
    PITTSBURGH HOTELS CO. v. THE UNITED STATES
    
    [No. E-397.
    Decided May 2, 1927]
    
      On the Proofs
    
    
      Income tax; return on accrual basis; deductions; increase in public ■utilities rates thereafter sustained by the courts. — In making its income-tax return for the year 1919, plaintiff, which kept its books on an accrual basis, was entitled to include therein as a deduction the difference between contract rates to supply it with heat and light, and increased rates filed prior to the return with a public service commission and sustained thereafter by an appellate court, although the increase was not paid by the plaintiff until after the decision of the court.
    
      The Reporter’s statement of the case:
    
      Mr, 8. Leo Ruslander for the plaintiff. Mr. George R. Beneman was on the brief.
    
      Mr. Alexander H. McCovmich, with whom was Mr. Assistant Attorney General Herman J. Galloway, for the defendant.
    The court made special findings of fact, as follows:
    I. The plaintiff is and was at all times mentioned in the petition a corporation organized under and existing by virtue of the laws of the Commonwealth of Pennsylvania, with its principal office and place of business at Pittsburgh. Pennsylvania.
    II. Plaintiff’s petition is filed to recover from the United States of America the sum of $20,253.81, with such an amount of interest as may be allowed by law. This is the amount paid by plaintiff under duress and with written protest to the collectors of internal revenue for the twenty-third district of the United States in the Common-wealth of Pennsylvania as additional income and excess-profits taxes assessed for the year 1919 bj? the Commissioner of Internal Eevenue. Of said sum, $5,191.96 thereof was paid by plaintiff on June 14, 1920, to C. Q. Llewellyn, the then collector of said twenty-third district, and $15,061.35 thereof was paid by plaintiff to D. B. Heiner, the then collector of said twenty-third district, on March 20,1924.
    III. Plaintiff was, during all of the year 1919 and within the provisions of section 240(b) of the revenue act of 1918, the parent company controlling by direct ownership and otherwise all of the stock of and thus affiliated with the William Penn Hotel Company, the Fort Pitt Hotel Company, and the Hotel Service Company, all Pennsylvania corporations. The William Penn Hotel Company owned, operated, and conducted the William Penn Hotel, located in Pittsburgh; the Fort Pitt Hotel Company leased, operated, and conducted the Fort Pitt Hotel, located in Pittsburgh; and the Hotel Service Company was engaged in certain service activities connected with both of said hotels.
    IV. Plaintiff in due course and within the provisions of section 240 (a) of said revenue act of 1918 and Internal Revenue Regulations No. 45, filed with the internal revenue collector at Pittsburgh, Pennsylvania, a consolidated income and excess-profits tax return for the year 1919 for itself and the said affiliated corporations, which said return showed income and excess-profits tax liability of plaintiff aggregating $37,031.00, of which said tax $16,000.00 thereof was paid under date of March 13, 1920, and $21,037.00 thereof was paid under date of June 10, 1920, both payments being made by plaintiff to C. G. Llewellyn, the then collector of internal revenue for the aforesaid district. The total paid was the tax due as shown on the return filed.
    V. The basis of this suit is the addition by the Commissioner of Internal Revenue to income for the year 1919 as reported by plaintiff of the sum of $28,924.47, representing a liability due the Allegheny County Steam Heating Company, the sum of $7,716.45 representing a liability due the Duquesne Light Company, and the sum of $35,682.23 disallowed depreciation on the William Penn Hotel Building and the resulting additional taxes based thereon.
