the three tracts of land in question, their actual cash value at the time they were acquired by it. Section 326(a)(2) of the Revenue Act of 1918, and section 326(a)(2) of the Revenue Act of 1921. However, the burden is upon the petitioner to show that their value was greater than the amount the respondent has determined and allowed, and it has failed to meet that burden. The only evidence presented by the petitioner as to the first tract is the decree of the District Court of Brazoria County, Texas, ordering the petitioner to issue to the city of Galveston 6,222 shares of its capital stock of the par value of $622,200 for said land, but there is no evidence that either the land or the stock had, or was considered by the Court or the parties to the suit to have, the value now*1968 claimed by the petitioner. As to the two other tracts of land, the evidence clearly tends to sustain the value placed upon them by the respondent. The deeds expressly recited that the 2,000 shares and the 5,500 shares of the petitioner's capital stock issued for these tracts were valued at $120,000 and $330,000, respectively, *1317 which are the values placed upon them by the respondent. We see no reason for assuming, as we are urged to do by the petitioner, that these recitals of value were made in the deed in order to reduce the Federal stamp taxes. On the contrary, we think it should be assumed that the recitals in the deed are true, until the contrary is shown. On this issue the respondent must be sustained.
The second question is whether the respondent erred in reducing the petitioner's invested capital for 1920 and 1921 on account of depreciation sustained but not taken in prior years. The evidence on this point is that the petitioner took no depreciation during the years 1901 to 1919, inclusive, but that during that period it expended more than $2,400,000 in maintaining, repairing, replacing, renewing and improving its properties, all of which was charged to*1969 expense; that the effect of these expenditures was to keep the properties in a high state of efficiency and condition and at full value, and that the expenditures were larger in amount than the depreciation which the respondent claims was sustained in the period 1901 to 1919, inclusive. In other words, the expenditures made, but not capitalized, were more than sufficient to offset the depreciation sustained. On several occasions we have considered situations similar to that now presented. H. Northwood & Co.,4 B.T.A. 697">4 B.T.A. 697; Lockport Paper Co.,9 B.T.A. 601">9 B.T.A. 601; Union Co.,14 B.T.A. 1310">14 B.T.A. 1310. In the case of H. Northwood & Co., supra, it was stated:
Although the taxpayer was organized in 1906, it never charged off any amount for depreciation of depreciable assets prior to 1918. By reason of this fact the Commissioner, in computing the taxpayer's invested capital for 1918 and 1919, reduced the invested capital shown upon the return in the amount of $33,182.74 to cover alleged depreciation of plant for years prior to 1918. The taxpayer alleges error in this regard. The original records of the taxpayer for the years prior*1970 to 1918 have through accident, as indicated in the findings of fact, been destroyed. It appears, however, that it has been the practice of the taxpayer to charge most of the cost of improvements, renewals, replacements, and repairs to expense prior to 1918; that the taxpayer's plant had been well maintained and extended, and it also appears that, for the four years prior to 1918, improvements costing $68,100.36 had been charged to expense. The cost of such improvements was in no wise reflected by the taxpayer's capital account on its books. It is true that certain additions to the plant in the past had been capitalized, but it is equally true that the charging to capital of the cost of improvements was the exception rather than the rule. We conclude from the evidence before us that actual depreciation sustained during the years prior to 1918 had been more than offset by the cost of improvements, renewals, and replacements charged to expense. We are, therefore, of the opinion that the true earned surplus of the taxpayer at December 31, 1917, was not less than that shown by the taxpayer's books of account so far as relates to depreciation of depreciable assets, and that the reduction*1971 of invested capital made by the Commissioner in the amount of $33,182.74 to care for depreciation not shown to have been charged off on the taxpayer's books of account was in error.
*1318 In the case of Lockport Paper Co., supra, this Board stated:
The evidence offered by petitioner in depositions shows that prior to 1909 the depreciation of its property was made good by charging renewals and certain additions and betterments to expenses. This evidence is sufficient to satisfy us that the cost of such renewals, and additions and betterments, was at least equal to the depreciation that occurred in that period.
And in Union Co., supra, it was stated:
The next issue relates to the action of the Commissioner in reducing petitioner's invested capital for the fiscal year ended in 1921 for depreciation claimed to have been sustained between July 7, 1913, and January 31, 1916, and not written off on the books. While the depreciation charged off on the petitioner's books during that period would appear to have been insufficient, the uncontradicted testimony is that there were additions made during that period which were never added to the*1972 account and which, together with the depreciation written off, were sufficient to maintain the assets at the figure carried on the books. In such circumstances we are of the opinion that the Commissioner erred in reducing invested capital for alleged insufficient depreciation.
To the same effect is the case of Nashville, Chattanooga & St. Louis Ry. Co. v. United States,269 Fed. 355. We are satisfied from the evidence that the amounts expended by the petitioner during the period 1901 to 1919, inclusive, for renewals, replacements and betterments was at least equal to the depreciation that occurred in that period, and that the respondent erred in reducing the petitioner's invested capital for 1920 and 1921 on account of said depreciation.
The petitioner asks that there be added to its invested capital for 1920 and 1921 the amount of $766,850.21, representing alleged expenditures in prior years for dredging and filling. At the hearing it was stipulated that the total cost of dredging and filling for the years prior to 1901, as reflected by the petitioner's books, was $497,158.97, of which amount $222,096.05 was capitalized and $275,062.92 charged to expense. *1973 To sustain its position on this issue the petitioner introduced as a witness one C. W. Wittman, a certified public accountant, and in connection with his testimony introduced in evidence several exhibits, consisting of calculations, tabulations, and computations previously made by the witness. Wittman did not profess to have any actual first-hand knowledge of the petitioner's properties or of any work or any expenditures made by it for dredging and filling at any time. His testimony is based exclusively upon the result of his inspection of the petitioner's books of account, and is at best a mere expression of his opinion, based on the assumption that the dredging and filling were actually done in the manner and to the extent claimed. The evidence on this point falls far short of establishing that the petitioner is entitled to the relief it seeks, and its claim, therefore, must be denied.
The fourth issue is whether the respondent erred in including in the petitioner's income for 1920 the amount of $16,353.25 representing *1319 interest accrued in 1918 and 1919 on Federal compensation and quarterly balances due the petitioner for the use of its properties while under Federal*1974 control. The question here presented has been decided by the Board favorably to the contention of the present petitioner in Illinois Terminal Co.,5 B.T.A. 15">5 B.T.A. 15, and Great Northern Railway Co.,8 B.T.A. 225">8 B.T.A. 225. On the authority of those decisions we hold that the amount in question was not income to the petitioner in 1920.
The last question is whether the amount of $170,742.96 paid to the petitioner under the guaranty provisions of the Transportation Act of February 28, 1920, covering the six-month period of February 29 to August 31, 1920, is income within the meaning of the Sixteenth Amendment to the Constitution of the United States, and the Revenue Act of 1918. The same question was fully considered and exhaustively discussed by this Board in the case of Gulf, Mobile & Northern Railroad Co.,22 B.T.A. 233">22 B.T.A. 233, in which we held that amounts paid by the United States to a common carrier, pursuant to the guaranty provisions of the Transportation Act of 1920, constituted income to the carrier. The reasons for our holding are fully set forth in that opinion and their repetition will serve no useful purpose here. On the authority of that*1975 decision we hold that the amount of $170,742.96 was income to the petitioner in 1920.
Judgment will be entered under Rule 50.