Document: 412 U.S. 401 93 S.Ct. 2169 37 L.Ed.2d 30 UNITED STATES, Petitioner,v.CHICAGO, BURLINGTON & QUINCY RAILROAD COMPANY. No. 72—90. Argued Feb. 26, 1973. Decided June 4, Syllabus In this refund suit, respondent railroad seeks to recover an alleged income tax overpayment resulting from its failure take deductions for depreciation with respect the cost of facilities constructed at highway-railroad intersections and elsewhere that were paid for, not by respondent, but out Government funds appropriated further public safety improve highway systems. Respondent claimed subsidies qualified as contributions capital a nonshareholder under § 113(a)(8) Internal Revenue Code 1939, thereby permitting depreciate Government's in assets. The Court Claims ruled was entitled deduction. Held: governmental did constitute respondent's within meaning 113(a) (8); assets question have zero basis; cannot claim allowance those As can be gleaned Detroit Edison Co. v. Commissioner Revenue, 319 98, 63 902, 87 L.Ed. 1286, Brown Shoe 339 583, 70 820, 94 1081, qualify contribution capital, asset must become permanent part transferee's working structure; may compensation services; bargained for; benefit transferee commensurately value; ordinarily will used produce additional income. Here, almost none these criteria met, since and, subsidies, would been constructed. No substantial incremental terms production considered time transferred, such minor accrued merely peripheral railroad's business. Nor asserted obligation replace warrant depreciation. Pp. 2172—2177. 455 F.2d 993, 197 Ct.Cl. 264, reversed remanded. Richard B. Stone, Washington, D.C., petitioner. J. Schreiber, Chicago, Ill., respondent. Mr. Justice BLACKMUN delivered opinion Court. 1 issue federal case is whether Burlington Quincy Railroad Company (CB&Q), interstate common carrier railroad, certain prior 22, 1954, it or shareholders, funds. 2 Starting about 1930, CB&Q entered into series contracts various Midwestern States. By agreements States fund some all costs construction specified improvements, apparently bear, least part, maintenance replacement improvements once they had installed. 1933, program National Industrial Recovery Act, 48 Stat. 195, Congress authorized reimbursement shares incurred inured improved traffic control.1 1944 went reimbursement, stated limitations, entire subject condition received facility so liable up 10% project pro rata relation railroad.2 3 Under programs received, expense, undercrossings overcrossings having $1,538,543; crossing signals, signs, floodlights $548,877; jetties bridges $58,721.3 These aggregating $2,146,141, carried on books even though most between several expressly convey title railroad. 4 instituted timely suit alleging among other things, overpaid 1955 because failed assert, deduction return filed, allowable subsidized assets.4 4-to-3 decision (only one case), concluded that, 167 26 U.S.C. 167, claimed. This theory §§ 362 1052(c) Code, 1052(c), 1939. 5 arriving conclusion, majority relied 1081 (1950), reasoned payments intended 'principal purpose' being, instead, 'to community-at-large,' F.2d, 1000, Ct.Cl., 276, fact enlarge business, produced economic benefits it, qualifying cited section 1939 Code. three dissenting judges disagreed interpretation Shoe, 1286 (1943). They critical features donor's attitude, purpose, intent, payments, there could no intention confer upon CB&Q. Instead, findings revealed,5 expedite flow crossings. 1023, 1026, 315, 320. 6 Because afford precedent treatment sums,6 we granted certiorari. 409 947, 291, 34 217. 