Denver & Rio Grande Western R.R. Co. v. Comm'r of Internal Revenue

• Decision Date: 10 April 1959
• Docket Number: 65226.,Docket Nos. 63330
• Citation: 32 T.C. 43
• Parties: THE DENVER & RIO GRANDE WESTERN RAILROAD COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

32 T.C. 43

THE DENVER & RIO GRANDE WESTERN RAILROAD COMPANY, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 63330

65226.

Tax Court of the United States.

Filed April 10, 1959.

Stanley Worth, Esq., and Jules G. Korner III, Esq., for the petitioner.

William H. Welch, Esq., for the respondent.

1. DEDUCTIONS— LOSSES— BASIS OF RAILROAD RIGHT-OF-WAY PROPERTIES PAID FOR BY SHIPPERS.— The cost of sidings built on petitioner's right-of-way at the expense of shippers, which expense was not reimbursed to the shippers, is not includible in the petitioner's basis for determining loss on retirement of the sidings. Detroit Edison Co. v. Commissioner, 319 U.S. 98, followed.

2. DEDUCTIONS— PROPERTY TAXES.— Moffat Tunnel Improvement District levy deductible only to extent allocable to maintenance and interest charges as determined by the Commissioner. Western Products Co., 28 T.C. 1196, followed.

3. DEDUCTIONS— BASIS OF DEPRECIABLE ROADWAY PROPERTIES— CHANGE FROM RETIREMENT METHOD TO COMPOSITE ACCOUNTS METHOD FOR DEPRECIATION— ‘TERMS LETTER’ AGREEMENT.— ‘Terms Letter’ agreement providing for reduction of basis on depreciable roadway properties by amount representing depreciation sustained to January 1, 1943, held applicable to the basis of roadway properties sold or retired on account of casualty or sudden obsolescence in the taxable years. Cf. Denver & Salt Lake Railway Co., 24 T.C. 709.

4. DEDUCTIONS— REORGANIZATION EXPENSES OF ISSUING BONDS, PREPARATION OF ESCROW CERTIFICATES AND DOCUMENT ASSUMING A LEASE.— Costs of issuing bonds, preparation of escrow certificates and a document for the assumption of a lease, not deductible as expense in the year incurred, may be amortized and deducted over the definite lives of the bonds, escrow, and lease.

5. DEDUCTIONS— REPAIRS OF CAPITAL EXPENDITURES.— Cost of replacing floor planks and stringers in railroad viaduct held to be an item requiring capitalization, and not deductible as an expense of repair.

6. DEDUCTIONS— WORTHLESS DEBT— YEAR OF WORTHLESSNESS.— The petitioner has failed to show that the first mortgage bonds of the Rio Grande Southern Railroad did not become completely worthless at some time prior to 1951, the earliest year involved herein for which the petitioner seeks a deduction because of their worthlessness.

7. DEDUCTIONS— ESTIMATED ACCRUALS FOR LIABILITIES ON CLAIMS AND POTENTIAL CLAIMS FOR LOSS AND DAMAGE TO FREIGHT.— The petitioner, pursuant to its long standing practice, deducted in 1953 the full amount paid in that year on claims for loss and damage to freight and in addition accrued and deducted an estimated liability for unsettled claims and potential claims for loss and damage to freight; held no deduction is allowable based on the unsettled and potential claims.

8. DEDUCTIONS— CHARITABLE CONTRIBUTIONS— FAIR MARKET VALUE OF NARROW GAGE LOCOMOTIVE AT DATE OF GIFT.— The fair market value of narrow gage locomotive found to be $6,000 at the time of gift.

MURDOCK, Judge:

The Commissioner determined deficiencies in the petitioner's income tax of $44,278.54 for 1951, $104,974.30 for 1952, and $242,259.36 for 1953.

GENERAL FINDINGS OF FACT.

The petitioner filed its income tax returns for the calendar years 1951, 1952, and 1953 with the director of internal revenue at Denver, Colorado. It used an accrual method of accounting. The petitioner, a corporation, is a common carrier by rail operating principally in the States of Colorado and Utah. It was organized in 1908 by the consolidation of the Denver & Rio Grande Railroad Company and the Rio Grande Western Railway Company. It was reorganized in 1921, 1924, and 1947. All of its reorganizations constituted nontaxable reorganizations under the Internal Revenue Code and prior revenue laws. The Denver & Salt Lake Railway Company, a former subsidiary, was merged with the petitioner in the 1947 reorganization.

All stipulated facts are incorporated herein by this reference.

First Issue.

This issue is whether the petitioner may deduct losses on retirement of roadway properties to the extent that the cost thereof was paid by shippers desiring siding facilities and not reimbursed to them by the petitioner.

