1936 BTA LEXIS 742 | B.T.A. | 1936
Lead Opinion
The petitioner’s first contention is for “a deduction in the year 1929, on account of the exhaustion of a contract entered into with the Canadian Pacific Railway Company.” It argues that the evidence “establishes the value to the petitioner of the Canadian Pacific guaranty as of March 1, 1913.” This value is supposed to be shown by the alleged saving to the petitioner resulting from the fact that the bondholders agreed to accept 4 percent interest on the bonds. The argument is, that, but for the guaranty, the petitioner would have had to pay interest at 5 percent instead of at 4 percent, thus the guaranty saved the petitioner 1 percent annually on all bonds outstanding, and, by the petitioner’s method of computation, the present worth on March 1, 1913, of the savings to be realized during the next 25 years was $7,370,146.43. On March 1, 1913, $52,293,000 par value of the petitioner’s bonds due in 1938 were outstanding. The remaining life of the bonds after 1913 was 25 years. Those bonds were still outstanding during 1929 and that year represented one twenty-fifth of the life of the bonds after March 1, 1913. Therefore, the petitioner would deduct for 1929, one twenty-fifth of the value which it claims for the guaranty on March 1, 1913.
The petitioner’s method of finding the present worth as of March 1, 1913, of the anticipated savings is mentioned in its brief. Detailed figures of the computation do not appear but only the following explanation: “The March 1, 1913, value of this total savings at 5% compounded annually (See Table IV — present value, page 124r-Kent) was $7,370,146.43.”
Four million four hundred and thirty-nine thousand dollars par-value of the bonds of the issue here involved were outstanding as-straight 5 percent bonds prior to the execution of the contract in 1890. Thereafter at least 85 percent of these were surrendered by the bondholders so that the change in rate and the guaranty could', be stamped on them. The petitioner says in its reply brief:
The evidence is conclusive as to the savings on bonds issued prior to the-making of the contract. This evidence appears to be the only competent evidence in respect to the value of the guaranty provision. We submit that-inasmuch as there was apparently no change in financial condition of the-taxpayer when the later bonds were issued, that the savings in connection,, with the earlier bonds may properly, under the circumstances, be taken as-the basis for determining the savings on the later bonds.
This argument is a poor substitute for some proof of savings and. value, if any, which should properly be attributed at some particular time to the guaranty provisions of the contract. The holders - of the bonds sold prior to the contract of May 27, 1890, agreed to a. reduction of the interest rate on at least 85 percent of those bonds,., but the evidence does not show whether or not they did so solely because of the guaranty provisions of the contract. The guaranty probably helped to influence them, but the question is, How much? The petitioner depends upon inference for the answer.
Most of the bonds involved herein were issued at some undisclosed time, or times, after May 27, 1890, and before March 1, 1913. They-were sold with the guaranty and the 4 percent interest provisions - on them. If the guaranty enabled the petitioner to sell its bonds-as essentially 4 percent bonds, when otherwise a higher rate would-’ have been demanded, then certain value attributable to the guaranty and based upon a saving of 1 percent in interest must have come-
The statute allows a deduction on account of depreciation or exhaustion based upon the “fair market value” on March 1, 1913, of the property being exhausted through use in a taxpayer’s business. Secs. 23 (k), 114 (a), 113 (b), Revenue Act of 1928. Huyler's, Inc.. 24 B. T. A. 425. “Fair market value” has been defined judicially as the price at which property would pass at a given time from a willing seller to a willing buyer, where neither was forced into the transaction. The guaranty in question may not have been valuable or salable on March 1,1913. The bonds had been sold previously. The petitioner was then obligated to pay interest at 4 percent, and the bondholders could demand no more, except in case of default. In the latter case, the Canadian Pacific Avas to pay 4 percent to the bondholders and to become entitled to collect its advances with 5 percent interest thereon from the petitioner, or, if the Canadian Pacific defaulted on its guaranty, the bondholders could demand 5 percent from the petitioner. Thus the contract might prevent foreclosure,
The petitioner contends that it abandoned its ore dock, yard and tracks, and its branch line and tracks on the range in 1929, and thereby sustained losses. Each party makes various other claims in regard to the proper treatment of these items which need not be set forth. The figures are not in dispute. The principal questions are whether the facilities were actually abandoned in 1929 and, if so, whether deductible losses resulted. The findings of fact furnish complete answers to all questions raised. A brief discussion of some of the evidence may be appropriate.