    VI. Plaintiff proceeded duly and legally, as required by the revenue act of 1918, to protest a proposed additional assessment of income and profits taxes for the years 1917,1918, and 1919, and followed said protest through the committee on appeals and review and the office of the solicitor to the Commissioner of Internal Revenue, which appeal was, on June 29, 1923, in part allowed, but for the year 1919 denied as to the matters and in the amounts in this case complained of. Payment of said additional amounts was made under protest on or about June 14, 1924, and a claim for refund in the sum of $21,000.00, covering the items complained of in the petition in this case, was duly filed on September 13, 1924. Said claim for refund was rejected by the Commissioner of Internal Revenue on December 15, 1924, and as a result the $20,253.31 sought to be recovered in this action is now retained and held by the United States.
    VII. The William Penn Hotel Company on December 31, 1919, had set up on its books for the year 1918 a liability of $6,476.47 and for the year 1919 a liability of $22,458.00, or a total of $28,934.47 due the Allegheny County Steam Heating-Company, and a liability of $2,624.46 for the year 1918 and $5,091.99 for the year 1919, or a total of $7,716.45 due the-Duquesne Light Company. The total of said liabilities, to wit, $36,650.92, was entirely disallowed by the Commissioner of Internal Kevenue as an expense, and said amount was added by the Commissioner of Internal Revenue to income-of plaintiff for the year 1919. The said liabilities represented increased charges for steam and electrical energy billed by said respective companies to the William Penn Hotel Company from October, 1918, to December 31, 1919,. but not paid by plaintiff during said years because of proceedings, first before the public service commission and then in the courts of the State of Pennsylvania, brought to test the-right of said public service corporations to raise rates over-an unexpired contract rate.
    VIII. The charges for steam and electrical energy involved in this case were incurred under contracts between the William Penn Hotel Company and the Allegheny County Steam Heating Company as to steam and the Duquesne-Light Company as to electric energy, both contracts being dated June 15, 1914, true and correct copies thereof being-attached to the petition in this case and marked Exhibits-“A” and “B.”
    IX. On or about September 8, 1917, the said Allegheny County Steam Heating Company filed with the Public Service Commission of the State of Pennsylvania a new tariff, effective October 8, 1917, and on May 1, 1918, the Duquesne Light Company also filed with said commission a new tariff,, effective May 31, 1918. The said two new tariffs increased the rates to be charged the William Penn Hotel Company over the said unexpired contract rates. The- said heating- and lighting companies, starting -in October, 1918, billed the William Penn Hotel Company monthly at the new tariff' rates, claiming that they superseded the contract rates. The William Penn Hotel Company paid the contract rates and did on December 31, 1919, set up the difference between the contract rates and the new tariff rates billed as a liability and charged the full new tariff rates to expense. The said difference between the contract rates and the rates as billed totals $36,650.92 for the years 1918 and 1919.
    X. One H. C. Frick, prior to and during 1919, had contracts with the said heating and lighting companies for steam heat and electric energy, which were similar in nature to those entered into with the William Penn Hotel Company, and which said contracts likewise provided for a specified rate or charge.
    In August, 1919, said H. C. Frick filed a complaint with the Public Service Commission of the State of Pennsylvania to test the right of said companies to charge a rate in excess of his contract rate. The public service commission sustained the complaint, but upon appeal the Superior Court of Pennsylvania reversed the decision of said commission. Subsequently, upon appeal from the Superior Court to the Supreme Court of Pennsylvania, the Supreme Court affirmed the decision of the Superior Court, said decision being reported as Duquesne Light Company et al. v. Public Service Commission et al., appellants, 273 Pa. 287. Plaintiff was not directly or indirectly a party to said proceedings or suits.