7 * Section 23(l) successor, 167(a) 1954 167(a), allow taxpayer 'as reasonable exhaustion, wear tear . property trade business.' usual situation himself incurs acquiring which asserted.7 But are different situations formally recognized governing statutes. A familiar example gift property.8 Another acquired corporation shareholders paid-in surplus capital.9 Another, pertinent here, covered 113(a)(8)10 contrasting provisions 362(a) (c) (c).11 concerns nonshareholder. See Treas.Reg. 111, 29.113(a)(8)—1 114(a) earlier nonshareholder-contributed hands receiving same basis, adjustment, purposes transferor; however, basis zero. 8 Pertinent Court's Edwards Cuba R. Co., 268 628, 45 614, 69 1124 (1925). held Cuban promote 'were profits gains use operation railroad,' corporation. Id., 633, S.Ct., 615. holding Edwards, taken seemingly anomalous result, meant corporate only free allowed assert free. result also ensued led enactment zero-basis provision, referred above, 362(c) 362(c). Veterans Foundation 317 456, 458 (CA10 1963). 9 argues very should follow here. It said taxable liability when expense DB&Q now asserts And, providing facilities, argues, make 113(a)(8), Whether raised case, intimate it. United States, 'contribution capital' accordingly, available. 10 Our inquiry, therefore, narrow one: payment constituted capital,' 113(a)(8). both bear issue, turn two decisions. II 11 concerned customers' utility estimated service (primary power lines) otherwise obligated provide. For years 1936 1937, Act 1936, 49 1648, applied, full base computing disallowed, purposes, portion customers refundable. Board Tax Appeals, B.T.A. 358 (1941), 131 619 (CA6 1942), sustained Commissioner. affirmed. 12 Jackson, speaking unanimous (the Chief participating), observed, 'The end purpose (depreciation) approximate reflect financial consequences subtle effects value his assets.' U.S., 101, 904. statute, said, 'means taxpayer,' 'may history quite taxpayer.' Also, 'taxpayer's outlay measure recoupment through accruals.' 102, utility's attempt avoid contention gifts transferors' bases, rejected. 13 'It enough say overtaxes imagination regard farmers who furnished makers either donations Company. transaction neither form nor substance bore semblance. 14 customer price service. taxed does permitted recoup untaxed accruals investment has refused make.' 102—103, 15 Edison, itself, appear foreclose CB&Q's claims obvious parallel before us. 16 last word. decided seven later, opposite reached 8—1 vote Court, Black dissent without opinion. 17 taxpayer's excess tax, Second 1940, 54 974, amended, fiscal 1942 1943. Community groups cash transferred inducement location expansion factory operations their communities. Contracts into, each instance itself locate community operate minimum term. transfers focus controversy Commissioner, inclusion equity invested asserted. overruled Commissioner's disallowance acquisitions cash, buildings transferred. T.C. 291 (1948). Appeals upheld items. 175 305 (CA8 1949). reversed. 18 Clark, writing noted if continued physical plant eventually replaced. recognized, controlling. 'neither service,' therefore infer transactions petitioner groups.' 591, 824. expectation 'such might prove advantageous large.' Thus, 'the manifested definite company.' Ibid. 19 thus professed distinguish overrule Edison. analysis behind respective cases. Where facts transferors regarded corporation, depreciable. where made direct recompense, obtaining advantage general community, capital. III 20 seems fair business stressed intent motive transferor determined character motive. decisional distinction rested nature transferor, rather than transferee, indirect, specific general, speculative.12 factors, course, simply indicia transferor's 21 That line distinctions, relatively little do selfevident.13 cases actually provide sought depreciated. Yet cases, consideration pursuant agreement. If, first glance, seem somewhat inconsistent, reconciled, indeed be, ground whereas intent. 22 statutory phrase nowhere defined our decisions limited guidance precise meaning. services sheds light, rendered, gifts, order company. 23 characteristics implicit apparent viewed light presently example, contributed well, put immediate generation Without taxpayer, agreement certainly made. Perhaps extent true Edison; utility, anticipated revenue lines warranted itself. 99, 903. Its benefit, marginal. 24 We distill Codes. structure. compensation, specific, quantifiable provided transferee. for. foreseeably amount commensurate value. And ordinarily, always, employed contribute assured respect. 