UNITED STATES v. CHICAGO, BURLINGTON & QUINCY RAILROAD CO.
No. 72-90
SUPREME COURT OF THE UNITED STATES
Argued February 26, 1973—Decided June 4, 1973
412 U.S. 401
Richard B. Stone argued the cause for the United States. With him on the brief were Solicitor General Griswold, Acting Assistant Attorney General Ugast, Meyer Rothwacks, and Grant W. Wiprud.
Richard J. Schreiber argued the cause for respondent. With him on the brief was Richard T. Cubbage.
MR. JUSTICE BLACKMUN delivered the opinion of the Court.
The issue in this federal income tax case is whether the respondent, Chicago, Burlington & Quincy Railroad Company (CB&Q), an interstate common carrier railroad, may depreciate the cost of certain facilities paid for prior to June 22, 1954, not by it or by its shareholders, but from public funds.
Starting about 1930, CB&Q entered into a series of contracts with various Midwestern States. By these agreements the States were to fund some or all of the costs of construction of specified improvements, and the railroad apparently was to bear, at least in part, the costs of maintenance and replacement of the improvements once they had been installed. In 1933, as part of the program of the
Under these programs CB&Q received, at public expense, highway undercrossings and overcrossings having a cost of $1,538,543; crossing signals, signs, and floodlights having a cost of $548,877; and jetties and bridges having a cost of $58,721.3 These improvements, aggregating $2,146,141, were carried on the railroad‘s books as capital assets even though most of the agreements between CB&Q and the several States did not expressly convey title to the railroad.
CB&Q instituted a timely suit in the Court of Claims alleging, among other things, that it had overpaid its 1955 federal income tax because it had failed to assert, as a deduction on its return as filed, allowable depreciation on the subsidized assets.4 By a 4-to-3 decision on this issue (only one of several in the case), the Court of Claims concluded that, under
In arriving at this conclusion, the Court of Claims majority relied on Brown Shoe Co. v. Commissioner, 339 U. S. 583 (1950), and reasoned that, even though the governmental payments for the facilities may not have been intended as contributions to the railroad‘s capital, the “principal purpose” being, instead, “to benefit the community-at-large,” 197 Ct. Cl., at 276, 455 F. 2d, at 1000, the facilities did in fact enlarge the railroad‘s working capital, were used in its business, and produced economic benefits for it, thereby qualifying as contributions to its capital under the cited section of the 1939 Code. The three dissenting judges disagreed with this interpretation of Brown Shoe, and, instead, relied on Detroit Edison Co. v. Commissioner, 319 U. S. 98 (1943). They concluded that the critical features were the donor‘s attitude, purpose, and intent, and that, with governmental payments, there could be no intention to confer a benefit upon CB&Q. Instead, as the findings revealed,5 the intention was to expedite traffic flow and to improve public safety at highway-railroad crossings. 197 Ct. Cl., at 315, 320, 455 F. 2d, at 1023, 1026.
Because the Court of Claims decision apparently would afford a precedent for the tax treatment of substantial sums,6 we granted certiorari. 409 U. S. 947.
I
Pertinent to all this is the Court‘s decision in Edwards v. Cuba R. Co., 268 U. S. 628 (1925). The Court there held that subsidies granted by the Cuban Government to a railroad to promote construction in Cuba “were not profits or gains from the use or operation of the railroad,” and did not constitute income to the receiving corporation. Id., at 633. The holding in Edwards, taken with
“Notwithstanding subsection (a) (2), if property other than money—
“(A) is acquired by a corporation, on or after June 22, 1954, as a contribution to capital, and
“(B) is not contributed by a shareholder as such, then the basis of such property shall be zero.
“(2) Money.
“Notwithstanding subsection (a) (2), if money—
“(A) is received by a corporation, on or after June 22, 1954, as a contribution to capital, and
“(B) is not contributed by a shareholder as such, then the basis of any property acquired with such money during the 12-month period beginning on the day the contribution is received shall be reduced by the amount of such contribution.”
