Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 70-17

1970-1 C.B. 41

Sec. 161
Sec. 167
Sec. 1016

IRS Headnote

Adjusted basis of property permanently retired (without replacements) from certain track accounts of reorganized railroads using the "retirement method of accounting".

Full Text

Rev. Rul. 70-17

Advice has been requested whether amounts capitalized by a taxpayer, a reorganized railroad company, and recorded on its books for Interstate Commerce Commission (ICC) purposes, under the circumstances described below, reflect the proper adjusted basis of certain roadway track account property that is to be taken into account for Federal income tax purposes when the property is permanently retired (without replacements).

The adjusted basis for Federal income tax purposes of the roadway property to the taxpayer's predecessor (before reorganization) was determined in the instant case to be equal to the "cost of reproduction new" recorded on the "valuation date" for income tax purposes. The cost of reproduction new, for such property, was ascertained by the ICC under the provisions of section 19a of the Railroad Valuation Act of March 1, 1913, (49 U.S.C. 19a) for all railroads.

Subsequent to the valuation date, the taxpayer's predecessor was reorganized on January 1, 1948, within the meaning of section 113(a)(20) of the Internal Revenue Code of 1939 (sections 373(b) and 374(b) of the Internal Revenue Code of 1954). The predecessor's adjusted basis of the roadway property was carried over to the "reorganized railroad," the taxpayer.

Since the valuation date, the taxpayer (and its predecessor) have consistently used the retirement method of accounting for depreciation generally used by railroads, with respect to the property accounted for in its capital roadway accounts (ICC Accounts 8--"Ties," 9--"Rails," 10--"Other Track Materials," 11--"Ballast," and 12--"Track Laying and Surfacing"). See  Revenue Ruling 67-22 and Revenue Ruling 67-145, C.B. 1967-1, 52 and 54, respectively, for descriptions of the retirement method of accounting for depreciation generally used by railroads.

Consistent with the "retirement method," since the valuation date, for Federal income tax purposes, "additions" and "betterments" have been charged (capitalized), and permanent retirements (without replacements) have been credited, to these accounts. Such permanent retirements and all replacements (except betterment portions of replacements) have been charged to expense.

However, at the time of its reorganization, the taxpayer in the instant case adjusted its books with respect to property in accounts 9, 10, and 11 of the track accounts by capitalizing the actual costs of the non-betterment portion of replacements, and the old property (with a substantially lower recorded adjusted basis) was retired. Thus, there was recorded on its books a higher adjusted basis in the capital accounts. These higher costs had been previously recorded on the valuation records for ICC purposes (but not for Federal income tax purposes) for the period from valuation date to reorganization date.

The amounts recorded on the taxpayer's books in accounts 9, 10, and 11 for property accounted for in these accounts are therefore not the proper amounts to be taken into account as the adjusted basis of such property for income tax purposes in determining the amount of any deduction for permanent retirements (without replacements), since the taxpayer, as a reorganized railroad, changed the amounts capitalized on its books when it was reorganized. For Federal income tax purposes, between valuation date and reorganization date, when replacements occurred, the net costs of property replacements (except betterment portions) were charged to expenses under the retirement method of accounting for depreciation; however, for ICC purposes the costs of the installed property was "written-in" and the costs of the replaced property "written-out" pursuant to the amounts charged and credited to the valuation records.

Section 167 of the Internal Revenue Code of 1954 sets forth the general rule that there shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear, and obsolescence of property used either in the trade or business or held for the production of income.

Section 1016(a)(1) of the Code and the Income Tax Regulations thereunder provide, among other things, that proper adjustments are to be made to the basis of property to determine the adjusted basis defined in section 1011 of the Code.

Section 1.161-1 of the regulations provides that double deductions are not allowable under the 1954 Code. Further, section 7852(c) of the Code provides, except as otherwise distinctly expressed or manifestly intended (exceptions not pertinent to this Revenue Ruling), that the same item shall not be taken into account both in computing income tax under the 1954 Code and under the 1939 Code.

Section 1.167(a)-1 of the regulations provides, in part, that a reasonable allowance for depreciation is that amount which should be set aside for the taxable year in accordance with a reasonably consistent plan (not necessarily at a uniform rate), so that the aggregate of the amounts set aside, plus salvage value, will, at the end of the estimated useful life of the depreciable property, equal the cost or other basis of the property.

Section 1.167(a)-7(c) of the regulations provides, in part, that a taxpayer's regular books of account, or permanent auxiliary records, shall show the basis of the depreciable property, including adjustments necessary to conform to the requirements of section 1016 of the Code and other provisions of law relating to the adjustments to basis, and the depreciation allowances for Federal income tax purposes.

To allow for Federal income tax purposes the higher amounts recorded by the taxpayer on its books for ICC purposes as the adjusted basis for such property for determining the amounts deductible for permanent retirements (without replacements) would be to permit double deductions for the same amounts (or portions of amounts) in the year of retirement, since such amounts have already been deducted by the taxpayer as expenses under the retirement method of accounting for depreciation in prior years.

Accordingly, in the instant case, the taxpayer's adjusted basis of its roadway track account property (accounted for in accounts 9--"Rail," 10--"Other Track Material," and 11--"Ballast") to be taken into account for Federal income tax purposes when the property still on hand is permanently retired (without replacements) are "cost of reproduction new," as recorded on the valuation date, and for such property acquired since the valuation date the proper costs for Federal income tax purposes of "additions" and "betterments."