FINDINGS OF FACT.

The petitioner, at the request of a shipper, would build a spur track or a related facility. The portion of the total cost which related to the trackage on the land of the shipper was paid for by the shipper and is not here involved. The portion of the total cost which related to the trackage on the petitioner's right-of-way and to which the petitioner acquired exclusive title and exclusive right of use was included in the petitioner's road property account, pursuant to the requirements of the Interstate Commerce Commission. The shipper was required to make a deposit with the petitioner at the time of construction of an amount equal to that portion of the total cost. The deposit was credited by the petitioner to an account entitled ‘Other Deferred Liabilities' and was to be refunded to the shipper, either in whole or in part, depending upon the number of cars moved over the spur track during the next 5 years. Any portion of the deposit which had not been refunded by the end of the 5-year period was credited to an account entitled ‘Donations and Grants' and the shipper lost all rights to refund of that portion.

The petitioner retired some of these spur tracks and facilities during the taxable years. The unrefunded cost of these retirements amounted to $3,251.18 for 1951, $9,040.43 for 1952, and $2,950.35 for 1953. No portion of those amounts was ever included in the taxable income of the petitioner. The Commissioner, in computing the loss on the retirement of those facilities, excluded such unrefunded portions of the cost from the basis of those assets in the hands of the petitioner.

OPINION.

The sole question under this issue is whether the amounts unrefunded are a part of the basis of the assets in the hands of the petitioner for computing loss. The petitioner relies upon Brown Shoe Co. v. Commissioner, 339 U.S. 583, but the facts in that case distinguish it from the present case. There community groups contributed assets to the taxpayer as an inducement for it to locate a factory, or to expand its existing factory facilities, in the community. The Supreme Court held that those contributions were capital contributions which formed a part of the basis for depreciation of the assets of the petitioner.

The facts in the present case are like those in Detroit Edison Co. v. Commissioner, 319 U.S. 98. There consumers of electric power paid, at least in part, the cost of line extensions to their premises. The Court held that the amounts paid by the consumers were not gifts or contributions to the taxpayer's capital and were not a part of the taxpayer's basis for computing depreciation. The Court in Brown Shoe Co., supra, distinguished the Detroit Edison Co. case on the ground that in the latter case the payments were a part of the price paid by the customer for the service and the farmers and other customers who furnished those funds were in no sense making donations or contributions to the electric company, whereas in the Brown case there were neither customers nor payments for services and a donative intent was inferred in the transaction between the shoe company and the citizens of the respective communities to whom there was no direct service or recompense but only an expectation that such contributions might prove advantageous to the community at large. The Supreme Court in the Brown Shoe case also distinguished Commissioner v. Arundel-Brooks Concrete Corporation, 152 F.2d 225, where the cost of a concrete-mixing plant was financed in part by the supplier of a raw material used in mixing concrete, because there the payments were made in consideration of services rendered in insuring the supplier of raw materials of an outlet for his product.

The shippers in the present case paid the unrefunded amounts as a part of the price of service furnished them by the petitioner, not as gifts or contributions to it. Those contributions were made by the individuals benefited by the spur tracks and there is no indication of any community benefits being involved. The Commissioner did not err in excluding those amounts from the basis of the assets in the hands of the petitioner. The fact that the basis in this case is being used to compute loss rather than depreciation does not distinguish this case from the Detroit Edison case, since the basis is the same for both purposes. Cf. Teleservice Co. of Wyoming Valley, 27 T.C. 722, affd. 254 F.2d 105, certiorari denied 357 U.S. 919.

Second Issue.

This issue is whether the petitioner is entitled to deduct in each year the entire amount of the taxes levied by the Moffat Tunnel Improvement District.

FINDINGS OF FACT.

The petitioner ‘paid’ $11,737.47 in 1951, $9,778.08 in 1952, and $9,748.17 in 1953 as taxes levied by the Moffat Tunnel Improvement District (hereafter called Moffat District). The petitioner deducted those amounts as property taxes in those years.

Moffat District is an improvement district created by an act of the Legislature of Colorado. The Commissioner, in accordance with a statement of its receipts and disbursements for the taxable years issued by Moffat District, determined that 49 per cent of the deductions taken by the petitioner was properly allocable to maintenance and interest charges of the Moffat District, but the remainder of those taxes was not allowable as deductions because not allocable to maintenance and interest charges of the Moffat District.

OPINION.

The determination of the Commissioner is in accordance with the holding of this Court in Western Products Co., 28 T.C. 1196, and on authority of that case this issue is decided in favor of the Commissioner.

Third Issue.

The third issue is whether the petitioner, pursuant to a ‘Terms Letter’ agreement with the Commissioner, must reduce its basis on depreciable roadway...