25 measure, clearly Although performed customer, lead us conclusion despite this, any real sense Indeed, except orders state commissions likely all.14 Nashville, C. St. L.R. Walters, 294 405, 421—424, 55 486, 491—493, 79 949 (1935). unilateral: accept require pay them. Any marginal; importance indicated accounted requirement exceed own benefit.15 materially replaced existing new, better, safer ones deemed necessary. found, 'primarily flow,'16 need considered, 326. While lower accident rates, reduced expenses operating possibly higher train speed resulted, incidental insubstantial depreciated, presumably maximum Act. view, foreseeable Accordingly, effected. nevertheless contends maintain Whatever desirability creating reserve circumstances, matter good accounting practice, answer is, Judge Davis observed dissent, 1025, 318, 'Depreciation reflects asset, potential replacement.' Reisinger 144 475, 478 (CA2 1944). Ludey, 274 295, 300—301, 47 608, 610, 71 1054 (1927); Weiss Wiener, 279 333, 335—336, 337, 338, 73 720 (1929); Helvering F. P. Lazarus 308 252, 254, 60 209, 210, 84 226 (1939); Massey Motors 364 92, 80 1411, 1592 (1960); Fribourg Nav. 383 272, 86 862, 751 (1966). 27 conclude Code; 113 114 1052(c); precluded claiming assets.17 judgment remanded proceedings. 28 ordered. 29 Reversed POWELL took case. 31 DOUGLAS, dissenting. 32 I join STEWART, add few words. Funds Federal government overpasses underpasses grade-crossing protection equipment. funds, work—all found Claims. 997—998, 271. 33 controlled STEWART says, advances service.' 103, different. found: '(U)nder agreements, plaintiff necessary, originally built. primarily motor-vehicle flow. record shows, e.g., probable equipment permitted, limits. Plaintiff intangible benefits, goodwill community-at-large, plaintiff's long-term advantage.' 998, 272. 35 fours 820. distinguishing said: 36 'Since service, groups. citizens communities recompense whatever, being large. circumstances affirm 38 whom DOUGLAS joins, 39 involves 1954. 'contributions 113(a)(8)(B) 40 Beginning early 1930's governments intersections, flashing-light signals automatic gates. generally 50% more total cost, subsequently assume State's share costs. 204(a), 203. Federal-Aid Highway 1944, 5, 58 840, reimbursed projects, railroads benefited facilities. 41 filed seeking taxes, erred refusing publicly 'depreciable property' throughout 'for business,' capital.' 42 uncomplicated one. applicable return, 'a (including obsolescence) (1) ..' using rules including capital.'1 contended carryover short, highway-safety financed them.2 43 agreed exhaustible properly depreciable 1002, 276. undisputed, conceded normally respondent), appropriate proper.' 999, 273—274. court was, available respondent.3 respondent) (The respondent's) 272.4 'that enlarged business; property, track freight cars, derived them' fn3. undisputed 'contributed' 'and mean owns them 44 think entirely right Code.5 fall plain language noted, 'capital' term 589 n. 11, 823, 1081; Texas Pacific 286 285, 52 528, 76 1108; 631—633, 615—616, 1124; H. Guthmann Dougall, Corporate Financial Policy 136—138 (4th ed.); Marple, Capital Surplus Net Worth 136 137; Mertens, Law Income Taxation 5.06 (J. Malone rev. Harvey, Some Indicia Transfers Laws, Mich.L.Rev. 745, 747—749.6 directly us—Detroit supra—confirm 46 supra, prospective electric company required receive company's services. rejected capital: '(I) t induce expand 113(a)(8)(B), stressing practical addition corporation's "(T)he out, taxpayer) continue Looking toward continuity, Code's provisions—and especially substituted basis—would envision like this. ." 590, 824 (quoting McKay Products Corp., Cir., 178 639, 643). explained contrast, '(t)he 824.7 me present Shoe. State Governments purchase connection Rather, achieve goal transportation increased fell practical, definition exception significant urges read establish presence purpose. local area, accomplished contributing assets; gratuitous passing, existence underline paying rendered. here attempted accomplish taxpayer. 