Norfolk Southern Corp. v. Comm'r of Internal Revenue, s. 19305–91

• Decision Date: 06 April 1995
• Docket Number: 19306–91.,Nos. 19305–91,s. 19305–91
• Citation: 104 T.C. 417,104 T.C. No. 21
• Parties: NORFOLK SOUTHERN CORPORATION and Affiliated Companies, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.*
• Court: U.S. Tax Court

104 T.C. 417

104 T.C. No. 21

NORFOLK SOUTHERN CORPORATION and Affiliated Companies, Petitioners,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.*

Nos. 19305–91

19306–91.

United States Tax Court.

April 06, 1995.

Ps claimed investment tax credit (ITC) on their 1981 consolidated Federal income tax return and accelerated depreciation deductions on their 1981 through 1985 consolidated Federal income tax returns. The ITC and depreciation related to certain intermodal cargo containers (Containers) included under a safe harbor lease agreement entered into with F on Nov. 13, 1981, pursuant to sec. 168(f)(8), I.R.C.

Held: Ps are not entitled to claim depreciation under sec. 168(f)(2) for any Containers which do not meet the definition of “qualified leased property” under sec. 168(f)(8)(D). Norfolk S. Corp. v. Commissioner, 104 T.C. 13 (1995), modified.

Newman T. Halvorson, Jr., Sean F. Foley, Washington, DC, Frederick A. Richman, Los Angeles, CA, Andrew J. Frackman, Joseph G. Giannola, New York City, Richard Alan Brady, and William M. Paul, Washington, DC, for petitioners.

Phillip A. Pillar, John A. Guarnieri, Philadelphia, PA, Stephen M. Miller, Washington, DC and Keith L. Gorman, Philadelphia, PA, for respondent.

SUPPLEMENTAL OPINION

PARR, Judge:

The Court's opinion in these cases, 104 T.C. 13 (1995), was issued on January 11, 1995 (prior opinion). Thereafter, on February 13, 1995, pursuant to Rule 161,¹ respondent filed a motion for reconsideration of opinion. The Court directed petitioners to file a response to respondent's motion. On March 6, 1995, petitioners filed their objection to respondent's motion for reconsideration.

Background

During 1981, petitioners entered into an agreement with Flexi–Van Leasing, Inc. (Flexi–Van), a large lessor of intermodal cargo containers, intended to qualify as a safe harbor lease under section 168(f)(8) (safe harbor lease). ² Under that agreement, petitioners agreed to pay Flexi–Van $18,032,147 for all rights to claim investment tax credit (ITC) and accelerated depreciation deductions relating to, among other equipment, approximately 38,000 intermodal cargo containers (Containers) that Flexi–Van leased in the course of its business to more than 675 shipping companies based throughout the world. See Norfolk S. Corp. v. Commissioner, supra at 20–21, 22. In notices of deficiency issued for the years 1981 through 1985, respondent determined that petitioners were not entitled to claim ITC and accelerated depreciation for the Containers on the ground that the safe harbor lease did not qualify under section 168(f)(8), because petitioners had not shown that the Containers qualified as eligible property for 1981. Id. at 24.

For 1981, section 38 provides a credit against tax for qualifying tangible property used in a trade or business or held for the production of income and having a useful life of 3 years or more at the time the property is placed in service, but only if depreciation is allowable with respect to that property (section 38 property). Section 48(a)(2)(A) provides that property does not qualify as section 38 property if during the taxable year it is used predominantly outside the United States. Section 48(a)(2)(B)(v), however, provides that a container used predominantly outside the United States nevertheless qualifies for ITC if it is owned by a U.S. person and is “used in the transportation of property to and from the United States” (the container exception).

At trial and in her briefs, respondent took the position that the Containers were not eligible section 38 property for 1981, because petitioners had not shown that the Containers were used substantially in the direct transportation of property to or from the United States during each taxable year of the Containers' recovery period. Petitioners, on the other hand, took the position that the Containers satisfied the container exception, because those Containers were made available for use in the transportation of property to or from the United States. See Norfolk S. Corp. v. Commissioner, supra.

In our prior opinion, we found that section 48(a)(2)(B)(v) requires that intermodal cargo containers must actually be used to transport property to or from the United States at least once each year during their recapture period. Id. at 46. Accordingly, we held, using our best judgment, that petitioners were not entitled to claim ITC for 54 Containers that had no lease activity by December 31, 1983, or for any Containers that were leased to lessees that had no U.S. trade routes or exclusively on single trip leases between two non-U.S. ports. We also held that petitioners were entitled to claim ITC for those Containers with a 1981 on-hire or off-hire in the United States and for Containers leased to lessees with 100 percent of their container capacity devoted to U.S. trade routes during 1981. In addition, we held that petitioners were entitled to claim ITC for 33– 1/3 percent of the cost of any remaining Containers. Id. at 57.

