Opinion
Docket Nos. 18932 20683 20685 20687.
1951-07-31
BATES MOTOR TRANSPORT LINES INC., A CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.STANDARD FREIGHT LINES, INC., A CORPORATION, TRANSFEREE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.HARRY F. CHADDICK, TRANSFEREE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Franklin R. Overmyer, Esq., and Donald MacKay, Esq., for the petitioners. Harold H. Hart, Esq., for the respondent.
1. During the taxable years, petitioner Bates Motor Transport Lines, Inc., carried freight for the Federal Government under an agreement that its charges would not exceed the lowest land grant railroad rate available to the Government over any combination of carriers between the points of shipment and the points of destination. Its efforts to obtain such land grant rates for the purpose of billing the Government for freight carried were unsuccessful, and it was required to bill the Government for the shipments at its prevailing rates and accept payments therefor in full, pending determination by the General Accounting Office of the amount or amounts it would be required to refund under the agreement. Held, that the excess of the amounts collected over the lowest land grate rate for the shipments in question which it was obligated to refund to the Government did not constitute gross income to petitioner.
2. The facts show that petitioner Standard Freight Lines, Inc., is liable as the transferee of Bates Motor Transport Lines, Inc., for any deficiencies in tax against Bates Motor Transport Lines, Inc., for any deficiencies in tax against Bates Motor Transport Lines, Inc., for both the taxable years 1942 and 1944, plus interest as provided by law, and that petitioner Harry F. Chaddick is liable as such transferee for 1944. Franklin R. Overmyer, Esq., and Donald MacKay, Esq., for the petitioners. Harold H. Hart, Esq., for the respondent.
The respondent determined a deficiency in excess profits tax against Bates Motor Transport Lines, Inc., for 1942 in the amount of $12,238.94, and deficiencies in income tax and excess profits tax for 1944 in the amounts of $3,360.06 and $1,579.81, respectively. He also determined that Standard Freight Lines, Inc., is liable, as transferee of Bates Motor Transport Lines, Inc., for both 1942 and 1944, and that Harry F. Chaddick is liable, as transferee, for 1944. Aside from the question of transferee liability of Standard Freight Lines, Inc., and Chaddick, the only question for determination is whether Bates Motor Transport Lines, Inc., in computing net income, may deduct or exclude $7,262.91 for 1942, and $14,117.62 for 1944, as representing its ultimate liability under an agreement with the Quartermaster General to protect the Federal Government against costs for transporting commodities in excess of costs which would result from application of the lowest net land grant rate for such shipments.
FINDINGS OF FACT.
Part of the facts have been stipulated, and are found accordingly.
Bates Motor Transport Lines, Inc., sometimes referred to as Bates, was organized in December 1937, under the laws of Illinois, and had its principal place of business in Chicago. Its corporation income and excess profits tax returns for 1942 and 1944 were filed with the collector for the first district of Illinois. The returns were made on an accrual basis.
From the time of its organization until the end of 1944, when its assets were transferred to Standard Freight Lines, Inc., sometimes referred to as Standard, Bates operated as a common carrier by motor transport, pursuant to certificate from the Interstate Commerce Commission. It served approximately 1,200 points in the states of Illinois, Indiana, Ohio, and Kentucky. Standard was organized in April 1936, under the laws of Illinois, and since that time has operated as a common carrier by motor transport, pursuant to certificate from the Interstate Commerce Commission. Prior to 1945 it served points in the states of Illinois, Michigan, and Missouri. Harry F. Chaddick has been president of Standard since 1936. Upon organization of Bates, Chaddick acquired 196 of the 300 shares of its stock issued at that time, and during 1942 and 1944, he was its president. Standard is now a debtor in possession, pursuant to an order of the United States District Court for the Northern District of Illinois.
During the early years of railroad development, the Federal Government made grants of land to, or otherwise aided, certain railroads and, by reason thereof, became entitled to a lower freight charge of rate than that charged the public generally. Such reduced charges or rates are known as land grant rates and they range from 5 to 50 per cent below the usual charge. Other carriers, which never received any land grants or other aid from the Federal Government, in an effort to obtain traffic and the resultant revenue, entered into agreements allowing the Government land grant rates on property hauled for it.