The Northern Pacific Railway Co. (hereinafter referred to as Northern Pacific) owned a large modern concrete ore dock in Superior, which was near and accessible to the petitioner’s main line. The capacity of this dock was sufficient to handle the ore shipments of both roads. The petitioner’s ore dock was in need of improvements and required increasingly expensive repairs. The two companies agreed to a plan in 1928 whereby they would try for one year to handle the ore shipments of both roads over the Northern Pacific dock. The petitioner was to pay rent for the use of the dock. The plan was not successful. Plowever, both companies were of the opinion in 1929 that operating expenses could be reduced by pooling their traffic in ore and coal under a single management so that the one dock and a single set of tracks on the range would suffice for all purposes. They appointed a committee in January 1929, which worked out a plan and prepared a contract.
The contract was executed by the two companies on April 15, 1929. It was for a period of 99 years. It provided for the pooling and the division between the two railroads in stated proportions of the ore and coal transported between Superior and the Cuyuna Range, the pooling of ore cars and other facilities, the movement of the petitioner’s ore trains over part of the main line of the Northern Pacific, the joint ownership of the trackage necessary for the movement of pooled tonnage on the Cuyuna Range and the abandonment of such of them as might be found unnecessary after a survey during the operating season of 1929 and for the abandonment of the branch line of the petitioner connecting its main line with the range.
The movement of ore began about April 1, 1929, and at that time the two companies began operating under the pooling provisions of the agreement. Shortly after the agreement was signed they filed a joint application with the Interstate Commerce Commission for approval of the provisions relating to the pooling of ore tonnage, the operation by the petitioner over the line of the Northern Pacific Railway Co., and the joint operation by the two companies of tracks and facilities on the Cuyuna Range. The Commission approved this arrangement on June 3, 1929. The operations up to August 1929 demonstrated to the satisfaction of the petitioner’s general superintendent that all ore could be handled over the Northern Pacific dock. He notified the vice president in August 1929 that he was satisfied that the petitioner’s ore dock and ore line would no longer be required and recommended that arrangements be made to dismantle them. The petitioner’s chief engineer in the fall of 1929 informed his assistant, in charge of the ore dock, that the dock and ore line would be used no longer, and he instructed him to take the necessary steps to dismantle them and recover as much salvage as possible. They were not useful for any other purpose. The assistant found that the material could not be disposed of readily or profitably, but finally, in July 1930, a contract was entered into for dismantling the ore dock, the approach, and part of the ore line, and the actual work of dismantling was begun in August 1930. Shortly after the approval of the pooling agreement by the Interstate Commerce Commission, the general superintendent of each company determined and agreed what part of the tracks and facilities on the Cuyuna Range should be retained in use as jointly owned facilities under the agreement of April 15,1929, and what part should be abandoned. The tracks which they decided to abandon were not taken up immediately but their use was discontinued. The general superintendent of the petitioner prepared a detailed statement of all the tracks
The Commissioner, in determining the deficiency, has held that the properties in question were abandoned in 1929 but, because the abandonment took place as a result of the agreement of April 15, 1929, the loss should be amortized over the 99-year period of the pooling agreement. This agreement was not a lease. It did not result in the substitution of any assets for those abandoned. The abandonment of the property was not a necessary incident to the acquisition of other property. Thus the unexhausted cost of the assets abandoned should not be treated as cost of the agreement, nor should that cost be amortized over the life of the agreement on any other theory. The case of Chas. N. Manning, 7 B. T. A. 286, and other similar cases cited by the respondent apply only where there has been a substitution of assets and are not in point here.
The respondent now contends that there was no abandonment in 1929. This is contrary to his determination as shown in the notice of deficiency and is also contrary to the preponderance of the evidence. Loss for income tax purposes in cases such as this depends upon whether in fact the property became worthless in the taxable year as demonstrated in part by its abandonment. The abandonment is to be determined from all facts and surrounding circumstances. Belridge Oil Co., 11 B. T. A. 127; Reuben H. Donnelley Corporation, 26 B. T. A. 107; Fox River Paper Co., 28 B. T. A. 1184, 1200. See also Regulations 74, art. 173. Here there was not only an intention to abandon and a non-user but also an actual abandonment in fact of the facilities in 1929. The properties were not valuable for other purposes except as salvage. The loss actually occurred in 1929. The fact that demolition did not take place until later does not preclude the allowance of the deduction for the year of actual abandonment and loss. Fraser Brick Co., 10 B. T. A. 1252; Kilby Car & Foundry Co., 4 B. T. A. 1294.
The respondent argues that permission of the Interstate Commerce Commission had to be obtained before the branch line and the tracks on the range could be legally abandoned. See pars. 18, 19, 20, sec. 1, Interstate Commerce Act.
Reviewed by the Board.
Decision will be entered under Rule 50.
A value of $8,542,667.16 is claimed in tile petition “on a 5% present value basis.”
These sections provide that no carrier by railroad subject to the act shall abandon any portion of a line of railroad until it shall first have obtained a permit for such abandonment from the Commission. The penalty provided is fine and imprisonment upon conviction.