Louisville & Nashville Railroad Co. v. Comm'r of Internal Revenue, Docket Nos. 4614-67
| Decision Date | 09 September 1976 |
| Docket Number | 5384-67.,Docket Nos. 4614-67 |
| Citation | 66 T.C. 962 |
| Parties | LOUISVILLE AND NASHVILLE RAILROAD COMPANY, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
66 T.C. 962
LOUISVILLE AND NASHVILLE RAILROAD COMPANY, PETITIONER
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Docket Nos. 4614-67
5384-67.
United States Tax Court
Filed September 9, 1976.
Petitioner is an interstate railroad which used the retirement-replacement-betterment method of accounting for its track structure during the years at issue. Respondent determined deficiencies in petitioner's income taxes for the years 1955-63 based on numerous adjustment in petitioner's returns as filed. By an amendment to its petitions, petitioner claimed overpayment in its taxes for the years 1955-63. Held, during the years at issue:
1. Petitioner may not depreciate under sec. 167, I.R.C. 1954, roadway assets donated to it by or constructed with funds supplied to it by governmental bodies. These assets, acquired prior to June 22, 1954, were not contributions to capital within the meaning of sec. 113(a)(8), I.R.C. 1939.
2. In applying the retirement-replacement-betterment method of accounting, petitioner must reduce its deduction for rail replaced or retired along its lines by the current fair market value of the rail which is recovered for reuse.
3. Costs incurred by petitioner in welding rail into continuous lengths are not currently deductible but must be capitalized as a betterment under sec. 263, I.R.C. 1954.
4. Costs incurred by petitioner in heat-treating and flame-hardening rail are not currently deductible but must be capitalized as a betterment under sec. 263, I.R.C. 1954.
5. Petitioner may not take a deduction under sec. 165 or sec. 167, I.R.C. 1954, in connection with the purported abandonment or retirement of certain railroad grading and ballast. These assets continued to possess significant value and utility in petitioner's operations.
6. Petitioner may not deduct as a charitable contribution under sec. 170, I.R.C. 1954, the fair market value of an easement conveyed to the City of Birmingham. In a mutually advantageous business arrangement, the economic benefits received by petitioner were commensurate with the value of the property transferred.
7. Certain overhead costs (including vacation pay, holiday pay, payroll taxes and health and welfare benefits applicable to direct labor, payroll taxes and health and welfare benefits attributable to indirect labor, and the cost of transporting materials on its own lines) incurred by petitioner in its freight car building and rebuilding program must be capitalized under sec. 263, I.R.C. 1954, as part of the cost of the freight cars under accepted accounting practice and established tax principles.
8. Respondent's adjustments under sec. 481, I.R.C. 1954, are upheld.
[66 T.C. 963]
George K. Dunham, for the petitioner.
Robert A. Roberts, for the respondent.
This case was assigned to and heard by Special trial Judge James M. Gussis pursuant to Rules 180 through 182, Tax Court Rules of Practice and Procedure. His report was filed on February 11, 1976, and subsequently both parties filed exceptions to his report. The exceptions have been considered and, for the most part, are rejected. Where appropriate, some amendments have been made to the report. The Court agrees with and adopts the report set forth below.
Respondent determined deficiencies in the petitioner's Federal income tax for the years 1955 through 1963 as follows:
+-------------------------------------------+
¦Docket No. ¦Year ¦Income tax deficiency ¦
+------------+------+-----------------------¦
¦ ¦ ¦ ¦
+------------+------+-----------------------¦
¦5384-67 ¦1955 ¦$1,147,429.18 ¦
+------------+------+-----------------------¦
¦ ¦1956 ¦951,817.29 ¦
+------------+------+-----------------------¦
¦ ¦1957 ¦631,617.78 ¦
+------------+------+-----------------------¦
¦ ¦1958 ¦2,203,121.93 ¦
+------------+------+-----------------------¦
¦ ¦1959 ¦2,034,386.54 ¦
+------------+------+-----------------------¦
¦ ¦1960 ¦2,222,080.62 ¦
+------------+------+-----------------------¦
¦ ¦1961 ¦815,752.76 ¦
+------------+------+-----------------------¦
¦4614-67 ¦1962 ¦886,243.91 ¦
+------------+------+-----------------------¦
¦ ¦1963 ¦379,794.83 ¦
+-------------------------------------------+
In amendments to the answers filed in docket No. 5384-67 and docket No. 4614-67, the respondent claimed increased deficiencies
[66 T.C. 964]
in petitioner's Federal income taxes for the years 1955 through 1963 in the following amounts:
+------------------------------------------+
¦Docket No. ¦Year ¦Increased deficiency ¦
+------------+------+----------------------¦
¦ ¦ ¦ ¦
+------------+------+----------------------¦
¦5384-67 ¦1955 ¦$177,417.66 ¦
+------------+------+----------------------¦
¦ ¦1956 ¦555,994.67 ¦
+------------+------+----------------------¦
¦ ¦1957 ¦739,749.57 ¦
+------------+------+----------------------¦
¦ ¦1958 ¦447,342.50 ¦
+------------+------+----------------------¦
¦ ¦1959 ¦170,878.34 ¦
+------------+------+----------------------¦
¦ ¦1960 ¦543,175.29 ¦
+------------+------+----------------------¦
¦ ¦1961 ¦838,556.37 ¦
+------------+------+----------------------¦
¦4614-67 ¦1962 ¦594,638.51 ¦
+------------+------+----------------------¦
¦ ¦1963 ¦753,380.38 ¦
+------------------------------------------+
In an amendment to the petition filed in docket No. 5384-67 and docket No. 4614-67, the petitioner claimed overpayments in its Federal income taxes for the years 1955 through 1963.