We also stated in the prior opinion that “For those Containers for which no ITC is allowed, depreciation shall be computed under the provisions of section 168(f)(2)”.³ Id. In her motion for reconsideration, respondent requests, among other things, that the Court amend our prior opinion by deleting the above-quoted sentence or otherwise clarifying such holding because under section 168(f)(8)(A) and (D) ⁴ only property that is eligible for ITC may be the subject of the safe harbor leasing provisions.

Respondent's position in her motion for reconsideration is supported by the temporary regulations promulgated under section 168(f)(8), which provide in pertinent part as follows:

Sec. 5c.168(f)(8)–6 Qualified leased property.

* * *

(b) Special rules—(1) New section 38 property. (i) New section 38 property is section 38 property described in subsection (b) of section 48 and the regulations thereunder other than a qualified rehabilitated building (within the meaning of section 48(g)(1)). Qualified leased property must be new section 38 property at the beginning of the lease and must continue to be section 38 property in the hands of the lessor and the lessee throughout the lease term. The fact that the lessee used the property within the 3–month period prior to the lease will not disqualify the property as new section 38 property of the lessee.

(ii) The application of this paragraph (b)(1) may be illustrated by the following examples:

* * *

Example (3). R Corp., a foreign railroad, acquires new rolling stock and enters into a sale and leaseback transaction with B Corp., a domestic corporation. R uses the rolling stock within and without the United States, but predominantly outside the United States within the meaning of section 48(a)(2)(A). Section 48(a)(2)(B)(ii) is inapplicable to R because R is neither a domestic railroad corporation nor a United States person; therefore, the rolling stock cannot be section 38 property to R. The property is not qualified leased property.

Sec. 5c.168(f)(8)–6(b), Temporary Income Tax Regs. under the Economic Recovery Tax Act of 1981, 46 Fed.Reg. 51911 (Oct. 23, 1981).

In their objection to respondent's motion for reconsideration, petitioners do not disagree substantively with respondent's position that depreciation is not available under section 168(f)(8)(A) and (D) to a safe harbor “lessor” (to wit, petitioners) for property that is not eligible section 38 property. Rather, they contend that respondent's position that petitioners are not eligible to have depreciation computed under section 168(f)(2) is contrary to paragraph 17 of the stipulation of facts (stipulation) filed September 20, 1993. Petitioners contend further that paragraph 17 of the stipulation is consistent with the issues in these cases as understood by both parties.

Paragraph 17 of the stipulation states as follows:

17. The economic substance of the transaction was that Norfolk paid $18,032,147 in cash and received all rights of Flexi–Van to claim the investment tax credits and accelerated depreciation deductions with respect to the Containers, chassis and trailers. There was no transfer of title or possession of the Containers and chassis from Flexi–Van to Norfolk at any time.

Petitioners assert that in paragraph 17 the parties stipulated that petitioners were entitled to receive any ITC or depreciation that Flexi–Van would have received. Petitioners contend that, since section 168(f)(2) prescribes the depreciation deductions that Flexi–Van would have received for the nonqualified containers had Flexi–Van not sold the tax benefits relating to those Containers to petitioners, pursuant to paragraph 17 of the stipulation, petitioners similarly are entitled to have the depreciation deductions for those Containers computed under section 168(f)(2).

Petitioners rely on a reference to section 168(g) that respondent made in a motion for continuance dated December 18, 1992,⁵ and a statement in respondent's trial memorandum, filed September 20, 1993, in which respondent describes the safe harbor lease as the instrument under which petitioners “acquired Flexi's tax attributes” in the Containers, to support their contention that the only issue framed for trial, argued, and briefed was “what actual use, if any, petitioners as the owners of the Containers were required to prove for purposes of ITC and depreciation”.⁶ According to petitioners, respondent now is attempting in her motion for reconsideration to redefine the issue in these cases to be whether petitioners are entitled to deduct depreciation under section 168(f)(2).

We do not agree with petitioners that respondent's position on the applicability of section 168(f)(2) is contrary to paragraph 17 of the stipulation. Nor do we find that in that paragraph 17 respondent, in effect, conceded that petitioners were entitled to compute the depreciation deductions for nonqualified containers under section 168(f)(2). We do not interpret paragraph 17 of the...