Union Pac. Corp. v. Comm'r of Internal Revenue, Dkt. No. 24152-81
| Decision Date | 18 July 1988 |
| Docket Number | Dkt. No. 24152-81 |
| Citation | 91 T.C. 32,91 T.C. No. 4 |
| Parties | UNION PACIFIC CORPORATION AND AFFILIATED COMPANIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner operated rail-test cars to detect defective track which was then replaced. HELD, petitioner is not entitled to an investment tax credit in respect of the operating costs of such cars.
Petitioner made mobile homes available rent-free to certain of its employees responsible for sections of track in remote areas. HELD, such mobile homes constitute ‘lodging‘ with the result that petitioner is not entitled to an investment credit for its investment in such homes. James P. Holden, Susan H. Serling, and J. Walker Johnson, for the petitioner.
Lewis R. Carluzzo, for the respondent.
Respondent determined the following deficiencies in petitioner's Federal income tax.
+----------------+
¦Year¦Deficiency ¦
+----+-----------¦
¦1975¦$4,072,046 ¦
+----+-----------¦
¦1976¦5,509,231 ¦
+----+-----------¦
¦1977¦45,869,744 ¦
+----------------+
After concessions by the parties, the issues for decision are whet her petitioner is entitled to an investment tax credit for the costs of operating equipment used to detect flaws in railroad track, and whether petitioner is entitled to an investment tax credit for investments in mobile homes used to house certain employees.
The facts were fully stipulated. The stipulation of facts and attached exhibits are incorporated herein by reference.
Petitioner, Union Pacific Corporation, is a corporation organized under the laws of the state of Utah. It had its principal office in New York, New York, at the time it filed its petition.
For both book accounting and tax purposes, petitioner used the accrual method of accounting. It maintained its books of account and filed its Federal income tax returns on a calendar year basis. For calendar years 1975 through 1977, petitioner timely filed consolidated Federal income tax returns with the Internal Revenue Service Center, Holtsville, New York, which included the income, expenses, etc., of its affiliate Union Pacific Railroad Company (Union Pacific).
During 1975 through 1977, Union Pacific was a common carrier railroad operating in interstate commerce. During those years, Union Pacific used the retirement-replacement-betterment (RRB) method of accounting for depreciation or its railroad track structure. 1
One of the principal components of railroad track structure is rail. Rail is the portion of the railroad track structure that carries the wheels of railroad rolling stock. When steel is rolled into rail, certain rails may be produced with metallurgical defects and flaws. Other defects and flaws may be created as installed rail is subjected to pressure and wear. These defects and flaws increase the possibility that a rail will break or otherwise fail, which could result in an accident such as a derailment.
When defective rail is identified, it must be removed and replaced. To permit early detection of incipient rail failure, Union Pacific operates rail-test cars over its lines of railroad. Rail-test cars are specially equipped railroad cars that run over the track at speeds up to 15 miles per hour. The cars carry electronic test equipment that sends through the rail ultrasonic signals which are designed to identify defects. An operator in the rail-test car monitors the equipment and evaluates the signals. By this process, the operator is able to detect defects and flaws in the rail.
When a rail-test car operator identifies a rail that may be defective, the rail-test car stops. An operator then performs an additional test on the rail using hand-held equipment. If the operator verifies that the rail is defective, the operator marks the rail by painting it, and records the number and location of the rail. A rail work crew follows each rail-test car and removes and replaces all rail identified as defective. The rail-test car itself neither designed nor equipped for the physical installation of rail.
Rail-test cars operate in accordance with itineraries of regularly scheduled tests. Rail is tested from one to four times per year, depending on the tonnage moved over the track and the track's age. Union Pacific's sole purpose for operating the cars is to permit it to identify defective rail as soon as possible so that the rail may be removed and replaced.
During the years in issue, Union Pacific made replacements of rail pursuant to the detection by rail-test cars of specific track material needing removal and replacement. Petitioner claimed investment tax credits with respect to its investment in replacement track material placed in service during those years. It included the costs incurred to operate rail-test cars in investment in replacement track material.
