The Commissioner of Internal Revenue determined a deficiency in the income tax of the Chicago & North Western Railway Company and from an order of the United States Board of Tax Appeals which reduced the amount of a deficiency, the taxpayer appeals, and the Commissioner of Internal Revenue cross-appeals.
Before ALSCHULER and SPARKS, Circuit Judges, and FITZHENRY, District Judge.
FITZHENRY, District Judge.
The Chicago & North Western Railway Company, petitioner, appeals from the order of the United States Board of Tax Appeals in its case against the Commissioner of Internal Revenue. TheCommissioner of Internal Revenue makes his cross-appeal from the order complained of in the original appeal. The chief questions involved in both appeals have to do with the undermaintenance during federal control of the taxpayer's property and the compromise settlements between the taxpayer and the Director General.
The property of the taxpayer was taken over by the United States government December 28, 1917, and for accounting purposes as of December 31, 1917, under and by virtue of the President's Proclamation of December 26, 1917. It was operated until and including February 29, 1920, when it was returned to the taxpayer. It was under the management of the United States Railroad Administration, at the head of which was the Director General of Railroads.
Under the Federal Control Act March 21, 1918 (40 Stat. 451), the President was authorized to enter into agreements, with the several carriers, with reference to the just compensation to be paid them for the use of their several properties during federal control.
Upon authority of the act the Director General and the taxpayer entered into the "Standard Contract," which had been worked out and accepted by most of the railroad companies. This contract required, during federal control, that the Director General should annually, as nearly as practicable, expend either in payments for labor and material, or by payments into funds, such sums for maintenance, repairs, renewals, retirement, and depreciation as might be requisite in order that the property may be returned in substantially as good repair and in substantially as complete equipment as on January 1, 1918. It also provided that the annual expenditures and charges, during federal control of such property, and the fair distribution thereof, or the payment into funds of an amount equal in the aggregate to the average annual expenditures and charges therefor during the stipulated test period (less the cost of fire insurance), should be taken as a full compliance with the foregoing obligations, and in comparing the amounts expended during federal control with amounts expended during the test period, due allowance should be made for any difference that might exist between the cost of labor and materials and between the amount of property taken over and the average of the test period, and for any difference in use substantial enough, in the opinion of the Commission, to be considered, so that the result would be as nearly as practicable the same relative amount, character, and durability of physical reparation.
At the end of federal control (February 29, 1920), the Director General returned to the taxpayer a railroad which was not in substantially as good repair and with as complete equipment as when taken over.
The amount of undermaintenance of the taxpayer's property became a proper charge against the Director General at the conclusion of federal control, and all that remained to be done was to ascertain its extent according to the standards agreed upon in the contract between the parties, from January 1, 1918, to February 29, 1920, inclusive.
From accounting circulars sent to the appropriate officers and employees of the property, the Director General ascertained that the taxpayer's railroad, ways, and structures had been undermaintained in the sum of $4,585,865, and the equipment overmaintained in the sum of $3,525,747.
The taxpayer claimed, under a proper construction of the contract and provisions for ascertaining the amounts of the several items, there was due the railroad approximately $33,000,000, while the Director General contended originally the taxpayer owed him $1,774,495.04. Later, there were some adjustments made in the division of liquidation claims of the Railroad Administration and the original figures of the Director General were changed, and the total amount of undermaintenance was fixed at $8,191,905.37.
There were many conferences with reference to the amount due the taxpayer, which continued until late in the summer of 1921. Finally the Director General offered to pay the taxpayer a lump sum of $6,500,000 in full of all claims, which was accepted. The claim of the Director General for overmaintenance of equipment and many claims of the taxpayer were eliminated, and upon the payment in cash the taxpayer's release was taken, which, among other things, provided:
"The purpose and effect of this instrument is to evidence the complete and final settlement of all demands of every kind and character as between the parties hereto growing out of Federal control of railroads. * * *"
A "breakdown" of this settlement made by the Director General indicates that, giving effect to various debits and credits in the mutual account between the parties, the allowance included in the settlement for undermaaintenance of way and ...