Union Pacific Railroad v. United States

Nioiiols, Judge,

concurring in part and dissenting in part:

I concur and join in the court’s opinion except for Part V, headed Leased Line Subsidiaries. As to this. I dissent with all respect.

*81 The court here adopts without change the opinion recommended by Trial Judge Schwartz. While the latter, with his usual keenness of analysis, recognizes fully the difficulties of his position, he ends up applying this court’s “source of supply” line of decisions which extend the Corn Products v. Commissioner, 350 U.S. 46 (1955) doctrine to cases in which a corporation invests in stock of another corporation to obtain a source of supply. Waterman, Largen & Co. v. United States, 189 Ct. Cl. 364 , 419 F. 2d 845 (1969), cert. denied, 400 U.S. 869 (1970), and cases there cited. However, in a strangely forgotten decision, Dearborn Co. v. United States, 195 Ct. Cl. 219 , 444 F. 2d 1145 (1971), a unanimous court laid down certain lines beyond which Corn Products and Waterman, Largen would not be applied, and instead the normal rule would obtain, that the purchase of corporate stock, except by a dealer in securities, is a capital transaction.

Admitting that case was close, former Trial Judge Davis distinguished it because he found the purchasing corporation was motivated by substantial investment purpose and intent, besides the business purpose of assuring a source of supply. The main factors supporting this conclusion were

(a) the purchaser did not pay a premium over the market value of the stock, or in other words, the purchase, if an investment, was not an unattractive one at the price paid,

(b) the acquisition was meant to be permanent, not to be unloaded at the end of some temporary emergency, and (c) the purchaser intended to benefit by receipt of dividends and by exacting a management fee to run the business, not just to integrate the subsidiary’s operations into its own and make it a mere feeder of materials.

I do not find that Trial Judge Schwartz applied the same tests. As I read him, the decisive factor here is that the Union Pacific and the leased lines, run as a unified operation, could have been and no doubt were more profitable than the same lines controlled and operated separately. Without them, the Union Pacific as previously known was truncated and incomplete. To be sure! But if this is all, what we are coming to is a rule that it is not a capital investment whenever one corporation purchases control of another with the purpose, alone or among others, of integrating their operations. The *82 kind of inquiry Trial Judge Davis made will be foreclosed because it will be irrelevant whether the purchase is attractive, viewed as an investment, whether it was intended to be permanent, constituting a permanent addition to the purchaser’s fixed assets, and whether the purchaser will or will not derive the benefits a prudent investor in an unrelated enterprise would seek.

It is obvious here that the acquisition of the Oregon Short Line and the others were intended to be permanent, and have been so up to now. The Oregon Short Line and the others were themselves investors in railroad securities, and as to their investments it would appear the Union Pacific got an investment benefit. As to the other criteria, I do not find answers in the findings. I do not think the plaintiff has sustained its burden of proof.

In penning the above few words, I have assumed, as I must, the entire soundness of Waterman, Lar gen and our other decisions as well as, of course, Dearborn, despite previous qualms. This court’s application of Corn Products in its “source of supply” cases can roll on down the track without any challenge by me, unless derailment by the Supreme Court or by Congress occurs. This is an area of law where stare decisis must prevail in this court. It is beyond our proper power now to make it easy or simple to determine whether a transaction is a capital one for tax purposes, or to do it on the basis of objective facts and statutory language, without inquiry or speculation into the undisclosed state of mind of corporate officers, possibly ones, as here, long since deceased, and I do not so urge. My argument is directed simply against extending Waterman, Lar gen uncritically to new situations not covered by it as a precedent, and to failure to apply standards as we applied them in Dearborn.

I agree with the decision in United States v. Mississippi Chemical Corp., 405 U.S. 298 (1972) does not overrule Waterman, Largen. It holds that a borrower from a Bank for Cooperatives, obliged to purchase a stated quantity of bank stock in lieu of a higher rate of interest, nevertheless makes a capital investment in the stock. The situation is far removed from that in our “source of supply” cases. The Corn Products doctrine is not mentioned. It may perhaps afford a slight *83 clue that tlie Supreme Court is not so enamored of expanding Corn Products as we are.

Findings of Fact

JURISDICTIONAL AND GENERAL

Í. Plaintiff was at all times pertinent hereto a corporation organized and existing under the laws of the State of Utah, with its office and principal place of business at 120 Broadway, New York, New York 10005.

2. Jurisdiction to hear and determine this cause is conferred upon the court by section 7422(a) of the Internal Kevenue Code of 1954. Jurisdiction of the subject matter is conferred upon the court by section 1491, Title 28, United States Code.

3. Plaintiff seeks a judgment for (1) $13,409,961.46 (consisting of $9,222,801.78 in statutory interest for 1942 and $4,187,159.68 in income and excess profits tax) and assessed interest thereon paid for 1942 or such other amount as may be legally refundable for 1942, together with statutory interest thereon.

4. For federal tax purposes, plaintiff kept its books and reported its income on the accrual and calendar year basis.

5. On or about March 15, 1943, plaintiff filed a timely tentative corporation income and declared value excess profits tax return (Form 1120) and a timely tentative corporation excess profits tax return (Form 1121). On or about June 15, 1943, pursuant to a granted extension, plaintiff timely filed its final corporation income and declared value excess profits tax return (Form 1120) and final corporation excess profits tax return for the calendar year 1942 (Form 1121). Payments of the tax shown to be due thereon and two additional payments were made on or about the following dates:

*84 6. On or about October 4, 1946, plaintiff timely filed a elaim for refund of income and excess profits taxes in the amount of $1,807,514.54, or such larger amount as might be legally refundable, together with statutory interest thereon for the tax year 1942. On or about April 25, 1949, plaintiff timely filed a claim for refund of income and excess profits taxes in the amount of $7,394,419.35 plus assessed interest in the amount of $361,745.90, a total of $7,756,165.25 or such larger amount as might be legally refundable, together with statutory interest thereon for the tax year 1942. On or about April 10, 1951, plaintiff timely filed a claim for refund of income and excess profits taxes in the amount of $390,828.41 or such larger amount as might be legally refundable, together with statutory interest thereon for the tax year 1942. On or about September 11,1953, plaintiff timely filed a claim for refund of income and excess profits taxes in the amount of $348,705.41, or such larger amount as might be legally refundable, together with statutory interest thereon for the tax year 1942.

7. On July 16, 1946, $12,837.99 in declared value excess profits tax for 1942 was credited against plaintiff’s income tax liability for 1942; $196.82 in declared value excess profits tax for 1942 was credited against the tax liability of the St. Joseph & Grand Island Eailway Company for 1942; $45,-685.38 in declared value excess profits tax for 1942 was refunded to plaintiff with interest of $9,178.87; and $694,-754.62 in excess profits tax for 1942 was refunded to plaintiff with interest of $68,742.63.

8. On September 16, 1960, after the audit of plaintiff’s tax returns for 1942 was finally completed, a total of $7,793,-219.55 was refunded or paid to plaintiff, consisting of $3,729,-059.29 in income tax for 1942, $2,141.13 in assessed interest thereon, $13,462.80 in declared value excess profits tax for 1942, and $4,048,556.33 in statutory interest. On September 16,1960, there was assessed against plaintiff a deficiency in excess profits tax for 1942 of $4,654,621.45 plus interest of $300,639.16, which was satisfied by a credit of $4,206,773.93 in income tax for 1942 and a post-war credit of $748,486.68.

9. Pursuant to Form 872, “Consent Fixing Period of *85 Limitation Upon Assessment of Income and Profits Tax,” timely executed on behalf of the plaintiff and the Commissioner of Internal Eevenue, the period for assessment of income and excess profits taxes for the tax year 1942 did not expire prior to June 30,1961.

10. On December 28,1961, plaintiff filed a timely claim for refund for 1942 in the amount of $13,409,961.46 or such further amount as may be refundable, together with statutory interest thereon. Of the $13,409,961.46 claimed, $9,222,-801.78 was for statutory interest on amounts previously refunded or credited and the balance of $4,187,159.68 was for income and excess profits tax.

11. Statutory notices of disallowance were mailed to plaintiff on September 26,1960, with respect to the claims filed on April 26, 1949, and April 10, 1951, and on August 13, 1962, with respect to the claim filed on December 28,1961. No such notice has been issued with respect to the claim filed on October 4,1946. Since less than 2 years elapsed between the mailing of the notices of disallowance and the filing of this suit, this action is timely brought.

12. No action or suit has been commenced or is pending in any other court on account of these claims, and plaintiff is the owner of the claims herein stated.

13. After consideration Of all refunds and credits, plaintiff has paid for 1942 $30,481,263.37 in income tax and $7,484,-866.83 in excess profits tax. Plaintiff seeks to recover some portion of these payments as well as statutory interest.

i. “minimum rule” acquisitions

14. During the taxable year, plaintiff acquired miscellaneous units and items of road property and equipment which had an individual unit or item cost of $100 or more but less than $500. The aggregate cost incurred by plaintiff for these units and items during the taxable year was $113,-717.84. Each of these units and items was a capital asset, and the amounts totaling $113,717.84 constituted expenditures which would have been capitalized, except for the minimum rule which is the subject of the next following finding.

*86 15. The Uniform System of Accounts prescribed by the ICC provided, for 1942, in part as follows:

(a) When the property change involves: (1) The acquisition of property (other than land, a section of track, or a unit of equipment) the cost of which is less than $500.00; (2) the betterment of property (see paragraph 10 of Section 2 of the General Instructions in the Classification of Investment of Eoad and Equipment), the excess cost of which is less than $500.00; (3) the retirement of property (other than land, a section of track, or a unit of equipment), the ledger value of which is less than $500.00, the cost of the property acquired or the value of the salvage from the property retired shall be appropriately included in operating expenses, and no adjustment shall be made in’the property investment account.

(b) The carrier shall not parcel expenditures or retirements under a general plan for the purpose of bringing the accounting therefor within this rule, neither shall it combine unrelated items of property for the purpose of excluding the accounting therefor from the rule.

(c) This exception to the general instructions of this classification shall not apply to: (1) property changes involving the retirement and replacement of property when either the ledger value of the property retired or the cost of the property acquired is $500.00 or more. (See Section 7 of these instructions.) (2) property changes involving the retii'ement of property the cost of which is included in the investment account and which is not replaced. (See Section 8 of these instructions.)

(d) The carrier is permitted to adopt for the purpose of its accounting a limit of less than the aforesaid amounts provided it first files with the Commission the maximum amount which it proposes to adopt and makes no subsequent change in this amount except by authoritv of the Commission, except that when the carrier adopts a limit of less than $500.00 in reporting property changes to the Bureau of Valuation for valuation purposes it shall adopt a like minimum for accounting purposes in order to coordinate the original cost with the physical property included in the inventory.

The foregoing rule is hereinafter referred to as the “ICC minimum rule” or “minimum rule”. The same rule was in effect for 1940 and 1941; a similar rule was in effect for 1921 through 1939 with a $100 minimum; no such rule was in effect *87 for 1915 through. 1920; a similar rule was in effect for 1914 with a $200 minimum.

16. On its federal income tax returns for each of the taxable years 1921 through 1939, plaintiff included in various items of operating expense the amounts expended by it in acquiring units and items of road property which qualified as minimum rule acquisitions under the applicable Uniform System of Accounts prescribed by the Interstate Commerce Commission for each such taxable year. On the audits of these returns, the Commissioner of Internal Eevenue did not disallow as a deduction any of the minimum rule acquisitions.

17. On its federal income tax returns for 1940 and 1941, plaintiff deducted amounts up to $500 with respect to the minimum rule then in effect. On the audits of these returns, the Commissioner of Internal Eevenue did not disallow as a deduction any minimum rule acquisitions.

18. On its federal income tax return for 1942, plaintiff included in various items of operating expense the $113,717.84 referred to in finding 14.

19. On audit of plaintiff’s income tax return for 1942, the Commissioner of Internal Eevenue disallowed the deductions totaling $113,717.84 claimed for minimum rule acquisitions, and allowed plaintiff a deduction of $3,790.59 as amortization of the $113,717.84 in minimum rule acquisitions.

20. The average useful life of the units and items of minimum rule acquisitions was 15 years.

21. For the taxable year 1942, plaintiff utilized the retirement-replacement method of accounting for depreciation of its road property. Beginning with the taxable year 1943, the plaintiff changed its method of accounting for the treatment of road property by using the ratable depreciation method. The change in the method of accounting for the road property from the retirement method to the ratable method made no change in the accounting for items acquired under the $500 minimum rule. These items, which had been charged off as operating expenses before 1942, as set out in findings 16 and 17, continued to be so charged off.

22. Schedule 1 of the Appendix hereto presents:

(a) The amounts (under Column 1 of Schedule 1) actually deducted by plaintiff on its corporate income tax returns *88 as operating expenses in each of the taxable years 1942 through. 1947 and 1949 through 1967 for minimum rule acquisitions which had an individual unit or item cost of at least $100 or more but less than $500.

(b) The amortization of the amounts described in subpara-graph ('a) of this finding for the taxable years 1942 through 1960 (and which are set forth under Column 1 of Schedule 1) over a 15-year period which reflects the treatment accorded these amounts by the defendant’s agents.

(c) The amortization of the amounts described in subpara-graph (a) of this finding for the taxable years 1961 through 1964 (and set forth under Column 1 of Schedule 1) over a 15-year period which is based upon the plantiff’s understanding as to the adjustments which will be included in the reports which are being prepared by defendant’s agents for the taxable years 1961 through 1964. These proposed adjustments are consistent with the treatment proposed by defendant’s agents for the taxable years 1942 through 1960.

(d) The amortization of the amounts described in subpara-graph (a) of this finding for the taxable years 1965 through 1967 (and which are set forth in Schedule 1) over a 15-year period which is based upon a projection of the adjustments which plaintiff believes will be made by defendant’s agents for said taxable years. Said projection is based upon and is consistent with the adjustments made or proposed by the defendant’s agents for the taxable years 1942 through 1964.

(e) The total amount of amortization deduction allowed by the defendant’s agents for the years 1942 through 1960.

(f) The total amount of amortization deduction to be allowed by the defendant for the taxable years 1961 through 1964 which is based upon plaintiff’s understanding as to the adjustments which will be made for such taxable years and which is consistent with the adjustments actually made by defendant’s agents for the taxable years 1942 through 1960.

(g) The total amortization deduction to be allowed for the taxable years 1965 through 1967, which has been projected by the plaintiff based upon the actual adjustments made by the defendant’s agents for the taxable years 1950 through 1960 coupled with plaintiff’s understanding as to the adjustments *89 which will be made by the defendant’s agents for the taxable years 1961 through 1964.

(h) The 15-year amortization spread on Schedule 1 actually is spread over a 16-calendar-year period. The amounts amortized in the first and sixteenth year reflect, in each instance, one-half of the annual amortization. This is consistent with what is commonly known as the “half-year averaging-convention” whereby those items which are acquired during the year are considered to have been acquired on and on hand from the first day of July of such year.

23. Schedule 2 of the appendix hereto presents a reasonable reconstruction of the amounts which were included in operating expenses under the minimum rule in effect for the years 1927 through 1941. Such amounts were mathematically derived by applying a percentage test to actual operating expenses for the years involved. The percentage used was derived from an analysis of the actual experience of the company for the years 1942 through 1949. The percentage test was derived and applied specifically as follows:

('a) Each work order for the years 1942 through 1949 disclosing an expenditure of less than $500 was analyzed. Statements were prepared listing work orders, descriptions and amounts charged to operating expenses, which, except for the minimum rule, would have been charged either to the depre-ciable or nondepreciable investment accounts.

(b) The total amounts of such operating expenses when analyzed were as follows:

Depreciable property

Nondepreciable property

1942.... $115,524 $13,072

1943. 144,044 15,885

1944. 183,300 17,315

1945. 191,852 18,634

1946. 154,933 11,829

1947.-. 126,141 7,600

1948. 116,313 11,701

1949. 129,685 8,254

Total. 1,161,792 104,295

(c) The grand total of the items charged to operating expenses ($1,161,792) which, except for the minimum rale, would have been charged to the depreciable investment account was used as a numerator of a fraction which had as its *90 denominator an amount of $95,715,171, which, was the total amount of the operating expenses in the following accounts:

Account No.: Description

208_ Bridges, trestles and culverts.

221_ Fences, snow sheds and signs.

227_ Station and office buildings.

229 _ Roadway buildings.

231_ Water stations.

233 _ Fuel stations.

235 _ Ships and engine.

247_ Telegraph & Telephone lines.

249_ Signals and interlockers.

253 _ Power transmission systems.

265 _ Mise, structure.

