Title 26
SECTION 1.281-2
1.281-2 Effect of section 281 upon the computation of taxable income.
§ 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 |
Gross income ($156,000 less $24,000) | $132,000 |
Less allowable deductions | 120,000 |
Taxable income | 12,000 |
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 |
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 |
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 |
Gross income ($141,000 less $9,000 charges not made) | $132,000 |
Less allowable deductions | 120,000 |
Taxable income | 12,000 |
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 |