NEW YORK, CHICAGO, & ST. LOUIS RAILROAD CO. v. United States

• Decision Date: 15 May 1964
• Docket Number: No. 385-61.,385-61.
• Parties: The NEW YORK, CHICAGO, AND ST. LOUIS RAILROAD COMPANY v. The UNITED STATES.
• Court: U.S. Claims Court

331 F.2d 865 (1964)

The NEW YORK, CHICAGO, AND ST. LOUIS RAILROAD COMPANY v. The UNITED STATES.

No. 385-61.

United States Court of Claims.

May 15, 1964.

Grant W. Wiprud, Washington, D. C., for plaintiff; Robert T. Molloy, Joseph M. Jones, Washington, D. C., and Thomas O. Broker, Cleveland, Ohio, of counsel.

J. Mitchell Reese, Jr., Washington, D. C., with whom was Asst. Atty. Gen., Louis F. Oberdorfer, for defendant; Edward S. Smith and Lyle M. Turner, Washington, D. C., were on the brief.

Before JONES, Chief Judge, and WHITAKER, LARAMORE, DURFEE and DAVIS, Judges.

DAVIS, Judge.

This is another tax refund case, held pending the decision of the Supreme Court, in which United States v. Zacks, 375 U.S. 59, 84 S.Ct. 178, 11 L.Ed.2d 128 (1963), supplies the major premise.¹ Cf. Kellogg-Citizens National Bank v. United States, Ct.Cl., 330 F.2d 635 (1964). Plaintiff sues for overpayment of World War II excess profits taxes for 1943 and 1944. The only dispute is over the timeliness of the refund claims. Under the normal limitations provisions, 1943 and 1944 were barred long before the claims were made in 1960. The taxpayer relies on a 1958 statute, retrospectively changing the substantive rule involved in the computation of the excess profits tax, as in effect granting a new limitations period.

The New York, Chicago and St. Louis Railroad, an accrual-basis taxpayer, had for many years prior to World War II used the "retirement" method of accounting for its depreciable roadway properties, as did other Class I railways. When, in 1942 and 1943, the Interstate Commerce Commission required many Class I roads to use, instead, "straight line" depreciation, plaintiff and others sought permission to account in the same manner for tax purposes. The Commissioner of Internal Revenue acceded to the request, but only upon the condition that the roads set up a reserve for past depreciation, which had been sustained prior to the accounting changeover date, in the amount of 30 percent of cost. This reserve for past or accrued depreciation was, specifically, to have a twofold effect: (1) it would limit the depreciation to be expensed in the future and (2) it would reduce accumulated earnings and profits in the determination of invested capital, thus lowering excess profits credits and raising excess profits taxes.

The Commissioner of Internal Revenue sent plaintiff a "terms letter" (dated September 15, 1944) which embodied these conditions.² On or about September 23, 1944, plaintiff accepted the limitations. Accordingly, plaintiff's excess profits for the calendar years 1943 and 1944 were calculated and returned in compliance with the Commissioner's letter; as a result, it claims that it paid excess profits taxes approximately $1,500,000 greater than would otherwise have been owing for those periods.

Some fourteen years later, when refund claims for 1943 and 1944 were precluded,³ Section 94 (known as the Retirement-Straight Line Adjustment Act of 1958) of the Technical Amendments Act of 1958, 72 Stat. 1606, 1669-1671,⁴ was enacted. This provision permits taxpayers who had switched from the retirement method to the straight-line depreciation method (subject to the terms-letter conditions) to elect to reduce the 30 percent reserve for past depreciation, in a prescribed manner, replacing it by a reserve for pre-1913 depreciation only. Section 94(f) (1) specifically permits an election to recompute excess profits taxes (in accordance with the reduced reserve) retroactively "as of the changeover date, and as of the beginning of each taxable year thereafter." The final regulations under the section were promulgated on October 13, 1959. In the following month, plaintiff elected its benefits and, then, made formal claims for refund on August 1, 1960 (within two years of the Retirement-Straight Line Adjustment Act of 1958). The Internal Revenue Service rejected the claims on September 8, 1961, and plaintiff's petition was filed in this court a few weeks later. It sues for almost $1,600,000 (plus interest).⁵

In the taxpayer's view, section 94(f) (1) is a retroactive relief provision creating a new cause of action and permitting the otherwise closed years of 1943-1944 to be opened for a recomputation of its excess profits taxes. The Government, in opposition, says that the provision, though retroactive, applies only to those taxpayers whose past years are still open; the statute, according to defendant, does not waive, extend, or revive the ordinary limitations period. These positions match those taken by the parties in Zacks.⁶

