Boston E. R. Co. v. Commissioner

BOSTON ELEVATED RAILWAY COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Boston E. R. Co. v. Commissioner

Docket Nos. 83489, 97991, 100480, 102555.

United States Board of Tax Appeals

45 B.T.A. 906; 1941 BTA LEXIS 1047;

December 9, 1941, Promulgated

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">*1047 1. The managing and operating of petitioner's property by trustees under the provisions of the Public Control Act of Massachusetts (1918) and acts amendatory thereof, did not create the relationship of lessor and lessee so as to make applicable the provisions of article 70 of Regulations 77, Revenue Act of 1932, and other similar regulations of a later date, providing for the return of "income to lessor from leased property." Boston Elevated Railway Co.,37 B.T.A. 494">37 B.T.A. 494, followed on this point.

2. Under the Public Control Act, if for any year the income from the properties was insufficient to meet expenses and dividends on the common stock and taxes after a specified reserve account had been exhausted, the commonwealth was to pay over to petitioner amounts sufficient to cover such deficiencies, and if for any year the income was greater than the expenses and dividends and taxes, the excess was to be placed in the reserve account until it was fully restored, after which the trustees were to apply the excess, so far as necessary, to reimburse the commonwealth for any amounts which it may have paid to petitioner. During each of the taxable years there were no excess">*1048 earnings and petitioner received amounts sufficient to cover the foregoing described deficiencies from the commonwealth. Held, the amounts so received were income to petitioner and not loans. 37 B.T.A. 494">Boston Elevated Railway Co., supra, no longer followed on this point.

Charles W. Mulcahy, Esq., and Ward Loveless, Esq., for the petitioner.

James T. Haslam, Esq., for the respondent.

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BLACK

">*906 These are proceedings to redetermine deficiencies in income taxes determined by the respondent against petitioner for the calendar years 1933 to 1938, inclusive, in amounts as follows:

Docket No.	Year	Deficiency
83489	1933	$186,744.37
	1934	186,744.37
97991	1935	186,744.37
	1936	202,561.13
100480	1937	204,625.83
102555	1938	234,436.01

">*907 According to the stipulation of facts (paragraph III), as we construe it, there is only one issue for the Board to decide, and that is whether, as a matter of law, the payments made to petitioner by the Commonwealth of Massachusetts of deficiencies in petitioner's income, as defined by the provisions of the Public Control Act, as amended, constituted income">*1049 taxable to petitioner. This precise point was before the Board in Docket No. 77244 involving the calendar year 1932, and was decided by us in favor of petitioner in (second issue). The respondent in that case, and also in Docket No. 76751 involving the calendar year 1931, filed a petition for review of our decision in the United States Circuit Court of Appeals for the First Circuit, and when the cause cmae on to be heard before that court counsel for both parties entered into the following stipulation:

The parties hereto having arrived at a settlement in compromise of the issues involved in the above-entitled proceedings, it is hereby stipulated by and between the said parties, through their respective attorneys, that the Court may enter mandates and orders to the following effect:

2. That in No. 3428 (B.T.A. Docket Nos. 76751 and 77244) the decisions of the United States Board of Tax Appeals be vacated and that the cases be remanded to the United States Board of Tax Appeals with instructions to enter decisions to the following effect, viz.:

In Docket No 76751. Pursuant to a mandate of the Circuit Court">*1050 of Appeals for the First Circuit, in accordance with the agreement of the parties, and without prejudice to the right of petitioner before the Board to claim that, for any year subsequent to 1932, amounts repaid to the Commonwealth of Massachusetts under the provisions of Section 11 of Massachusetts Special Acts of 1918, Chapter 159, as amended constitute an allowable deduction from gross income for the year in which repaid; it is order and decided that there is a deficiency in income tax for the year 1931 in the amount of $3,727.69.

