§ 1.281-2 Effect of section 281 upon the computation of taxable income.
(a) Computation of taxable income of terminal railroad corporations—(1) Income not considered received or accrued. A terminal railroad corporation (as defined in paragraph (a) of § 1.281-3) shall not be considered to have received or accrued the “reduced amount” described in paragraph (c) of this section in the computation of its taxable income. Thus, income is not to be considered accrued or actually or constructively received by a terminal railroad corporation where, in the manner described in paragraph (c) of this section, (i) a charge which would be made to any railroad corporation for related terminal services is not made, or (ii) a portion of any liability payable by any railroad corporation with respect to related terminal services is discharged.
(2) Deduction not disallowed. In the computation of the taxable income of a terminal railroad corporation, a deduction relating to a “reduced amount”, described in paragraph (c) of this section, which is otherwise allowable to it under chapter 1 of the Code (without regard to sec. 277) shall not be disallowed by reason of section 281. Thus, deductions for expenses attributable to services rendered to a shareholder are not to be disallowed to a terminal railroad corporation merely because, in the manner described in paragraph (c) of this section, (i) a charge which would be made to any railroad corporation for related terminal services is not made, or (ii) a portion of any liability payable by any railroad corporation with respect to related terminal services is discharged. To the extent that section 281 applies to a deduction relating to a “reduced amount”, such deduction shall not be disallowed under section 277.
(b) Computation of taxable income of shareholders—(1) Income not considered received or accrued. A shareholder of a terminal railroad corporation shall not be considered to have received or accrued any “reduced amount” (described in paragraph (c) of this section) in the computation of the shareholder's taxable income. Thus a dividend is not to be considered actually or constructively received by a shareholder of a terminal railroad corporation merely because, in the manner described in paragraph (c) of this section, (i) a charge which would be made to the shareholder or any other railroad corporation for related terminal services is not made, or (ii) a portion of any liability payable by it or any other railroad corporation with respect to related terminal services is discharged.
(2) Expenses not considered paid or incurred. In the computation of the taxable income of a shareholder of a terminal railroad corporation, the shareholder shall not be considered to have paid or incurred any “reduced amount” (described in paragraph (c) of this section). Thus, a shareholder of the terminal railroad corporation may not deduct as an expense for related terminal services (as defined in paragraph (c) of § 1.281-3) an amount in excess of the net cost to it of such services.
(c) Amounts to which section 281 applies—(1) Reduced amount. For purposes of this section, the term reduced amount means, subject to the limitation of paragraph (c)(4) of this section, the amount by which:
(i) A charge which would be made by a terminal railroad corporation for its taxable year for related terminal services provided to a railroad corporation; or
(ii) A liability of a railroad corporation, resulting from a charge made by a terminal railroad corporation for its taxable year, with respect to related terminal services provided by the terminal railroad corporation, is reduced by reason of the terminal railroad corporation's taking into account, pursuant to an agreement (as defined in paragraph (d) of § 1.281-3), related terminal income (as defined in paragraph (b) of § 1.281-3) received or accrued (without regard to section 281) during such taxable year.
(2) Charge which would be made. For purposes of this section, a “charge which would be made” by a terminal railroad corporation is the amount that would be charged to any railroad corporation for related terminal services provided if the terminal railroad corporation made the charge without taking related terminal income into account.
(3) Reduction resulting from related terminal income. For purposes of subparagraph (1) of this section, a charge or a liability is reduced by taking related terminal income into account to the extent that:
(i) Related terminal income is received or accrued (without regard to section 281) by the terminal railroad corporation for its taxable year in which the charge or liability is reduced; and
(ii) The charge or liability in question would have been larger than it is had such income not been received or accrued (without regard to section 281).
The reduction must be made (directly or
indirectly) on
the books of
the terminal railroad corporation, and in
fact, for
the same
taxable year for which
the charge would be made or for which
the liability is incurred.
The reduction of
the charge or
liability must be taken into
account by
the terminal railroad corporation in ascertaining
the income, profit, or
loss for such
taxable year for
the purpose of reports to
shareholders and
the Interstate Commerce Commission, and for
credit purposes.
