Issue 2. Basis of ICC Valuation PropertyThe second issue is whether petitioner's basis for depreciation with respect to its roadway assets, properly includes the ICC estimates of construction period interest and taxes as were established by the ICC pursuant to the Railroad Valuation Act of 1913. Respondent argues that petitioner's basis should exclude these particular estimates. Southern Pacific Transportation Co. v. Commissioner, 75 T.C. 497 (1980)), and once in the Court of Claims ( Southern Railway Co. v. United States, 218 Ct. Cl. 150">218 Ct. Cl. 150, 585 F.2d 466">585 F.2d 466 (1978)), and in both cases his position was rejected on the merits. *146 In Southern Railway, the Government argued that the ICC estimate of construction period interest and taxes should be excluded from the taxpayers' depreciable basis because the taxpayers therein had not proven that they had actually incurred such costs. The Court of Claims rejected the Government's argument stating emphatically that --
Manifestly, the estimates made by the ICC provide the best, and in fact the only, available source for determining the tax bases of the taxpayers' properties. Accordingly, we hold that the Cohan rule [Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930)] should be applied in these cases with respect to the ICC estimates of taxes and interest during construction. [Southern Railway Co. v. United States, supra at 470.]
The court then proceeded to analyze the ICC's specific analysis by which it estimated interest and taxes, as described in Texas Midland Railroad, 75 I.C.C. 1">75 I.C.C. 1, 153-158 (1918)Southern Railway Co. v. United States, supra at 471), and found that these estimates adequately reflected amounts of interest and taxes actually paid by the railroads. The Court of Claims concluded by adding that --
it was also "obviously illogical and incorrect" for the Commissioner to accept the ICC estimates for 44 out of 46 component costs of constructing plaintiffs' railroads while refusing to accept the estimates for taxes and interest, even as a starting point. There is no rational explanation for the Government's position; its unreasonableness is demonstrated acutely by the fact that the IRS has accepted other overhead items, including engineering, organization expenses, general officers' and clerks' salaries, legal expenses, and the cost of stationery.
Perhaps a major fallacy in the Government's refusal to allow the use of the estimates for taxes and interest for any purpose rests on its mistaken notion that the accepted items are "known expenditures," the cost of which was "reasonably ascertainable." * * * This position is patently incorrect, as shown by the ICC explanation of its methodology for all of its valuations. See Texas Midland, supra, at 108-82."
[585 F.2d at 472.]
In Southern Pacific, we reached the same conclusion as the Court of Claims. Noting that respondent "made much the same argument in Southern Railway," 75 T.C. at 846, we undertook a similar analysis and held that --
We concur with the Court of Claim's analysis of the Texas Midland report. We believe it is readily apparent that the ICC's reproduction cost new includes reasonable estimates of interest and taxes actually paid during construction. The Texas Midland report clearly does not establish, as respondent contends, that the figures for interest and taxes used by the ICC were theoretical and therefore not properly chargeable to the capital account. [75 T.C. at 848.]
Moreover, we also concluded that --
We see no benefit to be derived from singling out any of the specific components comprising the total estimate for special scrutiny. There is no logic for any requirement that the various elements comprising reproduction cost new should be more accurate or verifiable than the whole. Nor should one element be required to be more accurate a reflection of actual cost than is any other element. See 585 F.2d at 473.Accordingly, we hold, as did the Court of Claims in Southern Railway Co. v. United States, supra, that the ICC amounts used by petitioner on its returns to show the cost of the retired assets at issue are not to be reduced to eliminate interest and taxes during construction. [75 T.C. at 848.]
Despite the clear holdings to the contrary in both of these cases, respondent once again argues that we should exclude any amounts for interest and taxes during construction, because "petitioner is unable to establish that any amounts for interest and taxes were actually paid." Respondent contends that, in contrast to the property actually inspected and valued by the ICC, there is no physical evidence that any amounts for interest on taxes during construction have ever been paid by the Railroads, and accordingly petitioner has not proven that it is entitled to deductions for these amounts.