In Docket No. 77244. Pursuant to a mandate of the Circuit Court of Appeals for the First Circuit, in accordance with the agreement of the parties, and without prejudice to the right of the Commissioner of Internal Revenue, any Collector of Internal Revenue, or the United States of America to claim for any taxable year subsequent to 1932 that any amounts received by petitioner from the Commonwealth of Massachusetts under the provisions of Section 11 of Massachusetts Special Acts of 1918, Chapter 159, as amended, constitute taxable income for the year in which received; it is ordered and decided that there is no deficiency in income tax for the year">*1051 1932.

It is the intent and purpose of the parties to this stipulation that the decisions of the Board of Tax Appeals (B.T.A. Docket Nos. 75751 and 77244) in No. 3428 shall not be res judicata of the issues involved therein for any taxable years other than those involved in such decisions.

Upon consideration of the stipulation the cause was remanded to the Board with directions to enter decisions in accordance with the stipulation, which was done.

The respondent is now making such a claim for the taxable years 1933 to 1938, inclusive, as is referred to in the above stipulation with reference to Docket No. 77244.

">*908 In the notices of deficiencies for the years now before the Board, the respondent did not base his determinations upon the ground that the amounts so received from the commonwealth were income taxable to petitioner, but rested his determinations upon the ground that the taxable net income of petitioner should be determined upon the socalled "leased road" basis, that is to say, upon the basis that the taxable net income of petitioner for each of said years consisted of the dividends paid during the respective years to the stockholders of petitioner under">*1052 the provisions of the Public Control Act, plus the Federal income tax payable thereon. In making these determinations, respondent said:

It is considered that the taking over of the properties of the Boston Elevated Railway Company was, in effect, a direct lease of these properties and assets to the Commonwealth of Massachusetts, in consideration for the payment of a fixed annual rental by the Boston Elevated Railway Company, Public Trustees, in the form of dividends on the capital stock of the former company and that the various acts of the Legislature of the Commonwealth of Massachusetts have created two separate and distinct entities: (1) The Boston Elevated Railway Company (the lessor) and (2) the Boston Elevated Railway Company, Public Trustees, (lessee). It is upon the former that the income tax liability is imposed, the latter being an instrumentality or agent of the Commonwealth of Massachusetts.

The question of whether the leased road basis was the proper method for determining the taxable income of petitioner was the principal issue before the Board in the case involving petitioner's tax liability for the years 1931 and 1932, above referred to. The Board, in deciding">*1053 that case, rejected the leased road basis as the method of determining the petitioner's taxable net income. See (first issue). In any event this question has now become moot so far as the decision of the instant proceedings is concerned, inasmuch as the parties have stipulated petitioner's correct gross income, deductions, and deductions in excess of gross income for each of the years now before the Board, "unless, and to the extent that, as a matter of law, the amounts received by petitioner from the commonwealth for deficiencies shall be held to constitute income taxable to petitioner."

The proceedings were consolidated.

FINDINGS OF FACT.

The facts were stipulated. We adopt the stipulation as our findings of fact and will recite herein only those facts whcih we deem necessary to an understanding of the issue to be decided.

Petitioner is now, and at all times hereinafter mentioned was, a corporation organized under the laws of the Commonwealth of Massachusetts, having its principal office in Boston, Massachusetts.

">*909 Since July 1, 1918, petitioner and all of its properties have been managed">*1054 and operated under the provisions of the Massachusetts Special Acts of 1918, ch. 159 (hereinafter referred to as the Public Control Act), as amended. The business conducted is the transportation of passengers by means of elevated, subway, surface railway, and bus lines in the city of Boston and suburban cities and towns. The Public Control Act was approved May 22, 1918, and all of its provisions became effective on or before July 1, 1918.

The Public Control Act provides for the management and operation of the Boston Elevated Railway Co. and all of the properties owned, leased or operated by it by a board of trustees appointed by the governor of the commonwealth. It was stipulated that the Public Control Act and amendatory acts, including chapter 333 of the Act of 1931, or any acts relevant to this proceeding, may be considered as if they were formally introduced in evidence herein. The material provisions of the Public Control Act and amendments thereto are as follows.