(4) Limitation. To the extent that a reduced amount (as described in paragraph (c)(1) of this section but without regard to the limitation under this subparagraph) would operate either to create or to increase a net operating loss for the terminal railroad corporation, this section shall not apply. Therefore, if a portion of a liability is discharged (in the manner described in this paragraph) and the discharged portion of the liability exceeds an amount equal to the terminal railroad corporation's gross income minus the deductions allowed by chapter 1 of the Code (computed with regard to the modifications specified in section 172(d) but without regard to section 281 and this section), then section 281 and this section shall not apply to such excess. The limitation described in this subparagraph shall apply only to taxable years of terminal railroad corporations ending after October 23, 1962.
(d) Examples. The provisions of this section may be illustrated by the following examples. In these examples, references to “before the application of section 281”, “after the application of section 281”, “taxable income”, and “allowable deductions” take no account of section 277, which may apply to deductions to which section 281 does not apply.
Example 1.
(i) Facts. The T Company is a
terminal railroad corporation which charges its three equal
shareholders,
the X, Y, and Z railroad corporations, a rental calculated monthly on a wheelage or user
basis for
the use of its
services and
facilities.
The T Company and each of its
shareholders report income on
the calendar year basis. A written
lease agreement to which all of
the shareholders were parties was entered into in 1947. The agreement provides that at
the end of each
year the liabilities of each of
the shareholders resulting from charges for rental
obligations with respect to
related terminal services shall be reduced by
the shareholder's one-third share of
the net income from each source of revenue that produced income (computed before
reduction for Federal
income taxes). For
the calendar year 1973,
the T Company's charges to its
shareholders include
the following charges for
related terminal services: $35,000 to
the X Company, $25,000 to
the Y Company, and $20,000 to
the Z Company. Thus, prior to
reduction, total
shareholder liabilities to
the T Company for
related terminal services are $80,000 at
the end of 1973.
The T Company's
net income from all sources (before
reduction of
liabilities pursuant to
the 1947 agreement and before
reduction for Federal
income taxes) and its
taxable income, before
the application of section 281, for 1973 are $36,000 determined as follows:
| Source
|
Gross income
|
Allowable deductions
|
Income (or loss)
|
| Related terminal services performed:
|
|
|
|
| For shareholders |
$80,000 |
$65,000 |
$15,000
|
| For nonshareholders |
46,000 |
37,000 |
9,000
|
| Related terminal income |
126,000 |
102,000 |
24,000
|
| Nonrelated terminal income |
30,000 |
18,000 |
12,000
|
| Total |
156,000 |
120,000 |
36,000 |
The liability of each shareholder is, pursuant to the agreement, discharged in part by the T Company crediting $12,000 against the rental due from each shareholder for a total discharge of liabilities of $36,000 (the net income from all sources), resulting in net shareholder liabilities owing to the T Company at the end of 1973 of $44,000 ($80,000 less $36,000): $23,000 from the X Company, $13,000 from the Y Company, and $8,000 from the Z Company.
(ii) Effect on terminal railroad corporation. The reduced amount to which this section applies is $24,000 (
related terminal income of $9,000 from nonshareholders and $15,000 from
shareholders). Thus, to
the extent of $24,000,
the T Company is not considered to have received or accrued income from
the discharged
liabilities of $36,000. Similarly, to
the extent of
the same $24,000,
the T Company is not disallowed
deductions for expenses merely
by reason of the discharge.
The T Company's
taxable income for 1973 after
application of section 281 is $12,000, computed as follows:
| Gross income ($156,000 less $24,000) |
$132,000
|
| Less allowable deductions |
120,000
|
| Taxable income |
12,000 |
(iii) Effect on shareholders—The reduced amount of $24,000 shall not be deemed to constitute either a dividend to the shareholders of the T Company or an expense paid or incurred by them. Thus, under the facts described, neither the X Company, the Y Company, nor the Z Company shall be considered to have received or accrued a dividend of $8,000, or to have paid or incurred an expense of $8,000. Assuming the X Company's taxable income for 1973 before the application of section 281 would have been $43,200, computed in the following manner, its taxable income for 1973 after the application of section 281 is $50,000, determined as follows:
|
Before the application of sec. 281
|
After the application of sec. 281
|
| Gross income:
|
|
|
| From sources other than T Co |
$146,000 |
$146,000
|
| Dividend considered received because of T Co.'s discharge of liabilities of $12,000 |
12,000 |
4,000
|
| Total |
158,000 |
150,000
|
| Less allowable deductions:
|
|
|
| From sources other than T Co |
69,600 |
69,600
|
| 85 percent dividend received deduction under sec. 243 attributable to dividend considered received because of T Co.'s discharge of liabilities |
10,200 |
3,400
|
| Expenses for accrued charges for related terminal services performed by T Co |
35,000 |
27,000
|
|
114,800 |
100,000
|
| Taxable income |
43,200 |
50,000 |
Example 2.
