Opinion ID: 545550
Heading Depth: 3
Heading Rank: 3

Heading: Useful Life and Salvage Value of Rolling Stock

Text: 25 Carland's rolling stock is encompassed by classes 210 through 260. Class 210, which includes boxcars, flatcars, hopper cars, tank cars, gondolas, coaches, locomotives, and cabooses, is by far the largest of these classes, accounting for approximately 75 percent (in dollar terms) of the rolling stock acquired by Carland from 1964 through 1975. See 90 T.C. at 527. The remaining classes include traction motors, locomotive engines, alternators and generators, auto racks, and other miscellaneous equipment. The Tax Court combined these classes to determine an average salvage value and useful life for rolling stock as a whole. The court found an average salvage value of 15 percent (stated as a percentage of acquisition cost) and an average useful life of 20 years. 26 Carland first argues that the Tax Court's salvage value determination is based on improper hindsight which looks merely at the amounts Carland actually obtained on resale, and ignores inflationary price increases that occurred from 1964 through 1975. Carland attempts to justify its lower salvage value estimates using adjustments based on the Producer Price Index for those years. 27 We rejected a very similar argument in Dinkins. There, we found evidence of general price increases in new construction equipment containing technical improvements and betterments insufficient to prove the taxpayer's contention of a general price increase in older and in some respects obsolete construction equipment. 378 F.2d at 830-31. Although we think Carland's use of the Producer Price Index falters for the same reason, we need not rest on that ground alone. Certainly, a taxpayer estimating salvage values can expect some increase in general price levels over a period of 8 to 20 years. Although the Supreme Court in Fribourg Navigation Co. v. Commissioner, 383 U.S. 272, 86 S.Ct. 862, 15 L.Ed.2d 751 (1966), said that a depreciation deduction may not be denied solely because the asset is sold for a price above its adjusted basis, the Court did not hold, as Carland seems to argue, that salvage values must in all cases be estimated in real dollar terms. 12 Indeed, in Fribourg the Court found it highly significant that the high resale profit had resulted from an unexpected and short-lived, but spectacular, change in the world market. Id. at 277, 86 S.Ct. at 865. Similar facts are not present here. The Tax Court therefore did not err in using Carland's actual sales profits over a 20-year period to help it determine a reasonable salvage value for rolling stock. 28 Carland next argues that even if the inflation issue is disregarded the Tax Court still erred in finding a 15 percent salvage value for rolling stock. Carland points out that although its data shows an average salvage of 15.37 percent for class 210 rolling stock, the salvage it obtained for equipment in classes 230 through 260 was lower, ranging from 4.6 percent to 10 percent. 29 Once again, we find no error. Carland appears to be asserting that the Tax Court should have made separate salvage value findings for each class of rolling stock. Yet Carland's own retirement schedule sets forth a group total encompassing all rolling stock classes. See Jt.App. at 988. Significantly, Carland's expert witness, Mr. Cournier, also considered all Carland's rolling stock as a group in his analysis of the useful life of that equipment for the court. 90 T.C. at 554. The Tax Court decided that aggregate treatment was imperative because of the paucity of historical data as to some type of freight cars   . 90 T.C. at 553. Moreover, Carland fails to explain how it was harmed to any significant extent by this averaging. As noted above, the vast majority of the rolling stock fell into class 210, which had an average salvage value of 15.37 percent. Adding the other classes with lower salvages brought the average down only to 14.7 percent. The Tax Court decided on a figure of 15 percent based on the entire record. 90 T.C. at 547. We cannot say that this finding was clearly erroneous. 30 We do find error in the Tax Court's finding of a 20-year useful life for Carland's rolling stock, however. In reaching this finding the Tax Court deviated sharply from its otherwise consistent reliance on Carland's own historical experience. Although the Court relied on Carland's historical data to determine the salvage value for rolling stock, the court rejected useful life estimates based on the same historical data on the apparent ground that the data was ambiguous and could not be relied upon as a valid indicator of useful lives. See 90 T.C. at 556-57. 13 The Tax Court arrived at the 20-year useful life figure by relying primarily on a 1981 depreciation study prepared by Kansas City Southern Railway and L & A Railway for the Interstate Commerce Commission (ICC). 14 This study analyzed the historical service lives of rolling stock actually owned by Kansas City Southern Railway and L & A Railway--not the rolling stock that was leased to these railroads by Carland. See Jt.App. at 2134, 2145. Nevertheless, the Tax Court found this study highly significant because a substantial portion of petitioner's rolling stock was in fact leased to the two railroads and presumably operated by them under conditions indistinguishable from their use of their own equipment. 90 T.C. at 555. 31 We think the Tax Court was too quick to reject Carland's own historical experience in determining a reasonable useful life for rolling stock. See Dinkins, 378 F.2d at 830. Carland is an equipment leasing company, not a railroad. Therefore, the equipment usage practices of Kansas City Southern Railway and L & A Railway, while perhaps relevant to the useful life determination, should not be systematically imputed to Carland. The importance of this point is highlighted by the fact that most of the rolling stock leased by Carland to Kansas City Southern and L & A Railway was used or remanufactured, see 90 T.C. at 523, whereas a large percentage of the freight cars upon which the ICC projections were based were purchased by the railroads when new, and thus had longer useful lives than Carland's rolling stock. Moreover, Charles Caroll, the Commissioner's primary witness, made no attempt to analyze Carland's historical data. Instead, his testimony merely discussed the useful lives of various rolling stock units owned by the two railroads. Repeating the Supreme Court's caution, it is the taxpayer's own practice that determines useful life, not the full abstract economic life of the asset in any business. Massey Motors, 364 U.S. at 97, 80 S.Ct. at 1414-15. 32 Our own analysis of Carland's historical data also supports a conclusion that the Tax Court erred in its determination of the useful life of Carland's rolling stock. Carland's retirement schedule fails to reveal a single instance in which a unit of rolling stock was kept in service for 20 years or longer. Rather, the schedule shows service periods for rolling stock ranging from 1 to 18 years, with an average of approximately 11 to 12 years. Jt.App. at 985-88. Many of the units kept in service for long periods produced little or no profit on resale. Therefore, the court's finding of a 20-year useful life seems inconsistent with a 15 percent salvage. We realize, of course, that many of the units placed into service by Carland before 1975 do not appear on the retirement schedule. Yet the Tax Court itself noted that the record indicated that some of these units had actually been retired. We are simply unable to find anything in the data to support the Tax Court's finding of a 20-year useful life for Carland's rolling stock. 33 Based on our review of the record, we conclude that the Tax Court erred in relying too heavily on the experience of Kansas City Southern Railway and L & A Railway to determine the useful life of Carland's rolling stock and that the finding of 20 years was clearly erroneous.