269_ Roadway machines.

273 _ Public improvements, maintenance.

281_ Right-of-way expenses.

(d) For the non-depreciable property expenses the grand total of the minimum rule items ($104,296) was used as a numerator for a fraction which had as its denominator the amount of $244,972,595, which was the total amount of the operating expenses in the following accounts:

Account No.: Description

202_ Roadway maintenance.

214_ Rails.

216_ Other track material.

218- Ballast.

220_ Track laying and servicing.

(e) The following operating expense accounts were not normally charged with expenditures under the minimum rule and were therefore omitted from the denominator:

Account No.: Description

201- Superintendence.

206- Tunnels and subways.

210- Elevated structures.

212_ Ties.

237- Grain elevators.

239- Storage warehouses.

241- Wharves and docks.

243- Coal and ore wharves.

267- Paving.

268 - Description not available.

*91 Account No.: Description

270_ Description not available.

270%_ Road-Amortization of defense projects.

271_ Small tools and supplies.

272_ Removing snow, ice and sand.

274 _ Injuries to persons.

275 _ Insurance.

276_ Stationery and printing.

277 _ Other expense.

279_ Maintenance of joint tracks, yards and other facilities.

280 _ Equalization — way and structures.

( f) The fraction for depreciable property described in sub-paragraph (c), above, resulted in a percentage of 1.2138% which was then applied to the total amounts ($5,963,685) of the operating accounts enumerated in subparagraph (c), above. The application of this percentage to the total of each of the operating expense accounts resulted in an aggregate amount of $71,173 for the year 1927 for depreciable property which, except for the minimum rule, would have been charged to the investment account.

(g) The fraction for non-depreciable property described in subparagraph (d), above, resulted in a percentage of .0426% which was then applied to the total amounts ($14,-368,201) of the operating accounts enumerated in subpara-graph (d), above. The application of this percentage to the total of each of the operating expense accounts resulted in an aggregate amount of $6,121 for the year 1927 for non-depre-ciable property which, except for the minimum rule, would have been charged to the investment account.

(h) The $71,173 referred to in subparagraph (f), above, and the $6,121 referred to in subparagraph (g), above, were totaled to give $77,294 as the total $500 minimum rule items. Since in 1927 a $100 minimum rule was in effect, 20% of the $77,294 represented the minimum rule items deducted in that year.

(i) The same procedure, as described in subparagraphs (a) through (h), above, was followed in determining the amounts expended under a minimum rule for the years 1927 through 1941. Since the minimum rule for the years 1927 through 1939 was $100, 20% of the amounts determined constituted a reasonable basis for determining the amounts ex *92 pended for minimum rule items, wbicli except for such rule, would have been charged to the investment account. The amounts so determined are set forth in the column captioned “Amount” on Schedule 2 for each of the years 1927 through 1945. The columns under the yearly dates 1927 through 1967 indicate the amortization of the “Amounts” over a 15-year period with the application of the half-year averaging convention (previously explained in subparagraph (h) of finding 22).

24.Plaintiff’s minimum rule items for the taxable year 1942 may be tabulated as follows:

Number of items

Percent

__ w dollars

Percent

$0.01 to $99.99.,. 473 46.28 $21,966.72 14.62

100.00 to 199.99,. 279 27.30 39,795.20 26.49

200.00 to 299.99.. 116 11.35 29,110.16 19.38

300.00 to 399.99.. 95 9.30 33,099.99 22.03

400.00 to 499.99.. 59 5.77 26,270.35 17.48

Total.. 1,022 100.00 100.00

The significance of the figures lies in the modest number of items in the higher dollar ranges and in the rough equality in number between items under and items over $100. The changes worked by the 1939 raising of the $100 to $499.99 seem not unreasonable; certainly no flood of items costing close to $500 were brought within the rule.

(The foregoing tabulation differs slightly from that in plaintiff’s proposed finding, to which defendant did not object. The proposed finding shows 1,026 items to a total of $146,565.93, with percentages and dollar subdivision figures slightly different than in this finding. Both this finding and the proposed finding are based on defendant’s exhibit 11. The differences are not material; both sets of figures equally support the significance ascribed to them in this finding.)

25. The plaintiff owned road property and equipment and miscellaneous road property having on its books an average net value (after depreciation) of $442,726,751.78 during the taxable year 1942.

26. The minimum rule acquisitions of $113,717.84 in question in this proceeding amounted to .00026 of the amount referred to in the preceding finding.

*93 27. The true relationship of minimum rule acquisitions to road property and equipment (the account into which the acquisitions would go if they were not expensed) is even smaller than .00026, because the $113,717.84 is the figure for plaintiff and its leased lines, and the $442 million figure is for plaintiff alone.

28. The plaintiff and its subsidiary companies during the years 1927 through 1942 had the following railway operating expenses and expended at least the following for minimum rule acquisitions. In addition, the proportion of minimum rule acquisitions to total operating railway expenses for the years 1927 through 1942 equal the percentages shown in the last column below:

Year

Total Tnlnlmmn rule acquisitions

Railway operating expenses

Ratio

1927. $15,459 $141,938,527 . 00011

1928. 16,846 149,060,334 . 00011

1929. 18,319 149,682,240 . 00012

1930. 14,625 133,538,866 . 00011

1931. 10,700 112,157,457 . 00010

1932. 5,782 80,513,455 . 00007

1933. 6,082 76,139,778 . 00008

1934. 7,322 85,353,628 , 00009

1935. 8,899 95,208,407 . 00009

1936. 9,602 108,728,114 . 00009

1937. 10,127 116,834,578 . 00009

1938. 8,311 105,731,151 .00008

1939. 9,732 117,858,588 . 00008

1940. 60,343 120,949,111 .00042

1941. 77,485 159,997,895 . 00048

1942. 146,666 218,307,770 . 00067

29.The minimum rule method employed by plaintiff for acquisitions within the scope of the rule constituted a method of accounting, and financial statements and figures for tax purposes based upon the method clearly reflect plaintiff’s income for tax purposes in the year in question.

H. PAYROLL TAXES

30. During 1942, plaintiff paid to its employees $1,103,-413.81 in vacation pay earned in 1941. On payroll tax returns filed for the calendar year 1942, plaintiff reported the $1,103,413.31 in vacation pay paid in 1942 and a payroll tax with respect thereto of $64,108.31, which it paid in 1942.

31. During 1943, plaintiff paid to its employees $1,518,-624.02 in vacation pay earned in 1942. On payroll tax returns *94 filed for the calendar year 1943,. plaintiff reported the $1,518,624.02 in vacation pay paid in 1943, and a payroll tax with respect thereto of $90,358.13, which it paid in 1943.

32. The vacation pay earned by plaintiff’s employees in 1942 was not payable or paid until 1943.

33. The vacation pay earned by an employee in 1942 could be forfeited if his employment were terminated in 1943, for reasons other than retirement, prior to the time his vacation began.

34. The record shows only the amount of vacation pay paid in 1943 which is stated in finding 31. It does not show the amount of vacation pay earned by plaintiff’s employees in 1942 or the amount thereof forfeited in 1943.

35. In the event plaintiff could not release an employee for a vacation in 1943, plaintiff was obligated to pay him an allowance in lieu of the vacation.

36. Aside from whether at the end of 1942 it was possible to determine the amount of vacation pay earned by plaintiff’s employees, it was not possible at that time to determine the payroll taxes thereon because some unpredictable portion of the vacation pay could be tax-exempt as having been paid in a month when the employee had already received

$300 in other compensation, the payroll taxes in question being imposed on only the first $300 of compensation for each calendar month, under section 1520 of the Internal Revenue Code of 1939 and Section 8(a) of the Railroad Unemployment Insurance Act.

37. Of the vacation pay disbursed in 1942 and 1943, it appears that some portion was tax exempt as having been paid in a month when the employee had already received $300 in compensation. The aggregate tax rate was 6 percent for 1942 and 6.25 percent for 1943, under section 1520 of the Internal Revenue Code of 1939 and Section 8(a) of the Railroad Unemployment Insurance Act. Plaintiff paid in 1942 vacation pay of $1,103,413. Six percent of this amount is $66,205, 'but plaintiff paid only $64,108 in payroll tax. Plaintiff paid in 1943 vacation pay of $1,518,624. Six point twenty-five percent of this amount is $94,914, but plaintiff paid only $90,358 in payroll tax. In the absence of any other explanation by plaintiff, the differences can only be attributed to *95 tax-exempt payments; that is, payments made in a month when the employee had already received $300.

38. On its federal income tax return for 1942, plaintiff deducted $1,103,413.31 for vacation pay paid, in 1942 and $64,108.31 in payroll tax with respect thereto. On its federal income tax return for 1943, plaintiff deducted $1,518,624.02 for vacation pay paid in 1943 and $90,358.13 in payroll taxes with respect thereto.

39. On audit of its 1942 federal income tax return, plaintiff claimed, and was allowed, a deduction for the year 1942 of the entire amount of the vacation pay which accrued during 1942 but was not payable to its employees until 1943. The Commissioner 'of Internal Revenue (relying on I.T. 3956, 1949-1 Cum. Bull. 78) allowed plaintiff an additional deduction for vacation pay of $415,210.71, representing the difference between the vacation pay paid in 1943 and the vacation pay deduction claimed on the return for 1942, but he did not allow plaintiff any additional deduction for payroll tax with respect to vacation pay.

40. In its claim for refund for 1942, plaintiff claimed a deduction in the amount of $26,249.82 for federal income tax purposes, representing the difference between the payroll tax paid in 1943 and the payroll tax paid in 1942 as described above in findings 30 and 31.

41. The Commissioner of Internal Revenue did not allow the deduction referred to in the preceding finding.

42. As of December 31, 1942, it was not possible to compute the amount of payroll taxes plaintiff would have to pay in 1943 with respect to vacation pay earned in 1942. First, the amount of vacation pay to be disbursed in 1943 was uncertain because it was forfeitable, as stated in finding 33. Second, some unpredictable amount of vacation pay could be tax exempt, as stated in finding 36.

IV., STOCK SUBSCRIPTION RIGHTS

43. During the taxable years ended December 31, 1922, 1923, and 1925, plaintiff and its wholly owned subsidiary, the Oregon Short Line, as the holders of common stock of the Illinois Central Railroad Company, received by distribution *96 from the Illinois Central rights to subscribe to its convertible preferred stock as follows:

Distributee

Date of distribution

Number of rights

union Pacific Railroad Company_ May 10,1922 138,000

Do. Oct. 23,1923 138,000

Do. Oct. 22,1925 138,000

Oregon Short Line Railroad Company. May 16,1922 87,000

Do... Oct. 23,1923 87,000

Do... Oct. 22,1925 95,700

44. For each share of Illinois Central common stock held, one right was received by the aforesaid distributees. Ten rights together with the subscription price of $100 entitled the said distributees, upon exercise, to one share of Illinois Central convertible preferred stock.

45. The high and low quotations on the New York Stock Exchange of the convertible preferred stock and the stock rights, on the dates indicated, were as follows:

Illinois Central Convertible Preferred Stock

Date

High

Low-

May 16,1922. 107H 107

May 10,1922_____ —no quotations—

Oct. 23,1923.... 108 108

Oct. 22,1925... 118 116

Illinois Central Convertible Preferred Stock Bights

Date

High

Low

May 16,1922_ 67 cents 67 cents

Oct. 23,1923. He %

Oct. 19,1926. m lHe

Oct. 22, 1925. HMo IMo

46. The stock rights were exercised by plaintiff and the Oregon Short Line on June 26,1922, December 1,1923, and December 10, 1925.

47. On February 9, 1914, the Oregon Short Line owned 87,000 shares of Illinois Central common, with a cost of $10,005,000.

48. On November 22,1924, the Oregon Short Line acquired an additional 8,700 shares of Illinois Central common by payment of $87,000 and the exercise of certain rights to acquire such shares of common stock.

49. As indicated in finding 43 above, the Oregon Short Line received from the Illinois Central $269,700 rights to sub *97 scribe to its convertible preferred stock. By exercising these rights and payment of $2,697,000 in cash, the Oregon Short Lino acquired 26,970 shares of the convertible preferred stock.

50. For the 26,970 shares of preferred, the Commissioner of Internal Eevenue determined that the basis to the Oregon Short Line was $2,950,102.23, consisting of the subscription price of $2,697,000 plus $253,102.23 allocated from the basis for the 95,700 shares of common in accordance with Section 214(e) of the Eevenue Act of 1939 and the Treasury Eegula-tions issued thereunder. As a result of the allocation, the Commissioner determined that the basis for the 95,700 shares of common was $10,621,897.77 or $110.99 per share.

51. On April 30,1930, the Oregon Short Line sold to plaintiff 87,000 shares of Illinois Central common in satisfaction of a debt owing to plaintiff in the amount of $10,005,000. No adjustment to earnings and profits of Oregon Short Line or plaintiff was made on account of this transaction. The Commissioner of Internal Eevenue on audit determined that the basis for this stock to the Oregon Short Line was $9,656,270.70.

52. The high and low quotations on the New York Stock Exchange for the aforesaid convertible preferred stock, on the dates indicated, were as follows:

Illinois Central Convertible Preferred Stock

Date

High

Low

June 26.1922. 108M 1075a

Nov. 30,1923. 104% 108 %

Deo. 1,1923... (Saturday, no quotation)

Deo. 10, 1926.. 118JS 117

53. On December 30, 1935, the Oregon Short Line distributed to plaintiff as a dividend in kind the entire 26,970 Illinois Central preferred stock acquired by it upon the exercise of the aforesaid rights.

On account of this dividend distribution, plaintiff increased its earnings and profits and the Oregon Short Line decreased its earnings and profits by the amount of $2,697,000.

54. On December 30,1935, the Oregon Short Line also distributed to plaintiff its remaining 8,700 shares of Illinois Central common stock. On account of this transaction, plaintiff *98 increased its earnings and profits and decreased those of the Oregon Short Line by the amount of $870,000. The Commissioner of Internal Revenue on audit determined that the basis for this stock to the Oregon Short Line was $965,627.07.

55. On account of the transfer to plaintiff by the Oregon Short Line of (a) the 26,970 shares of Illinois Central convertible preferred on December 30, 1935, and (b) the 8,700 shares of Illinois Central common on December 30,1935, the plaintiff and the Commissioner of Internal Revenue increased plaintiff’s earnings and profits by $3,567,000 and decreased those of the Oregon Short Line by the same amount. This sum of $3,567,000 is equal to the Oregon Short Line’s payment of $870,000 for 8,700 shares of common on October 22, 1924 and its payments of $2,697,000 for 26,970 shares of convertible preferred.

56. For the years 1922, 1923 and 1925, plaintiff and its railroad subsidiaries, including the Oregon Short Line, filed consolidated income tax returns.

57. On the consolidated returns referred to in finding 56, no amount was included as a dividend in gross income on account of the receipt of the rights referred to in finding 43.

58. For the taxable years 1930 and 1935, plaintiff and its railroad subsidiaries, including Oregon Short Line, filed consolidated federal income tax returns. Under the federal income tax laws applicable to 1930 and 1935, the distribution of the securities described in finding 53 and findings 51 and 54 constituted intercompany transactions and were eliminated in computing plaintiff’s consolidated federal income tax liability for 1930 and 1935.

59. In computing plaintiff’s accumulated earnings and profits, the Commissioner of Internal Revenue refused to include any amount for the distribution and exercise of the stock subscription rights described in finding 43.

60. As of December 31,1922, the Illinois Central Railroad Company had accumulated earnings and profits of no less than $8,897,224.38.

61. As of December 31,1923, the Illinois 'Central Railroad Company had accumulated earnings and profits of no less than $8,761,784.00.

*99 62. As of December 31, 1925, the Illinois Central Eail-road Company bad accumulated earnings and profits of no less tlian $22,173,584.00.

63. The spreads between the market value of the Illinois Central convertible preferred stock and the subscription price on the date of distribution of the rights entitling the recipient to exercise said subscriptions were as follows:

64.The spreads between the fair market value of the Illinois Central convertible preferred stock and the subscription price on the date that the rights entitling the recipient to subscribe were actually exercised were as follows:

65.The number of shares of Illinois Central convertible preferred stock acquired by exercise of stock rights which were distributed to the plaintiff and the Oregon Short Line times the respective spreads as of the date of distribution and the date of exercise of said stock rights were as follows:

66.The stock rights distributed to the plaintiff and its subsidiary on May 16,1922 were exercised on June 26,1922; those distributed on November 23, 1923 were exercised on *100 December 1,1928; and those distributed on October 22,1925 were exercised on December 10,1925.