Shortly after December 1941, the motor carriers of the country were asked to sign agreements to allow land grant rates to the Federal Government. For several years prior to 1942, Bates and Standard had had on file with the Interstate Commerce Commission their respective tariffs showing charges for the various commodities which they transported. On May 4, 1942, Chaddick, as president of Bates and Standard, signed an instrument addressed to The Quartermaster General, War Department, Washington, D.C., designated ‘Standard Motor Freight Land-Grant Equalization Agreement,‘ which became effective on May 19, 1942, when it was accepted for the Quartermaster General. This instrument contained the following provisions:
1. The undersigned carrier agrees or, if more than one are undersigned, they agree jointly and severally, in connection with any shipment of Government property transported from origin to destination exclusively by him or by any one or more of them, to protect the Government of the United States against any cost in excess of the lowest net land-grant charge lawfully available on such shipment from origin to destination at time of movement derived from lawful rates of common carriers filed with the Interstate Commerce Commission or appropriate State Commission.
2. This agreement becomes effective on the date of acceptance by The Quartermaster General, but not earlier than . . . , and will remain fully in effect during the remainder of the current calendar year ending December 31, and thereafter from year to year unless entirely withdrawn upon ninety days written notice signed by any undersigned carrier and received by The Quartermaster General: Provided, that no withdrawal of this agreement shall be valid to affect the operation of any other effective agreement, tender, contract, or traffic arrangement between the Government of the United States and any undersigned carrier.
3. This agreement, upon acceptance, cancels all previous freight land-grant equalization agreements, if any, which by their terms and participants are wholly encompassed within this agreement.
In executing the foregoing land-grant rate agreement, Chaddick understood that Bates was agreeing to transport property for the Government at the lowest rate available to it over any combination of carriers, even though the use of the route in such a combination might not be the most direct route between the point of shipment and the point of destination.
After signing the above-mentioned agreement, Chaddick made several trips to Washington and had discussions with a number of army officials in an attempt to ascertain what the land grant rates were so that Bates and Standard could use them in billing the Government for their transportation charges. He was advised that it was impossible for them to furnish such rates. He was further advised that such rates could be obtained by those carriers submitting their bills at their prevailing tariffs and the General Accounting Office, on an audit of the bills, would determine the applicable land grant rates, advise Bates and Standard accordingly and demand repayment to the Government for any excess charges. The General Accounting Office does not furnish carriers with the applicable land grant rates prior to an audit of their bills. However, it does furnish such information to Government agencies upon request.
After entering into the above-mentioned agreement, Bates transported Government properties during 1942 and 1944. The shipments tendered to Bates during those years were listed on Government bills of lading. After accepting the shipments and completing delivery, Bates forwarded its bill with the attached bills of lading, showing transportation charges computed at its prevailing tariffs, to the proper Government disbursing officer, who, after payment, forwarded the bills, together with the bills of lading, to the General Accounting Office for audit.
The payments to Bates by the disbursing officers were made, on an average, about six months after Bates submitted its bills. These payments were received by Bates without restriction as to their use. They were deposited in its general funds without any segregation in trust or otherwise, and were subject to check for any purpose Bates desired.
After Bates had been operating for five or six months under the land grant rate agreement mentioned above, Chaddick, from certain information he had obtained, concluded that the rates under such an agreement would average about 17 per cent less than those contained in Bates' prevailing tariffs. Thereupon he sought to file, in lieu of the land grant rate agreement previously filed, an agreement which would give the Government a rate 17 per cent below Bates' prevailing tariffs and which rate Bates would use in submitting future bills. However, his proposal was rejected by the Government officials concerned.
