Norfolk Southern Corp. v. Comm'r of Internal Revenue
| Decision Date | 11 January 1995 |
| Docket Number | 19306–91.,Nos. 19305–91,s. 19305–91 |
| Citation | 104 T.C. 13,104 T.C. No. 2 |
| Parties | NORFOLK SOUTHERN CORPORATION and Affiliated Companies, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Newman T. Halvorson, Jr., Sean F. Foley, Frederick A. Richman, Andrew J. Frackman, Joseph G. Giannola, Richard Alan Brady, and William M. Paul, for petitioners.
Phillip A. Pillar, John A. Guarnieri, Stephen M. Miller, and Keith L. Gorman, for respondent.
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. Sec. 48(a)(2)(A), I.R.C., generally excludes property used predominantly outside the United States from “eligible section 38 property”. Sec. 48(a)(2)(B)(v), I.R.C., excepts from sec. 48(a)(2)(A), I.R.C., “any container of a United States person which is used in the transportation of property to and from the United States”. Pursuant to Rev.Rul. 90–9, 1990–1 C.B. 46, 47, R determined that the Containers did not meet the requirements of sec. 48(a)(2)(B)(v), I.R.C., because they were not “used substantially in the direct transportation of property to or from the United States during each taxable year” of their recovery period.
Held: under sec. 48(a)(2)(B)(v), I.R.C., the Containers must actually be used to transport property to or from the United States at least once each year during their recapture period.
Held, further, R is not equitably estopped from requiring Ps to establish that the Containers met the requirements of sec. 48(a)(2)(B)(v), I.R.C.
Held, further, Ps are entitled to ITC and accelerated depreciation deductions for the Containers to the extent provided herein.
Respondent determined the following deficiencies in petitioners' Federal corporate income taxes, net of offsets for credits or refunds of overassessments of taxes to which respondent agrees petitioners are entitled: 1
+----------------------+
¦¦Year ¦Net Deficiency ¦
++-----+---------------¦
¦¦1981 ¦$8,274,876 ¦
++-----+---------------¦
¦¦1982 ¦5,859,265 ¦
++-----+---------------¦
¦¦1983 ¦6,319,433 ¦
++-----+---------------¦
¦¦1984 ¦736,022 ¦
++-----+---------------¦
¦¦1985 ¦6,788,350 ¦
++-----+---------------¦
¦¦Total¦27,977,946 ¦
+----------------------+
These cases were consolidated for trial, briefing, and opinion. The ultimate issue for decision is whether petitioners may claim investment tax credit (ITC) and accelerated depreciation deductions for certain intermodal cargo containers 2 (Containers) subject to a safe harbor lease entered into between petitioners and Flexi–Van, Inc. (Flexi–Van), on November 13, 1981. In order to resolve that issue, we must decide, in a case of first impression, the meaning of the phrase “used in the transportation of property”, and more specifically the meaning of the word “used”, as employed in section 48(a)(2)(B)(v). All section references are to the Internal Revenue Code in effect for the taxable years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated. We must decide also the extent of contact with the United States, if any, a container must have in order to satisfy the container exception. Additionally, we must decide whether petitioners have shown that Flexi–Van's Containers met the container exception. For that purpose, we consider expert testimony submitted by the parties in support of their respective positions. Last, we decide whether it is nonetheless inequitable to require petitioners to establish for the years in issue that the Containers satisfied the container exception. We hold that petitioners may claim ITC and accelerated depreciation for the Containers to the extent set forth herein.
The parties submitted these cases partially stipulated. The stipulation of facts, supplemental stipulation of facts, and attached exhibits are incorporated herein by this reference.
Petitioner Norfolk Southern Corp. is a corporation incorporated in the Commonwealth of Virginia. Its principal place of business at the time of the filing of the petitions was Norfolk, Virginia. For the year 1981 petitioner Norfolk and Western Railway Co. and for the years 1982 through 1985 petitioner Norfolk Southern Corp. was the common parent of an affiliated group of corporations which filed consolidated Federal income tax returns. Norfolk and Western Railway Co. was one of those affiliated corporations for 1982 through 1985. Hereinafter, Norfolk will be used to refer to Norfolk and Western Railway Co. or Norfolk Southern Corp., as applicable. Under the safe harbor lease petitioners stand in the shoes of Flexi–Van with regard to ITC and accelerated depreciation during the years in issue.