Section 2 provides that the trustees shall "have and may exercise all the rights and powers of said company and its directors, and, upon behalf of said company, shall receive and disburse its income and funds" ">*1055 and that "in the management and operation of the said company and of the properties owned, leased or operated by it, as authorized by this act, the trustees and their agents, servants and employees shall be deemed to be acting as agents of the company and not of the commonwealth * * *."

Section 3 provides that the trustees "Shall cause to be paid all amounts which may from time to time become due from the company, and shall declare dividends at the appointed times upon the preferred and common stock of the company, and provide for the payment of the same."

Section 5 requires the company to raise three million dollars by the issue of preferred stock, one million of which is to be set aside as a "reserve fund", to which resort is to be first had during periods when the income of the company should fail to meet the cost of the service.

Section 6 requires the trustees to fix such rates of fare as will reasonably insure sufficient income to meet the cost of the service, which is made to include operating expenses, fixed charges, dividends upon the capital stock of the company, and taxes.

Sections 7 and 10 relate to changes in rates of fare to equate income with the cost of service.

">*1056 Sections 8 and 9 are as follows:

Section 8. The reserve fund shall be used only for the purpose of making good any deficiency in income as provided in section nine or for reimbursing ">*910 the commonwealth as provided in sections eleven and thirteen, and until such use, may be invested in income-producting securities in the discretion of the trustees, and all income or interest received thereon shall be treated as part of the general income of the company.

Section 9. Whenever the income of the company is insufficient the cost of the service as herein defined, the reserve fund shall be used as for as necessary to make up such deficiency, and whenever, on the other hand, such income is more than sufficient to meet the cost of the service, the excess shall be transferred to and become a part of the reserve fund.

Section 11 is as follows:

Section 11. [As amended by Special Acts of 1919, ch. 244.] If, as of the last day of June ¹ in the year nineteen hundred and nineteen, or the last day of any June thereafter, the amount remaining in the reserve fund shall be insufficient to meet the deficiency mentioned in section nine, it shall be the duty of the trustees to">*1057 notify the treasurer and receiver general of the commonwealth of the amount of such deficiency, less the amount, if any, in the reserve fund applicable thereto, and the commonwealth shall thereupon pay over to the company the amount so ascertained. Pending such payment it shall be the duty of the trustees to borrow such amount of money as may be necessary to enable them to make all payments, including dividend payments, as they become due. If, as of the last day of any June thereafter during the period of public operation, the reserve fund shall exceed the amount originally established, the trustees shall apply the excess, so far as necessary, to reimbursing the commonwealth for any amounts which it may have paid to the company under the provisions hereof, and the commonwealth shall thereupon distribute the amount so received among the cities and towns in which the company operates, in proportion to the amounts which they have respectively been assessed as provided in section fourteen.

In order to meet any payment">*1058 required of the commonwealth under the provisions of this section the treasurer and receiver general may borrow at any time, in anticipation of the assessments to be levied upon the cities and towns, such sums of money as may be necessary to make said payments, and he shall repay any sums so borrowed as soon after said assessments are paid as is expedient.

[The amendment to section 11 was accepted by the Directors December 29, 1919.)

Section 12 extends the period of public management until the commonwealth shall elect to discontinue it. Under this section the commonwealth "shall have the right to terminate such public management and operation, either at the expiration of the said ten year period or at any time thereafter, by appropriate legislation passed not less than two years before the date fixed for such termination."

Sections 13 and 14 are as follows:

Section 13. It shall be the duty of the trustees to maintain the property of the company in good operating condition and to make such provision for depreciation, obsolescence and rehabilitation, that, upon the expiration of the period of public management and operation, the property shall be in good ">*911 operating">*1059 condition. If the period of public management and operation expires, control of the property shall then revert to the company, and if at that time the reserve fund shall be less than the amount originally established because the income during the period of public management and operation has been insufficient to pay the cost of the service, the commonwealth shall forthwith pay over to the company an amount sufficient to restore it to its original amount; and if the amount in said reserve fund is then in excess of the amount originally established and any amount required to meet the cost of the service to the expiration of such period, such excess shall be paid into the treasury of the commonwealth and distributed among the cities and towns in which the company operates in the same proportions as the assessments provided for by section fourteen.