CB&Q argues that this very result should follow here. It is said that the railroad received no taxable income and incurred no income tax liability when it received, at governmental expense prior to June 22, 1954, the facilities as to which CB&Q now asserts depreciation. And, in providing the facilities, CB&Q argues, the Government intended to make a contribution to the railroad‘s capital, within the meaning of
Our inquiry, therefore, is a narrow one: whether the nonshareholder payment in this case constituted a “contribution to capital,” within the meaning of
II
Detroit Edison concerned customers’ payments to a utility for the estimated costs of construction of service facilities (primary power lines) that the utility otherwise was not obligated to provide. For its tax years 1936 and 1937, to which the
Mr. Justice Jackson, speaking for a unanimous Court (the Chief Justice not participating), observed, “The end and purpose of it all [depreciation] is to approximate and reflect the financial consequences to the taxpayer of the subtle effects of time and use on the value of his capital assets.” 319 U. S., at 101. The statute,
“It is enough to say that it overtaxes imagination to regard the farmers and other customers who furnished these funds as makers either of donations or contributions to the Company. The transaction neither in form nor in substance bore such a semblance.
. . . . .
“The payments were to the customer the price of the service. . . . They have not been taxed as income. . . . But it does not follow that the Company must be permitted to recoup through untaxed depreciation accruals on investment it has refused to make.” Id., at 102-103.
Detroit Edison, by itself, would appear almost to foreclose CB&Q‘s claims here, for there is an obvious parallel between the customers’ payment for the utility service facilities in Detroit Edison, and the governmental payments for improvements to the railroad‘s service facilities in the case before us.
But Detroit Edison was not the last word. Brown Shoe was decided seven years later, and the opposite tax result was reached by an 8-1 vote of the Court, with Mr. Justice Black in dissent without opinion.
Brown Shoe concerned a corporate taxpayer‘s excess profits tax, under the
Mr. Justice Clark, writing the opinion for the majority of the Court, concluded that the assets transferred by the community groups to the taxpayer were contributions to capital, within the meaning of
The Court thus professed to distinguish and not at all to overrule Detroit Edison. It did so on an analysis of the purposes behind the respective transfers in the two cases. Where the facts were such that the transferors could not be regarded as having intended to make contributions to the corporation, as in Detroit Edison, the assets transferred were not depreciable. But where the transfers were made with the purpose, not of receiving direct service or recompense, but only of obtaining advantage for the general community, as in Brown Shoe, the result was a contribution to capital.
III
It seems fair to say that neither in Detroit Edison nor in Brown Shoe did the Court focus upon the use to which the assets transferred were applied, or upon the economic and business consequences for the transferee corporation. Instead, the Court stressed the intent or motive of the transferor and determined the tax character of the transaction by that intent or motive. Thus, the decisional distinction between Detroit Edison and Brown Shoe rested upon the nature of the benefit to the transferor, rather than to the transferee, and upon whether that benefit was direct or indirect, specific or general, certain or speculative.12 These factors, of course, are simply indicia of the transferor‘s intent or motive.
That this line of inquiry, and these distinctions, have relatively little to do with the economic and business consequences of the transaction seems self-evident.13 In both cases the assets transferred were actually used in the transferee‘s trade or business for the production of income. In neither case did the transferee provide the investment for the assets sought to be depreciated. Yet in both cases, the assets in question were transferred for a consideration pursuant to an agreement. If, at first glance, Detroit Edison and Brown Shoe seem somewhat inconsistent, they may be reconciled, and indeed must be, on the ground that in Detroit Edison the transferor intended no contribution to the transferee‘s capital, whereas in Brown Shoe the transferors did have that intent.
The statutory phrase “contribution to capital” is nowhere expressly defined in either the 1939 Code or the 1954 Code, and our prior decisions provide only limited guidance as to its precise meaning. Detroit Edison might be said to be only a holding that a payment for services is not a contribution to capital. Brown Shoe sheds little additional light, for the Court stated only that because the community payments were not compensation for specific services rendered, and did not con-
But other characteristics of a contribution to capital are implicit in the two cases and become apparent when viewed in the light of the facts presently before us. In Brown Shoe, for example, the contributed funds were intended to benefit not only the transferors but the transferee as well, for the assets were put to immediate use by the taxpayer for the generation of additional income. Without benefit to the taxpayer, the agreement certainly would not have been made. Perhaps to some extent this was true in Detroit Edison; that taxpayer, however, was a public utility, and the anticipated revenue from the service lines to the customers would not have warranted the investment by the utility itself. 319 U. S., at 99. Its benefit, therefore, was marginal.