We must also consider several issues involving the year 1964 in order to determine the amount of the net operating loss carryback from that year to the taxable years before us.1
The issues remaining for decision are: (1) Whether petitioner is entitled to depreciation deductions under Section 167 of the Internal Revenue Code of 1954 2 with respect to roadway assets donated to it by various governmental bodies or constructed with funds supplied by various governmental bodies prior to June 22, 1954; (2) whether petitioner in its application of the retirement method of accounting for rail during the years 1955 through 1962 must use the current fair market value for relay rail; (3) whether the costs incurred in the years 1959 through 1964 in welding 39-foot rail into continuous welded rail are capital expenditures; (4) whether the costs incurred in the years 1959 through 1964 in heat-treating and flame-hardening rail are capital expenditures; (5) whether petitioner is entitled to a deduction in 1964 in connection with the purported abandonment or retirement of certain railroad grading and ballast; (6) whether petitioner may deduct as a charitable contribution under section 170 the fair market value of an easement conveyed in 1960 to the City of Birmingham, Ala.; and (7) whether certain costs incurred by petitioner in the freight car building and rebuilding program
[66 T.C. 965]
performed in its own shop facilities should be capitalized as part of the cost basis of said freight cars.
Some of the facts were stipulated and they are so found.
The Louisville & Nashville Railroad Co. (hereinafter called the petitioner) was incorporated under the laws of the State of Kentucky on March 5, 1850. Petitioner's principal offices at the time the petitions herein were filed were in Louisville, Ky. Petitioner filed its corporation income tax return for each of the years 1955 through 1963 with the District Director of Internal Revenue, Louisville, Ky.
Petitioner is a common carrier by rail in interstate commerce subject to the jurisdiction of the Interstate Commerce Commission.
Early in the 1900's local, State, and the Federal governments became involved in the financing of the cost of grade separations and crossing safety devices. With the increased volume of automobiles in use the various governments recognized an obligation to bear a portion of the cost for highway safety.
The need for grade separations and warning devices was generally determined by a State regulatory agency. On occasion the action of the regulatory agency would be prompted by the request of a local public agency or a citizens' group. Railroads normally participated in discussions with the regulatory agencies to determine the type of grade crossing or safety devices to be constructed or installed and also to determine the allocation of costs between the parties. Railroads could appeal determinations made by the regulatory agencies with respect to grade crossings.
Pursuant to written agreements between petitioner and various States and political subdivisions of the States, grade separations were constructed for the purpose of allowing roads and highways to cross petitioner's railroad tracks at highway and railroad intersections. These grade separations were either bridges or overpasses which carried highway traffic over the railroad tracks or tunnels or underpasses which carried highway traffic beneath the railroad tracks. Also pursuant to agreements between petitioner and various States and their political subdivisions, and in some instances in conformance with State
[66 T.C. 966]
statutes and city ordinances requiring railroad-highway crossing safety devices, grade-crossing protective equipment was installed at intersections of highways and tracks which were not separated by a difference in grade. The electronic automatic intersection protective devices were connected with the signal and communications system used by petitioner as a part of its track system. In some instances the safety devices were manually operated. After their installation the safety devices and equipment were maintained by the petitioner.
Under the provisions of Federal highway aid legislation beginning with the Highway Act of 1916 and particularly the Federal Highway Act of 1933, ch. 90, 48 Stat. 203, and the Federal Aid Highway Act of 1944, ch. 626, 58 Stat. 838, the Federal, State, and local governments paid all or a portion of the cost incurred in constructing the grade separations and grade-crossing...
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