In computing its 1942 taxable income, Bates reduced its gross operating revenues by $7,262.91, or 17 per cent of its total billings for the transportation of Government property in that year, on the ground that this amount represented its estimated liability to the Government for excessive billings during the year. In connection with this reduction, Bates set up on its books an account designated ‘Reserve for Government Land Grant Agreement on Overcharge Claims‘ and credited it with the amount of $7,262.91, by which it had reduced its gross operating revenues. In computing its 1944 taxable income, Bates reduced its gross operating revenues by $14,117.62 or 17 per cent of total billings for transportation of Government property during the year, on the ground that such amount represented its estimated liability to the Government for excessive billings during that year. In connection with such reduction, Bates credited the reserve account set up in 1942 with the amount of $14,117.62, by which it had reduced its gross operating revenues. In determining the deficiencies for the respective years, the respondent increased the taxable income reported for 1942 and 1944 by the foregoing respective amounts, on the ground that the full amount of transportation charges billed to the Government during the respective years was includible in taxable income under section 22(a) of the Internal Revenue Code, and that no deduction was allowable from gross income under the provisions of section 23 of the Code for any amount representing Bates' liability to the Government under the land grant rate agreement.
During the years 1944 and 1945, the General Accounting Office made an examination or audit of all the bills submitted by Bates for the transportation of Government property during 1942. About October 1945, and at the time the General Accounting Office was beginning the audit of payments made to carriers in October 1942, the Comptroller General of the United States announced that in the audit of carriers' bills, it would be the policy of the General Accounting Office to make no demand for repayment of payments made in excess of the land grant rate where the excess payment on a bill of lading was $10 or less, unless a repetitive situation was presented. This practice was to be followed even where a bill submitted involved several bills of lading and the total of the excess charges on those bills of lading amounted to several times $10. As a result of its audit of the bills submitted by Bates, the General Accounting Office determined that overpayments had been made with respect to 27 bills. Of those bills, 26 involved a total of 209 bills of lading and payments to Bates of $10,925.77. The overpayments determined on the 26 bills amounted to $1,132.66, and the overpayment determined on the other bill was $27.66, making total overpayments of $1,160.32 determined with respect to bills submitted by Bates for the transportation of Government property during 1942 under the land grant rate agreement.
The foregoing overpayments were recovered in 1944 and 1945, by deductions made by the Finance Officer, War Department, from bills submitted by Bates and paid in those years.
About the time of the hearing of these proceedings, the General Accounting Office had completed the audit of approximately 80 per cent of the bills for the transportation of Government property during 1944. In its audit of such bills, that office had determined only one overpayment in the bills submitted by Bates for that year, namely, an overpayment of $39.40 on a bill for $559.32.
Where the General Accounting Office initiates a re-audit of the bills of carriers, it makes no demand for the repayment of overpayments where the amount of such overpayments appears to be less than $50 on any bill. In March 1949, the Comptroller General directed that a re-audit be made of all bills for transportation which were paid during the period January 1, 1943 to September 30, 1946. However, he has announced that there will be no re-audit of bills for transportation which were paid during the year 1942.
In addition to the amounts of $7,262.91 and $14,117.62 credited by Bates in 1942 and 1944, respectively, to the ‘Reserve for Government Land Grant Agreement on Overcharge Claims,‘ it credited the reserve in 1943 with an amount of $8,463.62, or with a total of $29,844.15 for the 3 years. At the end of 1944, when all of Bates' assets were transferred to Standard, the credit balance of the account was $29,844.15. In setting up the assets taken over from Bates and the liabilities assumed, Standard entered the reserve on its books at $29,844.15 and carried the reserve in that amount on its books until the end of 1947, at which time the amount of the reserve was transferred to the surplus account.
On September 18, 1944, the outstanding capital stock of Bates and Standard and the number of shares in each owned by Chaddick or others were as follows:
+------------------------------------+ ¦ ¦Bates ¦Standard ¦ +-----------------+-------+----------¦ ¦Harry F. Chaddick¦196 ¦335 ¦ +-----------------+-------+----------¦ ¦Others ¦110 ¦None ¦ +-----------------+-------+----------¦ ¦Total ¦306 ¦335 ¦ +------------------------------------+
Bates and Standard, on September 18, 1944, entered into an agreement under which Bates agreed to transfer to Standard all of its assets and Standard agreed to assume every obligation of Bates then accrued or thereafter accruing, and that Bates would, thereupon, be liquidated. As a further consideration for the transfer, Standard agreed to issue shares of its capital stock to the stockholders of Bates in exchange, share for share, of those held by the respective stockholders of Bates, and to effect such an exchange, Standard agreed to increase its authorized capital to permit the issuance of the required shares which were to be of the same class as Standard's then outstanding stock. The agreement provided for the consummation of the transaction as of the close of 1944. Chaddick signed the agreement as president of Standard and as president of Bates.