The Supreme Court's opinion tells us that, where retroactive tax legislation is claimed to interact with the general limitations provisions of the Code, the issue is to be decided, not by flat or automatic rules or presumptions, but "on a case-by-case basis, as with all questions of statutory construction." 375 U.S. at 66 n. 8, 84 S.Ct. at 182. The Court stressed that "our sole concern is the intent of Congress in adding this section to the Code i. e., the particular, retroactive provision applicable in Zacks" (id., 375 U.S. at 62, 84 S.Ct. at 180) and "whether or not" there should be a waiver of limitations "is a matter for Congress to decide" (id., 375 U.S. at 70, 84 S.Ct. at 184). The opinion repeatedly emphasized "the administrative and legislative background of the retroactive enactment" (id., 375 U.S. at 62, 69, 84 S.Ct. at 180), and took pains to canvass that background of the specific section then before the Court (id., 375 U.S. at 62-66, 69-70, 84 S.Ct. 178). The prime effect of the decision was to elevate the direct indicia of Congressional intent in the particular instance, and to deemphasize the creation-of-new-rights versus clarification-of-existing-rights distinction; the latter was relegated to the realm of possible factors which may conceivably have importance in the appropriate context. Id., 375 U.S. at 68 n. 9, 84 S.Ct. 178.⁷ For cases like Zacks and this one, the Court thus neutralized the prior doctrines of the lower courts laying down general principles. We have been directed, rather, to search for the answer in the materials bearing directly and pointedly on the enactment claimed to reopen the barred years. If we cannot find that Congress had that aim, we must continue to apply the normal limitations statutes. See Kellogg-Citizens National Bank v. United States, Ct.Cl., 330 F.2d 635 p. 638 (1964).

Like the statute in Zacks, Section 94 "does not in terms waive the application of the statute of limitations to refund claims then finally barred. On its face, Section 94 does no more than overrule the Commissioner's position on a matter of substantive law respecting" the excess profits tax from the time when the changeover was made to straight-line depreciation (375 U.S. at 64, 84 S.Ct. at 181). In this respect, plaintiff's case is the exact parallel of Zacks. The mere words, taken alone, are not conclusive in taxpayer's favor.

The "administrative and legislative background," to which we must look is likewise comparable in pinpointing the precise problem with which Congress treated. The reserve for past depreciation, from its inception in the terms letters of the 1940's, had been a source of controversy between the railroad industry and the Government — both as the reserve affected future depreciation and as it bore upon the determination of invested capital for excess profits tax purposes. A large number of railroads (over 50, including plaintiff) observed the terms letters and did not keep open the relevant excess profits tax years. A smaller number (about 12) took steps to prevent the fall of the time-bar for those years. One railroad was successful in a Tax Court proceeding in which it was held that the 30 percent reserve was an unlawful imposition. Akron, Canton & Youngstown R. R. v. Commissioner, 22 T.C. 648 (1954). This decision was not a clear-cut holding on the legality of the conditions of the terms letters, since that railroad had been newly formed out of a nontaxable reorganization and was held not to have needed the Commissioner's permission to adopt the straight-line method. Nevertheless, the Akron ruling reflected favorably on the position of the taxpayers who were opting for removal of the conditions and still had live years.⁸ In 1954 and 1955, a group of railroad tax lawyers began working with representatives of the Internal Revenue Service and the Treasury Department to attempt to reach an administrative compromise of the tax problems engendered by the terms-letter conditions. The hope of the committee was that, if some over-all accord could be reached, extended litigation would be avoided and adjustments would be made, company by company, evidenced by formal closing agreements. Throughout, the emphasis was on an administrative settlement. After the Akron decision, a letter (dated September 3, 1954) calling attention to it, sent by the committee to the Commissioner of Internal Revenue, urged administrative recognition of the illegality of the conditions imposed at the time of the changeover. The first conferences were inconclusive, but the Treasury and the Service began tentatively to consider the idea of a settlement which would replace the 30 percent reserve with a lower reserve encompassing only pre-1913 depreciation.

On November 1, 1955, the railroads' committee met with representatives of the Engineering and Valuation Branch of the Internal Revenue Service to consider the details of a reserve based on pre-1913 depreciation. The Government's proposal was that the adjustments be made prospective only. One of the high-ranking Government representatives (Mr. Spaulding) indicated, however, that he would be receptive to allowing retroactive relief with respect to the adjustment of earnings and profits for excess profits tax purposes, and he requested an estimate of the amounts which would be involved.

In a letter of November 3, 1955, plaintiff's then counsel wrote Mr....