Chicago, Burlington & Quincy R. Co. v. United States

• Decision Date: 18 February 1972
• Docket Number: No. 149-65.,149-65.
• Citation: 455 F.2d 993
• Parties: CHICAGO, BURLINGTON & QUINCY RAILROAD COMPANY v. The UNITED STATES.
• Court: U.S. Claims Court

455 F.2d 993 (1972)

CHICAGO, BURLINGTON & QUINCY RAILROAD COMPANY v. The UNITED STATES.

No. 149-65.

United States Court of Claims.

February 18, 1972.

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COPYRIGHT MATERIAL OMITTED

Richard J. Schrieber, Chicago, Ill., for plaintiff, Robert T. Molloy, Washington, D. C., attorney of record, and Richard J. Cubbage, Chicago, Ill., of counsel.

Frances Foltz, Philip Miller, Joseph Kovner, and Mildred L. Seidman, Washington, D. C., with whom was Asst. Atty. Gen. Johnnie M. Walters, for defendant; Gilbert W. Rubloff and David J. Gullen, Washington, D. C., of counsel.

Before COWEN, Chief Judge, LARAMORE and DURFEE, Senior Judges, and DAVIS, COLLINS, SKELTON and NICHOLS, Judges.

OPINION

PER CURIAM:

This case was referred to Trial Commissioner James F. Davis with directions to make findings of fact and recommendation for conclusion of law under the order of reference and Rule 134 (h). The commissioner has done so in an opinion and report filed on October 28, 1970. The plaintiff filed exceptions to the commissioner's opinion with respect to the rail salvage issue and the vacation pay accrual issue. The defendant filed exceptions to the commissioner's opinion regarding the issues of donated property depreciation, casualty loss, welded rail, protective facilities, and the Mexican tax credit. Both parties requested review of the commissioner's opinion. The case has been submitted to the court on oral argument of counsel and the briefs of the parties. Since the court agrees with the commissioner's opinion, findings of fact and recommended conclusion of law, with certain modifications, as hereinafter set forth, it hereby adopts the same, as modified, as the basis for its judgment in this case.^* Therefore, it is concluded the plaintiff is entitled to recover, together with interest as provided by law, on the claims relating to (1) § 1341 computation, (2) excess salvage value, (3) donated property depreciation, (4) casualty loss, (5) welded rail, (6) protective work, and (7) Mexican tax credit, and judgment is entered to that effect. The court further concludes that plaintiff's recovery shall be subject to the setoffs raised by defendant with respect to (1) rail salvage value, and (2) vacation pay accrual. The amount of recovery will be determined in subsequent proceedings under Rule 131(c).

Commissioner DAVIS' opinion, as modified by the court, is as follows:

This is a suit to recover income taxes paid for the year 1955. Plaintiff operates a railroad as a common carrier in interstate commerce, subject to the jurisdiction of the Interstate Commerce Commission. Plaintiff's petition raised six issues with respect to a claim for refund timely filed with, and ultimately denied by, the District Director of Internal Revenue at Chicago, Illinois. In its answer and first amended answer, defendant asserted four setoff defenses, pursuant to Missouri Pacific R. R. v. United States, 168 Ct.Cl. 86, 338 F.2d 668 (1964). Before trial, defendant dropped one of the setoff defenses; and by pretrial stipulation, the parties resolved one issue raised in the petition.¹ Trial was held on the remaining eight issues. After trial, defendant conceded that plaintiff is entitled to recover on one other issue raised in the petition.² Remaining for resolution, therefore, are seven issues, designated as follows: (a) donated property depreciation; (b) casualty loss; (c) welded rail; (d) rail salvage value; (e) protective work; (f) vacation pay accrual; and (g) Mexican tax credit.

DONATED PROPERTY DEPRECIATION ISSUE

Starting about 1930, plaintiff entered into many agreements with several midwestern states for construction of highway overpasses and underpasses at highway-railroad intersections, and grade-crossing protection equipment, such as flashing-light signals and automatic gates. Though the agreements are not identical, generally plaintiff agreed to perform a large share of the construction work and the states agreed to pay most of the cost. Sometimes, part of the work was done by state highway departments. Pursuant to Federal highway aid legislation (particularly acts passed in 1933 and 1944), the Federal Government agreed to pay the governmental share of the cost. Federal funds were allocated to the states to pay for specific construction projects. E. g., the Federal Highway Act of 1944, 58 Stat. 839, ch. 626, provided that costs be apportioned between the Government and the railroads, the railroads' share not to exceed 10 percent.