    XI. Plaintiff, on February 11, 1925, which was subsequent to the decision reported in 273 Pa. 287, paid to the Allegheny County Steam Heating Company the said sum of $28,934.47, and to the Duquesne Light Company the sum of $7,716.45.
    Said liabilities accrued by plaintiff as aforesaid were accrued by said Allegheny County Steam Heating Company and Duquesne Light Company as billed and included in and reported as income for said years 1918 and 1919 by the said Allegheny County Steam Heating Company and Duquesne Light Company, and income and excess-profits tax at 1918 and 1919 rates paid thereon.
    XII. Since the filing of the petition in this case the Commissioner of Internal Revenue in his audit of plaintiff’s returns for the period subsequent to 1919 has allowed said accrued charges for steam and electric energy as proper charges to expense in the years accrued on plaintiff’s books and has thereby reversed his action for periods subsequent to 1919.
    XIII. Part of the additional tax collected from plaintiff for 1919 arises by reason of the disallowance by the Commissioner of Internal Revenue of part of the depreciation claimed and taken by plaintiff in its consolidated income and excess-profits tax return for 1919 upon the hotel building of the William Penn Hotel Company, known as the William Penn Hotel. The amount of depreciation taken by plaintiff was $83,258.17 or 3% per cent per annum, of which amount the Commissioner of Internal Revenue allowed $47,576.44 and disallowed $35,682.33. The said allowance was based upon a depreciation rate of 2 per cent, thus ascribing to the building a probable useful life of fifty years.
    XIV. The William Penn Hotel is what is known as a steel-frame building, covered with brick, stone, and concrete, and qualifies as fireproof construction. It is located in Pittsburgh, Allegheny County, Pennsylvania, fronting 216 feet on William Penn Way and running 130 feet along Oliver Avenue and a corresponding length on Sixth Avenue. It is 19 stories above ground and 3 stories underground. It is 265 feet high, contains six passenger elevators and four freight elevators, which run from the basement to the seventeenth floor. The average height of the guest rooms is nine feet. The lobby, which occupies approximately 8,000 square feet, is 25 feet in height; the largest main dining room, which occupies 4,000 square feet, is 23% feet high; the second main dining room, which occupies 2,080 square feet, is 13% feet high; the main ballroom, which occupies approximately 5,750 square feet, is 30% feet high. The total ground space of the hotel is approximately 27,300 square feet. The building is not constructed for the use of the ground floor by stores. The whole building in 1919 was used for hotel purposes.
    The William Penn Hotel was completed and thrown open to the public on March 15, 1916, and in 1919 had an average of 731 persons per day occupying its guest rooms and an average of 1,757 persons per day using its restaurants.
    The part of the building on which the 3% per cent rate of depreciation is claimed consists of the foundations, framework, walls, roof, floors, trimming, inside stairways of steel and reinforced concrete, and other fixtures, exclusive of plumbing fixtures, heating and ventilating systems, electric wiring, elevators, lighting fixtures, tile floors, and elevator machinery, the depreciation on which is allowed at a higher rate and so not here at issue. Plaintiff claimed and accepted a 2 per cent rate for years previous to 1919.
    XV. 'The cost of the said William Penn Hotel building, exclusive of elevators, fixtures, and parts not in dispute, as of December 31, 1918, and upon which depreciation is claimed as aforesaid, was $2,378,822.09. *
    The court decided that plaintiff was entitled to recover the sum of $10,262.25, with interest thereon from June 14, 1924, to date of judgment amounting to $1,775.37, an aggregate of $12,037.62.
    