50 today, decide absence motive, constructs guidelines met based relies 'peripheral' income, concludes cites nothing regulations, strange 51 clear commonly understood practice 589, 823. meet test. traditional understanding term; permanently 421. many essential operation—a bridge, necessity operate. All yielded tangible appears acknowledge normal term, concedes depreciable.8 understand why straightforward approach Edison—nonshareholder additions unless 'anomalous' although cost. anomaly, anomaly existed groups, yet able so-called ineluctable (B) created correct enacting Code,9 precisely that. eliminated transfers, after 53 sum, rewrote law prohibit nonshareholders 1954.10 turns saved trouble. today rewrites prohibits owned 1930's. wrote 204(a)(1), 840. Claims, dissenters, asserted, $1,538,543 figure related overcrossings. 271—272, 325 (1972). CB&Q, Brief, p. 3, oral argument, Tr. Oral Arg. 25, depreciated relate use. According involved. Inasmuch resolution factual affect reach, resolved. parties what adjusted bases rates depreciation, all. Trial following finding fact: '9. others, limits, function efficiently less expensively.' 326—327. Solicitor General asserts, Pet. Cert. 15—16, $623,000,000 projects railroad-highway grade crossings alone 1934 Department Transportation, Report Congress: Railroad-Highway Safety, Part I: Comprehensive Statement Problem (1971). estimates taking account grants kind companies, half billion dollars dependent still litigable. 16. 1012 1012, rule 'basis shall property.' 113(a)(2) provides 'property December 31, 1920, donor preceding owner gift, provision over 1015(a), 1015(a). effect nonshareholder's availability gifts. H.R.Rep. 1337, 83d Cong., 2d Sess., A128 (1954); S.Rep. 1622, 272 (1954), U.S.Code Cong. Admin.News pp. 4025, 4629; Bittker Eustice, Corporations Shareholders 3.14, 3—51 81 (3d ed. 1971); 3A 21.134 (1968 rev.). 362(a). '§ 113. Adjusted determining gain loss. '(a) Basis (unadjusted) property. property; that— '(8) Property issuance stock surplus. 'If corporation— '(A) securities described 112(b)(5) (including, also, transfer money, securities), '(B) then decreased loss year made.' 362. corporations. '(1) 351 (relating transferor) applies, '(2) transfer. '(c) Special capital.— money.— 'Notwithstanding subsection (a)(2), money— shareholder such, Money.— money during 12-month period beginning day contribution.' See, Teleservice Wyoming Val. 254 105 (CA3 1958), cert. denied, 357 919, 78 1360, 1364 (1959); Grocers, Ltd. 634 (CA9 1962). There support legislative 118 118, exclusion gross 'any indirect benefit—prepayment-for-futureservices distinction. 4042. distinctions wrought scholarly criticism. Note, Nonshareholder Contributions Capital, 82 Harv.L.Rev. (1969); Landis, Corporations, Tax.L.Rev. 241 Consequences Non-Shareholder 66 Yale L.J. 1085 (1957); Freeman Speiller, Subsidies Induce Business Location, 255 (1954). article authors suggest irreconcilable, latter overruling former. Id. 262. Supreme 1949 Term, 64 114, 149—151 (1950). Counsel argument 'preexisting legal construct facilities' funded subsidies. 30, 35—36. challenge portions pay. supra. argued, alternative, virtue 'terms letter' change method retirement straight-line irrevocably exclude donated aid source, base. determine barred question. applies 9, infra. part: "contributed" "and [the respondent] Findings Fact accepted follows: suggested alternative reversal whereby reach contention. agree reasoning letter bar text indicates significance donative duplicative allows similarly consequence nonshareholder, 'paid-in surplus' 113(a)(8)(B). 29.113(a)(8)—1. nongratuitous involved L.Rev. 255, 261. courts 634, 639—640 1962); 105, 110—111 (CA3). 619, 626—627. dispute 362, money. 'then Money. contribution. (if any) reduction sentence applied (as sentence) particular properties reductions paragraph allocated regulations prescribed Secretary delegate.' explicitly enacted overcome H.R.Rep.No. Sess. A128; S.Rep.No. 271

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