67.The lower of the aggregate value of the distribution spread and the aggregate value of the exercise spread for each of the sets of rights which were exercised were as follows:

t. LEASED LINE SUBSIDIARIES

68. Since January 1, 1986, plaintiff has operated under leasehold agreements all the properties of the Oregon Short Line Railroad Company, the Los Angeles & Salt Lake Railroad Company, and The St. Joseph & Grand Island Railway Company, hereinafter the “three roads” or the lessor corporations. Plaintiff entered into the leases in order, among other things, to reduce bookkeeping and other costs. It sought to eliminate intercompany accounting and to reduce the number of reports required to be made to state and federal authorities. Union Pacific R. Co. Unification, 189 ICC 357, 358-59, 363 (lines 21-23), 365 (lines 26-30) (1933); 207 ICC 543, 544-45 (1935).

69. During the years here in question, plaintiff accounted, for Interstate Commerce Commission and federal income and excess profits tax purposes, for all items of income and expense resulting from the operation by plaintiff of the properties of the three roads.

70. During the taxable year 1942, plaintiff included in its accounts and reported in its federal income and excess profits tax returns all items of income and expense resulting from the operation of the aforesaid properties of the three roads.

71. At all times material hereto plaintiff has owned 100% of the capital stock of Oregon Short Line Eailroad Company, 50% of the capital stock of Los Angeles & Salt Lake Eailroad Company (the remaining 50% being owned by Oregon Short Line Eailroad Company), and approximately 99% of the capital stock of The St. Joseph & Grand Island Railway Company.

*101 72.On its excess profits tax return for 1942, plaintiff treated its stock in the three lessor corporations as inadmissible assets having as their basis the following amounts:

The only change made by the Commissioner of Internal Revenue in the treatment of these items for the purposes of the inadmissible asset adjustment was to reduce the basis of the Oregon Short Line stock to $85,140,589.76. Plaintiff’s basis for that stock is dependent upon the resolution of count 5.

73. In computing its admissible assets for purposes of determining its excess profits tax credit based on equity invested capital for the taxable year 1942, plaintiff in its claim for refund claimed the aforesaid aggregate amount of $108,-129,266.19 was includible therein.

74. Throughout 1942, plaintiff owned 1,000,000 shares of Oregon Short Line common stock, of which 273,507 shares were acquired prior to June 30, 1908, and the balance of 726,493 were acquired on November 10,1910. As of June 30, 1908, plaintiff owned 100 percent of the outstanding stock. The acquisition in 1910 was of additional stock issued by the Oregon Short Line. Throughout 1942, plaintiff owned 125,-000 shares of Los Angeles & Salt Lake common stock and the Oregon Short Line owned a like amount, plaintiff having acquired its stock in 1921 and the Oregon Short Line having acquired its stock in the fiscal year ended June 30,1907. Plaintiff’s stock in The St. Joseph and Grand Island was as follows on the indicated dates:

During 1942, plaintiff did not hold any of its stock in the three lessor corporations primarily for sale to customers in the ordinary course of its trade or business. During 1942, *102 plaintiff was not a dealer in securities, bolding them for sale to customers.

75. All of the leases were approved by the Interstate Commerce Commission in opinions reported at 189 ICC 357 and 207 ICC 543.

78.Since January 1, 1936, plaintiff has also operated all of the properties of the Oregon-Washington Eailroad & Navigation Company under a lease similar to those made with the three lessor corporations described above. All of the stock of Oregon-Washington was, during 1942, owned by Oregon Short Line Eailroad Company.

77. During 1942, plaintiff had outstanding non-interest-bearing advances to the Oregon-Washington Eailroad & Navigation Company and the Los Angeles & Salt Lake Eail-road Company, the advances to the former ranging from about $44.6 million to about $45.7 million, and the advances to the latter ranging from about $25.7 million to about $27.3 million.

78. For 1940, 1941, 1943, 1944, and 1945, plaintiff and the lessor companies as well as other subsidiaries filed consolidated excess profits tax returns.

79. Each of the four lessor corporations incurred an income tax but no excess profits tax liability for 1942. The income tax was paid by plaintiff pursuant to the terms of the leases.

80. During 1942, the four lessor corporations owned the following shares of stock which were not leased to plaintiff:

81.Since the operation of the leasehold agreements 'began on January 1,1936, no dividends have been paid to plaintiff with respect to its stock in the lessor corporations.

*103 82. Under the lease with the St. Joseph and Grand Island, plaintiff agreed to pay as part of the rent certain dividends on the stock of the lessor in the hands of the public. The lease further provided that during the term of the lease the plaintiff waived all rights to dividends out of the rentals payable thereunder.

83. The leases with the Oregon Short Line and the Los Angeles and Salt Lake contained no provision prohibiting or restricting the payment of dividends by the lessor to the plaintiff.

84. As of December 31,1941, earnings and profits accumulated after February 28, 1913, amounted to approximately $1.9 million for the Los Angeles and Salt Lake and $4 million for The St. Joseph and Grand Island. As of December 31, 1941, the Oregon Short Line had an earnings and profits deficit for the period beginning March 1,1913. For the calendar year 1942, all three lessors had earnings and profits from which dividends to plaintiff could have been paid. (This is based on the fact that each of the lessors incurred an income tax liability for 1942, as indicated above in finding 116.) The income source of such dividends could have been the stock described in finding 80.

85. The plaintiff acquired and held the stock in the three roads for a business purpose, in connection with the conduct of its railroad operations, and only incidentally as an investment or capital asset.

VI. INTEREST ON 1948 AGREEMENT

86. Pursuant to the provisions of Section 321(a) of the Transportation Act of 1940, Government-owned materials transported in 1942 for military use were eligible for the preferential land-grant freight rates prescribed by the several Granting Acts and Equalizing Agreements.

87. During the taxable year 1942, plaintiff transported substantial quantities of war-connected materials for the Government. Many of these shipments were of a secret nature, their contents being unknown to plaintiff at the time of haulage. Other shipments contained new commodities for which freight rates had not yet been established pursuant to the Land Grant and Equalization Agreements.

*104 88. Where reasonable doubt existed as to the true nature of a particular shipment, plaintiff charged the Government the full commercial tariff rate. These charges were paid in full by the various Government shipment departments and agencies. Plaintiff accrued the total amount of these charges as income during the year of carriage, and reported them in its federal tax returns for the taxable year 1942.

89. Upon audit in years subsequent to the taxable year 1942, the General Accounting Office determined that a substantial amount of the charges exceeded the proper land grant freight rates provided for the materials so shipped. The excess rates so determined were disallowed by the General Accounting Office, and plaintiff was required to, and did refund the excess charges to the Government.

90. With respect to the taxable year 1942, plaintiff was required to, and did make refunds to the Government of the aforesaid excess charges in the aggregate amount of $12,801,880.24 during the taxable years ended December 31, 1943 through 1956, and the period ended August 31, 1957, inclusive.

91. During the taxable years ended December 31, 1943 through 1956, and the period ended August 31, 1957, inclusive, plaintiff deducted on its federal tax returns the entire amount of $12,801,330.24 so refunded. The amount of such refunds and deductions, the years in which made, as well as the tax applicable thereto, were as set forth below:

*105 92. Under date of November 29, 1948, the Commissioner of Internal Revenue sent the following letter to plaintiff, herein sometimes called the Land Grant Cutback Agreement or the Cutback Agreement:

Union Pacific Railroad Company 120 Broadway New York 5, New York Attention: L. J. Tracy, Controller

Gentlemen: Reference is made to your letter of November 1, 1948, in which you request that certain modifications be made to Bureau letter of September 22,1948, granting your company permission, subject to your agreement to the adjustments and conditions set forth therein, to allocate for Federal income tax purposes the repayments of certain excessive transportation charges to the years in which such charges were included in taxable income.

The information submitted in your letters of July 22, and November 1,1948, is to the following effect:

Under section 321(a) of the Transportation Act of 1940, materials which were owned by the Government and were moving for military or naval use were entitled to reduced freight rates in accordance with land grants or equalization agreements. Section 322 of such act provides for the payment of transportation charges as presented but reserves the right to the Government to deduct the amount of any overpayment from any amount subsequently f ound due the carrier.

Beginning in 1941 and continuing throughout the war years and in 1946, your company transported large quantities of property for the several Government departments and agencies. In some cases the facts necessary to determine whether the property was eligible for net land grant rates were not available and were not disclosed for security reasons. In other cases the commodities were new and without precedent. Where there was reasonable doubt as to the application of net land grant rates, your company billed the Government initially on the basis of full commercial tariff rates, and the bills were paid by the disbursing officers of the several departments and agencies. Subsequently, the General Accounting Office upon audit disallowed transportation charges in excess of net land grant rates on a considerable volume of traffic and has made or is making demand for refund or effecting repayment by deduction from other amounts currently due your company.

*106 Due to the arrearage in tbe work of General Accounting Office there has been a time lag of several years between the payment of the initial bills and the recoupment of the alleged excess charges. Your company has included the full amount of revenues received in its taxable income of the years in which accrued, and amounts repaid have been treated as reductions of taxable income for the years in which repaid. As a result of the delay in the audit of the transportation bills your company has reported large amounts of revenue in years when it was subject to high excess profits tax rates while the repayments have extended into post war years when tax rates are lower.

The statement submitted with your letter discloses that repayments in the amount of $38,424,471.15 have been made as of December 31,1947, which are applicable to the years 1941 to 1947, inclusive. You state that your company paid excess profits taxes for each of the years 1942 to 1945, inclusive, had an unused excess profits carry-over from 1940 and 1941 to 1942, and was within the 80 percent overall limitation in 1944.

You suggest that it would simplify the adjustment if June 30, 1948, were agreed upon as a cut-off date for the year 1941. The 1941 adjustment would be closed out with repayments up to and including June 30,1948, and any repayments arising after that date applicable to 1941 would be deductible in the year in which made.

Section 43 of the Internal Revenue Code provides, in part, as follows:

“The deductions and credits (other than the corporation dividends paid credit provided in section 27) provided for in this chapter shall be taken for the taxable year in which ‘paid or accrued’ or ‘paid or incurred,’ dependent upon the method of accounting upon the basis of which the net income is computed, unless in order to clearly reflect the income the deductions or credits should be taken as of a different period. * * *”

The facts presented by you show conclusively that by reporting the transportation charges as income on the accrual basis and deducting the repayments in the year in which repaid, the taxable income for the years involved is not clearly reflected; and thus, a large net tax is incurred due to the high tax rates during the war years.

In view of the facts and circumstances presented, permission is granted under the authority conferred in section 43 of the Internal Revenue Code to allocate, on the *107 terms and conditions hereinafter stated, repayments heretofore or hereafter made of excessive transportation charges of the class described above to the years in which such charges were included in taxable income. However, the allocation of any such repayments of excessive transportation charges to any year shall be made only to the extent the refund or credit of the overpayment of income and/or excess profits tax, if any, resulting therefrom is not prevented for any reason, and the deficiency, if any, of income and/or excess profits tax resulting therefrom may be assessed.

In this connection, it is understood that you agree, as follows:

1. All amounts received by you as transportation charges from the Federal Government Departments and Agencies shall be included in taxable income on the accrual basis.

2. All refunds of transportation charges made by you to the Federal Government shall be allowed as deductions in the year or years in which such transportation charges were included in income, and any deductions claimed in the year or years such refunds were made will be disallowed. This paragraph applies only to cutbacks on account of transportation charges in excess of land grant and reclassification rates, which were not contested or in controversy.

3. The amount of interest on refunds of income and excess profits taxes resulting from these adjustments shall be allowed only to the extent of, and limited to, the amount of interest on deficiencies resulting from these adjustments.

4. You will execute any such waivers under section 276 (b) of the Internal Kevenue Code as may be requested to protect the Government’s interests with respect to deficiencies for any of the years involved.

The adjustments agreed to above will not include any items which are the subject of presently pending claims filed on behalf of the United States by the Attorney General before the Interstate Commerce Commission for refunds from the railroads, including your company, for excessive charges for the transportation of war-time freight.

In regard to a cut-off date for any one of the years in question, a date which is mutually agreeable to the internal revenue agent in charge and your company will be acceptable to this office subject to the determination upon post review that the repayments made subsequent to that date which are applicable to the particular year are comparatively negligible in amount and that the deduc *108 tion of such repayments in the year or years accrued will not distort income.

In any of fcbe foregoing circumstances in which, the repayments cannot be allocated to the prior years, they will be deductible for the year in which the repayments accrue.

This letter supersedes Bureau letter of September 22, 1948.

Notification from you of your agreement with the foregoing will constitute authority for disposition of the issue for the years involved. It is requested that such notification be submitted in duplicate.

Please reply on or before December 15, 1948, for the attention of IT :P :CA :ECH.

Very truly yours,

(Signed) Geoege J. Schoeneman

Commissioner

93. By letter dated December 14, 1948, plaintiff notified the Commissioner of its assent to the foregoing letter, the Land Grant Cutback Agreement.

94. During the audit of plaintiff’s tax returns for 1942, plaintiff submitted to the Revenue Service statements showing the refunds for 1943 through 1957 listed in finding 91, as well as a refund of $72,335.30 made in 1942 of overcharges received from the Government ih 1941. Copies of these statements were included in the revenue agent’s report of December 12,1957. Representatives of the plaintiff advised Revenue Agent Stortz that additional freight charges totalling $23,-514.83 received from the Government in 1942 were refunded during the period beginning January 1, 1957, and ending August 31, 1957. Mr. Stortz verified this information, accepted it as correct, allowed as deductions for 1942 the amounts totalling $12,801,330.24, shown in finding 91, and disallowed for 1942 the deduction of $72,335.30 for refunds made in 1942 of overcharges received from the Government in 1941. These adjustments, which resulted in a net additional deduction of $12,728,994.94, were not disturbed by the Appellate Division in its final determination of plaintiff’s tax liability for 1942.

95. The deductions claimed by plaintiff in the 'amount of $12,801,330.24 on account of refunds made during each of the taxable years ended December 31,1943 through 1956 and the period ended August 31, 1957, have all been disallowed in *109 Eevenue Agents’ Eeports covering said years pursuant to paragraph 2 of the aforesaid Cutback Agreement.

96. None of the deficiencies attributable to the disallow-ances referred to in finding 95 have been assessed to date, the years being still open for assessment on waivers.

97. On or about June 15, 1943, the plaintiff timely filed its Corporate Income and Declared Value Excess Profits Tax Eetum (Form 1120) for the calendar year 1942 showing the following liabilities:

These amounts were assessed and payments with respect to the assessments were received by the defendant as follows:

98. On July 16,1946, a subsequent assessment was entered and payment made for corporate income tax in the amount of $10,696.86 and interest, to that date, in the amount of $2,141.13, or a total of $12,837.99.

99. After the completion of the audit of the plaintiff’s 1942 Corporate Income Tax and Declared Value Excess Profits Tax Eeturn (Form 1120), the plaintiff received, on September 21,1960, a Notice of Adjustment (relating to such 1942 return) together with a check for $7,793,219.55. The notice of adjustment explained the computation of the refund as follows:

*110 The total assessment was credited or refunded to tbe taxpayer as follows:

The adjustment for railroad cutbacks did not alter plaintiff’s income tax liability because the reduction in net income was completely offset by the reduction in the Section 26 (e) credit for income subject to excess profits tax.

The overassessment of income tax in the amount of $7,935,833.22 (col. 1 above) was due to general adjustments and not adjustments on account of railroad cutbacks. Accordingly, neither the refund of $3,744,668.22 nor the $4,048,556.33 in interest paid on account thereof was attributable to railroad cutbacks.

10,0. The overassessment previously allowed in Declared Value Excess Profits Tax for the calendar year 1942 (referred to in the preceding finding) which was in the amount of $58,720.19, a credit, was applied against outstanding liabilities as of July 16, 1945 and refunded to the taxpayer as follows:

Tn addition to the cash refund made to plaintiff in the amount of $45,685.38, the plaintiff received interest thereon in the amount of $9,178.87.

101. In addition to filing the Corporate Income and Declared Value Excess Profits Tax Eeturn (finding 97), the plaintiff timely filed a Corporation Excess Profits Tax Ee- *111 turn (Form 1121) for the calendar year 1942, indicating that no liability was due thereon. Anticipating a deficiency in excess profits tax, the plaintiff on December 1, 1944, paid oyer to the District Director $3,525,000, which was immediately assessed on December 12, 1944, together with interest in the amount of $361,745.90. The assessment of interest was satisfied from an additional payment made by plaintiff on December 1,1944. On July 16,1946, in response to plaintiff’s application for a tentative amortization adjustment, the Commissioner refunded to plaintiff $694,754.62 in excess profits tax for 1942 with interest thereon in the amount of $68,742.63. As a result of this refund, the net assessment for excess profits tax left on the books and paid by plaintiff as of July 16, 1946, was substantially $2,830,245.38.

