75 T.C. 497 (1980), 3493-69, Southern Pacific Trasnporation Co. v. C.I.R.

Docket Nº:3493-69.
Citation:75 T.C. 497
Opinion Judge:Drennen, Judge:
Attorney:Arnold I. Weber and Alan S. Beinhorn for the petitioner. James Booher Vernon R. Balmes Lawrence G. Becker Eugene H. Ciranni Randall G. Dick Thomas F. Kelly William E. Saul and Nicholas G. Stucky for the respondent.
Case Date:December 31, 1980
Court:United States Tax Court

Page 497

75 T.C. 497 (1980)




No. 3493-69.

United States Tax Court

December 31, 1980

I. Issue (i: RAPID AMORTIZATION OF FREIGHT CARS. On its consolidated income tax returns for the years 1959, 1960, and 1961, petitioner claimed rapid amortization under sec. 168, I.R.C. 1954 (as then applicable), with reference to freight cars certified by the Office of Defense Mobilization in 1956 as necessary in the interest of national defense. Respondent claims herein that the certifying agency intended all freight cars covered by the 1956 certification to be acquired by petitioner no later than Dec. 31, 1957, and that freight cars delivered to petitioner after Feb. 20, 1958, are therefore not within the scope of the certification. Accordingly, since certification is a statutory prerequisite, respondent has disallowed rapid amortization under sec. 168, I.R.C. 1954, for cars delivered after Feb. 20, 1958. Held the Office of Defense Mobilization, in issuing the 1956 necessity certificate, intended petitioner to acquire the certified cars as quickly as possible under the prevailing conditions and did not necessarily intend to preclude from certification those cars delivered to petitioner after Dec. 31, 1957. Held further petitioner acquired certified freight cars through the years at issue as quickly as was possible under the prevailing conditions, and petitioner is therefore entitled to the benefits of sec. 168, I.R.C. 1954, with reference to those cars. (Pp. 515-548.)

II. Issues (hh and (9): RECOVERY UPON MERGER OF PREVIOUSLY DEDUCTED AMOUNTS. During the years 1915 to 1924, the predecessor Southern Pacific Co. (PSP) had to make good on its guarantee of interest payments on certain bonds of the San Antonio & Aransas Pass Railway Co. (SA & AP). PSP deducted on its income tax returns for these years the amounts thus advanced. At the end of the period, the $4,158,624.87 total amount which PSP had paid on its guarantee (and deducted) remained as an outstanding debt which SA & AP owed to PSP. In 1934, SA & AP merged into the Texas & New Orleans Railroad Co. (T & NO), a subsidiary of PSP, with T & NO assuming all SA & AP debts, including amounts owed to PSP.

Respondent contends that when T & NO was merged into the former Southern Pacific Co. (FSP) in 1961, FSP recovered the amount PSP had deducted during the years 1915 to 1924. Respondent has therefore included the $4,158,624.87 amount in FSP's (petitioner's) gross income for 1961 under sec. 61, I.R.C. 1954, pursuant to the tax benefit rule. Petitioner contends that the tax benefit rule is not applicable herein because, inter alia, the 1915-24 payments made by PSP were not properly allowable as deductions during those years. Held:

1. Petitioner is not estopped under the doctrine of " quasi estoppel" or " duty of consistency" from denying the propriety of PSP's earlier deductions since the crucial facts bearing on deductibility were known to both parties and the question to be resolved herein is simply whether there was a mutual mistake of law.

2. The deductions claimed by PSP on its returns for the years 1915 to 1924 as a result of PSP payments pursuant to its guarantee were not allowable deductions under the applicable law.

3. Because the prior deductions were not properly allowable when they were taken, respondent may not employ the tax benefit rule to include in petitioner's gross income for 1961 any recovery of the previously deducted amounts. (Pp. 548-566.)

III. Issue ( kk: DEDUCTION OF TIMBER EXPENSES. During the years 1959, 1960, and 1961, petitioner incurred expenses in the form of salaries for forestry work performed by its employees. On its consolidated income tax returns for those years, petitioner offset the expenses against its capital gains from timber-cutting contracts falling under sec. 631(b), I.R.C. 1954. Petitioner seeks herein to treat such expenses as ordinary and necessary management expenses of its timber business and to deduct them under sec. 162, I.R.C. 1954. Held the amounts stipulated by the parties to be at issue herein reflect no less than the minimum amounts spent by petitioner on salaries for forestry work which was directly related to the sec. 631(b), I.R.C. 1954, timber-cutting contracts. Held further: The forestry expenses at issue must be applied to offset capital gains arising under the cutting contracts. Such expenses are not deductible under sec. 162, I.R.C. 1954. (Pp. 567-586.)

