CSX Corp. v. Comm'r of Internal Revenue
| Decision Date | 23 July 1987 |
| Docket Number | Docket No. 7521-82,30341-83. |
| Citation | 89 T.C. 134,89 T.C. No. 14 |
| Parties | CSX CORPORATION, AS SUCCESSOR BY MERGER TO CHESSIE SYSTEM, INC., AND AFFILIATED COMPANIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
P is the common parent corporation of an affiliated group of corporations involved in various railroad related activities. In the consolidated Federal corporation income tax returns filed for the 1972 and 1973 calendar years, certain member corporations of the affiliated group changed their method of depreciation from the 200 percent declining balance method (‘DDB‘) to the straight-line method of depreciation, with respect to certain assets placed in service before January 1, 1971. Beginning in 1973, certain member corporations of the affiliated group also began including in the depreciable basis of their roadway assets amounts for interest and taxes during construction as were estimated by the Interstate Commerce Commission (‘ICC‘) pursuant to the Railroad Valuation Act of 1913, 37 Stat. 701. HELD, upon a change in depreciation method from DDB to straight-line, sec. 1.167(a)-12 Income Tax Regs., requires that an asset's unrecovered basis be recovered by utilizing a remaining-life, as opposed to a whole-life, calculation.
HELD FURTHER, amounts for interest and taxes during construction, as estimated by the ICC, are properly includable in the depreciable basis of P's roadway assets. Southern Pacific Transportation Co. v. Commissioner, 75 T.C. 497 (1980), followed.
HELD FURTHER, Terms Letters agreed to by certain member corporations of the affiliated group with respondent in 1944, in order to secure respondent's consent to change the method of depreciation with respect to certain of P's roadway assets (i.e., ratably depreciable roadway property), do not estop P from including portions of the above-referenced interest and taxes during construction attributable to such property in the depreciable basis of such property. Chicago Burlington & Quincy RR. Co. v. United States, 455 F.2d 993 (Ct. Cl. 1972), followed. John W. Tissue, Garth B. Griffith and Lynne B. Klopf, for the petitioner.
Lewis R. Carluzzo and Sara M. Coe, for the respondent.
Respondent determined the following deficiencies in petitioner's Federal income taxes:
+------------------------------+
¦Docket No.1 ¦Year¦Deficiency¦
+--------------+----+----------¦
¦7521-82 ¦1973¦$2,373,810¦
+--------------+----+----------¦
¦30341-83 ¦1974¦100,000 ¦
+--------------+----+----------¦
¦ ¦1975¦100,000 ¦
+--------------+----+----------¦
¦ ¦1976¦2 100,000¦
+------------------------------+
After agreements by the parties, the remaining Issues for decision are whether petitioner (1) in changing from the declining-balance method to the straight-line method of depreciation, must determine its depreciation allowance by utilizing a rate based on a whole-life or remaining-life calculation, and (2) is entitled to Include in the depreciable basis of its roadway assets amounts for interest and taxes during construction as were estimated by the Interstate Commerce Commission pursuant to the Railroad Valuation Act of 1913.
This case was submitted fully stipulated under Rule 122. This reference incorporates herein the stipulations of facts and attached exhibits.
CSX Corporation (‘CSX‘) is a Virginia corporation, with its principal office at Richmond, Virginia. CSX is the successor to Chessie System, Inc. (‘CSI‘) by virtue of a statutory merger under Virginia law on November 1, 1980, between CSX, CSI and Seaboard Coast Line Industries, Inc. (‘SCLI‘). Upon such merger, the separate identities of CSI and SCLI, previously unaffiliated corporations, became merged into one corporation, CSX, the petitioner in this case.
The issues herein relate to the 1973, 1974, 1975 and 1976 taxable years, with respect to which consolidated Federal corporation income tax returns were filed by CSI, as the common parent corporation of an affiliated group of corporations during such years and on behalf of the other members of that affiliated group, with the Internal Revenue Service Center, Baltimore, Maryland.
The Chesapeake and Ohio Railway Company (‘C&O‘), the Baltimore and Ohio Railroad Company (‘B&O‘), Western Maryland Railway Company (‘WM‘), Chessie Resources, Inc. (which, in 1981, was renamed CSX Resources, Inc., hereinafter ‘Resources‘) and Railease, Incorporated (‘Railease‘) were members of the affiliated group of corporations of which CSX is and has been the common parent corporation since the date of the merger between CSX, CSI and SCLI. C&O is a Virginia corporation with its principal office at Cleveland, Ohio. B&O and WM are each Maryland corporations with their principal office at Baltimore, Maryland. Railease is a Delaware corporation with its principal office at Cleveland, Ohio. Resources is a Virginia corporation with its principal office at Richmond, Virginia.