Most of the agreements did not state expressly whether the respective state governments or plaintiff was to have legal title to the facilities. However, the parties have stipulated that the facilities (jetties, bridges, highway under-crossings and overcrossings, floodlights, flasher signals, and signs) were "contributed" to plaintiff by the states; and this is taken to mean that plaintiff owns them, at least for purposes here material. See Lazarus, infra. In any event, under all the agreements, plaintiff was obligated to maintain and replace as necessary, at its own expense, facilities originally built. The facilities were constructed primarily for the benefit of the public to improve safety and to expedite motor-vehicle traffic flow. The record shows, however, that plaintiff received economic benefits from the facilities, e. g., probable lower accident rates, reduced expenses of operating crossing equipment and, where permitted, higher train speed limits. Plaintiff also received intangible benefits, e. g., goodwill from the community-at-large, which was to plaintiff's long-term economic advantage.

On February 5, 1943, plaintiff requested permission of the Service to change from retirement to depreciation accounting for road property. On April 23, 1943, the Service responded by letter to plaintiff's request and enclosed Mimeo 58, entitled "Change from Retirement to Depreciation Accounting for Road Property." Mimeo 58 set out guidelines under which the changeover in accounting practice by the railroads would be acceptable to the Service and described information to be furnished by the railroads. Plaintiff thereafter furnished to the Service the required information which, in essence, constituted a list of properties subject to depreciation, their cost basis, salvage value, expired life, and estimated normal useful life. On September 20, 1944, the Service sent plaintiff a terms letter, incorporating the information supplied by plaintiff and some of the requirements set out in Mimeo 58. This terms letter was reaffirmed by defendant's letter of December 14, 1959. The terms letter granted plaintiff permission "to change from retirement to depreciation accounting as of January 1, 1943," to be effective "upon receipt of a letter agreeing to all the terms and conditions set forth herein." On April 20, 1945, plaintiff accepted the terms letter on the condition that "in the event that if any of the terms and conditions stated in said letter should be changed by statutory amendment, by operation of law, or otherwise," plaintiff would not be precluded "from the benefits of any such changes" and would be "entitled to the benefits of any such changes regardless of the acceptance herein contained."

Mimeo 58 provided in part that "Donated property or contributions or grants in aid of construction from any source must be excluded" from the depreciable base. This statement was not included in the terms letter. However, the schedules of plaintiff's property, submitted to the Service for which straight line depreciation was requested, did not include the donated property here at issue.

Subsequently, on May 1, 1961, plaintiff submitted to the Service revised schedules for depreciable roadway property and requested the benefit of section 94 of the Retirement-Straight Line Adjustment Act of 1958. The Service responded to plaintiff's request, noting the terms letter of September 20, 1944, and stating that plaintiff's revised schedules were acceptable so far as relevant herein. The revised schedules of depreciable property submitted by plaintiff to the Service in 1961 did not include the donated property here at issue.

The issue is whether the facilities are assets properly depreciable by plaintiff. Plaintiff contends they are property donated to it for use in its business and are depreciable under the rationale of Brown Shoe Co. v. Commissioner, 339 U.S. 583, 70 S.Ct. 820, 94 L.Ed. 1081 (1950). Defendant concedes that the facilities are of a character normally subject to allowance for depreciation and that to the extent they were paid for by plaintiff, appropriate depreciation deductions are proper. Defendant says, however, that to the extent plaintiff did not pay for the facilities, it cannot depreciate them, relying on Detroit Edison Co. v. Commissioner, 319 U.S. 98, 63 S.Ct. 902, 87 L.Ed. 1286 (1943). The parties have agreed to the adjusted tax basis for the facilities in the hands of the plaintiff at the time of acquisition, and the rate of straight-line depreciation applicable, if the court decides that depreciation on the full value is proper. The parties have also agreed that the issue is whether the law of Detroit Edison or Brown Shoe is applicable. Our starting point therefore is a brief discussion of the Detroit Edison and Brown Shoe cases.³

In Detroit Edison, the issue was whether the taxpayer could depreciate the cost of certain electric power lines. The taxpayer, Detroit Edison Company, engaged in the generation of electric power for distribution and sale to the public. It often received applications for service which, in its opinion, would require the construction of power line extensions having a cost not warranted by prospective revenues. Accordingly, the company required the applicants for service to pay the cost of line installations, in part refundable from future revenues collected. The company contended that, to the extent the cost of the lines was not refunded, the customers'...