Respondent claims that the new evidence he has produced for purposes of this litigation, namely, selected portions of a report entitled "The Federal Valuation of the Railroads in the United States," prepared by B.H. Moore for presentation to the American Railway Engineering Association in 1952, supports his position. Respondent argues that this report clearly demonstrates that the ICC, in estimating the amounts for interest and taxes during construction, did not, as it did with the other components which went into its overall estimate, first verify that any amounts attributable to these components had actually been paid or incurred by the railroads. Accordingly, respondent maintains that the ICC estimates with respect to interest and taxes do not establish that any amounts for interest and taxes were ever actually paid by the Railroads and therefore, absent production by petitioner of further evidence (e.g., books and records) that such amounts were so paid, we should exclude these amounts from the Railroads' depreciable basis. Moreover, respondent suggests that Southern Railway is distinguishable because, in that case, the taxpayer presented evidence by way of affidavits that some expenditures for interest were in fact made. See 585 F.2d at 470.
Respondent's new arguments are merely revamped versions of outworn claims. The affidavits submitted in Southern Railway are too thin a reed upon which to distinguish that case from the one before us. Not only did these affidavits apparently not show that any amounts were spent for taxes but, after referring to those affidavits, the Court of Claims went on to point out: "In Texas Midland, supra, at 155, the Commission explained that interest during construction 'is universally conceded [to be] * * * an item of expense in the construction of the property which should be included in a reproduction estimate.'" Southern Railway Co. v. United States, 585 F.2d at 470-471. (Emphasis in original.) Moreover, in Southern Pacific, we made no reference to the presence of any such affidavits or comparable evidence of some payment and nevertheless concluded that "the ICC's reproduction cost new includes reasonable estimates of interest and taxes actually paid during construction." 75 T.C. at 848. (Emphasis added.) Accordingly, we reject respondent's plea that we not follow our prior decision in Southern Pacific*152 and that of the Court of Claims in Southern Railway. supra), irrevocably agreed to exclude from their basis for depreciation all amounts for interest and taxes during construction. Petitioner, of course, argues that it made no such agreement and therefore is now entitled to claim deductions based on the inclusion of these amounts in the basis for depreciation, with respect to those assets subject to the straight-line method. For the reasons herein set forth, we agree with petitioner.
The facts are not in dispute. As we discussed (supra at pp. 141-142), upon receiving the Railroads' requests to change their method of depreciation, respondent issued a document referred to as "Mimeo 58" which listed five specific conditions to which the Railroads were required irrevocably to agree upon changing their method. In addition to these conditions, Mimeo 58 also stated, among other things, that "Interest and taxes may not be included in the depreciation basis." Accordingly, the Railroads submitted depreciation schedules to respondent which excluded any amounts for interest and taxes during construction from the assets' basis for depreciation. Thereafter, respondent sent each Railroad a terms letter with attached schedules. The terms letter repeated the five specific conditions and added a sixth condition (to which each Railroad was required to agree irrevocably to follow) in order to obtain permission for the change in method of depreciation. Each Railroad accepted the conditions listed in the terms letter. However, while the schedules included in these letters in fact did not include any amounts attributable to interest and taxes during construction, as we noted supra at page 142, the terms letters themselves, made no reference to, or specifically required the exclusion of, such amounts from the assets' basis for depreciation.
Respondent argues that --
while the terms letter did not expressly reiterate all of the requirements of Mimeo 58 it was clear that such terms were to be incorporated by virtue of the depreciation schedules involved.
Consequently, petitioner irrevocably agreed, as a condition to the respondent's consent to change the method of accounting for the railroads involved, that interest and taxes during construction as estimated by the ICC would not be a part of depreciable basis. The fact that such condition was not expressly set forth in the terms letter is not significant. * * *
We disagree.
In Chicago, Burlington & Quincy RR. Co. v. United States, 197 Ct. Cl. 264">197 Ct. Cl. 264, 278, 455 F.2d 993">455 F.2d 993, 1001 (1972), revd. on other grounds 412 U.S. 401">412 U.S. 401 (1973) (the CB&Q case), the issue was whether the taxpayer, by complying with respondent's instructions in Mimeo 58 that "Donated property or contributions or grants in aid of construction from any source must be excluded [from the basis of depreciation]" (a statement which almost immediately follows the previously quoted statement as to the exclusion of interest and taxes (see p. 158 supra)), entered into a binding agreement to be bound by these instructions. As in the instant case, with respect to interest and taxes, the terms letter made no reference to the exclusion of donated property from the basis for depreciation, but the schedules submitted to respondent in accordance with Mimeo 58 in fact excluded such amounts. The court found that --
The statement "Donated property or contributions or grants in aid of construction from any source must be excluded" was only the opinion of the Service with respect to what constituted the basis allowable under the Code and does not rise to the level of a condition upon which permission to change depreciation methods would be granted. *156 [455 F.2d at 1001. Emphasis added.]