C&O, B&O and WM are, and have been since before 1973, common carriers by rail subject to the jurisdiction of the Interstate Commerce Commission (‘ICC‘). C&O, B&O and WM are Class I railroads. Such carriers are subject to a uniform system of accounting and bookkeeping as prescribed by the ICC pursuant to 49 U.S.C.A. sec. 20 (1970). Railease is, and has been since before 1973, principally engaged in the acquisition, financing and leasing of railroad locomotives, rolling stock and equipment. Resources is, and has been since before 1975, principally engaged in the business of managing and developing non-rail real estate, managing investments in oil and gas exploration, managing forest reserves and operating a sawmill.
During the taxable years 1973 through 1976, CSI, C&O, B&O, WM, Resources and Railease maintained their books and records and filed consolidated Federal corporation income tax returns on an accrual method of accounting and on the basis of the calendar year.
In various years after 1953 and before 1970, C&O, B&O, and Railease (collectively referred to hereinafter as ‘petitioners‘) acquired railroad rolling stock, roadway machines, shop machinery, communication systems, and signals and interlockers. All of such property was ‘qualified property‘ within the meaning of section 1.167(a)-12(a)(3), Income Tax Regs. and was properly includable in asset guideline Class 40.1 pursuant to Rev. Proc. 72-10, 1972-1 C.B. 721. The portion of such property which is involved in this case was included by these petitioners in a single, open-end, multiple-asset account for each petitioner. Each such account was initially depreciated under the 200 percent declining balance (‘DDB‘) method of depreciation. The three accounts are hereinafter referred to as ‘the C&O DDB account,‘ ‘the B&O DDB account,‘ and ‘the RL DDB account,‘ respectively. In each of the years 1972 through 1976, petitioners elected to apply section 1.167(a)-12, Income Tax Regs., to Class 40.1.
All of the qualified property of C&O, B&O, and Railease in Class 40.1 was accounted for in 1973, 1974, 1975, and 1976 in depreciation accounts which conformed to the asset guideline class, in that all of their Class 40.1 property was included in such accounts, and no other property was so included. The depreciation for each such account was determined by using a rate based upon a 14-year class life, equal to the asset guideline period for Class 40.1 as set forth in Rev. Proc. 72-10, supra.
In the consolidated Federal corporation income tax returns filed for the calendar years 1972 and 1973, petitioners changed from the DDB method to the straight-line method of depreciation for the C&O DDB account (changed 1972), the B&O DDB account (changed 1973), and the RL DDB account (changed 1972), by computing depreciation on such accounts under the straight-line method for the year of change and in all succeeding tax years.
In 1973, the average unadjusted basis of the assets in the C&O DDB account was $266,421,639, the average unadjusted basis of the assets in the B&O DDB account was $112,717,135, and the average unadjusted basis of the assets in the RL DDB account was $139,081,124. In computing depreciation in their 1973 return for all three accounts, petitioners applied a rate (one-fourteenth) based on the class life to the average unadjusted basis of the assets in each account:
+-----------------------------------------------+
¦ ¦Average ¦Depreciation ¦
+---------------+----------------+--------------¦
¦Account ¦unadjusted basis¦claimed (1/14)¦
+---------------+----------------+--------------¦
¦C&O DDB account¦$266,421,639 ¦$19,030,117 ¦
+---------------+----------------+--------------¦
¦B&O DDB account¦112,717,135 ¦8,051,224 ¦
+---------------+----------------+--------------¦
¦RL DDB account ¦139,081,124 ¦9,934,366 ¦
+---------------+----------------+--------------¦
¦ ¦ ¦37,015,707 ¦
+-----------------------------------------------+
Respondent, however, determined the allowable depreciation for each account for the 1973 taxable year, in accordance with Rev. Rul. 75-195, 1975-1 C.B. 78, by dividing the number of years remaining in the class life of the account into its average adjusted basis for 1973, as computed before taking account of any depreciation allowance for 1973. Respondent computed the allowable depreciation as follows:
+------------------------------------------------------------------+
¦ ¦Average basis less average reserve¦Remaining ¦Depreciation¦
+-------+----------------------------------+----------+------------¦
¦Account¦before 1973 depreciation ¦years ¦allowed ¦
+-------+----------------------------------+----------+------------¦
¦C&O DDB¦$266,421,639 ¦less¦$162,078,385 ¦7.41 years¦$14,081,411 ¦
+-------+--------------+----+--------------+----------+------------¦
¦B&O DDB¦112,717,135 ¦less¦56,635,630...To continue reading
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