Assume
the same
facts as in
Example 1, except that
the charges to each of
the shareholders for
related terminal services for 1973 were as follows: $35,000 to
the X Company, $40,000 to
the Y Company, and $5,000 to
the Z Company. Assume further that
the Z Company, prior to
the reduction in
liabilities at
the end of 1973, owed
the T Company an additional $4,000 resulting from charges for 1972 for
related terminal services and $6,000 resulting from
the purchase of equipment. Since only $21,000 (X Company $8,000, Y Company $8,000, Z Company $5,000) of
the liabilities which were discharged resulted from charges made for 1973 for
related terminal services,
the reduced amount to which this section applies is $21,000 (instead of $24,000 as in
Example 1). Thus,
the T Company's
taxable income for 1973 would be $15,000 ($36,000 less $21,000 reduced
amount) and
the amount which shall be considered not to have been received or accrued as a
dividend nor paid or incurred as an expense of each
shareholder is $8,000 for
the X Company, $8,000 for
the Y Company, and $5,000 for
the Z Company.
Example 3.
Assume
the same
facts as in
Example 1, except that
the allowable deductions with respect to nonrelated terminal
activities were $39,000 instead of $18,000.
The T Company's
net income from all sources (before
reduction for Federal
income taxes) and its
taxable income, before
the application of section 281, is therefore $15,000, determined as follows:
| Source
|
Gross income
|
Allowable deductions
|
Income (or loss)
|
| Related terminal income |
$126,000 |
$102,000 |
$24,000
|
| Nonrelated terminal income |
30,000 |
39,000 |
(9,000)
|
| Total |
156,000 |
141,000 |
15,000 |
The liability of each
shareholder is nevertheless discharged in part, pursuant to the agreement, by
the T Company crediting $8,000 against
the rental due from each
shareholder for a total discharge of
liabilities of $24,000 (
the net income from each source of revenue that produced income). Assume further that none of
the modifications
specified in section 172(d) apply. If
the limitation under
paragraph (c)(4) of this section were not applied,
the reduced
amount for
the purposes of this section would be $24,000, and
the operation of this section would
result in a
net operating loss of $9,000, since
the allowable deductions of $141,000 would exceed
the gross income of $132,000 ($156,000 less discharged
liabilities of $24,000) by that
amount. Because of
the limitation under
paragraph (c)(4) of this section, however, $9,000 is not included in
the reduced amount to which this section applies. Accordingly,
the reduced
amount is $15,000 (instead of $24,000 as in
Example 1). Thus,
the T Company's
taxable income for 1973 would be zero ($15,000 less
the $15,000 reduced
amount), and
the amount which each
shareholder shall be considered not to have received or accrued as a
dividend nor paid or incurred as an expense is $5,000.
Example 4.
Assume the same facts as in Example 1, except that under the agreement income from the terminal parking lot would not reduce the shareholders' liabilities. Assume further that such income amounted to $3,000 of the total related terminal income of $24,000 for the taxable year 1973. The liability of each shareholder therefore is discharged by crediting $11,000 against its rental due for a total discharge of liabilities of $33,000. The reduced amount to which this section applies is $21,000 ($24,000 less $3,000) since only to the extent of $21,000 would there have been no such reduction under the agreement if there were no related terminal income.
Example 5.
Assume
the same
facts as in
Example 1, except that, pursuant to the agreement,
the A Company, a nonshareholder railroad corporation, is to have its
liabilities resulting from charges for rental
obligations reduced equally with each of
the shareholders. Assume further that
the T Company's charges to
the A Company for
the calendar year 1973 included $15,000 for
related terminal services and that
the liability of each
shareholder and
the A Company is discharged in part pursuant to the agreement by
the T Company crediting $9,000 against
the rental due from each.