Moreover, the court concluded that --
Furthermore, the 1944 terms letter itself, which constitutes the only agreement between the parties, says nothing about excluding donated property from the basis of depreciable property. While it might be argued and inferred that [the taxpayer] agreed by implication to such condition in the guidelines, it is just as reasonable to infer that [the taxpayer] acquiesced in the condition, without agreeing with it, simply to avoid possible refusal of its requested change in accounting methods.
[455 F.2d at 1002.]
We agree with the reasoning of the Court of Claims in the CB&Q case. In this connection, we recognize that the Court of Claims had before it as we do not herein) the text of the taxpayer's letter of acceptance of respondent's terms letter in which the taxpayer stipulated that it would not be precluded from obtaining the benefits of any change in the terms and conditions "by statutory amendment, by operation of law, or otherwise." 455 F.2d at 1002. The Court of Claims, after holding that the reference to the statement in Mimeo 58 in respect of the inclusion of donated property in basis was not a condition of the terms letter, went on to observe that, even if it had concluded that such statement was a condition, the taxpayer's position would have been preserved by virtue of the reservation in its acceptance letter. We view this observation as, at most, an alternative ground to support the decision of the Court of Claims and not as an essential link in the primary basis of its decision. Nor do we consider, as respondent would have us do, that our holdings in Denver & Salt Lake Railway Co. v. Commissioner, 24 T.C. 709">24 T.C. 709, 719 (1955), and Denver & Rio Grande Western Railroad Co. v. Commissioner, 32 T.C. 43">32 T.C. 43, 46-50 (1959), affd. on other grounds 279 F.2d 368">279 F.2d 368, 371-372 (10th Cir. 1960), require us to hold that the terms letters herein, as construed by respondent, must be given binding effect. Those cases involved the proper interpretation of one of the six express conditions of the terms letters, namely, the application of "depreciation accounting" to the question of the impact on basis of losses on the disposition of the taxpayer's assets. Indeed, initially this Court took the position that even in interpreting an express condition of the terms letter, respondent's argument as to the "necessary implication" of that letter should be rejected observing --
Such an important matter * * *, had the parties intended its inclusion, would not have been left to implication or interpretation. It would have been made the subject of specific provision. The terms letter seems clear and unambiguous. To hold as respondent suggests, would extend the effect of the agreement far beyond its apparent scope. [Denver & Salt Lake Railway Co. v. Commissioner, supra at 717.]
This Court, in its subsequent consideration of the matter in Denver & Rio Grande Western Railroad, did no more than modify its view to the extent of accepting additional evidence in order to determine the meaning of an express condition of the terms letter. This is not the situation herein where we face the threshold issue as to what should be considered as a condition of the terms letters. In the context of this case, we think that the foregoing quotation from Denver & Salt Lake Railway is clearly supportive of our conclusion herein. Finally, we observe that respondent seeks herein not only to persuade us to transmute a statement in Mimeo 58 into a condition of the terms letters but an irrevocable condition as well, irrespective of any change or clarification in the law. We are unwilling to make such a double jump and imprison petitioner in perpetuity, particularly in light of the following provision of the terms letters in respect of the amounts of depreciation in the schedules set forth in those letters:
It is mutually understood that this is an agreement in principle and that a detailed investigation of the depreciation basis has not been made by the Bureau, and that the basis may be corrected to conform to the allowable basis under the Internal Revenue Code should investigation disclose errors of cost or valuation. * * * [Cf. Chicago, Burlington & Quincy RR Co. v. United States, supra at 1001.]
