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decided: June 4, 1973.



Blackmun, J., delivered the opinion of the Court, in which Burger, C. J., and Brennan, White, Marshall, and Rehnquist, JJ., joined. Douglas, J., filed a dissenting opinion, post, p. 416. Stewart, J., filed a dissenting opinion, in which Douglas, J., joined, post, p. 417. Powell, J., took no part in the consideration or decision of the case.

Author: Blackmun

[ 412 U.S. Page 402]

 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 National Industrial Recovery Act, 48 Stat. 195, Congress authorized federal reimbursement to the States of the shares of the costs the States incurred in the construction of those improvements that inured to the benefit of public safety and improved highway traffic control.*fn1 In 1944 Congress went further and authorized reimbursement, with stated limitations, to the States for the entire cost of the improvements, subject to the condition

[ 412 U.S. Page 403]

     that a railroad that received a benefit from a facility so constructed was liable to the Government for up to 10% of the cost of the project pro rata in relation to the benefit received by the railroad.*fn2

Under these programs CB&Q received, at public expense, highway undercrossings and overcrossings having a cost of $1,538,543; crossing signals, signs, and flood-lights having a cost of $548,877; and jetties and bridges having a cost of $58,721.*fn3 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.*fn4 By a 4-to-3 decision on this issue (only one of several in the case), the Court of Claims concluded that, under § 167 of the Internal Revenue Code of 1954, 26 U. S. C. § 167, CB&Q was entitled to the depreciation deduction it claimed. This was on the theory that the subsidies qualified as contributions to the railroad's capital under §§ 362 and 1052 (c) of that

[ 412 U.S. Page 404]

     Code, 26 U. S. C. §§ 362 and 1052 (c), and under § 113 (a)(8) of the Internal Revenue Code of 1939.

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,*fn5 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,*fn6 we granted certiorari. 409 U.S. 947.

[ 412 U.S. Page 405]


Section 23 (l) of the 1939 Code and its successor, § 167 (a) of the 1954 Code, 26 U. S. C. § 167 (a), allow a taxpayer "as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear . . . of property used in the trade or business." In the usual situation the taxpayer himself incurs cost in acquiring the assets as to which the depreciation deduction is asserted.*fn7 But there are other and different situations formally recognized in the governing tax statutes. A familiar example is gift property.*fn8 Another is property acquired by a corporation

[ 412 U.S. Page 406]

     from its shareholders as paid-in surplus or as a contribution to capital.*fn9 Another, and the one that is pertinent here, is covered by § 113 (a)(8)*fn10 of the 1939 Code and by the contrasting provisions of §§ 362 (a) and (c) of the 1954 Code, 26 U. S. C. §§ 362 (a) and (c).*fn11

[ 412 U.S. Page 407]

     This concerns a contribution to capital by a nonshareholder. See Treas. Reg. 111, § 29.113 (a)(8)-1 (1943). Under §§ 113 (a)(8) and 114 (a) of the earlier Code, the nonshareholder-contributed asset in the hands of the receiving corporation had the same basis, subject to adjustment, for depreciation purposes as it had in the hands of the transferor; under the 1954 Code, however, its basis for the transferee is zero.

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 § 113 (a)(8) of the 1939 Code, produced a seemingly anomalous result, for it meant that a corporate taxpayer receiving property from a nonshareholder as a contribution to capital not only received the property free from income tax but was allowed to assert a deduction for depreciation on the asset so received tax free. This result also ensued under the Court's holding in Brown Shoe and led to the enactment of the zero-basis

[ 412 U.S. Page 408]

     provision, referred to above, in § 362 (c) of the 1954 Code, 26 U. S. C. § 362 (c). Veterans Foundation v. Commissioner, 317 F.2d 456, 458 (CA10 1963).

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 § 113 (a)(8), thereby permitting CB&Q to depreciate the Government's cost in the assets. Whether the governmental subsidies qualified as income to the railroad is an issue not raised in this case, and we intimate no opinion with respect to it. The United States, however, asserts that the subsidies did not constitute a "contribution to capital" under § 113 (a)(8), and that, accordingly, the transferee railroad's tax basis is zero and no depreciation deduction is available.

Our inquiry, therefore, is a narrow one: whether the nonshareholder payment in this case constituted a "contribution to capital," within the meaning of § 113 (a)(8). Because both Detroit Edison and Brown Shoe bear upon the issue, we turn to those two decisions.


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 Revenue Act of 1936, 49 Stat. 1648, applied, the utility claimed the full cost of the facilities in its base for computing depreciation. The Commissioner disallowed, for depreciation purposes, that portion of the cost paid by customers and not refundable. The Board of Tax Appeals, 45 B. T. A. 358 (1941), and the

[ 412 U.S. Page 409]

     Court of Appeals, 131 F.2d 619 (CA6 1942), sustained the Commissioner. This Court affirmed.

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, § 113 (a) of the 1936 Act, it was said, "means . . . cost to the taxpayer," even though the property "may have a cost history quite different from its cost to the taxpayer." Also, the "taxpayer's outlay is the measure of his recoupment through depreciation accruals." 319 U.S., at 102. The utility's ...

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