Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 75-29

1975-1 C.B. 91

Sec. 184

IRS Headnote

Amortization of railroad rolling stock; original use and placed in service. The "original use" of freight cars delivered by a manufacturer to a railroad under a short-term interim financing arrangement, pending permanent financing through sale of equipment trust certificates, began with the railroad for purposes of section 184(d)(2) of the Code, and such cars were "placed in service" on the date or dates they were delivered to and accepted by the railroad.

Full Text

Rev. Rul. 75-29

Advice has been requested, under the circumstances described below, as to the application of the terms "original use" and "placed in service" in section 184 of the Internal Revenue Code of 1954.

In 1971, the taxpayer, a railroad corporation, contracted with a manufacturer to acquire a number of freight train cars (rolling stock), to be built to the taxpayer's specifications. As groups of the cars were completed, they were delivered to and accepted by the railroad until the total number of cars ordered had been received. At the time the cars were delivered, the railroad had not completed the necessary permanent financial arrangements to pay for the cars, and the manufacturer and the railroad entered into a short-term interim arrangement. The arrangement provided for the railroad's possession and use of the cars until the permanent financing was arranged and payment of interest on the cost of the cars on the basis of a daily rate for the number of days the railroad had the cars between delivery date and the date permanent financing was completed. The arrangement, by its terms, terminated within six months.

Under the terms of the interim short-term arrangement, the railroad had custody, possession, and use of the cars, and had to replace or pay the manufacturer for any cars destroyed. Until the purchase price was paid, the manufacturer had title to, and a lien on, the cars and the railroad agreed to pay all taxes, fines, charges, and penalties, and to indemnify and save harmless the manufacturer from any and all claims, expenses, or liabilities of any kind arising out of the railroad's possession and use of the cars. The railroad had to pay for the cars at the termination of the interim arrangement.

The railroad financed the purchase of these cars through an equipment trust. This involved entering into an agreement with a bank which, acting under the trust agreement, issued equipment trust certificates, payment of which was guaranteed by the railroad. The certificates were publicly sold and were secured by a lien on the cars. Upon payment of the purchase price to the manufacturer, its lien on the cars was satisfied and title to the cars was transferred directly by the manufacturer to the trustee as a security device for the payment of the railroad's obligation to the equipment trust certificate holders. Consequently, although the railroad has all the burdens and benefits of ownership, bare legal title rests in the trustee until the railroad satisfies the equipment trust certificates.

Section 184(a) of the Code provides that a taxpayer, at his election, is entitled to a deduction with respect to amortization of qualified railroad rolling stock based on a period of 60 months. The 60-month period begins with the month following the month in which such rolling stock was placed in service or with the succeeding taxable year. In defining "qualified railroad rolling stock," section 184(d) requires that the original use of such rolling stock commence with the taxpayer after December 31, 1968.

Based on the facts and circumstances set forth above, it is held that: (1) for purposes of section 184(d)(2) of the Code, "original use" commenced with the railroad, and (2) such cars were "placed in service" on the date or dates the cars were delivered to and accepted by the railroad.