16 T.C. 1084">*1085 The respondent determined deficiencies in income taxes and declared value excess-profits taxes, as follows:

Petitioner claims an overpayment of income tax for the year 1940 in the amount of $ 269,923.81.

The questions raised by the pleadings are:

(1) Should the petitioner, on the 1951 U.S. Tax Ct. LEXIS 192">*196 accrual system of accounting, have accrued as income for the calendar year 1941 so-called cost-of-service deficits for which it sought reimbursement from the Commonwealth of Massachusetts, in the amount of $ 2,341,167.29 for the 12-month period ending March 31, 1941, and $ 1,311,406.44 for the 9-month period ending December 31, 1941? In the alternative, should the petitioner have accrued either or both of these amounts as income for the calendar year 1942 or 1943?

(2) Was the petitioner's loss with respect to the Atlantic Avenue section of its elevated railway structure sustained either in 1941 or in 1942?

(3) Is the petitioner entitled to deductions of $ 27,833.08, $ 27,833.08 and $ 13,916.53 in the taxable years 1940, 1941, and 1942, respectively, for depreciation on the Atlantic Avenue section of its elevated structure?

(4) Is the petitioner entitled to a pro rata deduction in each of the taxable years 1940 to 1943, inclusive, of an amount ($ 50,330.47) representing one twenty-eighth of the sum ($ 1,409,253.35) it paid to the Commonwealth of Massachusetts in 1931, pursuant to Chapter 333 of the Massachusetts Special Acts of 1931?

16 T.C. 1084">*1086 FINDINGS OF FACT.

The stipulated facts1951 U.S. Tax Ct. LEXIS 192">*197 are found accordingly.

Petitioner is a Massachusetts corporation organized in 1894 and having its principal office in Boston, Massachusetts. Its returns for all of the years here involved have been filed in the collection district of Massachusetts upon the calendar year basis and upon the accrual method of accounting. At all times material to this proceeding, petitioner was engaged in the business of a common carrier of passengers in the City of Boston and nearby cities and towns by means of street (surface) railway, elevated railways, subways, and bus lines.

Since July 1, 1918, and until August 29, 1947, petitioner and all of the properties owned, leased, or operated by it were managed and operated by a Board of Trustees (referred to as the Trustees) created by Section 1 of Chapter 159 of the Special Acts of Massachusetts for the year 1918 (referred to as the Public Control Act) in accordance with the provisions of the Public Control Act and amendatory legislation.

Section 2 of the Public Control Act provided that the Trustees "shall take and have possession of said properties in behalf of the commonwealth during the period of public operation, and, for the purposes of this act, 1951 U.S. Tax Ct. LEXIS 192">*198 shall, except as is otherwise provided in this act have and may exercise all the rights and powers of said company and its directors, * * *."

Section 4 provided that the stockholders should, as theretofore, elect a board of directors which should, however, during the period of public operation have no control over the management and operation of the street railway system; its duties were confined to maintaining the corporate organization, protecting the interests of the company so far as necessary, and taking such action from time to time as might be deemed expedient in cases where the Trustees could not act in its place.

Section 5 required the company to raise 3 million dollars by the issue of preferred stock, 1 million of which was to be set aside as a reserve fund, hereinafter described.

Section 6 required the Trustees to fix such rates of fare as would reasonably insure sufficient income to meet the "cost of the service" [also referred to herein as "cost of service"], which was made to include operating expenses, taxes, rentals, interest on indebtedness, such allowance as they should deem necessary or advisable for depreciation of property and for obsolescence and losses in respect1951 U.S. Tax Ct. LEXIS 192">*199 to property sold, destroyed or abandoned, all other expenditures and charges properly chargeable against income or surplus, fixed dividends on the preferred stocks of the company from time to time outstanding, and dividends on the common stock of the company from time to time outstanding 16 T.C. 1084">*1087 at the rate of 5 per cent during the first two years, 5 1/2 per cent for the next two years, and 6 per cent for the balance of the period of public operation.

Section 8 provided that the reserve fund should be used only for the purpose of making good any deficiency in income, as provided in section 9, or for reimbursing the commonwealth, as provided in sections 11 and 13.

Section 9 provided that, whenever the income of the company was insufficient to meet the cost of service, the reserve fund should be used as far as necessary to make up such deficiency, and whenever, on the other hand, such income was more than sufficient to meet the cost of service, the excess should be transferred to and become a part of the reserve fund.

Section 10 provided for periodical changes in the rates of fare to provide revenue to meet the cost of service.

Section 11, as amended, ¹ provided that as of a given1951 U.S. Tax Ct. LEXIS 192">*200 day each year [the last day of March for years after 1934, to and including 1941, and thereafter the last day of December, beginning with December 31, 1941] if the amount remaining in the reserve fund should be insufficient to meet any deficiency in the cost of service, the Trustees were required "to 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." Provision was also made to reimburse the commonwealth for amounts thus paid over if the reserve fund should rise above the level at which it was originally established.

The original period of public control was fixed by section 2 of the Act at 10 years from July 1, 1918. Section 12 provided that the public management and operation of the railway should continue after the expiration of the original 10-year period upon the terms and conditions specified1951 U.S. Tax Ct. LEXIS 192">*201 in the Act until such time as the commonwealth should elect to discontinue the same by appropriate legislation passed not less than two years before the date fixed for such termination.

Section 13 required the Trustees to maintain the property 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 be in good operating condition. It provided that, upon the expiration of the period of public management and operation, control of the property should revert to the company, and, if at that time the reserve fund was less than the amount originally established, the commonwealth should 16 T.C. 1084">*1088 restore it to its original amount, and, if the amount in the reserve fund exceeded the amount originally established and any amount required to meet the cost of service to the expiration of such period, such excess should be paid over to the commonwealth.

Section 14 provided that the amount of any deficiency payments which might be made by the commonwealth to the company under the provisions of sections 11 and 13 should be assessed upon the cities and towns in1951 U.S. Tax Ct. LEXIS 192">*202 which the company operated by an addition to the state tax next thereafter assessed.

In 1931 the period of public control was extended until July 1, 1959, by section 1 of chapter 333 of the Acts of 1931. Section 2 of that act reduced from 6 to 5 per cent the dividends payable upon the common stock of the company. Section 3 provided that in case of a deficit of which notice was given to the Treasurer and Receiver General, the Trustees should also notify the trustees of the Metropolitan Transit District ² and the Department of Public Utilities; that the fares should be increased if the council of the Metropolitan Transit District should so determine, and that the Department of Public Utilities should investigate and report its recommendations as to the avoidance of future deficits. Section 3A provided the means by which the leases of existing subways and tunnels might be extended by the City of Boston, and that, in the determination of any question as to constitutionality, this section should be deemed to be separable from the remaining provisions of the Act. Section 4 authorized the issuance of bonds of the company, the proceeds of which were to be used for the retirement of the1951 U.S. Tax Ct. LEXIS 192">*203 then existing preferred stocks of the company. Section 5 provided for the purchase of these bonds by the Metropolitan Transit District. Section 6 provided that petitioner was to pay a special compensation tax to the Metropolitan Transit District. Section 8 provided that acceptance of the Act was to be by vote of petitioner's stockholders and evidenced by the filing of a Certificate of Acceptance and certain other qualifying documents.

Section 17 provided, among other things, that the acceptance was to:

* * * constitute an agreement by the company to sell to the commonwealth or any political subdivision thereof * * *, at any time during the period of public management and operation, its whole assets, property and franchise as a going concern upon the assumption by the commonwealth or such political subdivision of all its outstanding indebtedness1951 U.S. Tax Ct. LEXIS 192">*204 and liabilities, and the payment of an amount in cash [determined in accordance with a specified formula] * * *.

Section 22 temporarily suspended the operation of sections 10 and 11 of the Public Control Act, which authorized an increase in fares and payment of deficits by the commonwealth, and provided that no such payment should be required in the year 1931.

16 T.C. 1084">*1089 Facts Relating to "Cost of Service" Deficits.

On March 12, 1941, the Finance Commission of the City of Boston made public a report to the mayor of the city wherein it was charged that in past years the Trustees had made excessive charges to the cost of service of approximately $ 20,000,000, and that the methods and practices used by the Trustees in determining the amount of deficits under the Public Control Act were improper and illegal, and recommended that a suit be brought against petitioner for an accounting.

On April 16, 1941, the Trustees notified the Treasurer and Receiver General of the Commonwealth that, as of March 31, 1941, the income of the company for the period since March 31, 1940, had been insufficient to meet the cost of service, as defined in the Public Control Act, by the sum of $ 2,341,167.29, 1951 U.S. Tax Ct. LEXIS 192">*205 and that there was no amount in the reserve fund applicable thereto.

Again, on January 28, 1942, the Trustees notified the Treasurer and Receiver General that, as of December 31, 1941, the income of the company during the period since March 31, 1941, had been insufficient to meet the cost of service, as defined in said Act, by the sum of $ 1,311,406.44, and that there was no amount in the reserve fund applicable thereto.

