412 U.S. 401 (1973), 72-90, United States v. Chicago, Burlington & Quincy Railroad Co.

Docket Nº:No. 72-90
Citation:412 U.S. 401, 93 S.Ct. 2169, 37 L.Ed.2d 30
Party Name:United States v. Chicago, Burlington & Quincy Railroad Co.
Case Date:June 04, 1973
Court:United States Supreme Court

Page 401

412 U.S. 401 (1973)

93 S.Ct. 2169, 37 L.Ed.2d 30

United States


Chicago, Burlington & Quincy Railroad Co.

No. 72-90

United States Supreme Court

June 4, 1973

Argued February 26, 1973



In this refund suit, respondent railroad seeks to recover an alleged income [93 S.Ct. 2170] tax overpayment resulting from its failure to take deductions for depreciation with respect to the cost of facilities constructed at highway-railroad intersections and elsewhere that were paid for not by respondent, but out of Government funds appropriated to further public safety and improve highway systems. Respondent claimed that the subsidies qualified as contributions to its capital by a nonshareholder under § 113(a)(8) of the Internal Revenue Code of 1939, thereby permitting respondent to depreciate the Government's cost in the assets. The Court of Claims ruled that respondent was entitled to the claimed depreciation deduction.

Held: The governmental subsidies did not constitute contributions to respondent's capital within the meaning of § 113(a)(8); the assets in question have a zero basis, and respondent cannot claim a depreciation allowance with respect to those assets. As can be gleaned from Detroit Edison Co. v. Commissioner, 319 U.S. 98, and Brown Shoe Co. v. Commissioner, 339 U.S. 583, to qualify as a nonshareholder contribution to capital, the asset must become a permanent part of the transferee's working capital structure; may not be compensation for the transferee's services; must be bargained for; must benefit the transferee commensurately with its value; and ordinarily will be used to produce additional income. Here, almost none of these criteria was met, since the facilities were not bargained for, and, but for the governmental subsidies, would not have been constructed. No substantial incremental benefit in terms of income production was considered at the time the facilities were transferred, and such minor benefit as may have accrued to respondent from the facilities was merely peripheral to the railroad's business. Nor would respondent's asserted obligation to replace the facilities warrant the claimed depreciation. Pp. 405-416.

197 Ct.Cl. 264, 455 F.2d 993, reversed and remanded.

BLACKMUN, J., delivered the opinion of the Court, in which BURGER, C.J., and BRENNAN, WHITE, MARSHALL, and REHNQUIST,

Page 402

JJ., joined. DOUGLAS, J., filed a dissenting opinion, post, p. 416. STEWART, J., filed a dissenting opinion, in which DOUGLAS, J., joined, post, p. 417. POWELL, J., took no part in the consideration or decision of the case.

BLACKMUN, J., lead opinion

MR. JUSTICE BLACKMUN delivered the opinion of the Court.

The issue in this federal income tax case is whether the respondent, Chicago, Burlington & Quincy Railroad Company (CB&Q), an interstate common carrier railroad, may depreciate the cost of certain facilities paid for prior to June 22, 1954, not by it or by its shareholders, but from public funds.

Starting about 1930, CB&Q entered into a series of contracts with various Midwestern States. By these agreements, the States were to fund some or all of the costs of construction of specified improvements, and the railroad apparently was to bear, at least in part, the costs of maintenance and replacement of the improvements once they had been installed. In 1933, as part of the program of the National Industrial Recovery Act, 48 Stat.195, Congress authorized federal reimbursement to the States of the shares of the costs the States incurred in the construction of those improvements that inured to the benefit of public safety and improved highway traffic control.1 In 1944, Congress went further and authorized reimbursement, with stated limitations, to the States for the entire cost of the improvements, subject to the condition

Page 403

that a railroad that received a benefit from a facility so constructed was liable to the Government for up to 10% of the cost of the project pro rata in relation to the benefit received by the railroad.2

[93 S.Ct. 2171] Under these programs, CB&Q received, at public expense, highway undercrossings and overcrossings having a cost of $1,538,543; crossing signals, signs, and floodlights having a cost of $548,877; and jetties and bridges having a cost of $58,721.3 These improvements, aggregating $2,146,141, were carried on the railroad's books as capital assets even though most of the agreements between CB&Q and the several States did not expressly convey title to the railroad.