Section 14. In case the commonwealth shall be called upon to pay to the trustees or the company any amount under the provisions of sections eleven and thirteen, such amount with interest or other charges incurred in borrowing money for the purpose shall be assessed upon the cities and towns in which the company operates by an addition to">*1060 the state tax next thereafter assessed in proportion to the number of persons in said cities and towns using the service of the company at the time of said payment, said proportion to be determined and reported to the treasurer and receiver general by the trustees from computations made in their discretion for the purpose.

Chapter 333 of the Special Acts of 1931 (hereinafter referred to as the 1931 Act) was entitled "An Act Revising and Extending the Term of the Lease to the Commonwealth of the Properties of the Boston Elevated Railway Company and Continuing Public Management and Operation Thereof." Except for sections 8 and 22, the 1931 Act became effective July 1, 1931. Section 8 became effective May 19, 1931, and section 22 became effective May 21, 1931. The material provisions of the 1931 Act are as follows:

Section 1 provides:

Section 1. Public management and operation of the Boston Elevated Railway Company under the provisions of chapter one hundred and fifty-nine of the Special Acts of nineteen hundred and eighteen, as heretofore and hereby amended, shall continue until July first, nineteen hundred and fifty-nine, and thereafter, unless terminated on said date or thereafter, ">*1061 in the manner provided in section twelve of said chapter one hundred and fifty-nine.

Section 2 reduced the rate of dividends upon the common stock from 6 percent to 5 percent.

Section 17 provides in part:

Section 17. The acceptance of this act by the company shall constitute an agreement * * * by the company to sell to the commonwealth or any political subdivision thereof or any corporation specifically authorized by the commonwealth to purchase the same, at any time during the period of public management and operation, its whole assets, property and franchises as a going concern upon the assumption by the commonwealth or such political subdivision of all its outstanding indebtedness and liabilities, and the payment of an amount in cash equal to any amount paid in in cash for stock hereafter issued and also an amount in cash equal to one hundred and five dollars per share for all common ">*912 stock at present issued and then still outstanding decreased by one half of any sums hereafter assessed under the provisions of said chapter one hundred and fifty-nine or of this act upon cities and towns served by the company which have not then been repaid to the commonwealth">*1062 provided however that such decrease shall not reduce the amount payable on account of said common stock below the amount of eighty-five dollars per share. * * *

Section 20 provides:

Section 20. This act shall be regarded as amendatory of said chapter one hundred and fifty-nine of the Special Acts of nineteen hundred and eighteen, and this act and said chapter shall, for purposes of interpretation and construction, be treated as one act.

Paragraph III of the stipulation of facts is as follows:

The books and accounts of petitioner during all periods herein referred to were kept, and all its income tax returns were filed, upon a calendar year and accrual basis. For each of the Calendar years 1933 to 1938, inclusive, the petitioner filed its Federal income tax return showing no tax liability, but reporting gross income, deductions from gross income, and excess of deductions over gross income as follows:

	Gross Income	Deductions	Deductions in Excess of Gross Income
1933	$10,134,308.14	$11,738,476.89	$1,604,168.75
1934	10,759,207.54	11,116,643.15	357,435.61
1935	10,369,304.10	11,426,115.46	1,056,811.36
1936	10,890,314.47	11,506,238.79	615,924.32
1937	10,320,779.06	11,919,011.69	1,598,232.63
1938	9,457,959.24	12,021,972.01	2,564,012.77

">*1063 The foregoing amounts reported as gross income do not include any portion of the money received from the Commonwealth of Massachusetts for deficiencies, as defined by the provisions of said Public Control Act, as amended. The foregoing amounts reported as deductions from gross income do not include dividends paid to stockholders of petitioner.

The foregoing amounts reported as Gross Income, Deductions and Deductions in Excess of Gross Income were correctly reported unless, and to the extent that, as a matter of law, the amounts received by petitioner from the Commonwealth for deficiencies shall be held to constitute income taxable to petitioner.