No payment was made to petitioner of either of the deficits above referred to, and petitioner did not accrue these amounts as income upon its books. However, payment of both deficits was made in 1947 to the Metropolitan Transit Authority after it acquired the petitioner's assets and franchises in 1947, as hereinafter set forth.

Pursuant to section 11 of the Public Control Act, deficits were certified by the Trustees to the Treasurer and Receiver General and paid to the petitioner, as follows:

1951 U.S. Tax Ct. LEXIS 192">*206 On April 30, 1941, the Governor of the commonwealth and the Executive Council requested an advisory opinion from the Justices of the Supreme Court of Massachusetts upon the following questions:

(1) Whether the provision of part second, c. II, § 1, art. XI, of the state constitution required that a warrant providing for the payment of the deficiency for the period ended March 31, 1941, of which the 16 T.C. 1084">*1090 Treasurer and Receiver General was notified by the trustees of the Boston Elevated Railway Company in accordance with Section 11 of the Public Control Act, be signed by the Governor with the advice and consent of the Council as a condition precedent to the payment by the Treasurer and Receiver General of the amount of such deficiency. The constitutional provision referred to is as follows:

No moneys shall be issued out of the treasury of this commonwealth * * * but by warrant under the hand of the governor for the time being, with the advice and consent of the council * * *

(2) Whether doubt on the part of the Governor and Council as to the correctness of the deficiency would, as a matter of law, give to the Governor the right to withhold his signature to the warrant and give1951 U.S. Tax Ct. LEXIS 192">*207 to the Council the right to withhold the advice and consent with relation to said warrant.

(3) Whether the Governor and Council had the right to withhold payment of the alleged deficiency for the year ended March 31, 1941, pending a determination of its correctness.

(4) Whether the Governor had the right to withhold his signature from the warrant providing for the payment of said deficiency and whether the Council had the right to withhold from the Governor its advice and consent with respect to the approval of said warrant "doubts having been raised as to the correctness thereof as notified to the Treasurer and Receiver General by the Trustees of the Boston Elevated Railway Company"; and

(5) Whether the Governor was required to sign the warrant and the Council required to give its advice and consent to the Governor with relation to said warrant, "notwithstanding the matter of doubts raised and presented to the Governor and Council as to the correctness of the amount of the deficiency." Opinion of the Justices, 309 Mass. 609">309 Mass. 609, 309 Mass. 609">610-612, 35 N.E.2d 5.

On May 28, 1941, the Justices rendered their opinion to the Governor and Council in which1951 U.S. Tax Ct. LEXIS 192">*208 they advised:

(1) That a warrant signed by the Governor with the advice and consent of the Council was "a condition precedent to the payment by the Treasurer and Receiver General of the amount of such deficiency." Opinion of the Justices, 309 Mass. 609">309 Mass. 609, 309 Mass. 609">624.

In response to the remaining questions, the Justices advised as follows (309 Mass. 609">309 Mass. 609, 309 Mass. 609">626, 309 Mass. 609">627, 309 Mass. 609">629-631):

* * * In conformity with the principle here stated, the Governor has the "right to withhold his signature to said warrant," and the Council has "the right to withhold its advice and consent with relation to said warrant," pending reasonable opportunity for them to inform themselves whether the proposed payment is in accordance with the law.

However, the reference in the question submitted to the "correctness of the deficiency as notified by the Trustees of the Boston Elevated Railway Company 16 T.C. 1084">*1091 to the Treasurer and Receiver General" raises a subsidiary question whether, in inquiring whether the proposed payment is in accordance with the law, the Governor and the Council are concluded by this notification as to the amount to 1951 U.S. Tax Ct. LEXIS 192">*209 be paid, or, on the other hand, may go behind such notification to inform themselves whether it is correct with respect to the amount to be paid.

* * * *

We find nothing in the provisions of the statute requiring the trustees to notify the Treasurer and Receiver General of the amount to be paid by the Commonwealth that makes such notification conclusive upon the Commonwealth that the elements included in the computation by them of the amount to be so paid are, in all particulars, in accordance with the law. In our opinion the provision of § 11, as amended, that the Commonwealth shall "pay over to the company the amount so ascertained," refers to the amount so ascertained in accordance with statutory authority, and not to an amount ascertained by the trustees as stated in the notification regardless of their statutory authority with respect to the elements upon which such amount is based. In other words, the obligation or liability of the Commonwealth to pay the "deficiency" is limited to an obligation or liability to pay the amount thereof legally incurred, and the notification by the trustees to the Treasurer and Receiver General is not in the nature of an adjudication that the 1951 U.S. Tax Ct. LEXIS 192">*210 amount stated by them constitutes such an obligation or liability. * * * We conclude, therefore, that in determining whether there is an obligation or liability upon the Commonwealth for the amount of the "deficiency", discharge of which by payment is authorized by law, the Governor and the Council have the right to consider whether the elements entering into the computation of such "deficiency" are in accordance with the law.

While it is not the purpose of Part II, c. 2, § 1, art. 11, of the Constitution to give the Governor and the Council power to refuse to pay obligations and liabilities lawfully incurred ( Willar v. Commonwealth, 297 Mass. 527">297 Mass. 527, 297 Mass. 527">529; compare Rice v. Governor, 207 Mass. 577">207 Mass. 577), it is a matter for the exercise by them of sound executive judgment and discretion to determine whether there is sufficient reason for delay by them in issuing a warrant for the payment of money in discharge of such an obligation or liability, in order to give reasonable opportunity for a determination whether the elements entering into the computation are in accordance with the law. It is a matter for the exercise of such1951 U.S. Tax Ct. LEXIS 192">*211 executive judgment and discretion for them to determine what constitutes such reasonable opportunity. In the exercise of such executive judgment and discretion, reasonable doubt on the part of the Governor and the Council as to the existence or amount, according to law, of an obligation or liability could be found by them to be a sufficient reason for delay in issuing a warrant * * *

* * * *

Subject to the explanations and limitations stated we answer the second question submitted "Yes".

The three remaining questions present in substance the same question as that presented by the second question, though they are stated in somewhat different terms. Subject to the explanations and limitations herein stated, we answer the third question submitted "Yes", the fourth question submitted "Yes", and the fifth question submitted "No".

On June 20, 1941, the attorney general of the commonwealth, to whom the Governor had referred the report of the Finance Commission of the City of Boston, recommended that legal proceedings be instituted seeking a declaratory judgment with respect to the authority of the Trustees in making charges to the cost of service, and requested 16 T.C. 1084">*1092 that an appropriation1951 U.S. Tax Ct. LEXIS 192">*212 of funds be made for the purpose of meeting the expenses of such proceedings.

On June 23, 1941, the Governor sent to the legislature a special message recommending an appropriation to cover the cost of the proceeding recommended by the attorney general. In his message the Governor stated:

The Justices of the Supreme Court recently advised the Governor and Council with relation to the deficit of 1941. This opinion stated that the Governor and Council were not bound to accept the deficit as it was certified to them by the Public Trustees but could, in their discretion, determine for themselves its accuracy. In view of this decision the difficulty of the Governor and Council in properly approving a warrant for this deficit becomes great. It means in substance that each year the Governor, before submitting a warrant for the deficit in operation of the Elevated Railway to the Council, must be sure in his own mind that this deficit has been accurately computed. * * * No approval of a warrant for the deficit of 1941 has as yet been given and, under the present circumstances for the reasons cited above, it will be impossible for the Governor to submit any recommendations to the Council1951 U.S. Tax Ct. LEXIS 192">*213 on this subject. * * *

Therefore, it becomes clear that such a suit to obtain a declaratory judgment on the proper method for assessing the depreciation and cost of service as has been suggested by the Attorney General be brought and a sufficient appropriation be made to carry on such a suit * * *.

The Governor's message renewed a previously made recommendation for public ownership of the petitioner as an alternative to the appropriation to permit suit for a declaratory judgment to be brought by the attorney general.

By chapter 89 of the Resolves of 1941, approved October 27, 1941, the State Department of Public Utilities, under the direction of the attorney general, was authorized to expend a sum not exceeding $ 75,000 --

for the purpose of bringing a proceeding at law or in equity seeking a declaratory judgment, order or decree interpreting the provisions of chapter one hundred and fifty-nine of the Special Acts of nineteen hundred and eighteen, as amended, pertinent to the authority of the board of trustees of the Boston Elevated Railway Company to make certain charges to the cost of service and their accounting duties incidental to such charges, or such other proceeding at1951 U.S. Tax Ct. LEXIS 192">*214 law or in equity as said department and the attorney general deem advisable for the purpose of having a judicial determination of the powers and duties of said trustees under said chapter or otherwise * * *.

Preparation of the proceeding thus authorized was actively commenced by the attorney general's office in the fall of 1941, and conferences were held in that year between officials and counsel for petitioner and the attorney general and his staff in an unsuccessful effort on the part of the company to obtain payment of this deficit from the commonwealth, either outright, or as a qualified payment without prejudice to the right of the commonwealth to recover the amount of the payment in case of a later court decision favorable to the commonwealth.

