Opinion ID: 2999644
Heading Depth: 2
Heading Rank: 2

Heading: Tax Credits

Text: TP&W next contends that the STB erred in refusing to consider the value of tax credits under the American Jobs Creation Act of 2004, 26 U.S.C. § 45G, in its determination of the line’s constitutional minimum value. The American Jobs Creation Act permits a railroad to take a credit “equal to 50 percent of the qualified railroad track maintenance expenditures paid or incurred by an eligible taxpayer during the taxable year,” not to exceed $3,500 multiplied by [] the sum of—[] the number of miles of railroad track owned or leased by the eligible taxpayer as of the close of the taxable year, and [] the number of miles of railroad track assigned for purposes of this subsection to the eligible taxpayer by a Class II or Class III railroad which owns or leases such railroad track as of the close of the taxable year. 26 U.S.C. § 45G(a), (b)(1). According to TP&W, its anticipated future investment in its rail line would entitle it to (...continued) noted that the STB should have used a six-month, rather than fourteen-month, average, see id. at 18; it did not argue that the specific starting and ending dates utilized by the STB were arbitrary or otherwise unreasonable. We therefore deem the argument waived and do not reach the matter on appeal. 30 No. 05-1920 approximately $874,650 in tax credits over a three-year period—an amount it contends should be taken into account in determining the line’s constitutional minimum value.21 The STB held that tax credits should not be considered in calculating the constitutional minimum value of the line under 49 U.S.C. § 10907, both because tax credits are non-physical assets of the line, and therefore not part of the line’s liquidated value, and because the STB found that it was “speculative at best . . . whether TP&W would actually spend the funds necessary to entitle it or its corporate parent to a tax credit, much less the maximum tax credit.” Petitioner’s App., Ex.B at 13. As discussed previously, we shall reverse the STB’s legal interpretation of a statute it is charged with administering only if it is arbitrary and capricious—in other words, if there are “compelling indications that the [STB’s] interpretation is incorrect.” 21 TP&W also argues on appeal that the “[STB’s] refusal to account for the value of tax credits in determining the Line’s market value violated the Fifth Amendment.” Petitioner’s Br. at 37 (urging this court to review its claim of constitutional error de novo). However, TP&W did not raise its Fifth Amendment claim in agency proceedings: In its petition for reconsideration, TP&W argued only that standard valuation procedures required the STB to take into account tax credits for maintenance expenditures under the newly enacted American Jobs Creation Act. See Petition for Reconsideration, A.R. 212639 at 19. For this reason, TP&W’s argument that failure to account for tax credits under 26 U.S.C. § 45G violates its Fifth Amendment right to just compensation has been waived. Even if this argument was not waived, the above analysis demonstrates that the STB’s refusal to consider the value of potential tax credits for maintenance of the line did not violate any constitutional guarantees. No. 05-1920 31 Caddo Antoine & Little Missouri R.R., 95 F.3d at 746 (internal quotation marks omitted). We review the STB’s factual finding that TP&W did not plan to invest necessary funds in the line “for substantial evidence.” Cross v. Dep’t of Transp., 127 F.3d 1443, 1448 (Fed. Cir. 1997) (“We do not substitute our judgment for that of the board as to the weight of the evidence or the inferences to be drawn therefrom.”). The STB did not err in refusing to consider future tax credits available under 26 U.S.C. § 45G in calculating the net liquidation value of TP&W’s rail line. Tax credits may be a proper consideration in calculating a line’s going concern value, under which the line will continue to operate in a profitable manner. However, when “there is no evidence of a higher going concern value for continued rail use,” the STB calculates a line’s constitutional minimum value by evaluating its net liquidation value, the property’s “highest and best nonrail use.” New York Cent. Lines, LLC—Abandonment Exemption—In Berkshire County, Mass., STB Docket No. AB-565, 2002 WL 599179, at  (April 18, 2002). In that scenario, the STB is to calculate the sale price “on the basis of what the seller would have realized from the sale of the assets had the line in fact been abandoned,” the track materials salvaged and the land sold. Iowa Terminal R.R. Co. v. I.C.C., 853 F.2d 965, 969 (D.C. Cir. 1988). TP&W does not dispute that, but for the feeder line application, it would have abandoned the La Harpe-Hollis Line, selling its track and rail materials for scrap. The line, with the exception of the Mapleton Spur, which TP&W will retain post-sale, no longer earns a profit and therefore has no going concern value.22 Therefore, TP&W should be 22 As the STB explained, (continued...) 