Since July 1, 1918, the board of trustees, in accordance with the provisions of the Public Control Act, as amended, has notified the treasurer and receiver-general of the Commonwealth of Massachusetts of deficiencies, as defined by the provisions of said act as amended, and payments thereof have been made by the commonwealth as follows:

Date of notice	Date of payment	Amount
July 1, 1919	July 24, 1919	$3,980,151.67
July 1, 1932	July 15, 1932	1,775,338.80
July 1, 1933	July 14, 1933	2,753,124.14
July 2, 1934	July 20, 1934	1,551,631.97
April 15, 1935	April 26, 1935	1,396,388.83
April 17, 1936	April 24, 1936	$2,086,202.37
April 15, 1937	April 23, 1937	1,799,357.27
April 13, 1938	April 29, 1938	1,674,823.31
April 17, 1939	April 28, 1939	2,842,831.73

">*1064 ">*913 The cost of service upon the basis of which the foregoing deficiencies were determined, except the deficiencies paid April 29, 1938, and April 28, 1939, included amounts set up as reserves for the payment of Federal income taxes.

In accordance with the provisions of section 11 of the Public Control Act, as amended, and section 23 of the 1931 Act, the following payments have been made by the petitioner to the Commonwealth of Massachusetts:

July 14, 1922	$517,196.45
July 19, 1923	1,114,557.82
July 27, 1925	20,581.33
July 21, 1926	22,304.46
July 25, 1927	$860,660.25
July 18, 1928	895,518.01
Aug. 19, 1931	1,409,253.35

During the entire period of public management and operation, all of the income and receipts from such management and operation and moneys in connection therewith, including moneys paid to petitioner by the commonwealth, have been deposited and kept in bank accounts carried in the name of the Boston Elevated Railway Co. Checks on said bank accounts have been signed by officers of the company appointed by the board of trustees pursuant to section 2 of the Public Control Act. No bank account has been maintained or kept in the">*1065 name of said board of trustees; all contracts have been made and all business conducted in the name of the Boston Elevated Railway Co.; and all payments and disbursements, including payments to stockholders of petitioner, as provided in section 6 of said Public Control Act, as amended, have been made from the above mentioned bank accounts carried in the name of Boston Elevated Railway Co.

Dividends to stockholders of petitioner in the amount of $1,193,970 have been paid annually by petitioner under the requirements of the Public Control Act, as amended, in and for each of the years 1933 to 1938, inclusive.

The reserve fund which was required by section 5 of said Public Control Act, as amended, to be set aside for the purposes specified in that act was exhausted in 1931 and has not been restored in any amount. Prior to December 31, 1931, the petitioner had paid to the Commonwealth of Massachusetts out of its reserve fund and out of its "West End Special Trust Fund" amounts equal to the sum of all payments theretofore made to the petitioner by the Commonwealth of Massachusetts for deficiencies as defined in said Public Control Act, as amended. The $1,409,253.35 paid by petitioner">*1066 August 19, 1931, which finished repaying all advances made by the commonwealth to that date, was paid out of its "West End Special Trust Fund", as required by section 23 of the Act of 1931.

The moneys received by the petitioner from the Commonwealth of Massachusetts for deficiencies as defined by the Public Control ">*914 Act as amended have been credited in every year to the account designated "Profit and Loss."

The following voucher attached to a check for $895,518.01 drawn by the Boston Elevated Railway Co. to the order of the Commonwealth of Massachusetts dated July 18, 1928, records repayments made to the commonwealth out of petitioner's reserve fund established under the Public Control Act, which the stipulation says was exhausted in 1931. It is typical of other vouchers accompanying payments made out of this reserve fund extending over the period from 1922 to 1931. The body of the voucher in question reads:

"Repayment to the Commonwealth of Massachusetts from the Reserve Fund established under Chapter 159, Special Acts of 1918, of part of the amount paid to the Boston Elevated Railway Company by the Commonwealth of Massachusetts on July 24, 1918, under the provision">*1067 of said Act.