We can distill from these two cases some of the characteristics of a nonshareholder contribution to capital under the Internal Revenue Codes. It certainly must become a permanent part of the transferee‘s working capital structure. It may not be compensation, such as a direct payment for a specific, quantifiable service provided for the transferor by the transferee. It must be bargained for. The asset transferred foreseeably must result in benefit to the transferee in an amount commensurate with its value. And the asset ordinarily, if not always, will be employed in or contribute to the production of additional income and its value assured in that respect.
By this measure, the assets with which this case is concerned clearly do not qualify as contributions to capital. Although the assets were not payments for specific, quantifiable services performed by CB&Q for the Government as a customer, other characteristics of
CB&Q nevertheless contends that it is entitled to depreciate the facilities because of its obligation to maintain and replace them. Whatever may be the desirability of creating a depreciation reserve under these circumstances, as a matter of good business and accounting practice, the answer is, as Judge Davis of the Court of Claims observed in dissent, 197 Ct. Cl., at 318, 455 F. 2d, at 1025, “Depreciation reflects the cost of an existing capital asset, not the cost of a potential replacement.” Reisinger v. Commissioner, 144 F. 2d 475, 478 (CA2 1944). See United States v. Ludey, 274 U. S. 295, 300-301 (1927); Weiss v. Wiener, 279 U. S. 333, 335-336 (1929); Helvering v. Lazarus & Co., 308 U. S. 252, 254 (1939); Massey Motors v. United States, 364 U. S. 92 (1960); Fribourg Nav. Co. v. Commissioner, 383 U. S. 272 (1966).
We conclude that the governmental subsidies did not constitute contributions to CB&Q‘s capital, within the meaning of
Court of Claims on this issue is reversed and the case is remanded for further proceedings.
It is so ordered.
MR. JUSTICE POWELL took no part in the consideration or decision of this case.
MR. JUSTICE DOUGLAS, dissenting.
While I join the dissent of MR. JUSTICE STEWART, I add a few words. Funds were contributed by the States and by the Federal Government to respondent for the construction of highway overpasses and underpasses and for grade-crossing protection equipment. While the Government provided most of the funds, the respondent did most of the construction work—all as found by the Court of Claims. 197 Ct. Cl. 264, 271, 455 F. 2d 993, 997-998.
This case is not controlled by Detroit Edison Co. v. Commissioner, 319 U. S. 98, as MR. JUSTICE STEWART says, for there the advances were made by customers of a utility as part of “the price of the service.” Id., at 103. Here, however, the situation was different. As the Court of Claims found:
“[U]nder all the agreements, plaintiff was obligated to maintain and replace as necessary, at its own expense, facilities originally built. The facilities were constructed primarily for the benefit of the public to improve safety and to expedite motor-vehicle traffic flow. The record shows, however, that plaintiff received economic benefits from the facilities, e. g., probable lower accident rates, reduced expenses of operating crossing equipment and, where
permitted, higher train speed limits. Plaintiff also received intangible benefits, e. g., goodwill from the community-at-large, which was to plaintiff‘s long-term economic advantage.” 197 Ct. Cl., at 272, 455 F. 2d, at 998.
The case is therefore on all fours with Brown Shoe Co. v. Commissioner, 339 U. S. 583. In distinguishing Detroit Edison we said:
“Since in this case there are neither customers nor payments for service, we may infer a different purpose in the transactions between petitioner and the community groups. The contributions to petitioner were provided by citizens of the respective communities who neither sought nor could have anticipated any direct service or recompense whatever, their only expectation being that such contributions might prove advantageous to the community at large. Under these circumstances the transfers manifested a definite purpose to enlarge the working capital of the company.” Id., at 591.
I would affirm the judgment of the Court of Claims.
MR. JUSTICE STEWART, with whom MR. JUSTICE DOUGLAS joins, dissenting.