16 T.C. 1084">*1093 On January 26, 1942, the attorney general filed an information in equity, which was later amended, against petitioner and the Trustees, alleging that the Trustees had improperly included for prior years in the cost of service large amounts on account of items and charges not authorized by law to be included therein. The information alleged that the Trustees had continued, and intended to continue, these improper and unauthorized1951 U.S. Tax Ct. LEXIS 192">*215 methods and practices, and sought a declaratory decree defining the authority of the Trustees to include such charges as a part of the cost of service, and an injunction to restrain the Trustees from charging in the future against the cost of service such items as might be determined to be improper or unauthorized by law.

A demurrer filed by the company to the information was overruled in the Superior Court and the case was reported to the Supreme Judicial Court of Massachusetts. On June 3, 1946, the Supreme Judicial Court affirmed the order of the lower court overruling the demurrer and the case was remanded to the Superior Court for amendment in certain formal respects and for trial on the merits.

On February 2, 1942, a bill in equity, later amended, was filed by a group of 29 taxpayers of Massachusettssub nom. Richards v. Treasurer & Receiver General, in which the commonwealth, the Treasurer and Receiver General of the Commonwealth, the Boston Elevated Railway Company, and the Trustees were made respondents. This bill, after reciting in substance that the Trustees had reported that the income of the company was insufficient to meet the cost of service in the amounts 1951 U.S. Tax Ct. LEXIS 192">*216 of $ 2,341,167.29 and $ 1,311,406.44 for the periods ending March 31, 1941, and December 31, 1941, respectively, contained the following allegations:

The petitioners believe, and therefore aver, that these last two named alleged deficits aggregating $ 3,652,573.73 do not legally exist; that the trustees in ascertaining the amount of these deficits included elements unauthorized by law and outside the discretionary powers conferred upon the trustees by said statute and that these deficits should not be paid by the Commonwealth.

22. The petitioners are informed, believe and therefore aver that the trustees are pressing the Treasurer and Receiver General and other officials of the Commonwealth for the immediate payment of said deficits alleged by the trustees in their notification to the Treasurer and Receiver General of the Commonwealth on April 16, 1941, and on or about January 27, 1942; and the petitioners aver that there is immediate danger that such payments will be made either directly or indirectly at the expense of the Commonwealth. The petitioners further aver that the payment by the Treasurer and Receiver General of any part or the whole of either or both of said alleged deficits1951 U.S. Tax Ct. LEXIS 192">*217 will be an illegal expenditure of public moneys for the reason set forth in the foregoing paragraphs.

The bill prayed for an injunction restraining the Treasurer and Receiver General of the Commonwealth from paying to the Trustees of the company the whole, or any part, of either, or both, of these deficits.

16 T.C. 1084">*1094 The answer of the Treasurer and Receiver General to the amended bill of complaint contained the following:

* * * This respondent has not paid and does not intend to pay the amount of either of said alleged deficiencies unless and until a warrant or warrants therefor shall have issued under the hand of the Governor with the advice and consent of the Council, comformably to the provisions of the Constitution Part II, chapter 2, section 1, article xi; that no such warrant or warrants has yet issued and this respondent is not about to make payment of the amount of said deficiencies.

Appeal was taken to the Supreme Judicial Court from interlocutory orders of the Superior Court entered November 22, 1944, sustaining demurrers to the bill of complaint, and from a final decree entered in the Superior Court on January 9, 1945, dismissing the bill. The Supreme Judicial Court1951 U.S. Tax Ct. LEXIS 192">*218 of Massachusetts, in a decision handed down June 3, 1946, affirmed both the interlocutory decree and the final decree of the Superior Court. Richards v. Treasurer & Receiver General, 319 Mass. 672">319 Mass. 672.

By Mass. Stat. 1943, c. 566, approved June 12, 1943, the time within which petitions founded on claims against the commonwealth could be prosecuted under chapter 258 of the General Laws (Ter. Ed.) was limited to a period of 3 years next after the cause of action accrued.

On February 1, 1944, petitioner filed a petition against the commonwealth under General Laws (Ter. Ed.), c. 258, setting forth the two deficits previously referred to for the 12-month period ended March 31, 1941, and the 9-month period ended December 31, 1941, respectively, and alleging that the commonwealth owed to it the sum of said deficiencies, namely, $ 3,652,573.73. The commonwealth filed an answer in abatement and a demurrer, which were overruled on May 19 and May 17, 1944, respectively. The commonwealth, on May 20, 1944, appealed from the order overruling its demurrer, and on the same day filed a claim of exception to the order overruling the commonwealth's plea in abatement. 1951 U.S. Tax Ct. LEXIS 192">*219 On May 29, 1944, the commonwealth filed an answer denying "each and every material allegation contained in the petition."

On June 6, 1944, the attorney general filed in the equity proceedings then pending in the Superior Court a motion seeking an injunction restraining the petitioner from further prosecuting its suit against the commonwealth to recover the alleged deficiencies for the 12 months ended March 31, 1941, and the 9 months ended December 31, 1941, alleging in substance that the issues would be more expeditiously determined in the equity proceedings.

On June 7, 1946, the Governor sent a special message to the legislature recommending a further appropriation of funds to meet the expenses incident to a trial on the merits in the equity proceedings instituted by the attorney general for a declaratory decree as to the 16 T.C. 1084">*1095 authority of the Trustees in making charges to the cost of service; and an appropriation of $ 68,000, in addition to amounts theretofore appropriated, was made for that purpose.

By stipulation filed by leave of court and approved August 7, 1946, the suit of the petitioner against the commonwealth and the information of the attorney general seeking a 1951 U.S. Tax Ct. LEXIS 192">*220 declaratory judgment were ordered to be tried together before a single justice, auditor or master, as the court might determine, beginning not later than January 13, 1947. By subsequent stipulations in these cases the trial date was postponed, the last postponement being to June 23, 1947.

No certifiable deficits existed for any period after 1941 until 1946. The Trustees notified the Treasurer and Receiver General of the Commonwealth of Massachusetts of the amount of the 1946 deficit and it was included in the payment made to the Metropolitan Transit Authority, on October 28, 1947, as hereinafter set forth.

Chapter 544 of the Massachusetts Acts for the year 1947, effective June 19, 1947, created the Metropolitan Transit Authority as a body politic and corporate and a political subdivision of the commonwealth. Section 5 of the Act directed the Authority to exercise the option set forth in section 17 of chapter 333 of the Acts of 1931. This option was exercised by the Authority, and on August 29, 1947, it acquired all of the assets, property and franchises of petitioner as a going concern in the manner and for the consideration specified in chapter 544.

Sections 24 and 25 of said 1951 U.S. Tax Ct. LEXIS 192">*221 chapter 544 provided in part as follows:

Section 24. Upon acquisition of the property and franchises of the company by the authority, all actions pending between the commonwealth and the company shall be discontinued.

Section 25. When the authority has acquired the property and franchises of the company and when the pending suits between the commonwealth and the company shall have been discontinued, as provided in this act, the state treasurer shall pay over to the authority the deficiencies of which the board of public trustees of the company notified the state treasurer in accordance with section eleven of chapter one hundred and fifty-nine of the Special Acts of nineteen hundred and eighteen, as amended, for the year ended March thirty-one, nineteen hundred and forty-one in the amount of two million three hundred and forty-one thousand one hundred and sixty-seven dollars and twenty-nine cents, for the nine months ended December thirty-one, nineteen hundred and forty-one in the amount of one million three hundred and eleven thousand four hundred and six dollars and forty-four cents, and for the year ended December thirty-one, nineteen hundred and forty-six in the amount of seven1951 U.S. Tax Ct. LEXIS 192">*222 hundred and eighty-seven thousand five hundred and twenty-seven dollars and eighty-nine cents * * *.

On September 15, 1947, the case of Boston Elevated Railway Co. v. Commonwealth and the information in equity seeking a declaratory judgment were discontinued, and, on October 28, 1947, the state treasurer paid over to the Metropolitan Transit Authority the deficits specified in section 25 of chapter 544.

16 T.C. 1084">*1096 The petitioner did not include either the amount of $ 2,341,167.29 or $ 1,311,406.44 in its income tax return for the year 1941. The respondent in his notice of deficiency included both of these amounts in petitioner's income for the year 1941. ³

At the end of each of the years 1941, 1942, and 1943, the petitioner did not have a fixed or unconditional right to receive payment of either of the amounts referred to in the preceding paragraph1951 U.S. Tax Ct. LEXIS 192">*223 and did not have a reasonable expectation that such amounts would be collected by it, except in the event of favorable termination of its controversy with the Commonwealth of Massachusetts.

Facts Relating to Atlantic Avenue Loss.

