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Chicago v. Commissioner of Internal Revenue

March 26, 1931

CHICAGO, R. I. & P. RY. CO.
v.
COMMISSIONER OF INTERNAL REVENUE



Petition for Review of Order of United States Board of Tax Appeals.

Author: Evans

Before ALSCHULER, EVANS, and SPARKS, Circuit Judges.

EVANS, Circuit Judge.

This appeal involves petitioner's 1916, 1917, 1918, and 1919 income taxes and also its 1917 additional profits tax. The Board of Tax Appeals entered a single order upon petitioner's three copending petitions. Review of the Board's decision is therefore sought through a single petition to this court.

Numerous questions are presented. The facts bearing on each issue are free from controversy.

Deductibility of Penalties. Petitioner first attacked the ruling of the Board because of its disallowance of a deduction for penalties paid for violation of the Federal Safety-Appliance Law, the Hours of Service Law, the Transportation of Live Stock Law, the Quarantine Law, etc. Penalties paid during the years in question aggregated $23,053.68. Deduction of this amount was sought upon the authority of section 234(a), Revenue Act of 1918 (40 Stat. 1077), and section 12(a), Revenue Act of 1916 (39 Stat. 767) which authorized deductions for "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasomable allowance for salaries or other compensation for personal services actually rendered," etc.

Petitioner argued that violations of the Safety-Appliance Act, etc., entail civil liability only (Chicago, B. & Q. Ry. Co. v. U.S., 220 U.S. 559, 578, 31 S. Ct. 612, 55 L. Ed. 582), and sums paid for their violations, constituted part of petitioner's ordinary and necessary expenses of operation of its business.

While the question is not free from doubt, we resolve it against petitioner upon the authority of Great Northern Ry. Co. v. Commissioner (C.C.A.) 40 F.2d 372; Burroughs Building Material Co. v. Commissioner (C.C.A.) 47 F.2d 178.

It would seem to require an unjustifiable, or at least a doubtful, stretching of the words "ordinary and necessary expenses" of a business to include therein judgments imposed as penalties for violations of public policy statutes. Moreover, following the words "ordinary and necessary expenses, * * *" there appears a more specific statement of items for which deductions may be allowed. The principle of statutory construction, of ejusdem generis, furnishes a basis for the holdings above cited.

Deductions of Annual Amortization of Expenses Incurred in Selling its Bonds during Years 1904 to 1908. During the years 1904 to 1908, petitioner sold $74,358,000 of its first and refunding mortgage bonds, which by their terms matured April 1, 1934. The expenses of such sale aggregated $256,686.08, which amount was charged to profit and loss on the date of sale. Petitioner claimed a prorated expense deduction for the years 1916 to 1919, inclusive, for the cost of selling said bonds.

Respondent argued that such prorating of the cost of selling the bonds did not fall within the language of the statute, which allowed "ordinary and necessary expenses paid or incurred during the taxable year." Petitioner, on the other hand, contended that the expense was analogous to discount in the sale of bonds, and should be amortized over the life of the bond.

It was held in Commissioner v. Old Colony R.R. (C.C.A.) 26 F.2d 408, 410, that premiums on bonds sold prior to March 1, 1913, could not be prorated over the life of the bond issue so as to be subject to the later enacted income tax laws. For a like reason, it would seem that expenses incurred and charged off prior to March 1, 1913, should not be allowed as deductions from income in subsequent years. Moreover, the statute allowing the deduction of expenses limited such expenses to those "paid or incurred during the taxable year."

Taxability of Overcharges Resulting from Errors in Computation of Passenger Fares. Petitioner collected from passengers sums in excess of the fares provided by its tariffs. These overcharges were the result of errors in computation by station agents, and consisted of many items of small amounts. The amounts thus collected were held by petitioner in a "suspense account" and credited to profit and loss at the end of the year.

Petitioner contended that the overcharges did not constitute taxable income because they were not gain derived from capital or labor or both. A practical mind (and problems of taxation are eminently practical, Tyler v. U.S., 281 U.S. 497, 503, 50 S. Ct. 356, 74 L. Ed. 991, 69 A.L.R. 758) would have some difficulty in accepting the conclusion that passengers' overpayments, received and retained by petitioner, were not income derived from its business. It is true petitioner was not legally entitled to charge passengers more than its published tariff rates, but the payments were made through mistake, and the names of the passengers, who made the overpayments, were unknown. It could hardly be said, in view of the mutual mistake, that the ...


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