      
       Writ of certiorari denied.
    
   Booth, Judge,

delivered the opinion of the court:

This is a tax case and involves a claim for two alleged overassessments upon plaintiff’s income and excess-profits return for the year 1919. The additional tax exacted was paid under protest, a refund asked and refused, hence no jurisdictional question appears.

The plaintiff is a Pennsylvania corporation, engaged in the hotel business, this suit concerning alone its ownership and operation of the William Penn Hotel in Pittsburgh, Pa. The first item of the suit seeks a judgment for $10,262.25, with interest, and right of recovery is rested upon section 214 (a) (1) of the revenue act of 1918, 40 Stat. 1066, which provides in terms as follows:

“* * * That in computing net income there shall be allowed as deductions:
“(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, * * * ”

The second item for the recovery of judgment for the sum of $9,991.06, with interest, is predicated upon (8) of section 214 (a) of the revenue act of 1918, 40 Stat. 1067, which provides as follows:

“SectioN 214 (a). That in computing net income there shall be allowed as deductions:
*
“(8) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.”

The first item is the result of a situation growing out of a difference between contract rates to supply the plaintiff with heat and light and an increase over and above the contract rates subsequently allowed the corporations furnishing plaintiff with heat and light by the Public Service Commission of Pennsylvania. Plaintiff company in 1914, by express contracts with the Allegheny County Steam Heating Company and the Duquesne Light- Company, obtained from said companies a fixed price for supplying heat and light to it for a period of years. On September 8, 1917, the heating company filed with the public service commission of the State a new tariff, effective October 8, 1917. On May 1, 1918, the light company pursued the same course, its new tariff to become effective May 81, 1918. The new tariffs of both companies increased the rates to be charged the plaintiff over the contract rates stipulated in the contracts of 1914. The heating and light companies billed the plaintiff at the new rates, approved by the commission, and the plaintiff paid the contract rates, the difference amounting for the period involved to $36,650.92. The reason for plaintiff’s withholding payment of the difference between the public-service rate and the contract rate is found in the fact that one H. C. Frick, during the year 1919, had with the same heating and light companies a contract for service similar in terms to plaintiff’s contract with the same companies, and Frick, in August, 1919, lodged a complaint with the public service commission to test the right of the companies to charge and collect a rate in excess of the rates stipulated in his contract. The controversy finally reached the courts, resulting in a decision adverse to Frick’s contention, whereupon on February 11, 1925, the plaintiff paid to the heating and light companies the balance due under their bills, the record in the present case dis'closing that the plaintiff did, on December 31, 1919, set up on its books of account the amounts due the heating and light companies for the year at the public-service rate. The Commissioner of Internal Revenue, in reviewing plaintiff’s return for the year 1919, disallowed this item as a legal deduction from plaintiff’s income, and charged back to plaintiff’s total income return the full amount thereof, resulting in the assessment, levy, and collection of an additional tax thereon of $10,262.25. The commissioner justifies his ruling upon the grounds that while the plaintiff did, as of right, keep its books of account upon the accrual basis, it did not monthly, as bills for light and heat were rendered, accrue the same as a liability at the public-service rate, but only at the contract rate, waiting until the last day of the year 1919 to charge in a lump sum as a liability the full amount of the difference between what was actually paid at the contract rate and what was1 not paid at the public-service rate. Obviously the plaintiff did not pay the heating and light companies the public-service rate, awaiting the final determination of the legality of the rate in the Frick case. And it is correspondingly clear that the companies did not insist upon or enforce payments; but this fact is not sufficient in view of the regulation^ of the commissioner to warrant his refusal of a deduction carried by the plaintiff upon its books as a liability.

Article 111 of Regulation 45, among other things, provides :

_ “A person making returns on an accrual basis has the right to deduct all authorized allowances, whether paid in cash or set up as a liability, and it follows that if he does not within any year pay or accrue certain of his expenses, interest, taxes, or other charges, and makes no deduction therefor, he can not deduct from the income of the next or any subsequent year any amounts then paid in liquidation of the previous year’s liabilities.”

The plaintiff was not a party to the Frick litigation. It was clearly susceptible to legal proceedings to collect the full amount of the bills rendered by the companies, and assuredly it is not to be denied a legal deduction when compliance with the regulations is not denied. The charge was made upon its books of account. The sum was entered, it is true, in a lump sum, but it appears as a liability. The amount is not disputed and no bad faith imputed. The commissioner allowed precisely similar items of deduction for the years 1920 and 1921, and it is difficult to perceive upon what basis an exception was made as to the year 1919. Judgment for the amount claimed will be awarded.

The second item is one of fact. The statute allows the deduction and the computation only is involved. In ascertaining a reasonable allowance for exhaustion, wear and tear of property, including obsolescence, the commissioner has promulgated a regulation to which the plaintiff takes no exception. Plaintiff insists that under the regulation it is entitled to 3y2 per cent of the building’s cost, and the commissioner allowed but 2 per cent. We will not discuss the facts. The plaintiff presents witnesses to establish its contention and the defendant offers contradictory testimony. Under the revenue law the commissioner’s duty to first compute the allowance is manifest. Nothing in the testimony of the plaintiff, expert in character, is of such certainty as to warrant us in concluding that an injustice has been done in this particular instance. The defendant meets the issue squarely, and we are not convinced from the record that the commissioner should have allowed more than was allowed. In addition to this, the plaintiff in previous years was content with the 2 per cent deduction allowed by the commissioner, and made no protest. The same objections now interposed were available then. This item of the petition will be dismissed.

Judgment for plaintiff. And it is so ordered.

Moss, Judge; Geaham, Judge; Hat, Judge; and Campbell, GMef Justice, concur.  