Petitioner's elevated railway system was constructed under authority of Mass. Stat. 1894, c. 548, as amended by Stat. 1897, c. 500. It consisted of the so-called main line and the Atlantic Avenue line. The main line extended from Forest Hills on the south to the southerly end of the Washington Street Tunnel, which passes through the central part of Boston, and from the northerly end of the Washington Street Tunnel to Everett, the northern terminus of the elevated system. The Washington Street Tunnel, through which the main line is operated, is owned by the City of Boston and was used by petitioner under contract with the city, which was executed September 25, 1902, and later extended pursuant to Mass. Stat. 1911, c. 741, sections 29 and 34, and Stat. 1931, c. 333, section 3A. The Atlantic Avenue line was roughly in the form of a loop, beginning at the main line somewhat south of the tunnel, and joining the main line again north of the tunnel. The1951 U.S. Tax Ct. LEXIS 192">*224 elevated structure on the main line and on the Atlantic Avenue line together thus formed a continuous line of elevated railway owned by petitioner from Forest Hills to Everett, and the Atlantic Avenue line was the only connection owned by the petitioner between the northerly and the southerly portions of its main line. The contract with the city for the use of the tunnel is terminable by the city on July 1, 1962, or on the first day of any July thereafter. Mass. Stat. 1931, c. 333, section 3A.

The Atlantic Avenue line was put in operation in 1901. It was a section of petitioner's elevated railway consisting of a double-track elevated railway structure and the stations, tracks, signals, telephones, etc., incident thereto. Also carried on the structure was part of the distribution system for the transmission of electric power and compressed air.

Petitioner's total investment in the Atlantic Avenue line was approximately $ 5,600,000, of which $ 2,793,548,51 was paid for damages to abutting estates pursuant to section 8, Mass. Stat. 1894, c. 548.

16 T.C. 1084">*1097 Operation of the main line service through the Washington Street Tunnel was commenced in 1908, and thereafter a considerable 1951 U.S. Tax Ct. LEXIS 192">*225 falling off was experienced in the traffic over the Atlantic Avenue line. The company made reductions in train service during the years 1919 to 1938. Operation of trains over the Atlantic Avenue line resulted in interference with operation through the tunnel at grade crossings.

During the period from 1923 to 1938 (the fare being the same during the entire period) the revenue collected at the four stations on the Atlantic elevated structure decreased steadily from $ 522,961.28 for the year ended December 31, 1923, to $ 180,854.18 for the year ended December 31, 1937.

In 1924, and on several occasions in subsequent years, suggestions were made by various public officials looking to a possible sale by petitioner to the state or city of its Atlantic Avenue elevated structure for use as an elevated vehicular highway.

It was the opinion of the Trustees and of their general counsel that, while they had full power to discontinue service over the Atlantic Avenue line, they had no authority to sell or remove the structure without the consent of the board of directors.

The Trustees were of the opinion that substantial operating savings could be effected by discontinuing the operation of trains1951 U.S. Tax Ct. LEXIS 192">*226 over the Atlantic Avenue line, and from an operating standpoint, the Trustees had no objection to the sale or other disposition of the Atlantic Avenue line, provided the sale was for cash and for a sum which would substantially aid in the financing of the road.

In 1937, a bill was introduced in the Massachusetts legislature providing for the purchase of the Atlantic Avenue elevated structure.

By chapter 22 of the Resolves of 1937, approved May 12, 1937, a special commission was appointed to investigate the removal of the Atlantic Avenue structure. The Trustees wrote to this commission on November 4, 1937, and, among other things, said that there were valid arguments for either the abandonment or retention of the Atlantic Avenue loop; that it formed a connecting link between the south and north sides of the city, and in an emergency might be useful to maintain through service without interruption; that a powerful argument for its sale was that it would reduce the deficit by about $ 81,000 per year; and that it was the opinion of their general counsel that they could abandon service on the loop, but that they had no authority to sell or remove the structure without the approval of 1951 U.S. Tax Ct. LEXIS 192">*227 the board of directors. The letter expressed the conclusions that (1) if the structure could "be acquired by the District at a reasonable figure," the Trustees would favor such action, and (2) reasonably adequate bus service could be substituted if the posts were removed from Atlantic Avenue or if the structure were converted to an elevated highway over which the busses could operate.

16 T.C. 1084">*1098 The majority of the commission reported in favor of the purchase of the Atlantic Avenue structure and the conversion of it into an elevated highway.

On May 6, 1938, the Trustees authorized Edward Dana, President and General Manager, to request petitioner's board of directors "to consent to the abandonment of the Atlantic Avenue Section, so-called, of the elevated structure."

By letter dated June 6, 1938, the chairman of petitioner's board of directors notified Dana that the board had taken no action on the request of the Trustees, in view of the opinion of the board's counsel, a copy of which was enclosed. That opinion stated that the board did not have the power to give up the company's right to maintain the elevated structure or any part of it; that it was the duty of the Trustees under1951 U.S. Tax Ct. LEXIS 192">*228 section 2 of the Public Control Act to operate the properties of the company; that their authority to determine the extent of the service and facilities to be furnished did not give them authority to abandon and tear down or sell a part of the elevated structure; that under section 13 of the Act it was their duty to maintain the property of the company in good operating condition and to preserve the company's rights to maintain the structure. Moreover, the opinion advised the directors not to consent to the abandonment of service since such action might result in the loss of the company's rights by reason of non-user; but stated that, if the Trustees themselves should abandon the use of the structure, it would not seem that such abandonment would work a forfeiture.

On August 24, 1938, the Public Works Department of the City of Boston notified the company of the city's intention to resurface a portion of Atlantic Avenue under the elevated structure with concrete pavement. On August 30, 1938, petitioner replied, stating that it wished to increase the number of ducts in its conduit under Atlantic Avenue from four to twelve before the paving work was begun. It was the regular practice1951 U.S. Tax Ct. LEXIS 192">*229 of the company to put its wires underground whenever the city undertook to resurface a street.

On September 7, 1938, the superintendent of power of petitioner wrote to Edward Dana, President and General Manager of petitioner, in reference to the proposed paving construction of the City of Boston in which he stated:

Considering the possibility of the removal of the Atlantic Avenue structure, it would appear desirable to construct an underground conduit prior to the reconstruction of the street so that provision will exist for installing the overhead feeders underground.

Authorization to perform the construction was granted by the Trustees on September 12, 1938.

At a meeting of the Trustees on September 21, 1938, the president and general manager outlined plans for discontinuance of passenger 16 T.C. 1084">*1099 service on the Atlantic Avenue elevated structure commencing October 1, 1938, and it was voted that he be authorized to discontinue such service on that date. On October 1, 1938, all passenger service was discontinued on the Atlantic Avenue line and no trains were thereafter operated over it.

The plans outlined by the president and general manager at the meeting of September 21, 1938, 1951 U.S. Tax Ct. LEXIS 192">*230 were that the service over the Atlantic Avenue line would be discontinued on October 1, 1938; that the service through the Washington Street Tunnel would be increased to take care of the additional traffic; that bus service would be instituted to certain points being served by the Atlantic Avenue line; and that the Atlantic Avenue line would be kept ready for use at all times, in case the need arose.

The petitioner obtained "locations" from the City of Boston to operate busses on Atlantic Avenue about the time service was discontinued on the Atlantic Avenue section.

On October 4, 1938, the chairman of the board of directors wrote to the chairman of the board of trustees objecting to discontinuance of service on the Atlantic Avenue line and suggesting that such discontinuance was contrary to Massachusetts law. The answering letter, of October 17, 1938, undertook, among other things, to refute the suggestion that the discontinuance by the Trustees would work a forfeiture of petitioner's rights, in violation of law, calling attention to the opinion expressed by counsel for petitioner, previously referred to, that abandonment of use by the Trustees would not result in the forfeiture 1951 U.S. Tax Ct. LEXIS 192">*231 of the petitioner's rights.

The cost of track walking for the Atlantic Avenue structure prior to the middle of December 1938 was $ 63.50 a week. After that a weekly inspection was made until the middle of February 1942 at a cost of $ 3.46 a week. The only maintenance expense shown on the books and records of the company between 1938 and 1942 was the repair of a pipe line on the structure in July 1941 at an expense of $ 254. However, the books contained no record of items regarded as expense as distinguished from capital items.

A bill was filed with the 1939 Massachusetts Legislature (Senate No. 221) providing for the taking by eminent domain or the acquisition by purchase by the commonwealth of the Atlantic Avenue structure.

Another bill (House Bill No. 116) was introduced in the 1939 Massachusetts Legislature upon petition of the mayor of Boston, to authorize the Transit Department of the City of Boston, with the approval of the mayor, to enter into a contract with petitioner for the purchase of the Atlantic Avenue elevated structure for an amount subsequently to be determined.

