Anschutz Company v. Commissioner
| Decision Date | 13 March 2006 |
| Docket Number | Dkt. No. 6169-03. |
| Citation | 91 T.C.M. 860 |
| Parties | Anschutz Company and Subsidiaries v. Commissioner. |
| Court | U.S. Tax Court |
John W. Bonds, Jr., Andrew B. Clubok, Thomas L. Evans, Matthew J. Gries, Todd F. Maynes, Herbert N. Beller, Mark B. Hamilton, and Tony Y. Lam for petitioners.
Virginia L. Hamilton and Michael C. Prindible, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined the following deficiencies in petitioners' Federal income taxes:
Tax Year Ended Deficiency
July 31, 1994 $467,424
July 31, 1995 4,837,121
July 31, 1996 9,503,991
After concessions,1 the issues for decision are: (1) Whether Qwest's incremental cost allocation method is a reasonable allocation method for purposes of sections 263A and 460 for tax years ended July 31, 1994 (1994), July 31, 1995 (1995), and July 31, 1996 (1996) (collectively, years in issue); and (2) whether respondent abused his discretion in determining that Qwest's incremental cost allocation method failed to clearly reflect income under section 446.2
Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference. At the time the petition was filed, petitioners were Delaware corporations with their principal place of business in Denver, Colorado.
Evergreen Leasing Corporation (Evergreen) was incorporated on June 10, 1966. Evergreen was primarily in the boxcar leasing business, but part of its charter indicated that Evergreen would provide telecommunications services. On March 20, 1989, Evergreen's name was changed to Southern Pacific Telecommunications Corporation (SP Telecom). In April 1995, SP Telecom's name was changed to Qwest.3
Qwest was formerly a wholly owned subsidiary of Southern Pacific Transportation Company (Southern Pacific). On September 30, 1991, Southern Pacific divested itself of its common stock interest in Qwest. As a result, Qwest became a 75-percent-owned subsidiary of Anschutz Company. On November 5, 1993, Anschutz Company purchased another 15 percent of Qwest. In August 1995, Anschutz Company purchased the remaining 10 percent of Qwest, making Qwest a wholly owned subsidiary.
During the years in issue, Phillip F. Anschutz (Mr. Anschutz) was the direct, sole owner of Anschutz Company. During the years in issue, Anschutz Company was the parent corporation of an affiliated group of corporations, as defined by section 1504(a), which included Qwest. Anschutz Company and its affiliated subsidiaries will hereinafter be referred to as petitioners.
Mr. Anschutz moved Qwest's headquarters from San Francisco to Denver in 1994 in order to have the company near his office for monitoring and control purposes. During the years in issue, Mr. Anschutz was in almost daily contact with Qwest executives. Mr. Anschutz had final approval on any decision by Qwest that involved investment.
While its charter indicated that it would provide telecommunications services, Qwest's initial involvement in the telecommunications business was not until 1987, when it acted as a liaison between Southern Pacific and MCI Telecommunications Corporation (MCI). Qwest's business operations further evolved through the years as it began constructing fiberoptic conduit systems. Qwest first worked as a general contractor and hired subcontractors to do the majority of the work. By the end of the years in issue, Qwest performed most of the construction on its own.
Prior to the late 1980s, long-distance carriers often buried cable directly in the ground. In the late 1980s, the idea of encasing fiberoptic cable4 in flexible conduit was developed. The conduit provides the cable greater protection from being cut, is more readily accessible for maintenance purposes, and, once buried, allows the installation of fiberoptic cable at a later date by pulling the cable through the buried conduit. Fiberoptic cables, or fibers, are pulled through buried conduit by way of hand holes, which are installed at appropriate intervals along the conduit route.
As fiberoptic cable became the preferred medium for the long-distance transmission of data, Southern Pacific developed the idea of using its railroad rights-of-way to lay fiberoptic cable for long-distance data carriers. The use of Southern Pacific's railroad rights-of-way was advantageous because: (1) The easements already existed and thus negotiations with private owners and government agencies for such rights were not necessary; (2) specialized equipment could ride the rails and be used to perform the installation efficiently and economically; (3) railroad rights-of-way are often the most direct routes between locations; and (4) railroad rights-of-way are more secure than other rights-of-way, such as those for highways, telephone poles, or overhead power transmission lines.