CB&Q instituted a timely suit in the Court of Claims alleging, among other things, that it had overpaid its 1955 federal income tax because it had failed to assert, as a deduction on its return as filed, allowable depreciation on the subsidized assets.4 By a 4-to-3 decision on this issue (only one of several in the case), the Court of Claims concluded that, under § 167 of the Internal Revenue Code of 1954, 26 U.S.C. § 167, CB&Q was entitled to the depreciation deduction it claimed. This was on the theory that the subsidies qualified as contributions to the railroad's capital under §§ 362 and 1052(c) of that

Page 404

Code, 26 U.S.C. § 362 and 1052(c), and under § 113(a)(8) of the Internal Revenue Code of 1939.

In arriving at this conclusion, the Court of Claims majority relied on Brown Shoe Co. v. Commissioner, 339 U.S. 583 (1950), and reasoned that, even though the governmental payments for the facilities may not have been intended as contributions to the railroad's capital, the "principal purpose" being, instead, "to benefit the community at large," 197 Ct.Cl. at 276, 455 F.2d at 1000, the facilities did, in fact, enlarge the railroad's working capital, were used in its business, and produced economic benefits for it, thereby qualifying as contributions to its capital under the cited section of the 1939 Code. The three dissenting judges disagreed with this interpretation of Brown Shoe, and, instead, relied on Detroit Edison Co. v. Commissioner, 319 U.S. 98 (1943). They concluded that the critical features were the donor's attitude, purpose, and intent, and that, with governmental payments, there could be no intention to confer a benefit upon CB&Q. Instead, as the findings revealed,5 the intention was to expedite traffic flow and to improve public safety at highway-railroad crossings. 197 Ct.Cl. at 315, 320, 455 F.2d at 1023, 1026.

Because the Court of Claims decision apparently would afford a precedent for the tax treatment of substantial sums,6 [93 S.Ct. 2172] we granted certiorari. 409 U.S. 947.

Page 405


Section 23(1) of the 1939 Code, and its successor, § 167(a) of the 1954 Code, 26 U.S.C. § 167(a), allow a taxpayer "as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear . . . of property used in the trade or business." In the usual situation, the taxpayer himself incurs cost in acquiring the assets as to which the depreciation deduction is asserted.7 But there are other and different situations formally recognized in the governing tax statutes. A familiar example is gift property.8 Another is property acquired by a corporation

Page 406

from its shareholders as paid-in surplus or as a contribution to capital.9 Another, and the one that is pertinent here, is covered by § 113(a)(8)10 of the 1939 Code and by the contrasting provisions of §§ 362(a) and (c) of the 1954 Code, 26 U.S.C. §§ 362(a) and (c).11

Page 407

This concerns a contribution [93 S.Ct. 2173] to capital by a nonshareholder. See Treas.Reg. 111, § 29.113(a)(8)-1 (1943). Under §§ 113(a)(8) and 114(a) of the earlier Code, the nonshareholder-contributed asset in the hands of the receiving corporation had the same basis, subject to adjustment, for depreciation purposes as it had in the hands of the transferor; under the 1954 Code, however, its basis for the transferee is zero.

Pertinent to all this is the Court's decision in Edwards v. Cuba R. Co., 268 U.S. 628 (1925). The Court there held that subsidies granted by the Cuban Government to a railroad to promote construction in Cuba "were not profits or gains from the use or operation of the railroad," and did not constitute income to the receiving corporation. Id. at 633. The holding in Edwards, taken with § 113(a)(8) of the 1938 Code, produced a seemingly anomalous result, for it meant that a corporate taxpayer receiving property from a nonshareholder as a contribution to capital not only received the property free from income tax, but was allowed to assert a deduction for depreciation on the asset so received tax free. This result also ensued under the Court's holding in Brown Shoe, and led to the enactment of the zero basis

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provision, referred to above, in § 362(c) of the 1954 Code, 26 U.S.C. § 362(c). Veterans Foundation v. Commissioner, 317 F.2d 456, 458 (CA10 1963)

CB&Q argues that this very result should follow here. It is said that the railroad received no taxable income and incurred no income tax liability when it received, at governmental expense prior to June 22, 1954, the facilities as to which CB&Q now asserts depreciation. And, in providing the facilities, CB&Q argues, the Government intended to make a contribution to the railroad's capital, within the meaning of § 113(a)(8), thereby permitting CB&Q to depreciate the Government's cost in the assets. Whether the governmental subsidies qualified as income to the railroad is an issue not raised in this case, and we intimate no opinion with respect to it. The United States, however, asserts that the subsidies did not constitute a "contribution to capital" under § 113(a)(8), and that, accordingly, the transferee railroad's tax basis is zero, and no depreciation deduction is available.

Our inquiry, therefore, is a narrow one: whether the nonshareholder payment in this case constituted a "contribution to capital," within the meaning of § 113(a)(8). Because both Detroit...

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