Pursuant to the foregoing agreement, all of the assets of Bates were transferred on December 31, 1944, to Standard, who assumed all of Bates' liabilities. In accordance with the agreement, Standard issued 306 shares of its stock to the stockholders of Bates, each stockholder receiving the same number of shares in Standard as he held stock in Bates. Chaddick held 196 shares of stock in Bates and received 196 shares in Standard, which had a value of $21,303.24.
By registered letter dated March 4, 1948, the respondent notified Standard that a determination of the income and excess profits tax liability of Bates, for the years 1942 and 1944, disclosed a deficiency in excess profits tax of $12,238.94 for 1942, and deficiencies in income tax of $3,360.06 and in excess profits tax of $1,579.81 for 1944, and that the amount of such deficiencies, plus interest as provided by law, constituted Standard's liability as transferee of the assets of Bates.
By registered letter dated March 4, 1948, the respondent notified Chaddick that a determination of the income and excess profits tax liability of Bates for 1944 disclosed deficiencies in income tax of $3,360.06 and in excess profits tax of $1,579.81, and that the amount of such deficiencies, plus interest as provided by law, constituted Chaddick's liability as the transferee of the assets of Bates.
The balance sheet at December 31, 1944, forming a part of Bates' corporation and declared value excess-profits tax return for 1944, which return was signed and sworn to by Chaddick as president, shows that at December 31, 1944, Bates' assets were in excess of liabilities, except stock, by $60,275.38. The assets and liabilities as recorded on the books of Standard as of January 1, 1945, following the transfer to it, disclose the same amount of excess. After reducing the $60,275.38 by the amount of an account written off by order of the Interstate Commerce Commission, the amount of the excess was shown by Standard as $56,508.72, and its common capital stock account was credited with the latter amount to record the issuance of 300 shares of common stock to stockholders of Bates for ‘Net Tangible Asset Value.‘ Immediately prior to the transfer of the assets of Bates to Standard, the latter had an earned surplus of $13,161.
OPINION.
TURNER, Judge:
With respect to the liability of Bates Motor Transport Lines, Inc., for the deficiencies herein, only one question is presented. That is as to the effect to be given for the liability on the part of Bates to repay to the Federal Government the amounts by which the freight payments made to it by the Government for transporting freight in 1942 and 1944 exceed the lowest net land grant rate for the shipments covered thereby. In its returns, Bates excluded the amounts in question from gross income. The respondent increased income by the amounts excluded, and the petitioner now claims that in computing net income the said amounts are deductible.
The respondent takes the position that the entire amounts of the charges made by Bates for the transportation of Government property in 1942 and 1944 are includible in income, without any exclusion of amounts which under the land grant rate agreement would have to be returned to the Government, and further, that Bates was not entitled to deduction in such years for any portion of the amounts set up in its reserve account to cover such refunds.
Where a taxpayer keeps its accounts and makes its returns on an accrual basis, its right to receive, and not the actual receipt of, income determines the inclusion of an amount in gross income. Spring City Foundry Co. v. Commissioner, 292 U.S. 182. Consequently, where the right to receive income arises in one year but the income is actually received some years later, the amount is income for the year in which the right to receive payment arose, and not for the year in which payment was actually made. Continental Tie & Lumber Co. v. United States, 286 U.S. 290. If in a given year a taxpayer receives earnings under a claim of right and without restriction as to disposition, he has received income in that year which he is required to report, even though it may still be claimed that he is not entitled to the said earnings, and even though he may still be adjudged liable to restore them, and this is true irrespective of whether the taxpayer keeps his books on a cash receipts and disbursements basis or on an accrual basis. North American Oil Consolidated v. Burnet, 286 U.S. 417.