102. On audit of plaintiff’s excess profits tax return for 1942, the Commissioner of Internal Revenue made a number of adjustments, including an adjustment for railroad cutbacks. After taking into consideration all of these adjustments, he determined a deficiency in excess profits tax for 1942 in the amount of $4,654,621.45. On September 16, 1960, he assessed this deficiency together with interest thereon of $300,639.16, for a total assessment of $4,955,260.61. This assessment was satisfied by a credit of $4,206,773.93 in income tax for 1942 (referred to above in finding 99) and a postwar credit of $748,486.68.

103. Certain additional computations were prepared by an auditor in the Audit Division of the Internal Revenue Service bearing on whether the interest restriction in the Cutback Agreement should be given effect in computing interest allowable to plaintiff. These additional computations showed first that the general adjustments made on audit, if taken alone, resulted in an income tax liability of $30,481,263.37, an income tax deficiency of $7,935,833.22, an excess profits tax liability of $18,807,391.15, and an excess profits tax deficiency of $15,977,145.77. The computations showed that the general adjustments and the adjustment attributable to railroad cutbacks resulted in an income tax liability of $30,481,263.37 (which was the same liability as determined in the first of the four computations above) and an excess profits tax liability of $7,484,866.83. Because the *112 latter was $11,322,524.32 less than the excess profits tax liability initially determined in the amount of $18,807,391.15, the computation showed $11,322,524.32 in the line for over-assessments. Finally, the computations showed that all adjustments resulted in an income tax liability of $30,481,263.37, an overassessment of income tax of $7,935,833.22, an excess profits tax liability of $7,484,866.83, and an excess profits tax deficiency of $4,654,621.45. Because the income tax liability was not changed by the adjustment for railroad cutbacks, these computations showed that none of the income tax overassessment or overpayment was attributable to the cutbacks and thus that the interest allowable on this overpayment should not be restricted by reason of the interest restriction in the Cutback Agreement. Because the computed excess profits tax deficiency of $15,977,145.77 resulting from general adjustments was never assessed or paid, the amount of $11,322,524.32 was not a true overassessment or overpayment. As indicated in the preceding finding, the Commissioner assessed and collected the excess profits tax deficiency of $4,654,621.45 resulting from all audit adjustments.

104. The Eevenue Service has not made any refund of income or excess profits tax for 1942 resulting from adjustments for railroad cutbacks. (The only refund made was for $3,744,663.22 in income tax which was attributable to general adjustments, as indicated in finding 99.)

105. In computing the interest on the overpayment of income tax of $7,935,833.22, the Commissioner of Internal Ee-venue did not reduce the interest allowable on account of the interest restriction contained in the Cutback Agreement. The interest restriction in the Cutback Agreement did not enter into that computation. Had the interest restriction been deleted from the Cutback Agreement, interest would have been computed in the same manner.

vn. 1898-1918 LAND SAUSS

106. Upon the acquisition of the properties of Union Pacific Eailway Company pursuant to a plan of reorganization in 1898, plaintiff acquired, among other properties, various lands.

*113 107. On April 5, 1898, plaintiff caused tbe Union Pacific Land Company to be incorporated in Utah. Plaintiff caused the lands and rights derived from the land grant to the Kansas Pacific Eailway Company to be transferred to the Union Pacific Land Company. The Union Pacific Land Company issued to plaintiff $100,000 par value of its common stock and $10 million par value of its bonds. The bonds were secured by a mortgage upon all of the Union Pacific Land Company’s assets. Plaintiff pledged the Union Pacific Land Company stock and bonds as collateral under its first mortgage.

108. The lands and properties referred to in the preceding findings consisted of 6,577,000 acres of land in Colorado, Kansas, Nebraska, Wyoming and Utah.

109. As of June 30,1919, the plaintiff owned lands for non-carrier purposes in Nebraska, Kansas, Colorado, Wyoming and Utah amounting to 971,348.64 acres.

110. Plaintiff’s first mortgage provided that the net proceeds from the sales of lands covered by the mortgage, with the exception of lands used for railroad purposes, be set apart and held by the trustee as a cash improvement and equipment fund and such net proceeds from time to time be paid to plaintiff to reimburse it for expenditures for betterments, improvements, and equipment, exclusive of such expenditures that may have been charged to operating expenses as cost of maintenance. Pursuant to this provision, during the period February 1,1898, through December 31,1918, the trustee had the following receipts:

*114 From these receipts, during the aforesaid period, the trustee paid over to plaintiff $28,286,091.13.

111. On its books plaintiff credited the aforesaid net proceeds of $23,286,091.13 to its investment in road equipment account.

112. Of the $2,381,588.36 in items 1, proceeds of sales, in finding 110, $160,922.65 is attributable to the period March 1, 1913, to December 31, 1917. None of the $160,922.65 was reported as income or gain on plaintiff’s federal income tax returns for 1913-1917. (The amount of $160,922.65 is the sum of $160,212.65, $450, and $260 shown on plaintiff’s exhibit Y, in column 6, for fiscal 1915 and 1916 and calendar 1917.)

113. Of the entire amount of $10,203,367.53 in item 2, in finding 110, the sum of $1,231,264.60 has already been included in plaintiff’s accumulated earnings and profits. This was for interest on deferred payments, other receipts from land, a small amount of taxable gain for 1918, less expenses. The balance of $8,972,102.93 represents deferred payments from sales of land.

114. Of the entire amount of $10,203,367.53 in item 2, in finding 110, $1,893,601.30 is attributable to the period March 1, 1913, to December 31, 1917. None of the $1,893,601.30 was reported as income or gain on plaintiff’s federal income tax returns for 1913-1917. Of the $1,893,601.30 attributable to March 1,1913, to December 31,1917, $375,974.45 has already been included in plaintiff’s accumulated earnings and profits as part of the $1,231,264.60 referred to in the preceding finding.

115. The entire amount of $5,713,967.20 in item 3 in finding 110 has 'already been included in plaintiff’s accumulated earnings and profits. Of the $5,713,967.20, $566,431.20 is attributable to the period March 1,1913, through June 30,1916. None of the $566,431.20 was reported as income or gain on plaintiff’s federal income tax returns for 1913-1916.

116. Of the entire amount of $5,067,000 in item 4, in finding 110, $151,947 is attributable to the period March 1, 1913, to December 31,1917. None of the $151,947 was reported as income or gain on plaintiff’s federal income tax returns for 1913-1917.

*115 117. Item 5, in finding 110, has been included in plaintiff’s accumulated earnings and profits. The sum of $18,223.89 was attributable to the period March 1,1913, to December 31, 1917. None of the $13,223.89 was reported as income or gain on plaintiff’s federal income tax returns for 1913-1917.

118. Of the claimed addition of $23,286,091.13 to accumulated earnings and profits, $6,972,025.93 has already been allowed, consisting of $1,231,264.60 of item 2 and all of items 3 and 5 in finding 110.

VIH. UNAMORTIZED BOND DISCOUNT & EXPENSE

119. When a corporation issues its bonds for cash, the difference between the maturity value of the bonds and the cash received, plus the expenses of the bond issue, is known as “bond discount and expense.”

120. The dollar amount of bond discount and expense is customarily charged off over the life of the bonds. The dollar amount which has not yet been charged off is known as “unamortized bond discount and expense.”

121. When the issuer receives less for its bonds than face value, e.g., $900,000 for $1,000,000 in face value of bonds, and the balance sheet would not balance as would be the case were the left side to show cash of $900,000 and the right side to show $1,000,000 in liabilities, the unamortized bond discount, in the example $100,000, is customarily placed on the left side of the ledger in order to make the balance sheet balance.

122. In computing its excess profits tax credit for 1942 and its unused excess profits tax credit carryovers from 1940 and 1941, plaintiff included in total 'assets the following amounts for unamortized bond discount and expense:

The amounts for 1940 and 1941 are aggregate amounts for the plaintiff, Oregon Short Line Eailroad Company, Oregon-Washington Eailroad & Navigation Company, Los Angeles & Salt Lake Eailroad Company and The St. Joseph and Grand Island Eailway Company.

123.On audit of plaintiff’s excess profits tax return for 1942, the Commissioner of Internal Eevenue included un- *116 amortized bond discount and unamortized bond issuance expense in total assets in the following amounts:

124. On its books, plaintiff bad deducted from surplus, in the year of issuance of debt securities, the amount of bond discount and expenses incurred. On its books and on its balance sheet, therefore, plaintiff did not carry as an asset amounts for unamortized bond discount and expense. For income tax purposes however, 'bond discount and expense was amortized and deducted over the life of the bonds. Helvering v. Union Pacific R.R., 293 U.S. 282 (1934). In computing plaintiff’s consolidated accumulated earnings and profits for 1940 and 1941, and plaintiff’s accumulated earnings and profits for 1942, the Commissioner of Internal Eevenue followed the treatment of bond discount and expense claimed for income tax purposes; that is, he did not deduct the discount and issuance expense in the year the bonds were issued, but he amortized it in accordance with deductions allowed for income tax purposes. In these same computations, the Commissioner deducted from earnings and profits none of the amounts referred to in finding 123. These amounts were stipulated to be unamortized, that is, unamortized for tax purposes, being the balances of bond discount and expense remaining to be written off in future years over the life of the bonds.

125. To a potential buyer of the stock of a corporation which had for income tax purposes unamortized bond discount and expense, the amount of the discount and expense could have some value as a source of tax deductions for future years. To a potential buyer of the assets of a corporation, or on liquidation, its unamortized bond discount and expense would not have any value. Unamortized bond discount produces no income.

126. In the determination of the book value of corporate stock, a securities analyst would not treat unamortized bond discount and expense as an asset; he would treat it as an offset to surplus.

*117 IX. DISCOUNT AND PREMIUMS

127. For 1940 and 1941, plaintiff and its railroad subsidiaries, including the Oregon Short Line Railroad Company and the Oregon-Washington Railroad & Navigation Company, filed consolidated income tax returns and consolidated excess profits tax returns. For 1942, plaintiff filed a separate income tax return and a separate excess profits tax return.

128. In computing net income, plaintiff deducted, on its consolidated income tax returns for 1940 and 1941 and its separate income tax return for 1942, the following amounts for amortization of bond discount and expense, unamortized bond discount and expense for bonds reacquired, United States documentary stamp taxes, and call premiums to retire bonds:

129.On September 1,1940, plaintiff called for redemption two series of bonds, both with a maturity date of June 1,2008. The first consisted of 4 percent bonds issued in the years 1908, 1909, and 1910, at a discount and with issuance expense. To redeem these 4 percent bonds, plaintiff paid the face amount of these bonds plus a premium of $4,942,881.12. The second series consisted of 5 percent bonds issued in 1923 at a discount. To redeem these 5 percent bonds, plaintiff paid the face amount plus a premium of $1,500,000. The total of the call premiums, $4,942,381.12 and $1,500,000, $6,442,381.12 is shown in the preceding finding. At the time these bonds were redeemed, there was unamortized bond discount and expense of $2,741,201.39 on the 4 percent bonds and unamortized bond discount of $517,997.28 on the 5 percent bonds. The total of these two amounts of unamortized bond discount is $3,259,-198.67.

*118 130. In May 1936, plaintiff issued 35-year Sy2 percent debenture bonds at a discount. In October 1936, plaintiff issued 34-year Sy2 percent debenture bonds at a discount. In 1940, plaintiff purchased certain of these debenture bonds at par with moneys derived from a sinking fund and retired them. With respect to these bonds purchased and retired, there was unamortized debt discount of $3,489.59 as to the 35-year bonds and $2,349.20 as to the 34-year bonds. The total of these two amounts of unamortized bond discount, $5,838.79, when added to the total unamortized bond discount in the preceding finding, $3,259,198.67, comes to $3,265,037.46, the figure shown in finding 129.

131. On its excess profits tax return for 1942, in computing its excess profits net income for 1942 and its unused excess profits tax credit carryovers from 1940 and 1941, plaintiff did not treat as interest the amounts shown in finding 128, but it treated the indebtedness with respect to these amounts incurred as borrowed capital.

132. On audit of the returns for the years 1940 and 1941, the Commissioner of Internal Eevenue did not disturb the action taken by plaintiff as described in these findings.

133. The $110,004 in finding 128 was deducted in full in the years the bonds were issued and was not amortized over the life of the bonds as bond issuance expense. Defendant does not contend that these deductions were for interest for purposes of section 711 (a) (2) (B).

X. DONATIONS AND CREDITS

134. (a) For the taxable years ended December 31, 1940 and 1941, plaintiff and its railroad subsidiary companies, set forth below, filed consolidated federal income and excess profits tax returns:

Oregon Short Line Eailroad Company (OSL) ;

Oregon-Washington Eailroad & Navigation Company (O-WE&N);

Los Angeles & Salt Lake Eailroad Company (LA & SL);

The St. Joseph and Grand Island Eailroad Company (St. J &GI);

*119 Saratoga & Encampment Valley Eailroad Company (S &EV);

Laramie, North Park & Western Eailroad Company (L &NPW);

Des Chutes Eailroad Company (D C);

Yakima Valley Transportation Company (Y V T).

(b) For the taxable year ended December 31,1942, plaintiff and the named subsidiaries filed separate federal income and excess profits tax returns.

(c) Henceforth the plaintiff and its aforesaid subsidiaries will ordinarily together be called the plaintiff.

135. The issue is whether the transfers by nonstockholders to plaintiff, whose amounts appear in finding 138(a), may be included in equity invested capital in plaintiff’s consolidated return for 1940 and 1941, to determine its unused consolidated excess profits tax credit carryovers from 1940 and 1941 to 1942, and in plaintiff’s return for 1942, to determine its credit for 1942.

In terms of statutory language, the question is whether the transfers in question are “contributions to capital” within the meaning of § 718(a) (8) of the 1939 Code. The test is that laid down in United States v. Chicago, Burlington & Quincy R.R., supra.

136. In the years 1914 through 1942, there were literally thousands of instances in which plaintiff received from numerous transferors cash and other property which it treated as donations and grants in aid of construction. These amounts were recorded on the plaintiff’s books, since July 1, 1914, in accordance with the Uniform System of Accounts as prescribed by the Interstate Commerce Commission, by debiting the investment account, with a concurrent credit being made to “Other Adjustment Credits,” “Donations” or “Grants in Aid of Construction.”

Note: Such words as “donations and grants” and “donor” in the stipulation of the parties and in these findings are words of convenience only, without any substantive significance, except where they appear in the historical facts as, e.g., in finding 136.

137. (a) On the balance sheets of plaintiff as of December 31,1940,1941 and 1942, the credit balances in the afore *120 said accounts were included on the liability side. Beginning with the year 1948, these amounts were included on the asset side of the balance sheet as credit balances in the investment portion.

(b) The following is a summary of the transfers treated as donations and grants on the respective books and records:

138. (a) The amounts of the transfers which (except as otherwise explicitly mentioned) are in issue and the classes of facilities constructed with the cash and property transferred appear in Schedule 3 of the appendix hereto and are incorporated by reference.

(b) The significance of the Schedule 3 tables lies in the amounts stated and not in the captions of the columns. In the stipulation of the parties, the caption of the first column of the tabulation reads “donor.” The term, as is noted in finding 136, was not intended to be one of legal consequence and is properly an alternative to “transferor.”

(c) The transfers in issue, whose amounts appear in foregoing subparagraph (a), fall into seven classes, the first five by governmental transferors and the last two by private transferors.

The classes (and in parenthesis their amounts for the period ending December 31, 1939) are as follows:

(1) governmental transfers to relocate line on account of dams ($5,992,110 of the total of $9,798,364).

(2) governmental transfers to relocate line on account of highways and waterways ($251,669). This class is a consolidation of lines 2 and 3, “relocation line account, highways,” and “relocation line account waterways,” in the column “class of facility” in finding 138(a). The single item whose amount appears on line 3 is on examination found to relate more to highways than to waterways.

(3) governmental transfers for highway underpasses and other highway crossings ($1,673,375). This class is a merger, *121 as substantially identical, of tlie transfers in line 4, “underpasses account highways” and line 5, “highway crossings,” in the column “class of facility” in finding 138 (a).

(4) governmental transfers for spur or other tracks ($273,831).

(5) governmental miscellaneous transfers ($320,601).

(6) nongovernmental transfers for industry spurs and other tracks ($891,354) and

(7) nongovernmental miscellaneous transfers ($395,422).