This case involves the depreciation of certain railroad facilities constructed with public funds prior to June 22, 1954. The precise question before the Court is whether those facilities constituted “contributions to capital” within the meaning of
Beginning in the early 1930‘s, various state governments entered into agreements with the respondent railroad for the construction of highway overpasses and underpasses at highway-railroad intersections, and construction of grade-crossing protection equipment such as
The respondent filed suit in the Court of Claims seeking a refund on its 1955 income taxes, claiming that the Commissioner of Internal Revenue had erred by refusing to allow a depreciation deduction for these publicly contributed facilities. The respondent asserted that these facilities were “depreciable property” held throughout 1955 “for use in its trade or business,” and that they were acquired prior to June 22, 1954, as “contributions to capital.”
The respondent‘s claim was an uncomplicated one.
respondent contended that the publicly contributed facilities were “contributions to capital,” and that under
The Court of Claims agreed with the respondent that these facilities were exhaustible assets properly depreciable to the full extent of their value. 197 Ct. Cl. 264, 276, 455 F. 2d 993, 1002. The depreciable nature of the facilities was undisputed, since the Government conceded that “the facilities are of a character normally subject to allowance for depreciation and that to the extent they were paid for by [the respondent], appropriate depreciation deductions are proper.” Id., at 273-274, 455 F. 2d, at 999. The court concluded that the facilities were “contributions to capital” under
I think the Court of Claims was entirely right in holding that these publicly contributed facilities constituted contributions to capital within the meaning of
The only two prior decisions of this Court that bear directly on the question before us—Detroit Edison Co. v. Commissioner, 319 U. S. 98, and Brown Shoe Co. v. Commissioner, supra—confirm that these publicly contributed facilities are contributions to the respondent‘s capital.
In Detroit Edison Co. v. Commissioner, supra, prospective customers of an electric company were required to pay for the construction of additional facilities in order
In Brown Shoe, supra, various community groups contributed cash and property to the taxpayer corporation to induce it to locate in or expand its operations in the respective communities. The Court held these assets to be “contributions to capital” within the meaning of
The Government urges us to read Brown Shoe as holding that, in order to establish a “contribution to capital,” a taxpayer must prove that the transferor of the asset had a definite purpose to enlarge the taxpayer‘s working capital. But that case did not turn on the presence of any such specific purpose. The purpose of the community contributions in Brown Shoe was to induce the taxpayer to locate or expand its operations in the local area, and this purpose was accomplished by contributing assets; there was no gratuitous attempt to enlarge the taxpayer‘s capital. The Court noted, in passing, the existence of a purpose to enlarge the taxpayer‘s working capital only in order to underline the fact that the community groups there were not customers paying compensation for services rendered. And, as in Brown Shoe, the State and Federal Governments here attempted to accomplish a general public goal by contributing facilities to the taxpayer. As in Brown Shoe, they were not paying for services.
United States, 308 F. 2d 634, 639-640; Teleservice Co. v. Commissioner, 254 F. 2d 105, 110-111. See also Note, Taxation of Nonshareholder Contributions to Corporate Capital, 82 Harv. L. Rev. 619, 626-627.
Brown Shoe made clear that “capital” was to be defined “as that term has commonly been understood in both business and accounting practice. . . .” 339 U. S., at 589. The facilities in the present case meet that test. They are certainly part of the respondent‘s capital under any traditional understanding of that term; they are assets permanently invested in the railroad‘s business. See supra, at 421. Indeed, many of these facilities are essential to the railroad‘s continued operation—a railroad bridge, for example, is an obvious physical necessity if the railroad is to operate. All of the facilities enlarged the railroad‘s working capital, were used in its business, and yielded tangible and intangible economic benefits to the railroad. And the Court even appears to acknowledge that these assets are “capital” in the normal sense of that term, since it concedes that the portion of the facilities constructed by the railroad with its own funds is depreciable.8 I do not understand why
The Government argues that to allow the railroad to claim a depreciation deduction on these facilities as “contributions to capital” would lead to the “anomalous” result that although the railroad had incurred no expense with respect to the publicly financed facilities, it could nevertheless recoup their cost. But if this is an anomaly, it is the same anomaly that existed in Brown Shoe. The taxpayer there had not paid for the property contributed by the community groups, yet it was able to claim a full depreciation deduction on it. In short, this so-called anomaly is the ineluctable result of
In sum, Congress in 1954 rewrote the tax law so as to overrule Brown Shoe and prohibit depreciation to be taken on contributions to capital made by nonshareholders on or after June 22, 1954.10 As it now turns out, Congress could have saved itself the trouble. For today the Court rewrites the law and prohibits depreciation to be taken on such assets the railroad has owned since the 1930‘s. I would follow the law as Congress wrote it and affirm the judgment of the Court of Claims.