Per Vote of Trustees, July 17, 1928.

895,518.01

OPINION.

BLACK: In our preliminary statement of this report it was pointed out that the Commissioner rested his determination of the deficiencies upon the ground that the taxable net income of petitioner should be determined upon the so-called "leased road" basis, that is to say, upon the basis that the taxable net income of petitioner for each of said years consisted of the dividends paid during the respective years to the stockholders of petitioner under the provisions of the Public Control Act, plus the Federal income tax payable thereon. This being upon the theory that the Commonwealth of Massachusetts was operating petitioner's properties as lessee and was paying to petitioner as rentals therefor enough to cover dividends to stockholders and taxes.

There are expressions in respondent's brief, especially the first few pages thereof, which apparently are still arguing for the "leased road" basis of determining petitioner's net income. But be that as it may, under issue (1) of our report in ">*1068 , we rejected the "leased road" basis and held that the commonwealth was operating petitioner's properties for petitioner's account. We have been cited to no authorities which would cause us to reverse our decision in that respect. Accordingly we reaffirm it. We do not deem it necessary to repeat the reasons which we gave in that report for reaching our conclusions on that particular point. We refer to them as there given without repeating them here.

The next question which we have to decide, and the only one which we understand the pleadings and stipulation really submit to us for decision, is whether the payments made to petitioner by the commonwealth in each of the taxable years to cover deficits in its operating ">*915 expenses as defined in the Public Control Act, should be taken into petitioner's gross income for purposes of taxation.

We held in our former report, , that petitioner should be taxed as any other corporation. Cf. ">*1069 ; affirmed on this point, ; certiorari denied, . This holding we reaffirm. It is certainly the general rule that when a public utility corporation, under private ownership, receives payments from the state to reimburse it for deficits incurred in operation or as a guaranty of a fair return, the corporation must return such payments as a part of its gross income for taxation. ; affd., ; affirmed on other issues, ; ; .

The petitioner concedes that the above decisions would be applicable and would cause the income in question to be taxable to petitioner except for one fact, and that fact petitioner alleges, is that the payments in question were loans to petitioner by the commonwealth and that, although petitioner's obligations to repay such advances were only contingent, nevertheless such advances must">*1070 be treated as loans for purposes of taxation and when so treated they do not go into petitioner's gross income for taxation.

We think a careful study of all the facts of these transactions does not support petitioner's contentions that the advances made to it in the taxable years which we have before us should be treated as loans. In the first place, petitioner's books of account did not treat them as loans. The last paragraph of the stipulation of facts which has been filed with us reads:

The monies received by the petitioner from the Commonwealth of Massachusetts, as set forth in paragraph IV hereof has [sic] been credited in every year to the account designated Profit and Loss.

It is, of course, true that bookkeeping entries are not conclusive. They are merely evidentiary. If the other facts in the record show that such advances were in fact loans to petitioner, then they should be so treated and the fact that petitioner credited them to its profit and loss account in each of the taxable years would not make them taxable income to petitioner. But an examination of these facts does not, in our opinion, demonstrate that these payments by the commonwealth to reimburse">*1071 petitioner for its operating deficits, including dividends and taxes, were loans.

Petitioner in its argument lays much stress on the fact that prior to December 31, 1931, the petitioner had repaid to the commonwealth amounts equal to the sum of all payments theretofore made to the petitioner by the commonwealth for deficiencies, as defined in said ">*916 Public Control Act as amended. It is true that these repayments were made, as petitioner says, but they were made in substantial amounts from capital reserves hitherto set up by petitioner and from a trust fund known as the "West End Special Trust Fund." Subsequent to 1931 there was no longer any "West End Special Trust Fund", and also there were no funds in petitioner's reserve. It should be noted that section 5 of the Public Control Act required petitioner to set up a reserve of $1,000,000 out of a sale of $3,000,000 of its preferred stock.