In 1987, Qwest first participated in a conduit project, acting as a liaison between Southern Pacific and MCI. Qwest obtained an easement for MCI for the right to install conduit and fiber on a Southern Pacific right-of-way from Houston to Los Angeles. MCI performed its own construction on this route. In exchange for the easement, MCI paid approximately $13 million in cash and provided capacity in the form of 36 DS-3s along the route.5
Once Qwest began installing conduit and pulling fiber, as discussed infra, Qwest used Southern Pacific's railway and equipment in the construction process. Qwest used a specialized rail plow to install the conduit along the railroad rights-of-way. The rail plow functioned as part of a plow train, which consisted of locomotives, rail plow cars, and several supply cars. The supply cars carried the conduit and other construction materials needed for the installation and continuously fed these supplies to the rail plows.
As the locomotives pulled the plow train forward, the rail plow dug a trench and simultaneously lowered and buried the conduit. The rail plow could install multiple conduits at the same time. The rail plow installed the conduits at a depth of approximately 42 to 56 inches and at a distance of 8 feet from the nearest rail. The rail plow also buried a warning tape approximately 1 foot from the surface and backfilled the land to its original contour. The plow train could install conduits up to 4 miles a day, depending on the availability of track time and the severity of the terrain.
In situations where a rail plow could not be used, Qwest used a tractor plow, backhoe, or other similar machinery. If the conduit needed to be laid across a bridge or through a tunnel, the conduit was typically placed in a galvanized steel pipe and attached to the side of the bridge or along the tunnel floor or wall. If the conduit needed to be run under a river or other obstruction, regular or directional boring techniques were used to bore small tunnels through which the conduit could be fed.
After the conduit was buried along a railroad track or other right-of-way, or attached to a bridge or tunnel, Qwest could pull fiber through the conduit using hand holes.
In December 1988, Qwest began its first conduit installation project along the Coast Route, a route running from Los Angeles to San Francisco. Qwest acted primarily as a general contractor and subcontracted out most of the construction work to third parties. The Coast Route project was performed for several long-distance carriers, including AT&T, Sprint, WilTel, and MCI. All of the Coast Route customers did not purchase conduit along the entire route, and each customer's fiberoptic cable was pulled only through the portions of the conduit purchased by that customer. However, Qwest laid multiple conduits along the entire route for its own potential future use or sale. Up to this point, installations of multiple conduits had not been done in the telecommunications industry.
As a result of the project, Qwest obtained several unconnected segments of empty conduit along the Coast Route.
From the long-distance carriers, Qwest received cash compensation and capacity in the form of 18 DS-3s along MCI's fiberoptic cable. Qwest offered the DS-3 capacity as a wholesale opportunity to long-distance carriers.
On March 14, 1991, Qwest purchased an installed conduit system from MCI involving the Union Pacific right-of-way from Wells, Nevada, to Salt Lake City, Utah.
On September 30, 1991, Qwest entered into an easement agreement with Southern Pacific. The agreement gave Qwest a nonexclusive easement along Southern Pacific's rights-of-way for the construction and operation of fiberoptic conduit systems. Qwest also entered into additional easement agreements with other railroads and parties both before and during the years in issue.
During the years in issue, documents titled "five-year plans" were authored within Qwest. The five-year plan for 1995 through 1999 (the 1995 five-year plan) stated "The primary business focus of [Qwest] is to create a nationwide, owned, facility based network and utilize it to carry profitable, revenue traffic." The 1995 five-year plan also stated that Qwest would build 6,617 miles of fiberoptic conduit for its own use and 15,502 miles for sale to third-party customers. The 1995 five-year plan estimated that, if the conduit were sold at an average of $30,000 per conduit mile, $465 million of revenue would be generated. The $30,000 figure was arrived at by looking at prior sales, and the value could be realized...
To continue reading
Request your trial