## Facts

- Bangor and Aroostook Railroad Company repurchased and retired its own bonds in 1942 with $634,000 aggregate par value for $497,553.30, producing $136,446.70 of discharge-of-indebtedness gain (“bond profit”).
- The bond profit was realized income under I.R.C. § 22(a), but Bangor elected under I.R.C. § 22(b)(9) and § 113(b)(3) to exclude it from 1942 normal and surtax net income, with tax effect shifted through basis adjustments.
- For 1943, Bangor computed its excess profits tax credit using the invested-capital method under the Excess Profits Tax Act, under which the credit depended in part on “accumulated earnings and profits” at the beginning of the year.  
- Bangor sought to include the 1942 bond profit in its accumulated earnings and profits component of invested capital for 1943.
- The Commissioner disallowed the inclusion, resulting in an excess profits tax deficiency of $3,677.45 for 1943.
- The Tax Court sustained the deficiency; Bangor petitioned for review.

## Issues

1. Whether bond retirement gain realized in 1942, excluded from 1942 taxable income by election under I.R.C. § 22(b)(9) and § 113(b)(3), may nevertheless be treated as “accumulated earnings and profits” at the beginning of 1943 for invested capital under I.R.C. § 718(a)(4).
2. Whether allowing both exclusion from taxable income and inclusion in invested capital would improperly confer a double tax benefit under the excess profits tax scheme.

## Decision

- The First Circuit affirmed the Tax Court.
- The court held that the excluded 1942 bond profit could not be included in “accumulated earnings and profits” for purposes of invested-capital computation under I.R.C. § 718(a)(4).
- The Commissioner’s disallowance and the $3,677.45 deficiency for 1943 were sustained.

## Legal Principles

- “Accumulated earnings and profits” for excess profits tax invested capital is a technical statutory concept that must be construed in harmony with the excess profits tax structure and related income tax provisions.
- Where Congress provides an election to exclude a realized gain from current taxable income and instead implement basis adjustments, the election may carry consequential limits on using that gain to enlarge other tax benefits absent clear statutory authorization.
- A taxpayer may not both exclude realized gain from current income by election and use the same amount to increase invested capital to reduce excess profits tax when such treatment would defeat the election’s intended tradeoff and produce an unwarranted double benefit.

## Conclusion

The court held that a corporation that elects to exclude bond retirement gain from current taxable income under the bond-profit provisions cannot treat that excluded gain as accumulated earnings and profits to increase invested capital for computing the invested-capital excess profits credit.


Bangor & Aroostook R.R. Co. v. Commissioner, 193 F.2d 827 (1st Cir. 1951)