In the instant case, it is apparent from the facts that in both 1942 and 1944 the petitioner received payment of amounts to which it was not entitled and to which it asserted no claim. As a matter of fact, Bates industriously endeavored to obtain information which would permit it to bill the Government only for the amounts to which it was entitled, under the land grant rate agreement, as charges for transporting the shipments in question. Its efforts in that direction were of no avail, however, and it was required by Government officials to bill the Government in full at its prevailing tariffs and accept payments in full, pending determination by the General Accounting Office of the amount to be refunded. Regardless of the fact that none of the moneys covered by the bills rendered as above described were, when received, earmarked for repayment to the Government but were commingled with petitioner's own unfettered funds, it seems to us apparent that it may not properly be said that petitioner received under any claim of right and as its own amounts which both it and the Government representatives were in agreement would have to be paid back, and, such being the circumstances, that as to those amounts there was any receipt of earnings by petitioner. It was at all times obligated to make repayment to the Government of the amounts which the General Accounting Office should determine to be due, and it never at any time felt or claimed that such amounts belonged to it. It is accordingly our opinion that the theory on which petitioner made its returns was sound and that the exclusion of such items from gross income is the proper method of dealing with them. See and compare Uniform Printing & Supply Co. v. Commissioner, 88 F.2d 75; Broadcast Measurement Bureau, Inc., 16 T.C. 988; and Horace Mill, 5 T.C. 691. Holding as we do that the amounts which petitioner was to repay the Government never properly became a part of its gross income, we have no occasion to rule upon the question as to the accrual of a liability for deduction purposes as posed.
In determining the amounts which were excludible from petitioner's gross income for the years in question, we are, of course, limited to the evidence of record. The petitioner still persists in its claim that the amount of 1942 is $7,262.91 and for 1944, $14,117.62. Admittedly, those amounts were estimates and the proof falls far short of substantiating those estimates. Beyond the estimates, the only proof is of the amounts which petitioner has since been required to refund. With the 1942 accounts completely audited by the General Accounting Office, Bates has been required to refund only $1,160.32 in respect of its entire 1942 business. With 80 per cent of the 1944 accounts audited, it has been required to refund only $39.40. We are accordingly unable to find that when petitioner's business was concluded at the end of 1942 and 1944, the amounts which it and the Government representatives were agreed would have to be paid back have been shown to have been in excess of those subsequently determined by the General Accounting Office as being repayable.
At the hearing and on brief, Standard has admitted that it is liable as transferee for any tax liability determined to exist against Bates.
Chaddick denies liability as a transferee of assets of Bates, claiming that no assets were transferred to him and contending that the mere fact that he agreed to and did exchange his shares of stock in Bates for shares of stock in Standard affords no basis for a conclusion that he was a transferee.
The agreement of September 18, 1944, pursuant to which Bates transferred its assets to Standard, shows that Bates was to transfer all of its assets to Standard and that Bates, thereupon, would be liquidated. This would leave it without assets. As consideration for the assets, Standard was (1) to assume all of the liabilities of Bates and (2) to issue to the stockholders of Bates shares of its (Standard's) capital stock in exchange, share for share, for the shares of stock they held in Bates. From the foregoing, it is apparent that the consideration to be given by Standard was the assumption of Bates' liabilities, plus shares of its stock equal in number to the outstanding shares of stock in Bates. The fact that the arrangement provided for Standard to issue such shares directly to the stockholders of Bates, who were to surrender to Standard the shares of stock they held in Bates, was no different in effect than if Standard had issued the shares directly to Bates, who, in turn, had called in its outstanding stock and in liquidation distributed to its stockholders the shares of stock in Standard. The result in each instance would be for the stockholders of Bates to receive the stock in Standard and leave Bates insolvent and without funds to pay its debts. The short cut employed by which Standard issued its stock directly to the stockholders of Bates in nowise relieved those stockholders of their liability as transferees of the assets of Bates. Cf. E. H. Dobrin, 27 B.T.A. 611, and Homer S. Warren, 31 B.T.A. 1041.
Reviewed by the Court.
Decisions will be entered under Rule 50.