139.The aggregate account balances with respect to the transfers set forth in finding 138 (a), as of December 31,1939, 1940,1941 and 1942 were as follows:

140. The foregoing aggregate account balances as of the close of each of the years 1939,1940,1941 and 1942 represent facilities on hand as of the close of each of the respective years.

141. The aforesaid facilities in finding 138(a), representing the cash and other property transferred to plaintiff and its railroad subsidiaries, were held by plaintiff and its subsidiaries during the taxable years 1940, 1941 and 1942 for use in their trade or business for such years.

142. None of the transfers whose amounts appear in finding 138(a) were reported or taxed as income for federal income tax purposes, with the exception of the transfers specified in finding 145(a) as having been subjected to income tax.

143. In computing its excess profits tax credit for the taxable year 1942, and its consolidated excess profits tax credit for the taxable years 1940 and 1941, so as to determine its unused excess profits tax carryovers from 1940 and 1941 to 1942, plaintiff included in equity invested capital:

(a) In Accumulated Earnings and Profits

The entire credit balances for the transfers set forth *122 in finding 138(a), as of December 31,1939 through. 1941, inclusive; and

(b) In Total Assets

The entire credit balances for the transfers set forth in finding 138(a) as of December 31 plus one-half the aggregate net additions occurring during the next succeeding year. The aggregate net additions so included were determined by netting retirements occurring during the stated periods against additions occurring during such periods.

144 In the audit of plaintiff’s consolidated excess profits tax returns for 1940 and 1941, and its separate excess profits tax return for 1942, the Commissioner of Internal Eevenue excluded from equity invested capital the amounts referred to in finding 143, with the exception of the amounts set forth in finding 145 (a).

145. (a) In the audit of plaintiff’s returns for the taxable year 1942, the Commissioner of Internal Eevenue treated the following transfers as includible in equity invested capital (either as a contribution to capital or as accumulated earnings and profits) and total assets of plaintiff’s aforesaid railroad subsidiaries in the amounts as set forth below:

(b) The parties have agreed that plaintiff is not entitled to prevail with respect to item 1 in the foregoing subpara-graph and with respect to a transfer by the United States Eailroad Administration in 1932 involving $243,475.60. These transfers are not included in the amounts stated in finding 138(a).

(c) The parties have agreed that for the purposes of this proceeding items 7, 8,9,10 and 11 in subparagraph (a) above are not in issue and they were properly included in equity *123 invested capital. These items are included in the amounts stated in finding 138(a).

(d) Items 2, 3, 4, 5 and 6 in subparagraph (a), above, are included in the amounts stated in finding 138(a), and are in issue in this proceeding as offsets to count 17. See the findings following finding 173.

146. (a) The thousands of transfers in issue (appendix, Schedule 3, finding 138(a)) have by agreement been reduced to 56 representative transfers, which appear in Schedule 4 of the appendix hereto.

(b) The parties have further agreed, in the interchange of proposed and counterproposed findings and objections thereto, upon individual transfers to represent the several classes of transfers in issue described in finding 138(a).

147. Glass 1 — Governmental transfers to relocate line on account -of dams, (a) The two transfers representative of this class were made by the Federal Government to the Oregon-Washington Railroad Company in connection with the construction of the Bonneville Dam on the Columbia River in Oregon.

The first took place in the years 1935-1943 and involves $2,359,747. This was the cost (paid by the Government) of relocating a portion of the line which was going to be submerged as the result of the construction of the dam.

The second took place in the years 1938-1941 and involves $1,200,729. This was part of the $1,531,000 paid by the Government to the railroad for flowage rights. The railroad agreed to grant the rights for this price in order to obviate the exercise of the right of eminent domain threatened by the Government. The railroad used the funds to relocate and protect parts of its line due to the raising of the level of the river.

(b) It is concluded that these transfers, exchanges of values and simple replacements of existing facilities which left the transferee railroad no better off than before, did not materially contribute to the production of further or additional income by the transferee railroad. The transfers were, also, a direct payment for a specific, quantifiable benefit provided for the transferor by the transferee. See United States v. Chicago, Burlington & Quincy R.R., supra. Also, *124 the transferors sought and obtained a direct benefit to themselves, and did not intend to confer a benefit on the transferee.

The transfers did not effect a contribution to the capital of the transferee railroad, the plaintiff.

148. (a) Glass % — Governmental transfers to relocate line on account of highways. The transfer representative of this class was made by the City of Long Beach to the Los Angeles and Salt Lake, involving $240,000 for 1933-1935.

The contract for the transfer recites that the City was desirous of acquiring (a) the railroad’s rights to operate its line on certain city streets, with a view to improving the streets, and (b) the right to use the railroad’s drawbridge across the entrance to a harbor for pedestrian and vehicular traffic (and certain land on the approaches to the drawbridge), requiring the construction of a new highway for this purpose. For these rights, the City agreed to pay the railroad $460,000, later reduced to $240,000. The railroad agreed to relocate its line on a right-of-way it would acquire. The purpose of the transaction on the part of the transferor was to pay for the property rights acquired.

(b) It is concluded that the transfers in class 2 are essentially the same as those in Class 1, supra, and, did not effect a contribution to the capital of the transferee railroad, the plaintiff.

149. Glass S — Governmental transfers for highway underpasses and other highway crossings, (a) The two transfers representative of this class are:

1. A transfer involving $152,316, made in the years 1934-1938 by the State of Idaho to the Oregon Short Line Railroad Company. The state and the City of Pocatello, under a contract with the railroad, replaced a viaduct with a subway to carry the highway traffic under the tracks of the railroad. Under the contract between the state, city, and railroad, the railroad granted the state the right to remove the viaduct and to construct the subway; granted the city the right to maintain and use the subway; and agreed to undertake, at •the expense of the state, portions of the work involved. The state agreed to pay for the removal of the viaduct and the construction of the subway. All of the construction was per *125 formed by the railroad at a total cost of $155,079.45, of which $152,816 was paid for by the State of Idaho.

Article I of the contract between the parties grants to the City the right to maintain and use the subway and street under the tracks, subject to the “continuing right and obligation of the Eailroad Company to use and maintain its said right of way in the performance of its public duty as a common carrier.” Article 8 provides that the City shall maintain the subway structure, except the track-supporting structure, and that “The Eailroad Company shall, at its own expense, maintain the track-supporting structure portion of the subway.”

There is no explicit reference to federal financing in the papers in the record concerning this transfer. In the papers on other transfers in this class for similar facilities, however, it appears that such transfers were federally financed. One of them, a transfer of $147,962 for a subway under the line at Lawrence, Kansas in 1938, is described as a grade crossing project financed under the Federal Aid Appropriation Act of June 16,1936 (Public Eesolution 686, 74th Congress) in accordance with the Federal Highway Act, which provided for the elimination of hazards to life at railroad grade crossings. By the contract between the parties, the railroad was obligated to maintain a specified part of the improvement. The contract for a transfer of $120,088 (federally financed) for a subway under the line in Denver, Colorado in 1941 imposes upon the carrier the obligation to “forever maintain” specified portions of the improvement.

2. The second transfer representative of this class involves $400 paid by Jefferson County, Kansas in 1921 to the plaintiff for the construction of a new highway crossing at Walnut Street in Williamstown, Kansas. The County Commissioners ordered the work and issued a warrant for it. The work consisted of grading and the supply of oak planks and one highway crossing sign, and other materials and labor. No formal agreement appears to have been made, and nothing appears as to any obligation of the railroad to maintain the improvement.

(b) It is concluded that the transfers in class 3 are substantially identical with those considered in United States v. *126 Chicago, Burlington & Quincy R.R., supra, and did not effect a contribution to the capital of the transferee railroad, the plaintiff.

150. Glass Jp — Governmental transfers for spur or other tracks, (a) The transfer representative of this class involves $9,564 paid by the State of Colorado and the City of Denver to plaintiff in 1939 as the cost of plaintiff’s share of work jointly performed by several railroads to eliminate grade crossings at the Union Stockyard in Denver by the construction of a vehicular subway below the railroad line. The transferor governments were seeking to replace the grade crossings with a subway to carry vehicular traffic under the tracks of several railroads in the stockyard. Plaintiff and The Colorado and Southern Railway Company jointly owned a portion of the trackage involved. The work was divided among the roads involved and plaintiff’s share of the work was some connecting track and extensions to the industry spur. (Hence, apparently, the title of category 4 as involving transfers for spurs.)

The project was to be financed from funds appropriated by the Federal Government, as appears from the agreement governing the project, which recites that funds described as “Works Program Grade Crossing Funds” provided under the Emergency Relief Act of 1935 (Public Resolution No. 11, 74th Cong.) are available for the purpose of eliminating the existing hazard to life of railroad crossings and that the project in question was being undertaken in the interest of public safety and convenience.

The contract provides that the City shall have the duty to maintain, repair and renew the new work on the roadway of the new subway and that the Burlington and the Colorado and Southern Railroads and the stockyard company shall have the duty for the subway structure. It does not appear what are the contractual relations between the Colorado and Southern on the one hand and plaintiff on the other, the joint owners of the trackage by reason of which the two were involved in the project.

(b) It is concluded that the transfers in class 4 are substantially identical to those considered in United States v. Chicago, Burlington & Quincy R.R., supra, and did not ef- *127 feet a contribution to the captial of the transferee railroad the plaintiff.

151. Glass 5 — Governmental miscella/neous transfers — (a) Transfers 1-6 of the 10 transfers representative of this class, totalling $13,679 or 87.2 percent of the total for the 10 transfers of $15,693, are as follows:

1. $145. In 1938 plaintiff leased a portion of its right-of-way to the Kansas City Prison for use as a pasture, under a lease providing that the lessee was to move the present right-of-way fence at its expense. The actual work for the facility involved, a “hog-tight” fence for the prison farm, was done by the plaintiff 'at the cost of the lessee. The labor was furnished by the prison and $145 worth of materials were used.

2. $62. The plaintiff was assessed $630, presumably by municipal authorities, for the installation of a street light system on Grand Street at the railroad station in Pullman, Washington. The plaintiff then billed the State of Washington $62 as the latter’s proportion of the assessment under the easement contract covering encroachment of the state’s highway on the railroad’s grounds at Pullman. The contract is not in the record.

3. $6,999, for the installation in 1938 of an underground cable and aerial cable for telephone and telegraph lines, replacing open wire lines, paid for by the Los Angeles Bureau of Power and Light. There is no contract in the record covering this transfer.

4. $456. In 1939 the town of Cornish, Utah, desired to furnish water to the stockyard at the railroad station and by contract obtained from plaintiff the right to construct and maintain a water pipeline under the plaintiff’s line to the stockyard. Apparently by further agreement, the plaintiff agreed to furnish the material and the town agreed to bear the labor costs, which it did by furnishing “W.P.A. labor” valued at $456.

5. $3,080 for the installation in 1924 under plaintiff’s roadbed and tracks of an irrigation waterway, compiising a cast iron pipe syphon, concrete end walls and a 4' x 8' ditch, paid for and to be maintained by the Indian Service of the *128 Federal Government in connection with the operation of an irrigation system for Indians.

6. $2,937 for the construction in 1938 of a culvert under the right-of-way for the drainage of waste irrigation water, paid for by the United States Beclamation Service.

(b) It is concluded that 87.2 percent of the transfers in this class, essentially expenditures by a tenant or easement owner for his own benefit, left plaintiff no better off than before. The transfers were under United States v. Chicago, Burlington & Quincy R.R., supra, peripheral to plaintiff’s business and did not materially contribute to the production of further income by the railroad. Also, the transferors sought and obtained a direct benefit to themselves, and did not intend to confer a benefit on the transferee. The transfers did not effect a contribution to the capital of the transferee railroad, the plaintiff.

(c) Transfers 7-9 of the 10 transfers representative of this class, totalling $1,885 or 12 percent of the $15,693 of the 10 transfers, are:

7. $437, paid by the State of Colorado in 1934 for rearrangement of telegraph and signal lines required in connection with the construction of a highway viaduct by the state.

8. $1,443 for two searchlight signals at a grade crossing in the City of Los Angeles, paid by the State of California in 1940 with funds allocated to the state by the Federal Government for the purpose of installing additional grade crossing protection.

9. $5, the cost of four metal plates reading “Stop,” provided by the State of Colorado in 1928 for use in “Stop” signs to be installed at two highway crossings.

(d) It is concluded that 12 percent of the transfers in this class are substantially identical with those considered in United States v. Chicago, Burlington & Quincy R.R., supra, and did not effect a contribution to the capital of the transferee railroad, the plaintiff.

(e) The last of the 10 transfers representative of this class is $129, or 0.8 percent of the total of $15,693 of the 10, and was the value of the W.P.A. labor caused to be furnished by the town of Oakley, Kansas, in 1938 to construct four new sanitary privies, notice having been given the railroad by the *129 town to abate a nuisance in the form of unsanitary privies. While the data is scanty, it is concluded as a matter of fact that the dispositive transferor was the town and that it was utilizing, in a manner it deemed appropriate, W.P.A. labor available to it for a purpose generally advantageous to the community and beyond its own regular functions, and that the town intended to confer a benefit upon the plaintiff.

(f) It is concluded that 0.8 percent of the transfers in this class replaced existing facilities with new and better ones which the plaintiff would have been required to construct from capital funds had the transfers not taken place, and thus the transfers resulted in a benefit to the transferee in an amount commensurate with value in that they enabled plaintiff to avoid a capital expenditure to the value of the assets transferred, the sum whose expenditure was avoided was employed in the production of further or additional income. Also, the transferors did not seek or obtain a direct benefit to themselves, but rather an indirect benefit to the community at large, thereby manifesting a purpose to enlarge the capital of the transferee. The transfers effected a contribution to capital of the transferee railroad, the plaintiff.

152. Class 6 — Nongovernmental transfers for industry spurs and other tracks, (a) The three transfers representative of the majority of the transfers in this class, by shippers, are as follows:

1. $1,154 paid by the Republic Chemical Works to the plaintiff in 1919 for a spur track of 975 feet. The track was requested by Republic to obtain rail service to its potash plant.

2. $6,976 transferred by the Utah Idaho Sugar Company to the Oregon Short Line in 1919 for a spur track to serve the former’s factory. In order to obtain rail service, the sugar company transferred to the railroad land for the spur track right-of-way, performed the necessary grading, and paid for the installation of nine culverts.

3. $577 transferred by the Amalgamated Sugar Company to the Oregon Short Line in 1936 for a 920-foot beet loading track. The sugar company sought the loading track to serve a new beet-raising territory it was developing. The *130 sugar company performed the necessary grading and paid for the labor required for the construction of the track.

Such transfers to railroads by shippers are compensation— “a direct payment for a specific quantifiable service provided for the transferor by the transferee” (United States v. Chicago, Burlington & Quincy R.R., supra). Also, the transfer-ors sought and obtained a direct benefit to themselves, and did not intend to confer a benefit on the transferee. The transfers did not effect a contribution to the capital of the transferee railroad, the plaintiff.

(b) The two transfers by nonshippers among the transfers representative of this class are:

1. $7,770 paid by the Utah Power and Light Company. In 1927 the company, by agreement with plaintiff, planned to construct a reservoir which would encroach on the plaintiff’s right-of-way, necessitating the underpinning and strengthening of an embankment and connected improvements. By contract the parties agreed that the work would be done at the expense of the power company and would become the property of the plaintiff.

It is concluded that such transfers are substantially identical with the transfers in class 1 and the 87.2 percent of the transfers in class 5. They did not effect contributions to the capital of the transferee railroad.

2. $1,997, the cost of work borne by the Southern Pacific Eailroad Company. The lines of plaintiff and the Southern Pacific crossed at a point in San Bemadino County, California. Under agreements dating from 1902 the two roads maintained a joint crossing and manually operated interlocking plant and gates. In 1930 the California Eailroad Commission ordered the replacement of the equipment with an automatic interlocker. The two roads negotiated and agreed, presumably in the light of the provisions of their existing agreements, upon the proportion of the cost each would bear. The $1,997 transferred to plaintiff by the Southern Pacific Eailroad is the product.

It is concluded that such transfers, made pursuant to an earlier agreement between transferor and transferee, for a consideration flowing from transferee to transferor, are *131 closely similar to a “direct payment for a specific quantifiable service provided for the transferor by the transferee” (United States v. Chicago, Burlington & Quincy R.R., supra). Also, the transferors sought and obtained a direct benefit to themselves, and did not intend to confer a benefit on the transferee. The transfers did not effect a contribution to the capital of the transferee railroad, the plaintiff.