IV. Issues (w and (x: DEDUCTIONS INVOLVING HOUSTON DEPOT. In 1959, petitioner sold certain property to the United States. As a result of this transaction, petitioner deducted the adjusted basis of its Houston depot as a retirement on its consolidated income tax return for that year. Petitioner claims herein that the said adjusted basis (as revised) is deductible pursuant to various provisions of sec. 1.167(a)-8, Income Tax Regs., or pursuant to other regulatory provisions. In the alternative, petitioner claims the fair market value of its Houston depot is deductible as a charitable contribution under sec. 170, I.R.C. 1954. Held petitioner retired the depot as an integral part of a sales transaction and must add its adjusted basis to the adjusted basis of the property sold to determine gain or loss; petitioner may not deduct such basis as an ordinary abandonment loss. Fox v. Commissioner 50 T.C. 813 (1968), affd. per curiam in an unreported order (9th Cir. 1970), followed. Held further petitioner did not satisfy the statutory requirement under secs. 170(a)(1) and 170(c)(1), I.R.C. 1954, that a benefit be conferred upon the United States and, accordingly, petitioner did not make a charitable contribution deductible under sec. 170, I.R.C. 1954. (Pp. 586-605.)

V. Issue (rr: DEDUCTIONS INCIDENT TO RELOCATION PROJECTS. During the years 1959, 1960, and 1961, petitioner relocated certain of its railway lines pursuant to agreements made with governmental bodies under which the governmental bodies paid the cost of relocating. In connection with these relocation projects, petitioner subtracted from its property accounts, under the retirement-replacement-betterment (RRB) method of accounting, the book value of materials removed in dismantling the original lines and charged it to operating expense. Petitioner claims herein that the amounts thus subtracted are allowable as deductions during the years at issue either under the loss provisions of sec. 165, I.R.C. 1954, or the depreciation provisions of sec. 167, I.R.C. 1954. Held: Petitioner failed to demonstrate that it incurred losses as a result of the relocation projects that would be deductible under sec. 165, I.R.C. 1954. Furthermore, the relocation projects involved exchanges of " like kind" property within the purview of sec. 1031, I.R.C. 1954, and any losses incurred therein would not be recognized. Held further the amounts at issue are not deductible under sec. 167, I.R.C. 1954, by virtue of the fact that the relocation projects did not involve retirements under the RRB method of accounting. (Pp. 605-624.)

VI. Issue (bbb: DEDUCTION OF ESTIMATED PAYROLL TAXES ON EARNED VACATION PAY. On its consolidated income tax return for the year 1961, petitioner, an accrual basis taxpayer, accrued and deducted its employees' 1962 vacation pay, the vacations having vested in 1961 under union contracts. On its books for 1961, but not on its tax return, petitioner estimated and accrued the 1962 payroll taxes attributable to the vacation pay. Consistent with its book accounting, petitioner seeks herein to deduct for income tax purposes in 1961 the accrued estimate of payroll taxes (on the vacation pay) payable by petitioner in 1962. Held: Under sec. 461, I.R.C. 1954, and sec. 1.461-1(a)(2), Income Tax Regs., petitioner's estimate of the payroll taxes attributable to the 1962 vacation pay is not accruable and deductible in 1961. The payroll taxes were payable in 1962 only if employees' earnings fell below specified maximum amounts when the employees were paid for their vacations; as a result, petitioner's liability to pay the taxes could not be determined in 1961. (Pp. 624-642.)

VII. Issue (zz: DEDUCTION OF PENALTIES FOR VIOLATIONS OF FEDERAL STATUTES. During the years 1959, 1960, and 1961, petitioner incurred penalties for violations of the Safety Appliance Act (45 U.S.C. secs. 1-16) and the Twenty-Eight Hour Act (45 U.S.C. secs. 71-74). Petitioner seeks herein to deduct these penalties under sec. 162, I.R.C. 1954, as ordinary and necessary business expenses. Held: The penalties were imposed to enforce the law stated in the above-mentioned acts and to punish violations thereof, and the penalties fall within the scope of the term " fine or similar penalty" appearing in sec. 162(f), I.R.C. 1954. Consequently, they would not be deductible under either prior judicial law or sec. 162(f). No deduction is allowable under sec. 162, I.R.C. 1954. (Pp. 643-654.)

VIII. Issue (ll: FREIGHT CAR USEFUL LIFE. On its consolidated income tax returns for the years 1959, 1960, and 1961, petitioner depreciated its freight cars under sec. 167, I.R.C. 1954, based on a 30-year useful life. Petitioner seeks an increased depreciation deduction herein, based on its present claim that the freight cars which it acquired after 1944 had a 20-year useful life. Held petitioner has failed to show, in view of conditions known to exist or reasonably ascertainable at the end of the years at issue, a clear and convincing basis for changing the 30-year useful life claimed by petitioner on its returns for those years. (Pp. 655-672.)

IX. Issue (yy: DEDUCTION OF EMBANKMENT EXPENDITURES. On its tax returns for the years 1959, 1960, and 1961, petitioner capitalized expenditures for maintaining and protecting railroad embankments and related facilities. In its amendment to petition,...

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