The reduced amount to which this section applies is $24,000. Thus,
the T Company's
taxable income for 1973 is $12,000, and each
shareholder shall not be considered to have received or accrued as a
dividend nor paid or incurred as an expense $6,000 ($24,000/ $36,000 × $9,000) merely because of
the discharge of its own
liability. Similarly, each
shareholder shall not be considered to have received or accrued as a
dividend nor paid or incurred as an expense $2,000 (1/3 × ($24,000/$36,000 × $9,000)) merely because of
the discharge of
the liability of
the A Company. Section 281 does not apply to
the determination of the tax consequences of
the transaction to
the A Company. Similarly,
the section does not apply to
the determination of the tax consequences to
the shareholders resulting from that portion of
the discharge of
the liability of
the A Company which is attributable to
the application of income which is not
related terminal income ($3,000). Hence, such
consequences shall be determined under
the sections of
the Internal Revenue Code which govern in
the absence of section 281.
Example 6.
(i) Facts. The TR Company is a
terminal railroad corporation with three equal
shareholders,
the M, N, and O Railroad Corporations.
The TR Company and each of its
shareholders report income on
the calendar year basis. Pursuant to a written agreement entered into in 1947 to which all
shareholders were parties,
the TR Company makes one annual charge to each of
the three
shareholders at
the end of each
year for
the difference between
the cost of operations, allocated on a wheelage or user
basis for
the use of its
services and
facilities provided to
the shareholder during
the year, and one-third of its
net income from all
other sources (computed before
reduction for Federal
income taxes).
The TR Company's
taxable income, before
the application of section 281, for 1973 is $21,000 determined as follows:
| Source
|
Gross income
|
Allowable deductions
|
Income (or loss)
|
| Related terminal services performed:
|
|
|
|
| For shareholders |
$65,000 |
$65,000 |
0
|
| For nonshareholders |
46,000 |
37,000 |
$9,000
|
| Related terminal income |
111,000 |
102,000 |
9,000
|
| Nonrelated terminal income from nonshareholders |
30,000 |
18,000 |
12,000
|
| Total |
141,000 |
120,000 |
21,000 |
For the calendar year 1973, the TR company's charges to its shareholders are $23,000 ($30,000 less $7,000) to the M company, $13,000 ($20,000 less $7,000) to the N company, and $8,000 ($15,000 less $7,000) to the O company for a total of $44,000 for related terminal services.
(ii) Effect on terminal railroad corporation. The reduced amount to which this section applies is $9,000. The TR company is not considered to have received or accrued income of $9,000 (related terminal income) merely because the charge of $21,000 (net income from all sources other than shareholders) was not made. Similarly, to the extent of $9,000, the TR company is not disallowed deductions for expenses merely because the full cost of services was not charged. The TR company's taxable income for 1973 after application of section 281, is $12,000, computed as follows:
| Gross income ($141,000 less $9,000 charges not made) |
$132,000
|
| Less allowable deductions |
120,000
|
| Taxable income |
12,000 |
(iii) Effect on shareholders. Neither the M company, the N company, nor the O company shall be considered to have received or accrued a dividend of $3,000 nor to have paid or incurred an expense of $3,000 merely by reason of the reduced charges. Thus, assuming the M company's taxable income for 1973 before the application of section 281 would have been $47,450, computed in the following manner, its taxable income for 1973 after the application of section 281 is $50,000, determined as follows:
|
Before the application of sec. 281
|
After the application of sec. 281
|
| Gross income:
|
|
|
| From sources other than TR Co |
$146,000 |
$146,000
|
| Dividend considered received because of TR Co.'s reduction of charges |
7,000 |
4,000
|
| Total |
153,000 |
150,000
|
| Less allowable deductions:
|
|
|
| From sources other than TR Co |
69,600 |
69,600
|
| 85 percent dividend received deduction under sec. 243 attributable to dividend considered received because of TR Co.'s reduction of charges |
5,950 |
3,400
|
| Expenses for accrued charges for related terminal services performed by TR Co |
30,000 |
27,000
|
|
105,550 |
100,000
|
| Taxable income |
47,450 |
50,000 |