153. Glass 7 — Nongovemmentdl miscellaneous transfers. (a) The transfers representative of this class are $536 paid by two lessees for street lights installed on the leased property ; $92 paid by the owner of land on both side of the right-of-way for the construction of a private road crossing over the right-of-way and the installation of two right-of-way gates; $2,100 paid by the Laramie Stock Yards Company for the construction of feed racks in the sheep pens located on the plaintiff’s land; $631 paid by the Beaverhead Water Company for the construction of a culvert to carry its irrigation ditch under the tracks; $126 paid by the Pacific Fruit Express Company for the repair and installation of an old car-body for storing charcoal heaters used by the Express Company; $354 as the value of a scale installed on Oregon Short Line property by the Big Hole Stockmen’s Association for the latter’s use in connection with the operation of its stock yards; $415 for a 22' x 60' covered vegetable platform located on plaintiff’s property for the use of a lessee produce company; $444 paid by the Pacific Fruit Express Company for an electric power line constructed across the right-of-way to the express company’s icing facilities; and $1,364 spent by Magnus Metal Company for the construction of a retaining wall on plaintiff’s right-of-way, preliminary to raising the grade on an industry spur track which was to serve a new addition to the Magnus plant.

(b) It is concluded that such transfers are substantially identical with the 85.2 percent of the transfers in class 5. Such transfers do not effect contributions to the capital of the transferee railroad.

154. Pursuant to a contract of March 25,1901, the Oregon Short Line Eailroad Company agreed to build a railroad from its line in Idaho to the properties of the White Knob *132 Copper Co., and to transport over the railroad coal and coke to be used in the smelter to be erected by the Copper Co., at as favorable terms and rates as made to other parties under similar conditions, in consideration of which E. C. Bradley agreed to bring about the construction of the smelter and to pay the Oregon Short Line $200,000 in cash. Subsequently, these agreements were carried out, and the $200,000 was paid to the Oregon Short Line.

155. Bradley paid the $200,000 in order to obtain rail service for his smelter.

156. In computing plaintiff’s excess profits tax liability for 1942, the Commissioner of Internal Eevenue included the $200,000 received from E. C. Bradley in the Oregon Short Line’s accumulated earnings and profits as of January 1,1940 and January 1, 1941. The Commissioner also included the $200,000 in total assets for the Oregon Short Line for 1940 and 1941. (See finding 145 (a), item 2.)

157. It is concluded that the transfer was a payment for a specific, quantifiable thing; also the transferor sought a direct benefit as a quid pro quo, and manifested no purpose to enlarge the working capital of the plaintiff. The transfer therefore did not effect a contribution to capital.

158. (a) During the year 1925, the Oregon Short Line acquired certain lands in Idaho in two transfers.

The first transfer consisted of land between Orchard and Boise, Idaho, acquired from a citizens right-of-way committee and/or individuals of Boise, Idaho. It was made pursuant to a contract of August 14, 1922, between the Boise Chamber of Commerce and the Oregon Short Line. The contract recites that the Chamber of Commerce has petitioned the railroad to build a railroad line from Orchard to Boise to connect with the existing line between Boise and Nampa, “the purpose of which is to provide through train service” for Boise. The railroad agreed to construct the line and to run through Boise four particular trains. The Chamber of Commerce agreed to (a) raise a fluid to pay a portion of the taxes on the new line, (b) provide the right-of-way, (c) secure for the railroad the balance of the so-called Citizens *133 Eight-of-Way Committee, and (d) obtain the necessary franchises.

(b) The transferors conveyed ¡the land for the right-of-way to obtain better rail service for the City of Boise.

(c) The second transfer consisted of land for a new line from Eogerson, Idaho, to Wells, Nevada, acquired from the Citizens Eight-of-Way Committee of Twin Falls, Idaho. It was made in connection with the construction of an extension of the rail line from Eogerson to Wells, a distance of some 94 miles; side tracks of about 13 miles; terminal facilities at Twin Falls and Wells; and an elevated crossing over the Southern Pacific line at Wells.

(d) The Citizens Eight-of-Way Committee of Twin Falls conveyed the land to the railroad to provide more direct outlet for agricultural .products of Southern Idaho to California markets, and to open up for tonnage shipments numerous copper mining properties adjacent to the new line.

159. In computing plaintiff’s excess profits tax liability for 1942, the Commissioner of Internal Eevenue included in the Oregon Short Line’s accumulated earnings and profits as of January 1, 1940, and January 1, 1941, and its total assets for 1940 and 1941, the amounts of $1,076 and $28,338.80 relating respectively to the two transfers described in the foregoing finding. (See finding 145(a), items 3 and 4.)

160. It is concluded that the two transfers described in finding 158 were not payments for a specific thing or a service, were bargained for, resulted in a benefit to the transferee in an amount commensurate with their value, and the assets transferred were employed in the production of further or additional income. Also, the transferors did not seek or obtain a direct benefit to themselves, but rather an indirect benefit to the community at large, thereby manifesting a purpose to enlarge the capital of the transferee. The transfers effected contributions to capital.

161. In 1928, a citizens committee paid $100,000 to acquire the Saratoga and Encampment Eailroad and transferred it to the Saratoga and Encampment Valley Eailroad Company, a subsidiary of the plaintiff incorporated on May 5, 1928, in Wyoming, in consideration of plaintiff’s promise to operate the railroad permanently.

*134 162. Operation of the railroad referred to in the foregoing finding had been terminated earlier that year. The committee paid the $100,000 in order to obtain a resumption of rail service.

163. In computing plaintiff’s excess profits tax liability for 1942, the Commissioner of Internal Revenue included this $100,000 in the Saratoga and Encampment Valley Railroad Company’s accumulated earnings and profits as of January 1, 1940, and January 1, 1941, as well as its total assets for 1940 and 1941. (See finding 145(a), item 6.)

164. It is concluded that the transfer described in the two foregoing findings was essentially similar to the two transiera described in finding 160 and equally with those transfers effected a contribution to capital.

165. Pursuant to a contract of October 24, 1917, the Los Angeles & Salt Lake Railroad Co. relocated a portion of its main line, which adjoined the tailings dumps of the Utah Copper Co., near Garfield, Utah, and conveyed its abandoned right-of-way to the Copper Co., in consideration of which the Copper Co. conveyed land to the Los Angeles and Salt Lake for the new right-of-way, paid the expenses of the relocation, and paid to the Los Angeles and Salt Lake $19,760 for future maintenance of the relocated line plus $46,125 for the increased cost of operating the line.

166. The Utah Copper Company needed the additional land conveyed to it for expansion of its tailings dumps and the location of the Los Angeles and Salt Lake line of .railroad prevented the acquisition in a useful way. To accommodate the former, the railroad company agreed to relocate its line on land furnished by the Copper Company, which was to pay all the expenses of the relocation.

167. In 1919, the Los Angeles and Salt Lake credited its property investment accounts with the sum of $196,564.27 as the cost of that part of its line of railroad which 'had been abandoned, charged to its property investment accounts the sum of $323,882.11 as the cost incurred by the Copper Company in the construction of the new and relocated section of railroad, and credited to its profit and loss account “606- *135 Donations,” the sum of $127,317.84, being the difference between the above-mentioned amounts credited and debited, respectively.

168. In 1921, the Los Angeles and Salt Lake credited the sum of the cash payments of $19,760 and $46,125 to its account “Miscellaneous Credits,” and in a later year transferred this sum to its account “606-Donations.” On audit of the income tax return of the Los Angeles and Salt Lake for 1919, the Commissioner of Internal Eevenue included in income the aforesaid amounts of $127,317.84, $19,760 and $46,125. The Los Angeles and Salt Lake conceded that the item of $19,760 was taxable income and sued for refund in the Court of Claims on the ground that the amounts of $127,317.84 and $46,125 were not taxable income.

169. In Los Angeles & S.L.R.R. v. United States, 86 Ct. Cl. 87 , 21 F. Supp. 347 (1937), this court held that the amounts of $127,317.84 and $46,125 were not taxable income on the ground that the contract was designed “to make the plaintiff whole in the transaction and to insure it against loss.”

170. In computing plaintiff’s excess profits tax liability for 1942, the Commissioner of Internal Eevenue included the aforesaid cash payments of $19,760 and $46,125 (but not the amount of $127,317.84) in the Los Angeles and Salt Lake’s accumulated earnings and profits as of January 1, 1940, and January 1, 1941, and its total assets for 1940 and 1941. (See finding 145 (a), item:5.)

171. The amounts of $127,317.84, $19,760, and $46,125 are included in the amounts received from private transferors set forth in finding 138(a) for the Los Angeles and Salt Lake Eailroad as of December 31,1939.

172. The defendant does not contest the treatment by the Commissioner of Internal Eevenue of the amount of $19,760 described in finding 170 for the stated reason that the Los Angeles and Salt Lake has paid an income tax with respect thereto.

173. It is concluded that the transfer of $46,125 was substantially identical with the transfers in class 1 and equally with those transfers did not effect a contribution to capital.

*136 XI. EQUITY INVESTED CAPITAL

Index

Finding No.

1. Definition of the Issue...-... 174

2. Issuance of the Stock. 190

(a) Issuance of the Reorganization Stock. 190

(b) Issuance of the Post-Reorganization Stock. 207

3. Cash Assessments on Old Stockholders. 208

4. The Expert Witnesses... 211

(a) Qualifications of the Plaintiff's Expert. 212

(b) Qualifications of the Government’s Expert. 218

6.Valuation Dates. ... 223

(a) Plaintiff's Valuation a Valuation as of 1907.-. 223

(b) Plaintiff’s Underlying Theory of a Reconstitutive-Reorganization.. 227

(c) The Valuation Dates Utilized by the Government’s Expert. 235

(d) Conclusions as to Valuation Dates.... 236

6. The Dollar Valuation of the Reorganization Stock by the Government’s Expert.-. 241

7. Pre-Receivership History...... 242

(a) 1869 — Construction and Capitalization. 242

(b) Expansion: Mergers. 247

(c) Expansion: Construction. 255

(d) Growth of Competition. 260

(o) The United States Pacific Railway Commission-.. 265

(f) Economic Conditions — 1869 to the Panic of 1893. 270

8. The Receivership of the U.P. — 1893-1898_-. 277

(a) Causes. 277

(b) Settlements. 282

(c) The Reorganization Plan. 288

(d) The End of Reorganization, January 31,1898. 292

(e) Receivership and the U.P.’s Branch and Subsidiary Lines. .. 297

9. Post-Reorganization Prosperity... 300

(a) National Prosperity. 300

(b) The U.P.'s Increasing Prosperity. 305

10. Approaches by the Government to Valuation of the Reorganization Stock. 326

(a) Prospects for Reacquisition of the Oregon Lines_____ 326

(i) History of the Oregon Lines. 326

(ii) The Oregon Lines in 1898. 332

(b) Stock Market Values. 337

(i) The common... 337

(ii) The Preferred. 344

(iii) Value Based on Stock Market Prices.... 348

(c) Net Asset Values. 361

(d) Values Based on Capitalization of Earnings.-. 366

(e) Values Based on Price-Earnings Ratios.. 370

(f) Comparison of Union Pacific Preferred with Othor Stocks.. 383

11. Conclusions on the Reorganization Stock. 384

12. Valuation of the Post-Reorganization Stock... 386

(a) The Exchange of U.P. Stock for Oregon Stock. 386

(b) The Dollar Valuations by Defendant's Expert of the U.P. Post-Reorganization Stock. 390

(c) Value of the Oregon Short Line at the Time of the Exchange Offer.. 391

(i) Value of the Oregon Itself. 391

(ii) Value of the Oregon’s Holdings in Oregon Navigation. 398

(iii) Defendant's Conclusion on the Value of the Oregon Short Line and its Holdings.....-. 407

(d) Value of the U.P. at the Time of the Exchange. 408

(e) The Value of the Several Blocks of Shares Issued in the Exchange_ 409

(i) The Stock Issued in 1899. 409

(ii) The 3,688 Shares Issued December 2,1899-June 30,1900. 418

(iii) The 2,636 Shares Issued July 1, 1900-June 30,1901_ 420

(f) Price-Earnings Ratios and Other Comparisons for 1899-1901. 425

13. Court's Findings on Value. 430

1. Definition of the Issue

174. The plaintiff’s predecessor, The Union Pacific Railroad Company, sometimes herein called the predecessor, was incorporated on July 1,1862, by tbe Act of July 1,1862, c. 120, 12 Stat. 489 . In 1880, when it was consolidated with the Kansas Pacific and Denver Pacific, its name was changed *137 to The Union Pacific Kailway Company. The Company was in receivership between 1893 and January 31, 1898, and was succeeded by the plaintiff, as will appear. Both plaintiff and its predecessor are for convenience herein often called the “U.P.”

175. Plaintiff, the Union Pacific Railroad Company, was incorporated July 1, 1897, under the general laws of the State of Utah, for the principal purpose of acquiring the property, rights and franchises of The Union Pacific Railway Company. In addition, plaintiff had the power to acquire the lands and land grants, and all rights with respect thereto, of The Union Pacific Railway Company or of its constituent companies, and to construct, purchase or otherwise acquire and operate branches, extensions and connecting or auxiliary lines.

176. As more fully set forth hereinafter, plaintiff acquired the property, rights and franchises of The Union Pacific Railway Company and certain of its constituent companies, including certain branch, extending, connecting and auxiliary lines.

177. Upon the conclusion of the receivership of its predecessor and pursuant to the reorganization plan, the plaintiff issued to the predecessor’s reorganization committee, for money and property of the predecessor acquired by the committee, $90 million in 4 percent first mortgage bonds, 610,000 shares of common stock, par value $100, with an aggregate par value of $61 million, and 750,000 shares of preferred stock, par value $100, with an aggregate par value of $75 million, for distribution to the predecessor’s stockholders and other claimants. The stock so issued — both the common and the preferred shares — is herein called the reorganization stock, and is the first of two blocks of stock whose valuation is the subject of the instant case.

178. During the fiscal year ended June 30, 1915, plaintiff cancelled 136 shares of its common stock, with a par value of $13,600, and 258 shares of its preferred stock, with a par value of $25,800, reducing the reorganization stock outstanding as of June 30, 1915, to 609,864 shares of common with a par value of $60,986,400 (609,864 shares at $100 par) and *138 749,742 shares of preferred with a par value of $74,974,200 (749,742 shares at $100 par).

179.Pursuant to an offer made by plaintiff, following the reorganization, to issue one share of its common stock, par value $100 per share, for one share of the common stock of the Oregon Short Line Railroad Company plus $3, plaintiff issued its common stock as follows:

The foregoing 273,493 shares will, either intact or minus 150 shares whose value has been agreed, herein be called the post-reorganization stock, and is the second of the two blocks involved in this case.

180. By other means, plaintiff acquired prior to June 80, 1908, an additional 14 shares of Oregon Short Line common. As of June 30, 1908, no shares of Oregon Short Line common were in the hands of the public; plaintiff owned the entire amount outstanding, having a par value of $27,350,700, and the Oregon Short Line owned $109,400 par value of its common stock.

181. On its excess profits tax return for 1942, plaintiff stated the money paid in for stock, or as paid-in surplus, or as a contribution to capital to be $321,834,100, or the par value of $100 per share for the 3,218,341 shares of common and preferred stock outstanding during 1942, of which 1,633,099 shares of common and preferred were originally issued in connection with the reorganization of the Union Pacific and the acquisition of the Oregon Short Line Railroad Company.

These 1,633,099 shares were comprised of the remaining outstanding reorganization stock, that is, (1) 609,864 of the 610,000 shares of common and 749,742 of the 750,000 shares of *139 preferred which had been issued as above-mentioned, pursuant to the reorganization plan, and (2) the 273,493 shares of common issued as above-mentioned between 1899 and 1908 to acquire the common shares of the Oregon Short Line Railroad Company.

In other words, plaintiff took the position in its tax return that the fair market value, when issued, of the then remaining outstanding shares of reorganization and acquisition stock, and thus that the fair market value, when issued, of each of the shares comprising the reorganization stock and the acquisition stock was its par value, $100 per share, with a total value of $163,349,300 for the originally issued 1,633,493 shares of reorganization and acquisition stock or a total value of $163,309,900 for the 1,633,099 remaining outstanding shares of reorganization stock and the acquisition stock.

182. Upon audit the Commissioner of Internal Revenue, determining the fair market value for the shares to be less than the plaintiff’s valuation, reduced the item of money and property paid in for stock by $83,790,860 or from $321,834,100 as claimed by plaintiff on its excess profits tax return to $238,043,240. Said decrease was determined by the Commissioner to be attributable to the fair market value of plaintiff’s preferred and common stock issued incident to the reorganization and to the acquisition of the Oregon Short Line Railroad Company common stock, that is, the reorganization and post-reorganization stock. The decrease was thus a decrease to $79,'519,040 from the $163,309,900 at which plaintiff had valued 1,633,099 shares still outstanding reorganization and the post-reorganization stock.