In view of the foregoing, we conclude that the Railroads, by accepting the terms letters, did not irrevocably agree to exclude amounts for interest and taxes during construction from the depreciable basis of the assets in question. If respondent had intended a contrary result, he should have made his intention clearer by setting out the exclusion of interest and taxes during construction as an express condition in the terms letters. 72 Stat. 1606, or because petitioner did not claim deductions based on the inclusion of such amounts in its submitted returns over the years, petitioner is estopped Sangers Home for Chronic Patients v. Commissioner, 72 T.C. 105">72 T.C. 105, 114 (1979),
The doctrine of equitable estoppel generally applies where the taxpayer makes a representation of fact on which the Commissioner relies to his detriment, and, through such reliance and his ignorance of the true facts, is induced not to correct the error before its correction is barred by the statute of limitations. * * * [Fn. ref. omitted.]
Respondent does not herein claim that he has been intentionally mislead or unfairly prejudiced by petitioner's delay in finally including amounts for interest and taxes in the basis for depreciation of its assets, nor that he has unjustly relied on petitioner's actions. Moreover, as we have previously noted (see p. 161 supra), the terms letters provided that "allowable basis" could be corrected, and it was in the context of this provision that the CB&Q case rejected a similar contention by respondent in respect of donated property. See 455 F.2d at 1001. We emphasize that we do not have before us the usual situation where the Government seeks to apply the doctrine of estoppel, namely, where the taxpayer has included an item in income which should properly have been included in income in an earlier year (now barred by the statute of limitations) or seeks a deduction which was taken in an earlier year (also so barred). in such situations, the potential for prejudice to respondent is clear. See Crosley Corp. v. United States, 229 F.2d 376">229 F.2d 376 (6th Cir. 1956); Southern Pacific Transportation Co. v. Commissioner, 75 T.C. at 559-561, 838-840. What is involved here is the failure of petitioner to take a deduction to which it would have been entitled if it had increased its basis for depreciation by the amount of interest and taxes during construction. In fact, the revenue would thus appear to have benefited from the resulting increase in taxes paid, although we recognize that the precise effect on the overall revenue may depend upon the extent of the gain or loss on the disposition of the assets in question.
In Southern Pacific Transportation Co. v. Commissioner, supra at 840, we pointed out that the doctrine of "laches" is typically applied only where, "in the discretion of the court in light of the facts and circumstances of each case," it is determined that there existed --
(1) inexcusable delay (lack of diligence) in asserting a claim by the party against whom the doctrine is to be applied, and (2) prejudice to the party against whom the delayed claim is made (the party raising the defense of laches) caused by his reliance on his adversary's conduct. * * * [75 T.C. at 840.]
Unlike the situation which existed in Southern Pacific, in which the taxpayer sought to establish its basis in certain railroad property acquired prior to 1914 with "historical costs" rather than by the ICC estimates it had consistently used on its returns, petitioner clearly has not compelled respondent --
to scrutinize materials which, owing to the passage of time, the lack of time, the deterioration of records, the murkiness of information relative to transactions and events which took place almost a century ago, and the death of crucial personnel, are extremely difficult, if not impossible, to verify. [75 T.C. at 841-842.]
To the contrary, in this case, the facts and figures relevant to petitioner's claims for additional depreciation deductions are as clear today as they were over 70 years ago, and are not disputed by respondent herein. The issue in dispute is a question of law, and respondent can as easily defend his position today as he could have when the terms letters were executed. Accordingly, while petitioner has delayed in claiming its deductions, such delay has not placed respondent at any disadvantage (compare Southern Pacific Transportation Co. v. Commissioner, supra at 842).
Under all the circumstances herein, we hold that petitioner's course of conduct over the years should not preclude it from now claiming deductions based upon the addition to the basis of depreciation of the assets in question of amounts representing interest and taxes during construction.
Finally, respondent argues that petitioner is collaterally estopped by our decision in Chesapeake & Ohio Railroad Co. v. Commissioner, 64 T.C. 352">64 T.C. 352 (1975), from claiming increased depreciation deductions, with respect to C&O's railroad grading and tunnel bores, by adding to the basis of its assets any amounts attributable to interest and taxes during construction. In that case, we decided several issues concerning C&O's claims for depreciation deductions, with respect to its railroad grading and tunnel bores, for the 1954 through 1963 taxable years. Prior to trial, the parties disposed of several issues by means of a negotiated partial settlement, one of which was whether interest and taxes during construction should be included in the adjusted basis of these C&O assets. Respondent argues that, since C&O, as part of the pre-trial settlement, agreed not to include such amounts in its basis for depreciation, petitioner is now precluded from litigating this issue. Respondent's argument misses the mark by a wide margin.