Section 8 of the Public Control Act provided how this reserve fund and any additions thereto should be used. It reads as follows:

Section 8. The reserve fund shall be used only for the purpose of making good any deficiency in income as provided in section nine or for reimbursing">*1072 the commonwealth as provided in sections eleven and thirteen, and until such use, may be invested in income-producing securities in the discretion of the trustees, and all income or interest received thereon shall be treated as part of the general income of the company.

This reserve which petitioner had established under the provisions of sections 5 and 9 of the Public Control Act was exhausted in 1931 and has not been restored in any amount. In fact there is no requirement that petitioner shall renew it by any further capital contributions. The only additions which might be made to petitioner's reserve fund would be from excess earnings which it might have in any particular year as provided in section 9 of the Public Control Act. During the taxable years which we have before us, petitioner had no excess carnings. Even if petitioner should have any excess earnings in the future, these earnings, as we understand the Public Control Act, would first go into petitioner's reserve to replenish the original reserve which was exhausted in 1931 before any of such reserves would be paid over to the Commonwealth of Massachusetts in repayment of its advancements. This we understand to">*1073 be the meaning of the following language in section 11 of the Public Control Act (as amended by Special Acts of 1919, ch. 244). That part of section 11 as amended reads:

* * * If, as of the last day of any June thereafter during the period of public operation, the reserve fund shall exceed the amount originally established, the trustees shall apply the excess, so far as necessary, to reimbursing the commonwealth for any amounts which it may have paid to the company under the provisions hereof, and the commonwealth shall thereupon distribute the amount so received among the cities and towns in which the company operates, in proportion to the amounts which they have respectively been assessed as provided in section fourteen. [Italics ours.]

No provision is made that at the end of the period of public control, when petitioner's property is to be turned back to its own management and control, petitioner shall reimburse the commonwealth ">*917 for funds which it may have paid over to petitioner during the period of public control in making good its operating deficits. In fact, section 13 of the Public Control Act provides that if at the end of the period of public control">*1074 the reserve originally established is less than it was when established, the commonwealth shall pay to petitioner sufficient funds to restore it to the original amount. Thus it will be seen that petitioner, having once established a reserve out of capital as it did in pursuance to section 5 of the Public Control Act, to be used in making repayments to the commonwealth, is under no obligation to make further payments into the reserve out of capital. Any additions to the reserve in the future must be made from excess earnings as provided in section 9 of the Public Control Act, and we do not think such an arrangement converts what otherwise would clearly be income payments, under the authorities which we have cited, into loans which would not be taxable.

We think that the requirement of the Public Control Act, that petitioner in years in which it has excess income shall pay such excess into a reserve fund to be used to repay the commonwealth, is somewhat similar to the provisions of section 209 of the Transportation Act of 1920 which required a railroad which had excess income during the guaranty period to pay such excess into the Treasury of the United States. Section 209(d) of">*1075 the Transportation Act of 1920 provided in part as follows:

Guaranty in excess of minimum operating income. - If for the guaranty period as a whole the railway operating income of any carrier entitled to a guaranty under paragraph (1), (2), or (4) of subdivision (c) of this section is in excess of the minimum railway operating income guaranteed in such paragraph, such carrier shall forthwith pay the amount of such excess into the Treasury of the United States. * * * The amounts so paid into the Treasury of the United States shall be added to the funds made available under section 72 for the purposes indicated in such section. * * *

The Supreme Court, in , in speaking of the provisions of section 209 of the Transportation Act of 1920, including the above quoted provision, among other things, said:

* * * If the fruits of the employment of a road's capital and labor should fall below a fixed minimum, then the government agreed to make up the deficiency, and, if the income were to exceed that minimum, the carrier bound itself to pay the excess into the federal treasury. In the latter event, the carrier">*1076 unquestionably would have been obligated to pay income tax measured by actual earnings; in the former, it ought not to be in a better position than if it had earned the specified minimum. Clearly, then, the amount paid to bring the yield from operation up to the required minimum was as much income from operation as were the railroad's receipts from fares and charges.