The Commissioner determined that the aggregate fair market value of the reorganization stock was $67,029,150 and that the aggregate fair market value of the post-reorganization stock was $12,489,890.

It does not appear, and it is not material for purposes of comparisons, whether the Commissioner deemed the proper number of shares to be valued 1,633,493 or 1,633,099 and thus whether he valued the number of the reorganization and post-reorganization shares originally issued or as reduced by the cancellation of 394 shares (136 common and 258 prefered). *140 It will henceforth, be assumed for purposes of comparisons that the Commissioner valued 1,633,493 shares. In any event the Commissioner determined the fair market value of stock valued by plaintiff at $163.3 million, to be $79.5 million, or less than 50 percent of plaintiff’s valuation.

183. The issue is the valuation of the reorganization and acquisition stock for purposes of computation of plaintiff’s excess profits tax credit for 1940 through 1942 based upon invested capital. The standard for determination of value is, as determined in the conclusions of law, the fair market value at the time of the issuance of the stock.

“Fair market value” is henceforth sometimes abbreviated to “value”; “value” when hereinafter used refers to “fair market value,” unless á different meaning appears from the context.

184. Solely for purposes of the issue of valuation, it is agreed that the 150 shares of acquisition common issued after June 30, 1901, for Oregon Short Line common stock had a fair market value when issued of $175 per share.

185. The 610,000 shares of reorganization common, the 750,000 shares of reorganization preferred and the 273,493 shares of acquisition common, a total of 1,633,493 shares, are the shares issued for the money and property paid in, and those shares are thus the shares whose valuation determines money and property paid in, without regard to any cancellation of such stock thereafter.

Accordingly, while these findings will address themselves to per share values, the blocks of stock to be considered and aggregated will be the blocks originally issued, without regard to the cancellation of 394 shares after the original issuance.

186. 'Plaintiff contends that the value of the reorganization and acquisition common was $175-200 per share and the value of the reorganization preferred was par or $100 per share.

These values ($200 for the common and $100 for the preferred), when applied to the total of 1,633,493 originally issued reorganization and acquisition shares give an aggregate total valuation of $251,698,600.

*141 Plaintiff thus now puts a value of $251.7 million on the stock it valued in its return at $163.3 million.

187. The Government has in an additional defense alleged that the Commissioner had only partly eliminated the overstatement in money and property paid in for stock; and that the fair market value of the reorganization stock was $47,450,000 and the value of the acquisition stock was $10,000,000 or less, a total of $57,450,000.

More specifically, on the trial, the Government has contended that the value of the 610,000 shares of reorganization common was $22.50 per share or an aggregate of $13,725,000; that the value of the 750,000 shares of reorganization preferred was $45 per share or an aggregate of $33,750,000; and that the value of the 273,343 shares (all but the last-issued 150) of the 273,493 acquisition shares issued at various times between 1899 and 1901 ranged from $35 to $112 or an aggregate of $10,046,021.50, bringing the aggregate value contended for by the Government to $57,521,021.50.

The Government thus now puts a value of $57,521,021.50 on the stock which the Commissioner of Internal Revenue valued at $79,519,040. The former figure is 72.3 percent of the latter; the latter is 138.2 (more precisely 138.24344) percent of the former.

188. The various valuations are

$251.7 million — plaintiff’s valuation contended for on trial

$163.3 million — plaintiff’s valuation in its return

$79.5 million — The Commissioner’s valuation

$57.5 million — the Government’s valuation contended for on trial

189. A comparison of the per share valuations contended for by the Government with the per share valuations derived from the Commissioner’s valuation is as follows. The pro forma per share valuations by the Commissioner are obtained by multiplying the Government’s per share valuations of the reorganization stock by 141.19 percent, and the Government’s per share valuations of the post-reorganization stock by 124.33 percent, these being the percentages by which the Commissioner’s aggregate valuations, respectively, exceed the Government’s aggregate valuations.

*142

2. Issuance of the Stock

(a) Issuance of the Reorganization Stock

190. On October '5,1898, 31 years after the original Union Pacific was incorporated, three of its stockholders filed a complaint in the Circuit Court of the United States for the District of Nebraska, alleging that the company would fail to meet its expenses and charges in 1893 by at least $3 million and that the company was insolvent, and asking that receivers be appointed for the entire system. On October 13,1893, the court issued an order appointing receivers as requested in the complaint.

191. On January 21,1895, the trustees of the Union Pacific first mortgage filed in the same court a bill to foreclose the mortgage. A decree of foreclosure was issued on July 29,1897.

192. Under date of October 15, 1895, a committee headed by Louis Fitzgerald published a plan for the reorganization of the railroad. It proposed that a new company (or a reorganized Union Pacific Railway Co.) should succeed to main lines and lands covered by the mortgages included in the plan and that the new company should issue to the reorganization committee $100 million in first mortgage 4 percent bonds, 750,000 shares of $100 par value noncumulative preferred stock, and 610,000 shares of $100 per value common stock. A major portion of the new securities were to be distributed by *143 the reorganization committee to holders of the securities of the plaintiff’s predecessor.

193. On January 29, 1897, the United States filed in the court referred to in finding 190, a bill to foreclose a lien existing under certain statutes against the Union Pacific line from Council Bluffs to Ogden. A decree of foreclosure was issued on July 29,1897.

194. Pursuant to the two decrees of foreclosure, the railroad (except for the lines and lands of the Kansas Pacific and Denver Pacific) was sold on November 1,1897, to Louis Fitzgerald and Alvin Krech, as purchasing trustees for the reorganization committee.

195. Pursuant to the decree of foreclosure under the suit filed by the United States, the reorganization committee paid, for the assets involved, $40,253,605.49 in cash, as follows:

196. Pursuant to the decree of foreclosure of the Union Pacific first mortgage, the reorganization committee paid $50,637,435 for the assets involved. Of this amount, $5,373,249 was paid in cash and the balance was apparently paid by use of the first mortgage bonds deposited with the committee.

197. On January 17,1898, the purchasing trustees assigned their two bids at the sale to the plaintiff. On January 22, 1898, two deeds were executed, conveying to the plaintiff the property sold on November 1, 1897. One of the deeds was executed by the special master, the purchasing trustees and the predecessor and the other (on the foreclosure under the first mortgage) ) by the special master, receivers, trustees, the purchasing trustees and the predecessor.

198. Pursuant to the plan of reorganization, plaintiff issued $90 million in first mortgage bonds and the reorganization stock (750,000 shares of preferred stock and 610,000 *144 shares of common stock) to the reorganization committee for money and property acquired by the reorganization committee.

199. On January 31, 1898, in the foreclosure proceeding brought by the United States, the court issued a decree approving and confirming the payment of the purchase price, the assignment of the bid to the plaintiff and the execution and delivery of the deed conveying to the plaintiff the property sold on November 1, 1897.

209. On January 31, 1898, the two deeds of January 22, 1898 and plaintiff’s first mortgage were recorded at Omaha in Douglas County, Nebraska.

201. On January 31,1898, the Mercantile Trust Company, the depositary under the plan of reorganization, advertised that on and after January 31, 1898 it was prepared to issue plaintiff’s new securitites (its bonds and preferred stock) in exchange for certain old bonds and the purchase money certificates, and on that day the Mercantile Trust Company in fact issued some of the new securities.

202. At midnight at the end of January 31,1898, plaintiff took possession of the property sold on November 1,1897, including the main line from Omaha to Ogden.

203. On February 9, 1898, the Mercantile Trust Company advertised that it was prepared as of that date to issue plaintiff’s preferred and common stock in exchange for certificates of deposit of the common stock of The Union Pacific Railway Company.

204. The plan of reorganization provided that it could be abandoned by the committee at any time and included a procedure for making substantial changes in the plan.

205. By reason of the events of January 31,1898, described in findings 199-202, on that day the plan was no longer contingent and could no longer be abandoned or changed substantially.

206. January 31, 1898 is the date of the issuance of the reorganization stock.

(b) Issuance of the Post-Reorganization Stock

207. The dates of the issuance of the acquisition stock are as stated in finding 179.

*145 3. Gash Assessments on Old Stockholders

208. Under the plan of reorganization of the Union Pacific Railway Company dated October 15, 1895, the common stock was assessed at the rate of $15 per share. A holder of one share of the old common who paid the $15 assessment was entitled to receive one share of the new common plus 15/100ths of one share of the new preferred. In other words each recipient of 1 new share of common was assessed $15; a total of $9,130,275 was received on account of these assessments.

209. As appears in finding 179, the post-reorganization stock — all common — was issued on the basis of 1 new share (acquisition common) for 1 share of Oregon Short Line common plus $3. In other words, each recipient of one share of post-reorganization common was assessed $3. The sum of $815,820.62 was received on account of these assessments.

210. The foregoing cash assessments of $15 and $3 were part payment for the shares being issued or, put otherwise, the shares being issued were issued in part for property and in part for money, the respective cash assessment. The shares were thus being issued for a combination of money and property and as determined in the conclusions of law the money — the cash assessments — is not to be included in equity invested capital in addition to the fair market value of the stock which was issued.

4. The Expert Witnesses

211. The value of the stock was the subject of testimony by an expert witness for each party. The direct testimony of these experts was exchanged before trial and the witnesses began their testimony at the trial with cross-examination. Both witnesses qualified as entitled to testify to their opinions.

(a) Qualifications of the Plamtiff's Expert

212. Plaintiff offered the testimony of Mr. Alexander Sachs as its expert witness on the stock valuation issues. Mr. Sachs is an independent economist, investment adviser and busi *146 ness consultant. He has not held himself out to the public as an investment adviser and is not registered as such with the SEC.

213» He has testified before this court as a witness for the United States, in a proceeding to determine the value of common stock for purposes of the World War II Excess Profits Tax Act, specifically the value at which such stock should be included in a taxpayer’s equity invested capital for purposes of determining its excess profits tax credit. He also has testified before the Federal Communications Commission, the New York Public Service Commission, and the Pennsylvania Public Utilities Commission regarding a fair rate of return.

214. Mr. Sachs was graduated from Columbia University in 1912, and shortly thereafter became an employee of Lee Higginson & Company, an investment firm, working on the effect of the money market on the purchase and issuance of various securities.

In 1916 he undertook studies in jurisprudence and administrative law at Harvard; and in the following year he assisted Mr. Justice Brandéis and Professor Felix Frankfurter in work related to foreign aff airs.

215. During the early 1920’s Mr. Sachs was employed in studying individual investment situations.

In 1929 he became the chief economist and director of investment research for a diversified investment fund, founded by Lehman Brothers, which ultimately became the Lehman Corporation. As director of investment research for the Lehman Corporation he directed staff members engaged in investment research, and reviewed problems in economics, banking and the economic outlook for particular industries and general economic conditions. He was also a member of the portfolio committee of the Lehman Corporation. He was a director of the Lehman Corporation from 1931 to 1959 and a vice president of that company from 1936 to 1942.

In 1933 he headed the Economic and Planning Division of the National Eecovery Administration. In 1956 and 1957 he was a special consultant to the Federal Eeserve Board on problems of credit and credit institutions. He has par *147 ticipated in various governmental and industrial committees and conferences.

218. Mr. Sachs has also rendered advisory and consultant services on economic and investment problems as well as on industrial management problems to a major oil company, a mid-western insurance company, a New York bank, a prominent French bank and to various investment management firms.

217. He has at various times been a member of various learned societies, including the American Economic and Statistical Association, the Econometric Society, the Society of Security Analysts, the American Political Science Association, the Boyal Economic Society, and the Conference of Business Economists. He has lectured at the University of Virginia, Swarthmore, St. John’s College and the Academy of Political Science. Mr. Sachs has not published any books or articles on the valuation of securities. He has published numerous articles in professional journals; the titles and subjects of some are: fcnancial dynamics of u.s. Recovery, 1937-38; logistics petroleum pipeline system for war prosecution, 1942; restoring economic-cultural bases foreign INVESTMENT, 1950; CRITIQUE OF THE CYCLE THEORY, 1953 J inflation as source and challenge, 1958; also chapter contributions to America’s recovery program, oxford university press, 1934; and to moral principles of action, Harper’s 1952.

(b) Qualifications of the Government's Expert

218. The Government offered as its expert witness on the stock valuation issues, Mr. Arthur Jansen, a general partner of W. E. Burnet & Company, a New York City brokerage firm. Mr. Jansen is a specialist in the analysis and valuation of railroad securities.

219. He has testified as an expert witness in four cases before the Interstate Commerce Commission and one case in this court. His appearances before the ICC were on behalf of railroads or railroad stockholders. One of the ICC cases concerned the division of freight rates on transcontinental shipments. He was retained by a group of eastern railroads to present various financial aspects of ten eastern *148 roads and to make comparisons with seven Mountain Pacific roads. His other testimony before the IOC concerned the fairness of plans of railroad recapitalization or railroad reorganization. His previous appearance in this court was on behalf of the Government with regard to the fair market value at the time of issuance of the preferred stock of a natural gas transmission company, issued in 1929 through 1931 in the construction of a pipeline.

220. Mr. Jansen attended Columbia College and the Columbia School of Business, graduating with a degree of Bachelor of Science in 1927. He has worked for Wall Street firms in investment research since 1930. In 1930 he began research work for a member firm of the New York Stock Exchange. In 1938, he went with his present firm as head of the research department. He became a partner in 1943 and since then has been the partner in charge of research activities.

221. His primary interest has been the railroad industry, an interest dating back to railroad courses he took in college. Since 1937 he has published at least 400' articles in Barron's, a widely read financial weekly; in recent years he has contributed four articles a year. About 90 percent of these articles have been on railroads, the remainder having dealt with public utilities and industrials. In the 1940’s many of his articles dealt with reorganized railroads, setting values for proposed new securities under varying conditions, and the recovery he foresaw for the bonds of railroads which had been in bankruptcy in the 1930’s and the depressed medium-grade bonds of other railroads. For some years he also wrote for his own firm a monthly letter on railroads, devoted mainly to trends in the industry and current developments. For several years in the 19'50’s he served as editor of the Annual Railroad Survey of “The Investment Dealers Digest.”

In connection with his interest in the railroad industry, Jansen has made numerous inspection trips. He has interviewed many railroad executives and carries on extensive correspondence with them. He also attends meetings of the New York Society of Security Analysts on railroad matters and *149 does extensive reading on current developments in the railroad industry.

222. He taught financial analysis of railroads 'and railroad securities at the New York University Graduate School of Business from 1943 until 1955 or 1956, corporation finance at Columbia in the 1950’s, analysis of industrial securities at the American Institute of Banking, and analysis of industrial and public utility securities at a summer course of the Graduate School of Banking of the American Bankers Association.

He is a long-time member of the New York Society of Security Analysts and was chairman of its Railroad Committee from 1948 through 1950. In 1968 he passed the examination of the Financial Analysts Federation to qualify as a Chartered Financial Analyst.

5. Valuation Dates

(a) Plaintiff’s Valuation a Valuation as of 1907

223. Mr. Alexander Sachs, the plaintiff’s expert, testified that

(a) “The 749,742 shares of Union Pacific preferred when issued incident to its reconstitutive-reorganization, had a fair market value, as evaluated by contemporaneously governing money rates, related to a 4 percent yield, of $100 per share.”

(b) “The 883,357 shares of Union Pacific common stock [a reference to the reorganization common and to the post-reorganization stock, which was all common] when issued incident to its reconstitutive-reorganization, had a fair market value or investment worth, figured conservatively, in the range of $175 to $200 per share.”

224. The witness derived his dollar figures for the preferred from a contemporaneous 4 percent money rate and for the common from price-earnings ratios for eight selected railroads during 1901-1907, multiplied by the total earnings per U.P. share as determined by him. The valuations of both preferred and common, however, were a product of the witness’ concept of a “reconstitutive-reorganization” which began in 1893 and ended in 1907.

*150 225. (a) The witness’ theory, which he said was held or espoused by no one else, was that only the financial or technical reorganization of Union Pacific took place on January 31,1898, and that the true reorganization was a “recon-stitutive-reorganization,” a term apparently coined by him, which ended in 1907, a date vainly sought in plaintiff’s post-trial brief to be amended to 1905.

(b) In his prepared direct examination the witness testified, on the subject of the duration and. terminal date of the reconstitutive-reorganization, that “the reconstitution was, for all intents and purposes, accomplished at the close of the 1907 fiscal year.”