As the Supreme Court explained in United States v. International Building Co., 345 U.S. 502">345 U.S. 502, 505-506 (1953), when faced with a similar situation,
We conclude that the decisions entered by the Tax Court for the [earlier taxable years] were only a pro forma acceptance by the Tax Court of an agreement between the parties to settle their controversy for reasons undisclosed. There is no showing either in the record or by extrinsic evidence (see Russell v. Place, 94 U.S. 606">94 U.S. 606, 608) that the issues raised by the pleadings were submitted to the Tax Court for determination or determined by that court. They may or may not have been agreed upon by the parties. Perhaps, as the Court of Appeals inferred, the parties did agree on the basis for depreciation. Perhaps the settlement was made for a different reason, for some exigency arising out of the bankruptcy proceeding. As the case reaches us, we are unable to tell whether the agreement of the parties was based on the merits or on some collateral consideration. Certainly the judgments entered are res judicata of the tax claims for the [earlier taxable years], whether or not the basis of the agreements on which they rest reached the merits. But unless we can say that they were an adjudication of the merits, the doctrine of estoppel by judgment would serve an unjust cause: it would become a device by which a decision not shown to be on the merits would forever foreclose inquiry into the merits. Estoppel by judgment includes matters in a second proceeding which were actually presented and determined in an earlier suit. See Commissioner v. Sunnen, supra, at 598. A judgment entered with the consent of the parties may involve a determination of questions of fact and law by the court. But unless a showing is made that that was the case, the judgment has no greater dignity, so far as collateral estoppel is concerned, than any judgment entered only as a compromise of the parties. [Emphasis added.]
The mere fact that the stipulated issue was related to an issue which was actually litigated does not require a different conclusion. Food Machinery & Chemical Corp. v. United States, 177 Ct. Cl. 219">177 Ct. Cl. 219, 366 F.2d 1007">366 F.2d 1007, 1008 (1966). Accordingly, it is clear that the parties' negotiated settlement, with respect to the issue of the inclusion in basis of amounts attributable to interest and taxes during construction claimed in prior taxable years, in no way acts as a bar to the claims made by petitioner with respect to the taxable years herein at issue.
To reflect the foregoing and the agreements reached by the parties on other issues, *168 Decisions will be entered under Rule 155.
Document Info
Docket Number： Docket Nos. 7521-82, 30341-83
Citation Numbers： 89 T.C. 134, 1987 U.S. Tax Ct. LEXIS 104, 89 T.C. No. 14
Judges： Tannenwald
Filed Date： 7/23/1987
Precedential Status： Precedential
Modified Date： 11/14/2024
Authorities (13)
Thor Power Tool Co. v. Commissioner , 99 S. Ct. 773 ( 1979 )
United States v. International Building Co. , 73 S. Ct. 807 ( 1953 )
Russell v. Place , 24 L. Ed. 214 ( 1877 )
Cohan v. Commissioner of Internal Revenue , 39 F.2d 540 ( 1930 )
Chicago, Milwaukee, St. Paul and Pacific Railroad Company v.... , 404 F.2d 960 ( 1968 )
Fulman v. United States , 98 S. Ct. 841 ( 1978 )
The Crosley Corporation v. United States , 229 F.2d 376 ( 1956 )
Philadelphia Saving Fund Society v. United States , 269 F.2d 853 ( 1959 )
Burnet v. Houston , 51 S. Ct. 413 ( 1931 )
Denver & Rio Grande Western Railroad Company v. ... , 279 F.2d 368 ( 1960 )
Food MacHinery and Chemical Corporation, a Corporation v. ... , 366 F.2d 1007 ( 1966 )
United States v. Chicago, Burlington & Quincy Railroad , 93 S. Ct. 2169 ( 1973 )
Hanover Bank v. Commissioner , 82 S. Ct. 1080 ( 1962 )
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