Whether petitioner, in a year when it has excess earnings and pays some of these excess earnings into a reserve to be used under certain ">*918 conditions in making repayment of advances made by the commonwealth, would be entitled to a deduction therefor on its income tax return, we do not now decide. We have no such payments in any of the taxable years which are before us. The petitioner, in support of its contention that the payments in question from the commonwealth were loans and should not be taken into petitioner's gross income, relies upon the Board's decision in

In our decision in that case, we upheld petitioner's contention that a payment of $1,775,338.80 which it received from the commonwealth, July 15, 1932, similar to the payments which petitioner">*1077 received from the commonwealth in each of the taxable years now before us, was a loan and therefore should not be taken into petitioner's gross income. Our decision in that case was largely based upon the court's opinion in ; certiorari denied, , affirming .

A further study of the law and facts connected with the payments by the commonwealth to petitioner, which, as we have already pointed out, petitioner credited in each year to its profit and loss account, convinces us that these payments should not be characterized as loans. Therefore, our reliance in our former opinion on the Island Petroleum Co. case, and the other cases cited, was in error. We think that under authority of ;; and , we must hold that the payments which petitioner received in each of the taxable years to make good petitioner's operating deficits as that term was defined in the Public">*1078 Control Act were taxable income in the year received. Cf. .

Another reason which leads us to this conclusion is that the $1,193,970 dividends which petitioner paid to its stockholders in each of the taxable years would not be taxable income to the recipient stockholders if paid out of capital, except to the extent that such payments might exceed the cost basis of the stock. It seems plain, however, that it was not the intention of petitioner to pay dividends out of borrowed capital, but out of earnings which were made up in part from its regular receipts from fares and charges to passengers and in part from receipts from the commonwealth. To the extent that our decision in , is in conflict with our holding herein, it will no longer be followed.

Petitioner makes an alternative contention which we think must be sustained. Petitioner says in its brief:

* * * It is further submitted that, even if the Board should overrule its prior decision and hold that the amounts received from the Commonwealth ">*919 are taxable, the respondent's determinations as set forth in">*1079 his deficiency letters should not be sustained, but, in such case, the net income of petitioner should be computed in accordance with the terms of Paragraph 3 of the stipulation of the parties.

Paragraph III of the stipulation has been incorporated in its entirety in our findings of fact. Notwithstanding this paragraph, the respondent attempts to support his determination as to the amount of net income by contending that we should disregard entirely the actual amounts paid to petitioner by the commonwealth in the respective taxable years and substitute in their place so-called accrued amounts as of the close of each calendar year equal to (1) the "deductions in excess of gross income" set forth in paragraph III of the stipulation, (2) the annual dividends paid of $1,193,970, and (3) the Federal income tax on the annual dividends. Clearly there is no basis for such a contention. The amounts paid to petitioner in each of the taxable years by the commonwealth could not be accrued by reason of section 11 of the Public Control Act, as amended, until the last day of June for the years 1933 and 1934 or the last day of March for all years subsequent to the year 1934. ">*1080 . These accruals correspond with the actual amounts paid to petitioner in each of the taxable years by the commonwealth. These amounts should be used in a computation under Rule 50.

Reviewed by the Board.

Decision will be entered under Rule 50.

MELLOTT

MELLOTT, concurring: While I concur in the holding of the majority that the amounts received from the commonwealth during the taxable years can not be characterized as loans, I am of the opinion that the discussion of the "leased road" theory, upon which the Commissioner relied in making his determination, is inadequate. His contention, with which I find myself in agreement, is that the various acts of the legislature created two separate and distinct entities - Boston Elevated Railway Co. (lessor) and Boston Elevated Railway Co. Public Trustees (lessee). If that be so then the amounts paid for the use of the property, albeit paid in the form of dividends to petitioner's stockholders, constituted income to petitioner.

VAN FOSSAN

VAN FOSSAN, dissenting: I dissent from the holding that the payments by the commonwealth constituted">*1081 income to the petitioner.

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Footnotes

• 1. As to years subsequent to 1934 this date appearing throughout section 11 has been changed from "June" to "March." Stat. 1935, ch. 99 (effective April 11, 1935). ↩