32 No. 05-1920 compensated only for the “ ‘the nonrail market value of [its] assets.’ ” Id. (quoting Chicago & N.W. Transp. Co. v. United States, 678 F.2d 665, 668 (7th Cir. 1982) (alteration in original)). Non-physical assets are not an appropriate consideration in this calculation: “ ‘The purpose of [section 10905] would be frustrated if the Commission were required to consider the value of the [line] to the offeror’ as part of an operating railway rather than the price the seller would have received from the sale of the [line] for nonrail uses.” Id. (quoting Chicago & N.W. Transp. Co., 678 F.2d at 668) (first alteration in original). As a result, savings realized from tax credits are not part of the line’s net liquidation value. As the D.C. Circuit explained in Iowa Terminal Railroad: Petitioner argues, on appeal, that it is at least entitled to the benefit of the tax savings it would have realized had it been able to deduct the value of the right-of-way as a charitable gift in its income tax returns. Such a position 22 (...continued) TP&W and KJRY agree that the traffic originating or terminating on the Western Segment is inadequate to give it a GCV that is higher than NLV, and it is not apparent how the Eastern Segment, without the Mapleton Spur traffic, could have a GCV higher than NLV. The Eastern Segment neither originates nor terminates traffic; its only value to TP&W is in the access it provides to the traffic-heavy Mapleton Spur. With TP&W retaining ownership of, exclusive access to, and all the revenues from, the Mapleton Spur, and receiving virtually cost-free trackage rights to continue serving the Spur, the Eastern Segment cannot have a separate, higher GCV. Petitioner’s App., Ex.A at 11. No. 05-1920 33 stretches the statute too far. Subsection 10905(f)(1)(C) requires the [STB] to determine the fair market value of an asset to a nonrail purchaser, not its after-tax value to the vendor. Id. at 969 (internal citations omitted). In sum, because the parties agree that the line’s constitutional minimum value should be calculated using a net liquidation formula rather than a going concern formula, and because TP&W does not contest that the line’s highest and best nonrail use requires sale of the land and salvage of the track and materials, we simply cannot understand why it would be appropriate to compensate TP&W for prospective tax credits, which assume, and indeed require, continued operation of the line. Moreover, even if tax credits were an appropriate consideration in calculating a line’s NLV, they are not an appropriate consideration in this case. TP&W apparently concedes that it does not plan to invest over half a million dollars per year in maintaining the 76 miles of track that it owns or leases as part of the La Harpe-Hollis Line, the sum necessary to render it eligible for $874,650 in tax credits over the three-year period. It instead contends that it is entitled to tax credits for maintenance it expects to perform elsewhere on its system. According to TP&W, it planned to invest $1,981,000 system-wide on the 283 miles it owns or leases per year, entitling it to a yearly tax credit of $990,500, $291,550 of which is attributable to railroad track owned or leased as part of the La Harpe-Hollis Line. But TP&W’s only evidence on this subject relates exclusively to what TP&W’s maintenance budget is; there is no evidence that TP&W actually has invested, or would invest, the sum claimed on maintaining its rail lines. 34 No. 05-1920 Nor is there evidence that TP&W planned to keep the La Harpe-Hollis Line long enough to accrue the relevant tax credits. The sum of tax credits claimed by TP&W— $874,650—assumes that TP&W would retain and invest in the line for three years. But TP&W previously attempted to sell the line as salvage to SF&L, and even its Chief Engineer, Mark Garvin, stated that, given high steel prices, TP&W—if permitted by the STB—would have abandoned the line and sold the track and materials for scrap. See Petition for Reconsideration, A.R. 212639 at 18 (noting that November 1, 2004, is the date closest to when “Mr. [G]arvin would [have] voluntarily [sold] the [line for] scrap steel”). We therefore reject the claim that the STB should have compensated TP&W for the value of tax credits to which TP&W allegedly was entitled under 26 U.S.C. § 45G.