Kansas City Southern Ry. Co. v. Comm'r of Internal Revenue
| Decision Date | 30 June 1981 |
| Docket Number | 974-72,Docket Nos. 971-72,4788-73. |
| Citation | 76 T.C. 1067 |
| Parties | THE KANSAS CITY SOUTHERN RAILWAY COMPANY, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENTKANSAS CITY SOUTHERN INDUSTRIES, INC., PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
ISSUE I. Carland Rentals: Petitioner claims that amounts paid or accrued pursuant to written agreements for the lease of equipment are deductible as rentals under sec. 162(a)(3), I.R.C. 1954. Held: The payments were for the “continued use or possession” of equipment used in the lessees' business, to which the lessees took no title and in which the lessees had no equity. As such, the payments are properly deductible under sec. 162(a)(3), I.R.C. 1954. Held, further, the amounts paid or accrued during the years at issue pursuant to the lease agreements constituted reasonable rentals.
ISSUE II. Darby Freight Cars: Petitioner claims that the total costs for certain freight cars qualify for the investment credit under sec. 38, I.R.C. 1954, and for accelerated depreciation under sec. 167(b), I.R.C. 1954, by meeting the requirements of secs. 48(b) and 167(c), I.R.C. 1954. Held:
1. 3,137 Freight Cars: Of this group, 2,665 cars were not “acquired” by Railway and L & A after the dates set forth in secs. 48(b)(2) and 167(c)(2), I.R.C. 1954. (Respondent concedes petitioner's claim as to 472 cars.) The 2,665 cars were “reconstructed” (rebuilt) by Railway and L & A after the statutory dates and fall within the purview of secs. 48(b)(1) and 167(c)(1), I.R.C. 1954, and the regulations thereunder. The investment credit and accelerated depreciation for these 2,665 cars is limited to the amounts properly attributable to the reconstruction.
2. 522 Freight Cars and 66 Freight Cars: The cars in these two groups of “reconstructed” (rebuilt) freight cars were leased prior to being purchased. As a consequence, the “original use” requirement of secs. 48(b) and 167(c), I.R.C. 1954, and the regulations thereunder, has not been satisfied. Moreover, the lessors, with whom “original use” commenced, did not elect to pass through the investment credit pursuant to sec. 48(d), I.R.C. 1954. Petitioner is not entitled to the investment credit and accelerated depreciation for these two groups of cars.
3. 259 Freight Cars: The cars in this group of “reconstructed” (rebuilt) freight cars were leased, only, and petitioner's claim is limited to the investment credit. Although the lessors elected to pass through the investment credit in an attempt to comply with the provisions of sec. 48(d), I.R.C. 1954, and the regulations thereunder, the “rebuilt” cars cannot properly be the subject of an election because the “original use” requirement has not been satisfied. Petitioner is not entitled to the investment credit for these 259 cars.
ISSUE III. Relay Rail: Petitioner claims that, under the retirement-replacement-betterment method of accounting, the proper amount (i.e., salvage value) to be assigned to rail released from the track system and relaid as additions and betterments (i.e., relay rail) is determined by reference to the cost of the released rail. Held, the salvage value of the relay rail is its fair market value at the time of its release from the track system and not the cost of such rail. Held, further, a formula for determining the fair market value of the relay rail at issue is provided herein.
ISSUE IV. Grading Useful Life: Petitioner claims that it is entitled to ratable depreciation deductions under sec. 167, I.R.C. 1954, and to investment credits under sec. 38, I.R.C. 1954, for certain railroad grading. Petitioner bases this claim on its assertion that it has shown, by statistical means, a reasonably determinable useful life over which the cost of the grading can be allocated. Held, petitioner has established that the useful life of the grading was reasonably ascertainable during the years at issue and that it is entitled to ratable deductions pursuant to sec. 167, I.R.C. 1954, and, further, to investment credits pursuant to secs. 38 and 48, I.R.C. 1954. Held, further, in commencing the ratable depreciation of the grading, petitioner does not require the consent of the Commissioner because it is not changing its method of accounting under sec. 446(e), I.R.C. 1954. Harlow B. King, J. Glenn Hahn, David E. Bass, J. Douglas Irmen, and Kip A. Wiggins, for the petitioners.
Denis J. Conlon and George T. Morse III, for the respondent.
