Court Opinion

ID: 4486109
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:34:11.631817+00
Date Added: 2024-06-11T15:03:47.781213
License: Public Domain

WHITAKER, J., dissenting: I dissent from that part of the majority’s opinion holding that petitioners’ contributions to the cost of highway overpasses constitute interests in property eligible for the investment tax credit allowed under section 38. As the majority notes, section 38 property includes tangible property used in furnishing transportation. But the fact that tangible personal property was used in construction of the overpasses does not answer the question as the majority seems to assume. We must ascertain whether petitioners had interests in those tangible properties and, if so, the nature of their interests in order to determine whether, as to petitioners, the interests are section 38 property. I conclude that petitioners’ interests are intangible property rights, which are not eligible for the credit. Moreover, section 48(a)(5) excludes from the definition of section 38 property any property used by any State or political subdivision or agency thereof. The highway overpasses in this case are parts of the public highway systems of the various States involved. They are, therefore, both owned and used by and for a State or a subdivision or agency thereof. The Nature of Petitioners’ Interests in Overpasses Without citation of authority, the majority holds that the petitioners are co-owners of the overpasses. However, the majority ignores the facts that the agreements for construetion of the representative overpasses1 state that the overpasses are to become part of the highway system of the governmental bodies. The majority’s analysis does not take into account the nature of an easement granted for public highway purposes, ignores the differences between dominant and servient estates, and the consequences of construction of public highway overpasses by the dominant estate holder. Petitioners’ interests in the overpasses can only be predicated upon one or the other of two factors: (1) Petitioners owned that part of the right of way upon or over which the overpasses were constructed2 and (2) petitioners contributed to the construction cost. Petitioners granted to each governmental body an easement or easements to construct the overpasses, the easements enduring so long as the overpasses were used as part of the particular public highway. If abandoned, the easements would terminate and all public rights would cease. The majority apparently assumes (and perhaps correctly) that upon abandonment petitioners would acquire legal title to whatever steel and mortar then constituted the overpass. See generally 39 Am. Jur. 2d, Highways, Streets and Bridges, sec. 184. But an executory interest or any other future interest maturing upon abandonment of an overpass does not give to petitioners a present interest in and certainly not co-ownership of the tangible property constituting the overpass, that is, in the materials used to build the structure to the extent of petitioners’ contribution to the cost thereof. The California Supreme Court long ago held that the interest acquired in land for a public highway is held for the benefit of the public. People v. Marin County, 103 Cal. 223, 37 P. 203 (1894). In this case the State, in its capacity as the owner , of the fee under a public highway, adjacent to which the State had constructed a prison, sought to enjoin Marin County from removing gates and obstructions placed on the highway by the State. Noting that in some respects the interests of the public were involved on both sides of the lawsuit, the Court stated: The easement of the public in and to a public highway is as sacred as any other property right, and cannot be divested by the action of the owner of the servient tenement in which it exists. No power is given either by our constitution or laws, to the board of prison directors, to abolish public highways. * * * ******* In strictness, all public highways belong to the state, which holds them for public use subject to legislative control. In this commonwealth their custody and control outside of municipalities is confided to the supervisors of the several counties in which they are located. * * * [People v. Marin County, supra at 204, 206.] California’s treatment of public highways as State property is not unique. The Pennsylvania Supreme Court has expressly held that title to an overpass constructed with railroad money lies in the State, saying: The Pennsylvania Railroad Company, complainant and appellant, has failed to make out title to the bridge in question over its right of way. Though constructed and paid for by it, the contract with the borough of Greensburg shows that it was so constructed as a part of the public highway Pennsylvania avenue, and to be maintained as such by the borough. * * * In either case the bridge became part of Pennsylvania avenue, and title is in the borough. [Pennsylvania R. Co. v. Greensburg, J & P St. Ry. Co., 176 Pa. 559, 35 A. 122, 129 (1896).] The majority makes much of respondent’s concession in 1945 that costs which are included in Interstate Commerce Commission capital account number 39 are depreciable. That account, entitled “Public Improvements; Construction,” includes overpass costs. Respondent’s concession also apparently extends to highway crossing and underpass expenditures, and the majority sees no difference in these situations. While the latter fact situations are not before us, there are obvious distinctions. Railroads have tracks and other facilities in actual use at grade crossings. In the case of underpasses, some portion, perhaps a major portion, of the cost is needed to support the railroad tracks passing above the tunnel.3  Section 48(a)(1) requires that in order for property to be eligible for the section 38 credit, it must be “property with respect to which depreciation (or amortization in lieu of depreciation) is allowable.” The majority states that “If Southern Pacific is entitled to a depreciation deduction for its $4.9 million investment in the overpasses, it would appear to foUow that Southern Pacific has a depreciable interest in the overpasses for purposes of the investment tax credit.” However, while all section 38 property must be depreciable or amortizable, it does not fohow that all depreciable or amortizable property is ehgible for the section 38 credit. The majority’s treatment is, therefore, a nonsequitur. In appropriate circumstances, an expenditure can result in a depreciable asset although title is held by a third party. See and compare Algernon Blair, Inc. v. Commissioner, 29 T.C. 1205, 1221 (1958), with D. Loveman & Son Export Corp. v. Commissioner, 34 T.C. 776, 806 (1960), affd. 296 F.2d 732 (6th Cir. 1961). In the latter case, we found that the public street was “property used in the trade or business” of the petitioner because it provided access to the petitioner’s place of business. Therefore, petitioner’s expenditure for resurfacing the street was depreciable. Similarly, in Denver & Rio Grande Western Railroad Co. v. Commissioner, 32 T.C. 43 (1959), affd. 279 F.2d 368 (10th Cir. 1960), we required the railroad to capitalize the railroad’s investment in a highway overpass, presumably resulting in depreciation or amortization. It should be noted in this context that section 167 refers to property in general terms which is to be distinguished from the definition of section 38 property as tangible property. See, e.g., sec. 1.167(a)-3, Income Tax Regs. I concede that petitioners did acquire an interest in the overpasses in common with other members of the public, an interest similar to that considered by us in Kauai Terminal, Ltd. v. Commissioner, 36 B.T.A. 893 (1937). In that case, we expressly found that the taxpayer “did not own the breakwater and had no tangible capital asset as a result of its expenditure.” (Emphasis added.) Kauai Terminal, Ltd. v. Commissioner, supra at 897. California recognizes similar intangible rights of abutting land owners in public highways. People v. Ricciardi, 23 Cal. 2d 390, 144 P.2d 799, 803 (1944). While the majority distinguishes the Kauai Terminal case on the ground that it did not involve the section 38 credit, the nature of the asset there acquired is conceptually indistinguishable from the nature of the asset acquired by petitioners. Therefore, the case should be followed. Respondent sets forth his position in an almost identical fact situation in Rev. Rul. 69-229, 1969-2 C.B. 86. There respondent took the position that the taxpayer had acquired an interest in an intangible asset which was depreciable oyer the life of the structure. While we are certainly not bound by respondent’s litigating position as set forth in a revenue ruling (Stark v. Commissioner, 86 T.C. 243, 250-251 (1986)), a sound interpretation of the law should be recognized as such. In summary, as we recognized in a recent opinion: As explained by the Supreme Court in Helvering v. F. & R. Lazarus Co., 308 U.S. at 254, a deduction for exhaustion, wear, and tear is granted to a person who uses property in his trade or business and incurs a “loss resulting from depreciation of capital he has invested.” In the seminal case of Gladding Dry Goods Co. v. Commissioner, supra, the lessee of a store paid for improvements to the property in return for an extension of the lease. The Board of Tax Appeals held that the lessee was entitled to depreciate the cost of such improvements over the lease term as extended. The Board explained that depreciation “is not predicated upon ownership of the property, but rather upon an investment in property which is thereafter used. * * * The material elements are, the person who makes the investment, use of the property, and the period over which that investment is to be recovered out of income.” 2 B.T.A. at 338-339. * * * [Tolwinsky v. Commissioner, 86 T.C. 1009, 1047 (1986).] An asset to be depreciated may be tangible property or an intangible right so long as it has been placed in service in or prior to the year involved and is actually used in the taxpayer’s business. Petitioners here acquired an intangible property right for their investment, the right in common with the public to use the overpass. This remote connection with petitioners’ business does not qualify as business use for purposes of the investment tax credit. Petitioners may also have acquired a future interest in the overpasses. But that too is not section 38 property.4 Depreciation is permissible; investment tax credit is not. Section 48(a)(5) Even if petitioners were held to have acquired an interest in tangible property, section 48(a)(5) operates to deny petitioners an investment tax credit for their expenditure. Section 48(a)(5) excludes from the definition of section 38 property any property used: by the United States, any state or political subdivision thereof, * * * or any agency or instrumentality of any of the foregoing * * * While investment credit was enacted “to provide a stimulant to the economic growth of this country,” it was not extended to property described in section 48(a)(5) “since allowing the [taxpayer] in such cases an investment credit would not be expected to increase the use of such property by the governmental units.” H. Rept. 1447, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 405, 416. At least one court has stated that property so used was excepted from the definition of section 38 property “since the in-elastic demand of governmental units is not subject to stimulation resulting from lowered costs.” Stewart v. United States, an unreported decision (D. Neb. 1977), 40 AFTR 2d 77-5735, 77-2 USTC par. 9648, at 88,175. Petitioners argue that their position is supported by Rev. Rul. 78-268, 1978-2 C.B. 10. That ruling involved an electric generating facility owned by two privately held corporations, a municipality and an electric cooperative exempt from tax under section 501(c)(12).5 The facility was owned by the four parties as tenants in common, with the city and cooperative each owning a 4-percent interest in the facility. The company seeking