16 T.C. 1084">*1100 In 1939 the Massachusetts Legislature enacted a statute (Stat. 1939, c. 482, approved August1951 U.S. Tax Ct. LEXIS 192">*232 12, 1939) which had been substituted in the House for House Bill No. 116. Section 1 of the statute provided that the right of the petitioner to construct, maintain and operate its elevated railway structure on Atlantic Avenue was thereby declared forfeited as the structure was no longer being operated in the public service for the purpose for which the franchise of the company to operate an elevated structure on that location was granted and that the structure constituted a nuisance in the public highway and unreasonably interfered with the enjoyment and use of the highway to the detriment of the public health and safety, and that the location and right of the company to construct, maintain, and operate an elevated railway structure thereon was thereby revoked. Section 2 provided in part as follows:

The company, acting by its board of directors, may, within thirty days of the effective date of this act, file a petition in equity in the supreme judicial court to determine whether there is just cause for the revocation and declaration of forfeiture provided for in section one. The supreme judicial court shall have jurisdiction in equity to determine the issues raised in such petition1951 U.S. Tax Ct. LEXIS 192">*233 and to affirm, modify, or annul the said revocation and declaration of forfeiture, and service of an order of notice upon the state secretary shall be sufficient.

Following the enactment of this statute, the petitioner, on September 8, 1939, filed a petition in the Supreme Judicial Court of Massachusetts contesting the validity of the statute and seeking a determination that there was no just cause for the revocation and declaration of forfeiture provided for in section 1 of that Act. The case was argued on May 14, 1940. The opinion of the court was rendered January 8, 1942, and final decree was entered on January 21, 1942. Boston Elevated Ry. Co. v. Commonwealth, 310 Mass. 528">310 Mass. 528, 39 N.E.2d 87. Petitioner paid $ 7,500 to its counsel, Gaston, Snow, Rice & Boyd, for legal services in the preparation and prosecution of the case.

On January 21, 1942, the Board of Trustees passed the following vote:

Voted:

Whereas a Final Decree has this day been entered in the Supreme Judicial Court of the Commonwealth of Massachusetts in case of Boston Elevated Railway Company vs. Commonwealth of Massachusetts et als that the right of the Boston Elevated1951 U.S. Tax Ct. LEXIS 192">*234 Railway Company to construct, maintain and operate its elevated railway structure located in and upon Commercial Street, Atlantic Avenue, Beach Street and Harrison Avenue and public or private lands or ways in the City of Boston between cross girder 164 over 201 east of Keany Square and cross girders numbers 1E and 1W near Washington Street, described in section one of Chapter 482 of the Acts of 1939, is forfeited as declared by said section, because the Company's elevated structure therein referred to is no longer being operated in the public service for the purpose for which the franchise of the Company to operate an elevated structure on the location described in said section one was granted;

16 T.C. 1084">*1101 That Edward Dana, President and General Manager, be and he hereby is authorized and directed in the name and behalf of the Boston Elevated Railway Company to arrange forthwith for the removal of said structure under and in accordance with the provisions of said Chapter 482 of the Acts of 1939 by making the necessary changes in and providing necessary substitute facilities for the compressed air pipe and electric cables now carried on the structure so that the air compressors and1951 U.S. Tax Ct. LEXIS 192">*235 electric facilities at Lincoln Power Station may be connected with those parts of the elevated structure and railway system not to be removed, by removing from said structure such materials, equipment and parts of said structure as the Railway Company desires to retain and by requesting bids for removal of those parts of said structure not to be retained by the Railway Company under form of contract to be approved by General Counsel providing that the materials removed shall, when removed, become the property of the Contractor.

The work referred to in the preceding vote was commenced on March 17, 1942, and was completed July 13, 1942. Later in that year the book value of the Atlantic Avenue line was written off on the books of the petitioner.

Subsequent to October 1, 1938, and until the decision of the Supreme Judicial Court in 1942, the Atlantic Avenue elevated structure constituted a facility which could be used in case of interruption for any cause of service through the Washington Street Tunnel, in case of shift in traffic load, or to lessen congestion at the Washington Street station in case of traffic overload in the tunnel. Also during this period it continued to carry electric1951 U.S. Tax Ct. LEXIS 192">*236 cables and air pipe lines which were used for the transmission of electricity and compressed air for use in connection with the operation of other parts of petitioner's system.

When the operation of trains over the Atlantic Avenue line was discontinued, instructions were given to the various departments that the Atlantic Avenue structure should be kept in such condition that service could be resumed on reasonably short notice.

During the years 1939 to 1942 the petitioner removed from the Atlantic Avenue line some passimeters, fare boxes, and other miscellaneous equipment. The removal of this equipment would not have interfered with the resumption of operation of trains over this line during the period October 1, 1938, to January 1942.

In 1941, certain frogs and switch points at the junction of the mainline elevated and the Atlantic Avenue line near Tower D at Castle and Washington Streets became worn out and plain rail was substituted therefor. At the time of this substitution instructions were issued to the engineer in charge of the matter to retain spare parts at that junction "until the question relative to the Atlantic Avenue section is settled," and that "should it become necessary1951 U.S. Tax Ct. LEXIS 192">*237 to make use of the switch at Tower D connecting with the Atlantic Avenue section the spare parts would enable you to restore this connection in a short period."

16 T.C. 1084">*1102 Subject to this qualification, there was no severance of the tracks on the Atlantic Avenue line from the main-line elevated and there was no rearrangement of the rail system which would have prevented the running of trains from the main line over the Atlantic Avenue line, or vice versa.

A special order was issued on December 15, 1941, pursuant to authorization of the Trustees on December 8, 1941, for the installation of new cable in conduits to take the place of the copper then on the elevated structure. The 1939 statute provided that work of demolition of the elevated structure should begin within 30 days from the date of the decision of the court. In view of the shortage of materials and the fact that it was estimated it would take in excess of 30 days to install this cable, it was deemed advisable to anticipate a decision unfavorable to the company and take steps to install the cable in the conduit so that the 30-day requirement could be satisfied.

Service over the Atlantic Avenue line could have been resumed1951 U.S. Tax Ct. LEXIS 192">*238 upon a few hours' notice at any time from October 1, 1938, up to the time of the decision in 1942.

There was no abandonment of or intention to abandon the Atlantic Avenue structure at the time operation of trains was discontinued in 1938, or at any other time prior to the decision of the Supreme Judicial Court of Massachusetts in 1942.

The loss with respect to its Atlantic Avenue line was claimed as a deduction by petitioner in its income tax return for 1942. It was disallowed by respondent in his notice of deficiency upon the ground "that the property was abandoned during the year 1938 and the loss occurred in that year." Petitioner did not claim depreciation on the Atlantic Avenue line in its income tax returns for any period after the calendar year 1938 and none has been allowed by the respondent.

Petitioner sustained a loss with respect to its Atlantic Avenue line in the year 1942 in the amount of $ 3,570,047.07, less the amount of depreciation allowable on the Atlantic Avenue structure for the years 1939 to 1942, inclusive.

Facts Relating to Pro Rata Deduction on Account of 1931 Extension Payment.

Chapter 740 of the (Mass.) Acts of 1911 provided for the consolidation of 1951 U.S. Tax Ct. LEXIS 192">*239 the properties and franchises of the West End Street Railway Company (referred to herein as "West End") and the petitioner to take effect on June 10, 1922, the date of the termination of the then existing lease from West End to petitioner. The consolidation was to take the form of a sale of all the property, privileges, and franchises of West End to petitioner (sec. 1). For this purpose the petitioner 16 T.C. 1084">*1103 was authorized to increase its capital stock by an amount equal in par value to the par value of the stock of West End; the new stock was to be divided into first preferred stock and second preferred stock, the aggregate par value of the first preferred to be equal to the aggregate par value of West End's outstanding preferred, and the aggregate par value of the second preferred to be equal to the aggregate par value of West End's outstanding common stock (sec. 2). The new stock was to be issued to West End in full payment for all of its properties, privileges, and franchises, subject to its existing indebtedness and liabilities, and thereupon distributed to the West End stockholders (sec. 4).

Section 9 provided that West End should forthwith sell to petitioner all of the1951 U.S. Tax Ct. LEXIS 192">*240 real estate of West End not required in the conduct of the business of the companies, that the proceeds of the sale to an amount not exceeding $ 1,500,000 should be held as a special trust fund by petitioner to be invested and accumulated until June 10, 1922, when the consolidation was to take effect, and that the petitioner should thereafter continue to invest the fund and accumulations to that date and apply the annual income thereof to the purchase and retirement of the second preferred stock referred to above. Section 9 further provided that no part of the fund or its income should be used for any other purpose until all of the second preferred stock had been retired, at which time the fund with its accumulations was to be applied by petitioner to any purpose for which its stock and bonds could legally be issued.

Section 10 provided that, upon the consolidation (June 10, 1922), the petitioner should assume and be responsible for all of the indebtedness and liabilities of West End and should, in general, succeed to all its powers, privileges, rights, and franchises and be subject to all of its duties, obligations and restrictions, and that all claims of one against the other should1951 U.S. Tax Ct. LEXIS 192">*241 be deemed satisfied and extinguished.

Pursuant to section 9, petitioner acquired in 1913 the real estate of West End not required for railway purposes and established a special trust fund amounting to $ 1,500,000.