“(A) is acquired by a corporation, on or after June 22, 1954, as a contribution to capital, and
“(B) is not contributed by a shareholder as such,
“then the basis of such property shall be zero.
“(2) Money.
“Notwithstanding subsection (a) (2), if money—
“(A) is received by a corporation, on or after June 22, 1954, as a contribution to capital, and
“(B) is not contributed by a shareholder as such,
“then the basis of any property acquired with such money during the 12-month period beginning on the day the contribution is received shall be reduced by the amount of such contribution. The excess (if any) of the amount of such contribution over the amount of the reduction under the preceding sentence shall be applied to the reduction (as of the last day of the period specified in the preceding sentence) of the basis of any other property held by the taxpayer. The particular properties to which the reductions required by this paragraph shall be allocated shall be determined under regulations prescribed by the Secretary or his delegate.”
Notes
“If the property was acquired after December 31, 1920, by a corporation—
. . . . .
“(B) as paid-in surplus or as a contribution to capital, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made.”
“The facilities . . . were constructed primarily for the benefit of the public to improve safety and to expedite highway traffic flow. [The respondent], however, received benefits from the facilities, among others, probable lower accident rates, reduced expenses of operating crossing facilities, and, where permitted, higher train speed limits, all of which permitted [the respondent] to function more efficiently and presumably less expensively.” 197 Ct. Cl., at 326-327.
“9. The facilities noted in finding 7 were constructed primarily for the benefit of the public to improve safety and to expedite highway traffic flow. Plaintiff [CB&Q], however, received benefits from the facilities, among others, probable lower accident rates, reduced expenses of operating crossing facilities, and, where permitted, higher train speed limits, all of which permitted plaintiff to function more efficiently and presumably less expensively.” 197 Ct. Cl., at 326-327.
The Government has suggested as an alternative basis for reversal that the respondent entered into a “terms letter” agreement with the Commissioner whereby it agreed to exclude contributed property from its depreciation base. The Court does not reach this contention. I agree with the reasoning of the Court of Claims in holding that the terms letter did not bar the respondent from claiming a depreciation deduction on contributed property.And similarly it is of no consequence that the contribution was by a nonshareholder, for a contribution by a shareholder would have a carryover basis under the “paid-in surplus” provision of
In short, a “contribution to capital” is any nongratuitous transfer to a corporation by a nonshareholder, such as is involved in the present case. See Freeman & Speiller, Tax Consequences of Subsidies to Induce Business Location, 9 Tax L. Rev. 255, 261.
“(a) Property acquired by issuance of stock or as paid-in surplus.
“If property was acquired on or after June 22, 1954, by a corporation—
. . . . .
“(2) as paid-in surplus or as a contribution to capital, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain recognized to the transferor on such transfer.
. . . . .
“(c) Special rule for certain contributions to capital.
“(1) Property other than money.
“Notwithstanding subsection (a) (2), if property other than money—
[Footnote 9 continued on p. 426]
“(a) Basis (unadjusted) of property.
“The basis of property shall be the cost of such property; except that—
. . . . .
“(8) Property acquired by issuance of stock or as paid-in surplus.
“If the property was acquired after December 31, 1920, by a corporation—
“(A) by the issuance of its stock or securities in connection with a transaction described in section 112 (b) (5) (including, also, cases where part of the consideration for the transfer of such property to the corporation was property or money, in addition to such stock or securities), or
“(B) as paid-in surplus or as a contribution to capital, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made.”
It was explicitly recognized that“(a) Property acquired by issuance of stock or as paid-in surplus.
“If property was acquired on or after June 22, 1954, by a corporation—
“(1) in connection with a transaction to which section 351 (relating to transfer of property to corporation controlled by transferor) applies, or
“(2) as paid-in surplus or as a contribution to capital, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain recognized to the transferor on such transfer.
. . . . .
“(c) Special rule for certain contributions to capital.
“(1) Property other than money.