Flexi–Van is a Delaware corporation which was engaged in the business of leasing containers and chassis 3 to shipping companies engaged in the transportation of property in international trade routes during 1981 through 1985. During 1981, Flexi–Van's world headquarters was located in New York, New York.
Flexi–Van has been engaged since the early sixties in the business of providing containers for lease from locations in the United States and around the world. During 1981, Flexi–Van was the second largest container leasing company in the world, owning about 245,000 TEU's 4 of containers, and was one of seven companies that dominated the container leasing industry. 5
Intermodal cargo containers are manufactured in standardized dimensions, with standardized performance characteristics pursuant to international agreements to which the United States is a party. The containers are generally used on vessels specifically constructed or modified for the purpose of transporting such containers. Standardization of the construction characteristics of containers has been developed primarily through the International Organization for Standardization, an international body of standards associations from approximately 55 nations. A container may be certified as meeting international standards by any duly recognized certifying body, including foreign certifying bodies provided for in the international agreements governing containers to which the United States is a party. In the United States, the U.S. Coast Guard establishes standards for certification of containers. As a result of the standardization of the size and construction characteristics of containers under international standards, certified containers of the same type, size, and construction are in essence interchangeable assets.
The standard container is called a dry van. There are also specialized containers, such as refrigeration containers (reefers), open-top containers, flat rack containers, and tank containers. Containers have standard dimensions in length (20 or 40 feet), width (8 or 9 feet) and height (usually 8 or 8.5 feet although the height can also be 9.5 feet). A nonstandard container can have a length of 24, 27, 30, or 35 feet. Of all the containers owned by U.S. carriers and lessors in 1981, more than 90 percent were dry van containers, according to the U.S. Department of Transportation, Maritime Administration.
Intermodal cargo containers used in commerce are not permanently stationed at any location. They move in commerce on board ships and railroad cars at the discretion of the persons shipping property in international commerce. The extent to which containers are used and the routes on which they are used depend on the needs of the persons shipping the property.
A container may travel a water route, inland, or both. After the consignee has unloaded the goods, the container may be either reloaded at or near the place of unloading, returned to the shipping line's local storage facility to await further use, or moved to another location where demand may be greater. If a container has been damaged, it also may be put into repair. For the containerized shipment of cargo to be efficient, large numbers of containers have to be readily available, and those containers must be spread throughout the world in depots on international trade routes. Often, containers are transported empty from a location where there is a surplus of containers to another location where there is a shortage (repositioning).
According to statistics published in Containerisation International, 6 during the period 1978 through 1985, container port handlings (in million TEU's) for the United States (the largest country for port handlings during that period), Japan (the next largest country), and the world (including the United States and Japan) were as follows:
+-------------------------------------+
¦Year¦United States¦Japan¦World ¦
+----+-------------+-----+------------¦
¦1978¦5.94 ¦2.46 ¦not provided¦
+----+-------------+-----+------------¦
¦1979¦7.24 ¦2.90 ¦31.99 ¦
+----+-------------+-----+------------¦
¦1980¦8.57 ¦3.42 ¦37.16 ¦
+----+-------------+-----+------------¦
¦1981¦8.36 ¦3.74 ¦40.85 ¦
+----+-------------+-----+------------¦
¦1982¦8.73 ¦3.75 ¦42.84 ¦
+----+-------------+-----+------------¦
¦1983¦9.56 ¦4.11 ¦45.57 ¦
+----+-------------+-----+------------¦
¦1984¦10.90 ¦5.03 ¦53.32 ¦
+----+-------------+-----+------------¦
¦1985¦11.53 ¦5.51 ¦55.90 ¦
+-------------------------------------+
As of 1981, containers were owned predominantly by leasing companies, and the trend was toward increasing leasing company ownership. A container leasing company provides operating flexibility to ocean carriers by allowing them to pick up and drop off containers in various ports around the world.
During the period 1...
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