Chapter 333 of the Acts of 1931 providing for the extension of the period of public control until 1959 contained the following provisions:

Section 23. When all the second preferred stock of the company has been retired, the special trust fund established under the provisions of section nine of chapter seven hundred and forty of the acts of nineteen hundred and eleven shall, to the extent necessary therefor, be converted by the trustees of the company into cash and the same shall thereupon be applied to repay to the commonwealth all amounts which, prior to the effective date of this act, have been assessed under the provisions of chapter one hundred and fifty-nine of the Special Acts of nineteen hundred and eighteen upon the cities and towns served 16 T.C. 1084">*1104 by the company and which have not been previously repaid to the commonwealth, and the treasurer and receiver general of the commonwealth shall thereupon distribute the same to such cities and towns as provided in said1951 U.S. Tax Ct. LEXIS 192">*242 chapter. Any balance remaining in said fund shall be applied as provided in said chapter seven hundred and forty.

Pursuant to said section 23 of the 1931 act, petitioner paid, on August 19, 1931, from the special trust fund established under section 9 of the 1911 Act to the Commonwealth of Massachusetts the sum of $ 1,409,253.35. This was the amount which, prior to the effective date of the 1931 act, had been assessed under the provisions of the Public Control Act upon the cities and towns referred to in the Public Control Act and for which the Commonwealth had not theretofore been reimbursed by petitioner.

In determining the deficiencies set forth in his notice of deficiency, respondent allowed as a deduction the amount of $ 50,330.47 in each of the years 1940, 1941, 1942, and 1943, which amount represents one twenty-eighth of the sum of $ 1,409,253.35 paid by petitioner to the Commonwealth of Massachusetts on August 19, 1931. Respondent now asserts in his amended answer that such deductions are not allowable.

OPINION.

1. Petitioner employed the accrual method of accounting, and there is no dispute here that payments due from the State of Massachusetts on account of the so-called1951 U.S. Tax Ct. LEXIS 192">*243 cost of service deficits would constitute taxable income in the year or years that they were properly accruable. Boston Elevated Railway Co., 45 B. T. A. 906, affd. (C. A. 1), 131 F.2d 161, certiorari denied, 318 U.S. 760">318 U.S. 760. The cost of service deficits herein for which petitioner sought reimbursement from the state were claimed to be $ 2,341,167.29 for the 12-month period ending March 31, 1941, and $ 1,311,406.44 for the 9-month period ending December 31, 1941. Respondent's principal contention is that these amounts must be accrued in 1941. However, during 1941 and for some years thereafter, the state was challenging the legality of certain accounting procedures used in arriving at these amounts, and was therefore refusing to make any payments to petitioner. Accordingly, petitioner contends that these amounts were not properly accruable while thus in dispute. This issue turns, therefore, upon the application of the principles of accrual accounting to the facts of this case.

These principles have long been understood and applied in a wide variety of cases. Thus, it has been held that liability1951 U.S. Tax Ct. LEXIS 192">*244 for a tax accrues and is deductible from gross income, when "all the events" have occurred "which fix the amount of the tax and determine the liability of the taxpayer to pay it." United States v. Anderson, 16 T.C. 1084">*1105 269 U.S. 422">269 U.S. 422, 269 U.S. 422">441. Moreover, an item may be accrued, "if there is legal liability, even though the amount is not definitely fixed, if all the events have occurred by which the amount may be determined with reasonable exactitude. Continental Tie & Lumber Co. v. United States, [286 U.S. 290">286 U.S. 290]." Lehigh Valley Railroad Co., 12 T.C. 977, 995. But where the item, whether of income or deduction, depends upon a contingency or future events, it may not be accrued until the contingency or events have occurred and fixed with reasonable certainty the fact and amount of the liability involved. United States v. Safety Car Heating Co., 297 U.S. 88">297 U.S. 88, 297 U.S. 88">93-94; Lucas v. American Code Co., 280 U.S. 445">280 U.S. 445, 280 U.S. 445">451, 280 U.S. 445">452. And where liability is substantially in controversy, accrual must await the resolution of the controversy. 1951 U.S. Tax Ct. LEXIS 192">*245 Security Mills Co. v. Commissioner, 321 U.S. 281">321 U.S. 281, 321 U.S. 281">284; Dixie Pine Co. v. Commissioner, 320 U.S. 516">320 U.S. 516, 320 U.S. 516">519; William Justin Petit, 8 T.C. 228; cf. North American Oil v. Burnet, 286 U.S. 417">286 U.S. 417, 286 U.S. 417">423-424.

Respondent contends that "petitioner's right to receive the deficit payments as defined in the Public Control Act as amended (certified by the Trustees to be the sums of $ 2,341,167.79 and $ 1,311,406.44) was fixed and definite at the end of its taxable year December 31, 1941"; that "at the end of December 1941 the Commonwealth was under a definite and fixed liability to pay whatever deficiency existed at that time"; that "the Commonwealth nowhere denied its liability to pay such amounts as deficiencies as were properly computed"; and that the amounts involved must therefore be accrued as of the end of 1941. Respondent further contends that, in any event, since the litigation contesting the payments was not instituted until 1942, it could not preclude the accrual of income as of the end of 1941 (cf. Edward J. Hudson, 11 T.C. 1042, 1050,1951 U.S. Tax Ct. LEXIS 192">*246 affd. (C. A. 5), 183 F.2d 180; Automobile Ins. Co. v. Commissioner (C. A. 2), 72 F.2d 265, 267). We do not agree.

Although the litigation had not yet been formally instituted in 1941, the controversy had ripened to the point where the state in 1941 was openly contesting its liability with respect to the amounts certified by the Trustees, and had taken significant steps to challenge the legality of the processes by which these amounts were computed.

On March 12, 1941, the Finance Commission of the City of Boston made public its report in which it charged that in past years the Trustees had made excessive charges to cost of service of approximately $ 20,000,000, and that the methods and practices used by the Trustees in determining the amount of the deficits were improper and illegal. That report, which was made approximately one month prior to the notification given by the Trustees to the commonwealth of the March 31 cost-of-service deficit, apparently raised doubts in the mind of the Governor as to the validity and existence of this 16 T.C. 1084">*1106 alleged deficit, and caused him to request an advisory opinion by the Justices1951 U.S. Tax Ct. LEXIS 192">*247 of the Supreme Judicial Court of Massachusetts. Their opinion, dated May 28, 1941, declared that the liability of the commonwealth to pay the alleged March 31 "deficiency" was limited to an obligation to pay the amount thereof legally incurred; that the notification by the Trustees was not in the nature of an adjudication that the amounts stated by them constituted such an obligation; that in determining whether there was a liability upon the commonwealth for the amount of the "deficiency," the Governor and the Council had the right to consider whether the elements entering into the computation of such "deficiency" were in accordance with law; and that reasonable doubt on the part of the Governor and the Council as to the existence or amount, according to law, of an obligation or liability could be found by them to be a sufficient reason for delay in issuing a warrant for payment.

Thereafter, in June 1941, the attorney general of the commonwealth recommended that legal proceedings be instituted to ascertain whether the Trustees had improperly included in cost of service large amounts on account of items and charges not authorized by law to be included therein, and, upon recommendation1951 U.S. Tax Ct. LEXIS 192">*248 of the Governor, an appropriation of $ 75,000 was made by the legislature for this purpose in October 1941. In the fall of 1941, the attorney general's office started work on the preparation of such proceedings. In the latter part of that year, the petitioner made an unsuccessful attempt to induce the commonwealth to make either an outright or a qualified payment of the amount of the March 31 deficit.

To be sure, suit was not actually filed until January 26, 1942. But the fact that a $ 75,000 appropriation had already been approved by the legislature in 1941 to finance the litigation made it virtually a foregone conclusion that suit would be filed. The controversy had reached a high pitch as of December 31, 1941. Surely, petitioner had no reasonable grounds for believing that it would be reimbursed for the deficits shown on its books, other than in the event of a successful termination of the pending dispute. The filing of the suit and other events in 1942 merely confirmed the existence of the controversy in 1941.

It is misleading to suggest, as does respondent, that the commonwealth nowhere denied its liability to pay such amounts as deficiencies as were properly computed. 1951 U.S. Tax Ct. LEXIS 192">*249 Of course, the commonwealth did not deny such liability as the statute imposed upon it; but the heart of the controversy was the challenge to the legality of the underlying procedures that were employed to measure that liability. This was more than a mere difference as to computations. It was a substantial legal controversy of a high order of magnitude; and until it was resolved, 16 T.C. 1084">*1107 petitioner could not be required to accrue as income any payments which depended upon the outcome of that controversy.