During 1975 through 1977, Union Pacific employed certain employees, whom we will refer to as section employees, whose responsibilities included inspecting, maintaining and repairing designated sections of Union Pacific's lines of railroad. Some of the section employees were responsible for sections of Union Pacific's lines that were located in remote areas, distant from available housing. Union Pacific made available to these employees housing owned by Union Pacific. We will refer to such housing as section housing. Mobile homes were often used as section housing.
Section employees who lived in section housing were paid the same compensation, and received the same benefits, as section employees who did not live in section housing. Section employees who lived in section housing were not charged rent or other compensation by Union Pacific for the use of either the housing or the Union Pacific-provided furnishings therein. 2
Section 38 3 allows an investment tax credit as determined under sections 46-50. The credit is allowed for qualified investment in section 38 property. See section 46. Section 38 property generally includes all depreciable tangible personal property. Section 48(a)(1).
The first issue for decision is whether costs incurred to operate rail-test cars are includable in petitioner's qualified investment in section 38 property. Under section 48(a)(9), if a railroad uses the RRB method of accounting for depreciation of its track structure, replacement track material is included in section 38 property if the replacement is made because, among other reasons, a rail-test car detects specific track material that needs to be replaced. Section 48(a)(9)(C). Section 48(a)(9) defines the term ‘track material‘ as ties, rail, other track material and ballast. 4 The legislative history states that, in addition to the items enumerated in the statute, ‘related installation costs‘ are to be included in qualified investment in section 38 property. S. Rept. 92- 437 (1972), at 34, reprinted in 1972-1 C.B. 559, 577. The legislative history further provides that ‘The costs of removing old track material are not to qualify for the credit.‘ S. Rept. 92-437, supra. The parties agree that if we determine that the costs in issue are described in section 48(a)(9), all other requirements to qualify as section 38 property have been met.
Petitioner first argues that because the costs of operating the rail-test cars are related to the cost of replacement track material they are a cost of replacement track material so as to be includable in qualified investment in section 38 property. We disagree. Congress indicated that costs relating to the installation of replacement track material are to be included in qualified investment in section 38 property. But Congress also indicated that costs of removing old track are not to be included in qualified investment in section 38 property. Both removal and installation costs are logically ‘related to‘ the replacement track material, yet Congress distinguished between them. Thus, merely because a cost is related to track replacement does not necessarily mean it is a cost of the replacement track material includable in qualified investment in section 38 property. Similarly, it does not follow, as petitioner argues, that because ‘detection by a rail-test car of specific track material needing replacement‘ is one condition for eligibility of the costs of replacement track material for the investment credit (see note 4, supra), that the costs of operating rail-test cars are replacement costs and therefore encompassed within the phrase ‘replacement track material.‘
Petitioner contends that, even if the costs of operating the rail-test cars are not per se encompassed within the phrase ‘replacement track material‘ in section 48(a)(9), they should be held to be within the meaning of the phrase ‘related installation costs,‘ which costs Congress has clearly indicated should be included in the amount of the investment by a railroad in replacement track material eligible for the investment credit. See pages 6-7, supra. Respondent contends that such costs are a cost of removing the old track and are therefore not includable in qualified investment in section 38 property, citing the express legislative intention to that effect. See page 7, supra.
Petitioner argues that, when classifying expenditures, we should look to the origin of the expenditure and that the sole purpose for operating the rail-test cars, and hence the origin of the operating expenses, is the installation of new track. While it is undoubtedly true that the purpose of operating the rail-test cars is the installation of new track, the argument proves too much. The purpose of removing the old track is also the installation of new track, but Congress' intent was not to allow track removal costs as qualified investment in section 38 property. Merely because the purpose for, and hence the origin of, the expenditure is installation of the new track does not make the expenditure includable in qualified investment in section 38 property.
Finally, petitioner argues that we may hold for...
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