(c) At the trial he testified that “[i]t is a terminal time span, the earliest part of which is the post-Northern securities case and the retirement of the directors of the Union Pacific from the board and the ensuing collaboration between the Northern Pacific and the Union Pacific in the Clearwater district. . . . That date was in 1905, around May, I think, but it extended through the ensuing year . . . through 1906 . . . into the end of the fiscal year 1907.”

(d) The testimony of the plaintiff’s expert must be taken to be that the “reconstitutive-reorganization” ended in 1907. In part this conclusion is rested on the actual words of the testimony and in part on the substantial reliance by the witness, for his valuation, on earnings of other railroads for the period 1901-1907 as a source of ratios to be applied to earnings per share of the U.P. over the period 1901 through 1907, and on other data with respect to groups of years ending in 1907.

226. The valuations by plaintiff’s expert were thus valuations as of 1907, not as of 1898 and not as of 1898 taking into account then foreseeable events. Only if one could in 1898 foresee all events to 1907 could his valuations be described as valuations as of the earlier date tailing into account future events so far as then foreseeable.

(b) Plaintiff's Underlying Theory of a Reoonstitutive-Reorganization

227. The concept of a reconstitutive-reorganization underlies the valuation of plaintiff’s witness and his utilization of *151 1907 as the date as of which he valued the stock. This concept is the subject of the following findings.

228. A valuation of the U.P.’s common and preferred shares, the plaintiff’s expert testified, requires that full attention be given the following fundamental and readily apparent facts concerning the construction, receivership, and reconstitutive-reorganization of the U.P., which he felt have for the most part largely been ignored in the great body of literature with respect to the road:

(1) The so-called “effective” date for the “financial reorganization” of the U.P. as of January 31, 1898 cannot be utilized as a proper date of valuation of the reorganized company inasmuch as:

(a) The reorganizers of the U.P. were dealing with a company which had become dismembered during the course of its receivership, and did not consider their task of reorganization to have been completed until that point in time when Union Pacific was fully reconstituted into a functioning railroad system. Thus the reorganizers of the U.P. would never have undertaken its reorganization, which involved the expenditures of great sums of money, unless they had been and were assured, among other things, that during the course of, and as a part of, that reorganization the Oregon Short Line and Oregon Railroad & Navigation Company, the U.P.’s gateway to the Northwest, would be reintegrated into the U.P. system;

(b) The pre-receivership competitive challenges thrown up to the Union Pacific Railway by the Chicago, Burlington & Quincy Railroad, which continued to persist throughout the U.P.’s receivership, and culminated in the Hill-Morgan combination of the Northern Pacific and the Great Northern Railroads, constituted a threat to the U.P.’s very survival, a fact which was well known to the reorganizers of that company who in the course of such reorganization were required to, and did, deal with such threat as an integral part thereof;

(c) The threat of the transfer of majority control of the Southern Pacific to a competitor of the U.P. had to be effectively overcome by the reorganizers of the U.P. and until *152 such threat had been met no true and concise determination of the value of the reorganized company could be made;

(2) The receivership of the U.P. and its various branch and auxiliary lines was not inevitable, but rather was undertaken as a means of solving problems inherent in the original charter of the U.P., which were occasioned 'by the high cost of the road’s construction during the inflationary Civil War years, and which arose from the oppressive burden of the U.P.’s indebtedness to the Federal Government; and

(3) The fact that there was, just prior to U.P.’s receivership, and continuing throughout its ensuing reconstitution, a shift in the ownership of its equity from domestic to foreign holders, who were predominantly British.

229. Plaintiff’s expert further testified that the U.P.’s re-constitutive-reorganization was to be distinguished from its financial reorganization, as follows:

(a) The U.P.’s reorganization was singular and distinct from those of other railroad reorganizations which were effectuated during the last decade of the 19th century and the first decade of the 20th century. The preponderance of other railroads reorganized during the aforementioned period remained intact as physical transportation systems during their respective receiverships. Their receiverships were brought about due to an inability to meet creditor obligations. In turn such receiverships were in each case replaced by “financial reorganizations” which were directed towards, and in fact accomplished, a rearrangement of such companies’ financial structure in order to meet their creditors’ demands.

(b) On the other hand, the reorganization of the Union Pacific was to be contrasted with the said “financial reorganizations,” undergone by various railroads. The U.P. did not during its receivership undergo a mere readjustment of its capital structure to meet creditor demands. Rather it was subjected to an extensive dismemberment and disintegration, and therefore the effective date of its “financial reorganization,” as of early 1898, applied to only a very small portion of the transportation system which in fact was reorganized. From the standpoint of economic functioning, that small fraction of road, which underwent a “financial reorganiza *153 tion” in early 1898, was in no way related to, nor could it be equated with, the great system which existed during the U.P.’s pre-receivership years. That integrated system, the true economic entity, was reestablished later through its re-constitutive-reorganization. It was to this great system and not to its component parts that an investor would look. The small fraction of road which resulted from the early 1898 “financial reorganization” was in a state of vulnerability to accentuated competition from neighboring transportation systems, and thus could not have been, nor was it, the economic entity which was the goal of the reorganizers of the U.P. Accordingly, it is to 'be concluded that as of the date of its “financial reorganization,” the U.P. had in fact only begun to embark on its true reorganization, its “financial reorganization” being merely the overture and prelude to the economic reconstitution and real reorganization of its requisite prior parts, and the rehabilitation of its competetive functioning in the post-receivership period. That competition was not only for local and trunk line traffic, but also for transcontinental traffic with competing systems, which systems for the most part had gone through their own individual receivership structurally intact, without the fractionation peculiar to the U.P. Thus while its competitors were reorganized as a unit, the foreclosure of the liens of the Union Pacific branch and auxiliary lines required a multi-step reorganization before the economic unit could in fact be reorganized.

(c) Accordingly, it is to be concluded that the reorganization of Union Pacific was not completed until that point in time when the system had been reconstituted, and the competitive threats which had existed prior to, and during receivership, had been effectively dealt with. The earliest possible point in time at which the reorganization of the U.P. could be considered completed was the latter part of 1905, when friendly relations were restored between the U.P. and the Northern Pacific, continuing to the end of the fiscal year 1907. See also finding 225.

230. It is found that the witness testified that the reorganization was completed at the end of the fiscal year 1907.

231. Plaintiff’s expert further testified that

*154 (1) The reorganization of the U.P. necessarily encompassed tbe reintegration of the Oregon’s lines into the U.P.’s system, as follows:

(a) It is to be repeatedly emphasized that the reorganizers of the U.P. from the outset worked to bring about a reconstitution of the system as it existed in the pre-receivership time, i.e., to bring back into the system on a satisfactory basis all of its important branch and auxiliary lines which had been cut off during the receivership, and thereby restore to the U.P. its connection with the Pacific Ocean.

The U.P.’s receivership brought about the complete dismemberment of the system, and its reorganizers had, from the outset, no less a goal than the reintegration into the system of the Oregon Short Line Railroad, the Oregon Railroad and Navigation Company, the Omaha and Republican Valley Railroad, the Union Pacific Lincoln & Colorado Railroad, the Kearney & Black Hills Railroad, the Junction City & Fort Kearney Railroad, the Julesburg Branch of the Union Pacific, Denver & Gulf Railroad, the Carbon Cut-off Railway, the Echo & Park City Railway, the Solomon Railroad, and the Salina & Southwestern Railway.

An important factor leading to the conclusion that the reorganization contemplated reacquisition of the various aforesaid lines of road, was that the prereceivership U.P. controlled or owned some 7,681.72 miles of railroad, of which it had lost during receivership some 5,832.43 miles, which included its connection with the Pacific Ocean, and therefore, as of the date of its “financial reorganization,” consisted of only 1,849.29 miles of railroad.

Another important f actor of great weight was the manner in which the reorganizers of the road reintegrated the various branch and auxiliary lines, as well as the speed with which such reintegration was accomplished. The 1891 Collateral Note Trust Indenture, to which had been pledged, as security, all of the stocks and bonds of Union Pacific Railway’s auxiliary and branch lines, played a large part in the plans of the reorganizers. More specifically, as early as 1895 the reorganizers of the Union Pacific commenced purchasing from the trustee of the 1891 Trust much of the aforesaid collateral, acquiring such securities in the name of the reorgani *155 zation committee for the account of the new company. All of the various acquisitions made by the reorganization committee from the trustee under the 1891 Indenture were made for the account of the Union Pacific Railroad, the purpose behind such acquisitions being to reintegrate into the U.P. those profitable branch and auxiliary lines which had been lost during receivership.

(b) The U.P.’s reorganization from the outset looked to the reacquisition of the Oregon lines. In the final settlement worked out 'between the reorganization committee and the Federal Government with respect to the Government debt, the reorganizers planned to secure for the benefit of the U.P. the various securities of the Oregon lines which were held as collateral in the Morgan-Drexel Trust of 1891.

The reorganization committee from the outset looked to reacquisition of the Oregon lines as part of their reorganization scheme. A failure to carry forward the reorganization plans would have adversely affected many other large affairs and interests in which the reorganizers were involved; particularly the comprehensive plans which had been made by them to recover the lines lost to the old Union Pacific system, plans which included an agreement to purchase the Oregon Short Line stocks, held by the firm of J. P. Morgan under an old trust indenture of 1891. In the fall of 1897 the reorganization committee “had gone too far to be able to retrace its steps.” Accordingly, the reorganizers of the road acceded to the demands of the Federal Government, paying in full Union Pacific’s indebtedness both for principal and interest.

(c) In about December of 1898 the U.P. announced that it was to absorb the Oregon Short Line through an exchange of its common stock. The act of acquisition of the Oregon lines was not to be regarded as a new development nor as introducing into the reorganization a new factor. It was only the method of carrying out the acquisition which constituted a new feature. The fact that a large block of Short Line stock had been purchased in 1897 by the reorganization committee from the Morgan Trust and was held in the interests of the Union Pacific has been well established for a long time. The investment public had long been aware of the fact that *156 the reorganization of Union Pacific necessarily carried with it a reacquisition and reintegration of the Oregon lines.

232. The plaintiff’s expert further testified that the reorganization of the U.P. necessarily encompassed the reor-ganizers’ plans for dealing with pre-receivership challenges to its transcontinental role as follows:

(a) Another major factor, as noted above, in.determining the point in time at which the U.P.’s reorganization was completed, was the manner in which its reorganizers dealt with threats to the U.P.’s transcontinental position by competing roads. The first of these threats was the possibility that major control of the Southern Pacific would fall into the hands of a competitor. The second of these threats took the form of the pre-receivership challenges of the Chicago, Burlington & Quincy Eailroad, which continued to persist throughout Union Pacific’s receivership, and culminated in a settlement between the U.P. and the Hill-Morgan combination. Had not both of these problems been overcome during the course of reorganization, the U.P. would have been reduced to the position of a trunk line without feeders of its own, dependent for freight upon traffic arrangements Which it might make with rival systems.

The various groups of security holders within the U.P. system struggled to put themselves in position to form alliances with other systems should the U.P. be broken up. It would be utterly false and erroneous to attempt to evaluate the U.P. as of the date when it emerged from its so-called “financial” reorganization, inasmuch as at that point in time it merely constituted a truncated fragment, nowhere resembling its pre-receivership identity or the entity which its re-organizers, officers and faithful investors envisioned from the outset as the system which would emerge from the true reorganization.

(b) The Southern Pacific and the Central Pacific were important to the U.P. The U.P. in early 1901, put the keystone to its arch through the purchase of control of Southern Pacific, thus permanently assuring to it possession of the Central Pacific connection. By 1901 the U.P. had determined on the purchase of Central Pacific or, in the alternative, the construction of a new line from Ogden to San Fran *157 cisco. The acquisition by Union Pacific of Southern Pacific was to protect the System from further threats of truncation.

The opportunity afforded the U.P. to acquire a controlling interest in Southern Pacific must be considered to have 'been a defensive move on its part to protect the System which was then in the final stages of its reconstitutive-reorganization.

The acquisition of Southern Pacific was to protect and maintain the position of the System, safeguard its future against combinations of other lines, which, should they become hostile, might divert its business by changes in the existing channels of transportation.

(c) With respect to the Chicago, Burlington & Quincy threats, problems arose in the late 1880’s between the U.P.’s management and the management of the Burlington. During the period of time wherein the U.P. was attempting to extricate itself from the problems of the Government debt, great obstacles were thrown in its way by the Burlington. The campaign which was waged by the Burlington was calculated to bring about the insolvency of Union Pacific and destroy its transcontinental character.

The challenges thus presented to the U.P. by the Burlington carried over into 1901. This is evident in the fact that the tenure in office of President Perkins of the Burlington did not terminate until 1901. Coupling this fact with the fact that it was during the closing years of Perkins’ presidency of the Burlington that the negotiations which culminated in the Hill-Morgan combination took place, leads to the conclusion that there was a connection between the two incidents which was evident to the reorganizers of the U.P.

The acquisition by the U.P. of the preferred stock of Northern Pacific was a protective measure, undertaken to preclude the reduction of the U.P. to a trunk line without feeders. The purchase of a majority interest in the Burlington by the Great Northern and Northern Pacific was an invasion of U.P.’s territory.

The ultimate resolution of the problems created in the Hill-Morgan combination were not effectively dealt with until that point in time at which a settlement between the parties was effected. This did not occur until the Supreme Court ruled on the proper distribution to be made by the *158 Northern Securities Company of the stock and securities of Northern Pacific which it had acquired during the early 1900’s.

In the light of the foregoing, it is to be concluded that reconstitution of the U.P. could not be considered complete until the dangers and threats to its transcontinental position had been surmounted. The earliest point in time at which the Burlington threat, as personified in the Hill-Morgan combination, could possibly have been settled was in 1905, when the U.P. and Northern Pacific joined in the construction of some 500 miles of road in the Clearwater District of Idaho, and the time extended to the end of fiscal 1907.

233. The plaintiff’s expert further testified that

The Union Pacific’s receivership was not inevitable but was undertaken to solve problems inherent in the original charter, as follows:

(a) An understanding of the true reorganization of the U.P. requires a thorough knowledge of the causes which underlay its receivership and its dismemberment during receivership ; that not until these factors are firmly understood can a true appreciation of the actual goals of the organizers of the road be possible and not until these goals are appreciated can the reconstitutive-reorganization be understood.

(b) One principal cause of the receivership and subsequent dismemberment of the U.P. was inherent in the original charter of the Pacific Railroads, which denied to the road the iegal power to effectuate any meaningful unification of its branch and auxiliary lines. Thus the road lacked the economic flexibility necessary to utilize such unification as a basis for refunding the existing debt obligations at interest rates lower than those with which the road was burdened at the time of original construction. Because of this restriction, the road was denied substantial financial advantages which other competing systems had available.

(c) The earnings power limitations which arose from the U.P.’s charter restrictions were not only known, but were of vital concern to both management and the long term equity investor over the pre-receivership period.

(d) The restrictions and their interrelationship with the problems of the Government debt ultimately led to the U.P.’s *159 receivership. The receivership of the U.P. in 1893 was effectuated more to force a settlement with the Government than from actual necessity.

(e) Other transcontinental systems entered into the field of U.P. competitors. The financial impasse faced by the U.P. prevented unification with its subsidiary companies, and also prevented a refunding of its fixed charges and indebtedness due to the interdictions placed upon changes in its capital construction. The Thurman Act of 1878 required the U.P. to pay over to the Federal Government all of the transportation revenues derived on account of services rendered to the Government, for investment in the sinking fund and for annual payments to be applied on the Government debt.

(f) The charter restrictions are to be related to the extremely high costs incurred in financing the original construction of the U.P., as compared to the lower costs of construction which its competitors were able to take advantage of during the 1880’s.

An additional factor underlying the U.P.’s receivership was the advantage available to other railroads, direct competitors of Union Pacific in many instances, to obtain financing at the much lower interest rates which prevailed during the 1880’s. The Northern Pacific and Manitoba was built in 1887, and thus enjoyed the advantage of low construction costs, while the U.P. was financed during the post-Civil War inflation at a time when labor and capital were scarce and costs high.

(g) Had the U.P. been free of the constraints inherent in its original charter, it would have been able to refund the excessively high fixed charges which it bore as the result of wartime finance and, therefore, could have guaranteed, without the necessity of refunding through the collateral trust medium, the prior burdens which had been incurred by its branch or auxiliary lines. Furthermore, after other transcontinental systems entered into the field of U.P. competitors, U.P.’s defensive construction, undertaken to counter the competing transcontinentals, could have been accomplished at

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