Respondent presses upon us a number of decisions growing out of the Federal control of railroads around the time of World War I. ⁴ In particular, he places special reliance upon Continental Tie & Lumber Co. v. United States, 286 U.S. 290">286 U.S. 290. In the Continental Tie & Lumber Co. case a payment was received by a taxpayer in 1923 pursuant to an award in that year by the Interstate Commerce Commission under section 204 of the Transportation Act of 1920. That section provided for such an award to a railroad which during any part of the period of Federal control competed for traffic, or connected, with one under Federal control, and sustained a1951 U.S. Tax Ct. LEXIS 192">*250 deficit in operating income for that portion of the period during which it operated its own railroad. The Act directed the Commission to compare the results of such operation with those of the test period (the 3 years ended June 30, 1917); and, if less favorable during the period of Federal control than during the test period, to award an amount calculated as prescribed by the section. The Supreme Court held that the award to the taxpayer had accrued in 1920, when the Act providing for the award was enacted, and was taxable income in that year rather than in 1923, the year in which the award was made. The underlying basis for this holding was that the right to the award was fixed by the passage of the Transportation Act in 1920; that all that remained was mere ascertainment of the amount to be paid; and that the taxpayer had in its own books and accounts in 1920 data to which it could apply the calculations required by the statute and ascertain the quantum of the award within reasonable limits.

1951 U.S. Tax Ct. LEXIS 192">*251 It is true that there is a certain superficial similarity between the present case and the Continental Tie & Lumber Co. case. As the Court pointed out (pp. 296-297), the 1920 Act merely formulated general principles for the computation of the award, leaving a number of problems, many of them difficult, to be worked out by the Interstate Commerce Commission, and indeed the applicable principles dealing with those problems were not settled by the Commission until 1921, 1922, and 1923. Nevertheless, the Court declared that (pp. 297-298) "in spite of these inherent difficulties we think it was possible for a carrier to ascertain with reasonable accuracy the amount of the award to be paid by the Government. * * * It does not appear 16 T.C. 1084">*1108 that a proper effort would not have obtained a result approximately in accord with what the Commission ultimately found." ⁵

1951 U.S. Tax Ct. LEXIS 192">*252 Regardless of the conclusion thus reached upon the record in that case, it is our view that upon the record now before us the petitioner herein could not in 1941 make any reasonably accurate forecast of the ultimate outcome of the pending controversy and that it could not at that time make any reasonable estimate as to how much, if anything, it would ever receive upon its claims for reimbursement with respect to its alleged deficits. In these circumstances, petitioner was not required to accrue the amounts in question in 1941.

Respondent has made certain alternative contentions that the amount of the deficit for the 9-month period ending December 31, 1941, should be accrued in 1942, or that, in any event, both deficits should be accrued in 1943. However, the controversy was no closer to a solution in 1942 and 1943 than it was in 1941, and, for the reasons stated above, these alternative contentions must similarly be rejected.

2. Petitioner claims a deduction from its 1942 gross income for a loss with respect to the Atlantic Avenue section of its elevated railway structure. By amendment to its petition, the petitioner makes the alternative claim that the loss was sustained in 1941. 1951 U.S. Tax Ct. LEXIS 192">*253 Respondent, on the other hand, contends that the loss was sustained in 1938 by reason of abandonment in that year.

Section 23 (f) of the Internal Revenue Code permits a corporation to deduct losses sustained during the taxable year and not compensated by insurance or otherwise. The Commissioner's regulations provide that the difference between the adjusted basis and the salvage value of a capital asset may be deducted as a loss under section 23 (f) when the usefulness of the asset in the taxpayer's business is suddenly terminated and it discards the asset permanently from use in its business. Section 19.23 (e)-3, Regulations 103; section 29.23 (e)-3, Regulations 111.

In order to have an abandonment it is necessary that there be an intention of the owner to abandon the property, coupled with an act of abandonment, both of which must be ascertained from all of the surrounding facts and circumstances. Belridge Oil Co., 11 B. T. A. 127, 137; Reuben H. Donnelley Corp., 26 B. T. A. 107, 115; Ewald Iron Co., 37 B. T. A. 798, 799; W. B. Davis & Son, Inc., 5 T.C. 1195, 1219.1951 U.S. Tax Ct. LEXIS 192">*254 16 T.C. 1084">*1109 Non-use, alone, is not enough. W. B. Davis & Son, Inc., supra;I. G. Zumwalt, 25 B. T. A. 566, 574; Ewald Iron Co., supra.

The respondent contends that the petitioner did not sustain any loss in 1941 or 1942, and that the loss, if any, was sustained prior to 1941. He urges that the evidence indicates that the Trustees became dissatisfied with the Atlantic Avenue line prior to 1938 and intended to abandon its use and substitute bus service; that they carried out this intention in 1938 "knowing well that it would result in a forfeiture of the location"; and that the intent to discontinue service when combined with the knowledge that such action constituted grounds for the declaration of a forfeiture of the location on Atlantic Avenue is sufficient to establish an intent on the part of the Trustees to abandon the Atlantic Avenue line. He also urges that intention to abandon in 1938 is indicated by acts with reference to the structure subsequent to that year, such as, the reduction in expenditures for track walking from $ 63.50 a week to $ 3.46 a week, the placing of some of the cable1951 U.S. Tax Ct. LEXIS 192">*255 on the structure in an underground conduit, the removal of passimeters, fare boxes, etc., from stations on the structure, and the substitution in 1941 of plain rail for certain frogs and switch points where the structure joined the main line at Tower D.

That the Trustees became dissatisfied with the Atlantic Avenue line prior to 1938 is undoubtedly true. The principal causes of this dissatisfaction were the decline in revenue from that line after the opening of the Washington Street Tunnel, the interference of Atlantic Avenue trains with main line trains on the elevated structure where they separated to travel their respective routes, and the potential saving in cost of service, estimated in 1937 to be approximately $ 81,000 per year, which they felt would result from the substitution of bus and other service for the train service on the Atlantic Avenue line. It is not surprising, therefore, that the Trustees let it be known in 1924 and in 1937, that from an operating standpoint they would not object to the sale of the Atlantic Avenue structure for an elevated roadway, provided the sale was for cash and for a sum which would substantially aid in the financing of the road. They 1951 U.S. Tax Ct. LEXIS 192">*256 realized, however, that they had no authority to effect a sale or otherwise dispose of the structure without the consent of the board of directors. Before taking action to discontinue service in 1938, they sought the consent of petitioner's board of directors, and although they failed to get it, their letter to the board dated October 17, 1938, indicates that their decision to discontinue service as of October 1, 1938, was made in the light of the opinion of counsel for the board that, while consent of the board to such discontinuance would result in forfeiture of the structure, an independent decision by the Trustees themselves to discontinue service would not. In these circumstances, we think that the respondent is not justified in saying that when the Trustees decided to discontinue 16 T.C. 1084">*1110 service on the Atlantic Avenue structure they knew that such action constituted grounds for forfeiture.

In a letter dated November 4, 1937, to the Special Commission appointed by the State legislature to investigate the removal of the Atlantic Avenue structure, the Trustees said: "It is a fact that the Atlantic Avenue Elevated forms a connecting link between the south and north sides of 1951 U.S. Tax Ct. LEXIS 192">*257 the city, and in an emergency might be useful to maintain through service without interruption." This thought also appears in the statement of the president and general manager to the Trustees at the time of discontinuance of service in 1938, that he planned to keep the Atlantic Avenue line ready for use at all times, in case the need arose, and in his memorandum to the Superintendent of Power dated November 23, 1938, that he approved cutting off the power from the third rail on the Atlantic Avenue structure, "on the understanding that it can be made alive, if necessary, upon reasonable notice." Moreover, he instructed the various departments of the company that the structure should be kept so that if it were needed for any reason, it could "be opened reasonably quickly," and he testified that to the best of his knowledge it was kept in a condition so that service ice could have been resumed on reasonably prompt notice. The superintendent in charge of the operation of the rapid transit lines testified that his understanding at the time service was discontinued was that the Atlantic Avenue structure was to be inspected frequently so that it would be ready for use within, possibly, 1951 U.S. Tax Ct. LEXIS 192">*258 an hour's time, and that the only thing done between October 1938, and January 1942, that would have delayed resumption of operations for a longer period was the removal of frogs and switches at Tower D and the substitution of plain rail in 1941. The reinstallation of these frogs and switches, which were kept on location, would, according to the witness, have taken about three or four hours.

The president and general manager testified that he considered the Atlantic Avenue structure to be a valuable facility not only for use in case of interruption for any cause of service through the Washington Street Tunnel, but also in case anything transpired that shifted the traffic load to such an extent that they might want to use it again. A director of the company since 1930 testified that it had considerable value during the period from October 1, 1938, to the time of its demolition in 1942, as an alternative route, in the event the tunnel became overcrowded or there was any breakdown in the service, and because it was the only connection owned by petitioner between the northerly and the southerly portions of its main line elevated railway. He also testified that it had a potential value1951 U.S. Tax Ct. LEXIS 192">*259 in case of a sale for use as an elevated highway, or in the event of possible acquisition by the state or other public authority of the properties of petitioner by eminent domain.