the investment credit was to operate the facility on behalf of all participants and was paid an amount not in excess of the fair market value of its services. It was held that the disallowance of the investment credit in respect of the interests of the municipality and the cooperative did not render the corporations’ investments in the facility ineligible for the investment credit. Even if revenue rulings had precedential value, which they do not (Stark v. Commissioner, supra), this ruling is distinguishable. Public utilities, even though quasi-governmental organizations6 are profit-oriented businesses which the investment tax credit was enacted to assist. Conversely, “whenever the necessities or convenience of the public require a road or highway for the purpose of trade or travel, it is the duty of the government to provide one.” 39 Am. Jur. 2d, Highways, Streets and Bridges, sec. 32 (1968). Such an activity is, by its very nature, carried on only by a governmental body in its capacity as such and according to the needs of its citizens. It is not carried on in part to take advantage of favorable tax laws, and those laws could not here have influenced petitioners’ expenditures, since they were required by the appropriate public utilities commission or like State agency. The ruling is also distinguishable in that the municipality and cooperative had only an 8-percent combined interest in the asset. Here, the governmental bodies made 90 percent of the expenditure and had a 100-percent possessory interest. While no authority exists which requires ascertainment of the quantum of use by a governmental body in order to find section 48(a)(5) to be applicable, we noted in World Airways, Inc. v. Commissioner, 62 T.C. 786, 811-813 (1974), affd. 564 F.2d 886 (9th Cir. 1977), that Congress had, in other parts of section 48, employed a predominant-use test for determining whether property was eligible for the investment credit. Noting that section 48(a)(5) does not employ such a test, we stated that: The only reasonable conclusion is that section 48 embodies a “predominant use” test and a “use” test and that different amounts of use in the prescribed activities operate to exclude property from qualifying as section 38 property. It is apparent that the provision specifying a predominant-use test explicitly authorized a substantial amount of use in the disfavored activities. And it is equally clear that section 48(a)(5) provides for less use in the activities it concerns. * * * [Fn. ref. omitted.] As noted by the District Court in Stewart v. United States, supra, “the statute does not require exclusive use or even predominant use by the Government before the property is to be excluded from qualification for the investment tax credit.” 40 AFTR 2d at 77-5737, 77-2 USTC par. 9648, at 88,176. However, in fact each overpass was used exclusively as a part of a particular public highway system, entirely a governmental use. Further, respondent’s regulations equate use by a governmental body with ownership. Sec. 1.48-l(k), Income Tax Regs. Even if, as the majority finds, petitioners were co-owners of the overpasses, which they Eire not, it is clear that the greater interest in those structures was held by the governmental bodies by virtue of their greater investment. To paraphrase Stewart, governmental ownership need be neither exclusive nor predominant, and the fact that the respective governmental bodies pEiid 90 percent of the cost of the overpasses, which were then included in that body’s highway system, counsels strongly in favor of excluding the property from the definition of section 38 property. Despite respondent’s concession on brief,7 I fail to see how a public highway cannot be used by a governmental body having authority over it. See People v. Marin County, 103 Cal. 223, 37 P. 203 (1894). That portion of the price of construction of the overpasses paid by the governmental bodies is indicative of the use made of the overpasses by those bodies. Further, the fact that the overpasses were built to either replace existing overpasses or crossings at grade indicates a use sufficient to require upgrading of the facilities. If in fact petitioners had a present property interest in the overpasses, the predominant use by the respective governmental bodies is sufficient to remove them from the definition of section 38 property. Accordingly, for either of these two grounds, petitioners are not entitled to investment tax credits. Parker, Cohen, and Williams, JJ., agree with this dissent.   See note 11 of the majority opinion.    The parties stipulated that petitioners “owned all or part of the railroad track line underneath the overpass.” This does not necessarily mean that petitioners owned the underlying fee as distinguished from holding only a right of way. The highway overpasses may not in fact have physically touched any part of the railroad right-of-way but may merely have invaded air rights which petitioners may have possessed.    To the extent the majority is influenced by the treatment given petitioners’ expenses for financial accounting purposes, it should be noted that treatment for financial accounting purposes is not controlling for tax purposes, even where such treatment is permitted or required by a regulatory agency. Cf. Commissioner v. Idaho Power Co., 418 U.S. 1, 15 (1974).    See our discussion which follows with respect to the purpose of the investment tax credit.    Sec. 48(a)(4) provides that property used by certain tax exempt organizations shall be treated as sec. 38 property only if such property is used predominantly in an unrelated trade or business, the income from which is subject to tax under sec. 511.    Gay Law Students Association v. Pacific Telephone & Telegraph Co., 24 Cal. 3d 458, 595 P. 2d 592, 156 Cal. Rptr. 14 (1979); cf. Pasillas v. Agricultural Labor Relations Board, 156 Cal. App. 3d 312, 202 Cal. Rptr. 739, 759 (1984).    “Respondent is not contending that use by the general motoring public constitutes use by governmental bodies.” Respondent’s Reply Brief at 49.