The IRS today publicly released a heavily redacted legal advice memorandum* concluding that, for purposes of the railroad track maintenance credit under section 45G, an attempted assignment of the credit between members of a group of taxpayers under common control must be disregarded. 20151601F (released April 17, 2015, and dated December 19, 2014)
Read the legal advice memo [PDF 120 KB].
*Field advice memo documents are prepared by IRS field attorneys in the Office of Chief Counsel, are reviewed by an Associate Office, and are subsequently issued to IRS field or service center employees. The memo cannot be used or cited as precedent..
The taxpayer was a holding company that apparently had ownership interests in several Class II or Class III railroad companies that owned railroad track that needed repairs and upgrades. The taxpayer and the railroads were not in the same consolidated group of corporations.
Section 45G provides a credit to a Class II or Class III railroad for a portion of the railroad track maintenance expenditures the railroad pays or incurs on its track, limited to $3,500 per mile of track owned by the railroad.
Section 45G permits a railroad with eligible track to assign miles of its track to certain other persons. If the assignee pays or incurs amounts that are considered to be railroad track maintenance expenditures on the assignor’s track, the assignee can claim the credit, limited to $3,500 per mile of assigned track.
The facts in the legal advice memo indicate that under a track maintenance agreement, the railroads assigned certain miles of their track to the taxpayer, and the taxpayer paid or incurred appropriate maintenance expenditures, and claimed the section 45G credit.
However, the taxpayer and the railroads were in a group under common control, a characterization that requires, generally, a more-than-50% common or direct ownership interest. The section 45G credit is computed as if all members of a group under common control are a single taxpayer, and then allocated among the members. Because the credit is computed on a group basis, Reg. section 1.45G-1(f)(8)(i) provides that transfers between members of the group are generally disregarded in determining the credit.
The IRS legal advice memorandum concludes, based on these common control rules, that the attempted assignment of the railroads’ track miles to the taxpayer must be disregarded. Thus, within the group, the only member that can claim a credit for the particular miles owned by the railroad is the railroad itself “since Taxpayer and Railroads are treated as a single taxpayer . . . , the assignment would in effect be allowing an assignment to oneself.”
The effect of disregarding the assignment within the group apparently would be to allow the section 45G credit for those miles of track to be claimed only by the railroad that owned those miles of track. Presumably, the railroads did not have sufficient tax liability on their own tax returns to use the credits in the year they were generated, but the taxpayer did. While the various entities were under common control, they do not file a consolidated return, and each reports its own tax liability. The credits, while unused in the year they were generated, are available to be carried back one tax year and carried forward 20 years, until the person considered to own the credit has sufficient tax liability to use the credit.
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