Concord & Portsmouth Railroad, Petitioner, v. Commissioner of Internal Revenue, Respondent

Concord & Portsmouth Railroad, Petitioner, v. Commissioner of Internal Revenue, Respondent. Docket No. 8848. Promulgated October 4, 1927. Many years prior to tbe taxable year petitioner leased its railroad and property for a term of years, the lessee agreeing to pay all Federal income taxes imposed upon the lessor with reference to the rental. The lessee paid the Federal tax upon the net income returned by petitioner for each year subsequent to the lease. Selct, the amount of tax so paid constitutes additional income to the petitioner for the year in which such tax became due and was paid. J. S. Y. Ivins, Esq., and O. R. Folsom-Jones, Esq., for the petitioner. M. N. Fisher, Esq., and P. J. Rose, Esq., for the respondent. The Commissioner determined a deficiency in income and profits tax for the calendar year 1919 in the amount of $288.39. The issue involved is whether the payment, under the terms of a lease, of the lessor’s income tax by the lessee constitutes additional income to the lessor. FINDINGS OF FACT. During the taxable year petitioner was a New Hampshire corporation with principal office at Manchester. It was the owner of a railroad which it had leased to the Boston & Maine Railroad under a lease which provided, inter alia, that the lessee would pay the Federal income tax of the lessor. The income tax of the lessor for each year was payable and was paid by the lessee in the following year. The Commissioner computed a Federal income tax of $2,283.95 on the petitioner’s income of $24,839.46 for the year 1919, as revised by him, and added the said amount of $2,283.95 to petitioner’s income for the year 1919, and computed an additional tax constituting the deficiency involved herein. The income-tax return of petitioner for the calendar year 1918 showed a tax liability of $2,165.11, computed upon the income of the petitioner for that year without the inclusion therein of any amount on account of the tax paid by petitioner’s lessee. This tax of $2,765.77 was paid by petitioner’s lessee during the calendar year 1919. Petitioner kept its books and rendered its returns upon an accrual basis. [MAJORITY — Littleton:] OPINION. Littleton: In Appeal of Providence & Worcester Railroad Co., 5 B. T. A. 1186, the Board held that the amount of tax upon the income of the lessor and paid by the lessee, under the terms of a lease such as we have here, constituted additional taxable income to such lessor in the year in which such tax was paid by the lessee. On the authority of that decision petitioner’s tax for 1919 should be recomputed by including therein the amount of $2,765.77, representing the tax upon petitioner’s income for 1918 and paid by the lessee in 1919. Reviewed by the Board. Judgment will he entered on 15 days’ notice, under Bule 50.