These consolidated cases were tried before Special Trial Judge Charles R. Johnston pursuant to Rules 180 and 182, Tax Court Rules of Practice and Procedure. His report was filed on February 1, 1980, and exceptions to the report were subsequently filed by the parties. The Court has duly considered those exceptions and has given appropriate weight to the findings of fact and conclusions of law recommended by Special Trial Judge Johnston. See Rule 182(c) and (d), and the accompanying Note, Tax Court Rules of Practice and Procedure, 60 T.C. 1057, 1149-1150 (1973).
Respondent determined the following deficiencies in petitioners' Federal income taxes:
+-----------------------------------------------------------------------------+
¦Docket No. ¦Petitioner ¦Year ¦Deficiency ¦
+------------+------------------------------------+--------------+------------¦
¦ ¦ ¦ ¦ ¦
+------------+------------------------------------+--------------+------------¦
¦971-72 ¦Kansas City Southern Railway Co ¦Jan. 1, 1962 ¦$474,609.07 ¦
+------------+------------------------------------+--------------+------------¦
¦ ¦ ¦Oct. 31, 1962 ¦ ¦
+------------+------------------------------------+--------------+------------¦
¦ ¦ ¦ ¦ ¦
+------------+------------------------------------+--------------+------------¦
¦974-72 ¦Kansas City Southern Industries, Inc¦Jan. 29, 1962—¦137,493.77 ¦
+------------+------------------------------------+--------------+------------¦
¦ ¦ ¦Dec. 31, 1962 ¦ ¦
+------------+------------------------------------+--------------+------------¦
¦ ¦ ¦Dec. 31, 1963 ¦469,984.89 ¦
+------------+------------------------------------+--------------+------------¦
¦ ¦ ¦Dec. 31, 1964 ¦115,355.58 ¦
+------------+------------------------------------+--------------+------------¦
¦ ¦ ¦Dec. 31, 1965 ¦240,104.04 ¦
+------------+------------------------------------+--------------+------------¦
¦ ¦ ¦ ¦ ¦
+------------+------------------------------------+--------------+------------¦
¦4788-73 ¦Kansas City Southern Industries, Inc¦Dec. 31, 1966 ¦568,867.65 ¦
+------------+------------------------------------+--------------+------------¦
¦ ¦ ¦Dec. 31, 1967 ¦1,540,332.11¦
+------------+------------------------------------+--------------+------------¦
¦ ¦ ¦Dec. 31, 1968 ¦1,038,080.66¦
+------------+------------------------------------+--------------+------------¦
¦ ¦ ¦Dec. 31, 1969 ¦2,268,007.70¦
+-----------------------------------------------------------------------------+
Respondent in docket No. 974-72, by amendment to answer, claimed in the alternative increased deficiencies for the taxable years in issue in the amounts of $168,034.77, $294,491.82, $354,527.96, and $217,732.78; and in docket No. 4788-73, by amendment to answer, claimed in the alternative increased deficiencies for the taxable years in issue in the respective amounts of $470,871.56, $716,606.16, $548,040.34, and $378,545.06.
Petitioner in docket No. 971-72, in its petition, claimed an overpayment in an amount not less than $98,966.37, and in an amendment to petition, claimed an additional overpayment of not less than $81,363. In docket No. 974-72, in its petition, petitioner claimed overpayments for the taxable years in issue in the respective amounts of not less than $165,443, $139,634.49, $290,536.96, and $119,215.10, and in its third amendment to petition, petitioner claimed further increased overpayments for all taxable years in issue in the total amount of $518,186. In docket No. 4788-73, petitioner, in its petition, claimed overpayments for the taxable years 1967, 1968, and 1969 in the respective amounts of $228,112.33, $213,132, and $56,017.50, and in its third amendment to petition, petitioner claimed increased overpayments for all taxable years in issue in the total amount of $711,406.
Other issues having been disposed of by mutual agreement of the parties, the following issues remain for decision:
Issue I. Carland Rentals.—Whether the amounts paid or accrued pursuant to written agreements for the lease of equipment are deductible as rentals under section 162(a)(3).1
Also involved is a question of whether the amounts paid or accrued during the years at issue pursuant to the lease agreements constitute reasonable rentals.
Issue II. Darby Freight Cars.—Whether the total costs for certain freight cars qualify for the investment credit under section 38 and for accelerated depreciation under section 167(b) by virtue of meeting the requirements of sections 48(b) and 167(c).
Also involved are various subsidiary questions.
Issue III. Relay Rail.—Whether, under the retirement-replacement-betterment method of accounting, the proper amount (i.e., salvage value) to be assigned to rail released from the track system and relaid as additions and betterments (i.e., relay rail) is determined by reference to the cost of the rail...
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