Peerless Stages, Inc. v. Commissioner of Internal Revenue

This is a petition to review a decision of the United States Board of Tax Appeals. The Commissioner of Internal Revenue determined against petitioner income and excess profits tax deficiencies for the year 1936 of $25,289.85 and $9,609.39, respectively. The Board of Tax Appeals upheld the Commissioner and petitioner appeals. The single question involved is whether losses sustained by petitioner in operating a bus route from 1931 through 1935 can be capitalized and used as a basis for computing the gain derived from the sale of the route in 1936, or whether the losses represent ordinary business expenses which must be deducted in the year the loss is sustained.

Since 1923 petitioner, a California corporation, has operated an intercity bus transportation service between Oakland, San Jose, Palo Alto and Santa Cruz. Prior to 1931, the area between Oakland and Hayward was sparsely settled and petitioner did not operate a purely local service route for this area. In 1931 petitioner considered two alternative plans for providing the Oakland-Hayward area with a local service route in addition to the existing intercity service. One plan designated the “skeleton service plan” would…