16 T.C. 1084">*1111 Further evidence that the petitioner did not intend to abandon the Atlantic Avenue structure and that it considered it to have a value in excess of what might be realized upon demolition, is the action it took to protect its rights to the structure and location, after the Massachusetts legislature in 1939 enacted a statute purporting to declare the right of the petitioner to maintain and operate the Atlantic Avenue structure had been forfeited and to require its removal. Petitioner immediately filed a petition in equity in the Supreme Judicial Court of Massachusetts to determine whether there was just cause for the declaration of forfeiture, pursuant to a provision in the statute permitting it to do so. Petitioner expended $ 7,500 for legal services in the preparation and prosecution of this case. It was not until 1942 that the court rendered its opinion holding that the petitioner had forfeited its right to maintain the Atlantic Avenue structure by reason of its breach of the implied condition1951 U.S. Tax Ct. LEXIS 192">*260 upon which the location and the right to maintain and operate an elevated structure had been granted, i. e., that it be used to "equip, maintain and operate engines, meters and cars thereon." Boston Elevated Railway v. Commonwealth, 310 Mass. 528">310 Mass. 528, 39 N.E.2d 87, 116. ⁶

1951 U.S. Tax Ct. LEXIS 192">*261 Petitioner has proved to our satisfaction that there was no abandonment of or intention to abandon the Atlantic Avenue structure at the time operation of trains was discontinued in 1938, or at any other time prior to the decision of the Massachusetts Supreme Judicial Court in 1942, and we have made a finding to this effect. The parties have stipulated that in such circumstances, the amount of the loss sustained in 1942 is $ 3,570,047.07, less the amount of depreciation allowable with respect to the Atlantic Avenue line for the intervening period from the end of 1938 to and including 1942.

The respondent contends, however, that even if petitioner sustained a loss at the time of the removal of the Atlantic Avenue structure in 1942, it is not deductible under the provisions of section 23 (f), as a loss sustained during the taxable year "and not compensated for by insurance or otherwise." The respondent argues that under the provisions of the Public Control Act of 1918, as amended, the petitioner had a right to charge the Atlantic Avenue loss to cost of service, and thus to recover the amount of the loss from the commonwealth by way of deficit payment. We disagree.

Passing the question1951 U.S. Tax Ct. LEXIS 192">*262 whether the amount of this loss could be included 16 T.C. 1084">*1112 in the cost of service in 1942 under the Massachusetts legislation, we think that respondent's position misconceives the nature of payments under the Public Control Act. The statute did not undertake to compensate petitioner for any particular loss; rather, it undertook to assure petitioner a given level of income, after providing for various charges (including losses) representing the cost of operation, that would enable petitioner to pay dividends at a specified rate. Thus, regardless of the amounts of any possible losses sustained by petitioner, no payments would be forthcoming to it if its income were sufficiently high, after absorbing the losses and other charges, to pay the required dividends. And to the extent that the commonwealth was obligated to make payments to petitioner, such payments constituted taxable income to petitioner. Boston Elevated Railway Co., 45 B. T. A. 906, affd. (C. A. 1), 131 F.2d 161. certiorari denied, 318 U.S. 760">318 U.S. 760. They were not in the nature of payments restoring a loss of capital that would normally1951 U.S. Tax Ct. LEXIS 192">*263 be received tax-free (apart from excess over basis). We think that the arrangement between petitioner and the commonwealth does not require the disallowance of the loss under section 23 (f).

We conclude that petitioner's loss with respect to its Atlantic Avenue line is deductible in 1942. In the circumstances, it is entitled to depreciation deductions with respect thereto for the period prior to the loss. Cf. Carter-Colton Cigar Co., 9 T.C. 219, 221. The parties have stipulated the amounts which constitute a reasonable allowance for depreciation for the years included in that period, and deductions will be allowed herein for the years in controversy.

3. The final issue relates to the right of the petitioner to a deduction in the amount of $ 50,530.47 in each of the years 1940, 1941, 1942, and 1943. These deductions, claimed by the petitioner, were allowed by the respondent in his notice of deficiency, but in his amended answer he alleges that no part thereof is properly deductible from petitioner's income for the taxable years.

Since this issue was raised by respondent for the first time in his amended answer, the burden is upon him to prove that1951 U.S. Tax Ct. LEXIS 192">*264 his allowance of the deductions was erroneous. His argument in support of disallowance is that there is nothing to show that the payment of $ 1,409,253.35 was the consideration for a 28-year extension of the period of public control, as petitioner urges, and that the evidence indicates that this payment was only one of the many conditions which petitioner had to meet to accept the provisions of chapter 333 of the Special Acts of 1931.

Section 11 of the Public Control Act provided that whenever during the period of public operation the petitioner's reserve fund exceeded the amount originally established, the Trustees should apply the excess to reimburse the commonwealth for the amount of any "deficiency" 16 T.C. 1084">*1113 which it had paid the company. At the time of the enactment of chapter 333 of the Massachusetts Acts of 1931, the commonwealth had received reimbursement of the amount of any deficiency theretofore paid by it to the company, with the exception of $ 1,409,253.35.

The 1931 act was accepted by the stockholders of the petitioner on June 30, 1931, and section 22 was accepted by its board of directors on May 21, 1931. By such acceptance the company agreed to an extension of1951 U.S. Tax Ct. LEXIS 192">*265 public management and operation of its properties to July 1, 1959 (sec. 1); to a reduction in dividends payable upon its common stock from 6 to 5 per cent (sec. 2); to certain changes in the procedure to be followed upon occurrence of a deficit (sec. 3); to the extension to July 1, 1962, of the term of all subway and tunnel leases (sec. 3A); to the issuance of its bonds in an amount not exceeding $ 30,000,000 for the purpose of retiring its preferred stocks, and for the purchase of such bonds by the Metropolitan Transit District (secs. 4, 5); to pay annually to the District, in addition to interest on its bonds, a sum sufficient when added to said interest to enable the District to net, after paying interest on its own bonds, an amount equal to 2 per cent per annum on the Company's bonds held by it (sec. 6) to declare and pay dividends not in excess of 6 per cent per annum on its common stock after termination of public management and operation (sec. 17); to give the commonwealth or any political subdivision thereof or any corporation specifically authorized by the commonwealth to purchase the same, the right to purchase, at any time during the period of public management and operation, 1951 U.S. Tax Ct. LEXIS 192">*266 its assets and franchises as a going concern (sec. 17); to the taking of its property and franchises at any time through the exercise of the power of eminent domain (sec. 17); to be subject to and bound by such regulations as to fares and services as the General Court or the Department of Public Utilities might prescribe after the termination of public management and control (sec. 17); and to the suspension of the payment of deficits for the year ending June 30, 1931 (sec. 22).

In addition to the foregoing, the 1931 act provided in section 23, as follows:

When all the second preferred stock of the company has been retired, the special trust fund established under the provisions of section nine of chapter seven hundred and forty of the acts of nineteen hundred and eleven shall, to the extent necessary therefor, be converted by the trustees of the company into cash and the same shall thereupon be applied to repay to the commonwealth all amounts which, prior to the effective date of this act, have been assessed under the provisions of chapter one hundred and fifty-nine of the Special Acts of nineteen hundred and eighteen upon the cities and towns served by the company and which have 1951 U.S. Tax Ct. LEXIS 192">*267 not been previously repaid to the commonwealth, and the treasurer and receiver general of the commonwealth shall thereupon distribute the same to such cities and towns as provided in said chapter. Any balance remaining in said fund shall be applied as provided in said chapter seven hundred and forty.

16 T.C. 1084">*1114 The $ 1,409,253.35 payment here involved was made pursuant to the provisions of section 23 on August 19, 1931.

It is apparent from the foregoing that the petitioner indeed was required to consent to a number of conditions in addition to the payment provided for in section 23. The fact remains, however, that it did pay $ 1,409,253.35 in conjunction with other consideration flowing from it in order to obtain the 28-year extension of the period of public control with its attendant benefits to it, including a guaranteed income. And if the consideration for obtaining such a long term arrangement is amortizable over the period involved, it is apparent that the $ 1,409,253.35 payment must be so spread, even though it represented only part of the consideration. That an expenditure made in acquiring a capital asset or a contract which is expected to be income producing over a series1951 U.S. Tax Ct. LEXIS 192">*268 of years is in the nature of a capital expenditure which must be amortized ratably over the life of the asset or the period of the contract is well established. Bonwit Teller & Co., 17 B. T. A. 1019, 1024, affirmed on this point (C. A. 2), 53 F.2d 381, certiorari denied, 284 U.S. 690">284 U.S. 690; Central Bank Block Assn. v. Commissioner (C. A. 5), 57 F.2d 5; Young v. Commissioner (C. A. 9), 59 F.2d 691, certiorari denied, 287 U.S. 652">287 U.S. 652; Home Trust Co. v. Commissioner (C. A. 8), 65 F.2d 532; Main & McKinney Bldg. Co. v. Commissioner (C. A. 5), 113 F.2d 81, certiorari denied, 311 U.S. 688">311 U.S. 688; Blanche B. Burley, 26 B. T. A. 615; cf. Commissioner v. Boylston Market Assn. (C. A. 1), 131 F.2d 966. The rule of these decisions requires that this issue be decided in favor of the petitioner.

Decision will be entered under Rule 50.