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Railroad Industry Overview - October 2007

LMSB Control Number: LMSB-04-1007-072
Affected IRM: X.XX.X

This document is not an official pronouncement of the law or the position of the Service and cannot be used, or cited or relied upon as such.


Table of Contents:


A. Purpose of Industry Overview
B. Use of the Intranet and Internet
C. General History of Industry Specialization Program (ISP)
D. History of Ground Transportation ISP
E. Industry Specialist Staffing (Technical Advisors in LB&I)
F. LB&I Industry Staffing
G. Description of the Railroad Industry

History of Railroad Industry


Industry Terms

A. Terms Specific to Railroad Industry
B. Terms Specific to Transportation Industries Generally
C. Abbreviations & Acronyms

Accounting Principles

A.   Regulatory Accounting.
B.   Tax Accounting.

Information Systems

Industry Operating Procedures

A.   In General
B.   Track Ownership, Usage
C.   Industry Composition and Metrics
D.    Railroads and Their Transportation Partners                                                      

Government Regulatory Requirements

A.   Federal Requirements
B.   State Requirements
C.   Local Requirements

Significant Law and Important Issues

A.   Coordinated Issues
B.   Emerging or Other Significant Issues
C.   Recent or Pending Legislation
D.   Specific Industry Related Tax Law
E.   Important Revenue Rulings or Revenue Procedures
F.    RRTA Rulings:
G.   Important Court Cases
H.   RRTA Cases
I.    Other Employment Tax Cases Potentially Impacting RRTA Issues
J.    Technical Advice Memorandums – Field Service Advices

Alternative Issue Resolution Considerations

Industry Resources

A.   WEB Sites
B.   Trade Associations
C.   IRS and Other Training Courses/Videotapes
D.   Trade Magazines and Newsletters
E.   Industry Books
F.    Internal Revenue Manual Citations
G.   AICPA Auditing Standards and Publications
H.   Market Segment Specialization Program (MSSP)


A.   Complete Listing of Overviews Available




A.  Purpose of Industry Overview

This overview is designed to provide industry-related information to all Large and Mid-Size Business (LMSB).  This is the first step in the effort of LMSB to develop a greater level of expertise in the industry or industries to which you will be assigned.  This overview is one of a series of industry specific overviews.  See the Appendix for a complete listing of available overviews.

B.  Use of the Intranet and Internet

It is anticipated that an industry web page will be established on the LMSB Intranet site that will contain detailed information involving each industry.  The topics included in this overview will be expanded upon and others will be included.  For example, an up-to-date economic analysis of the industry, current and future trends, and links to many other industry related web sites that can assist you in gaining the needed level of understanding of your industry will be included.    

C.  General History of Industry Specialization Program (ISP)






The Service was restructured in 1952 into a highly decentralized organization consisting of seven regions and 58 districts.  This reorganization was implemented in part to achieve greater sensitivity and responsiveness to pubic needs.  District Directors were given wide latitude and authority in administering the Service's policies, procedures and programs.  While decentralization of the Service proved to be a progressive action, communication between the regions and districts was made more difficult because of their quasi‑autonomy.  Positions taken by the Service on industry issues could differ significantly from one region to another on the same issues.


The Service implemented the Industry Wide Examination Program to concurrently examine the major taxpayers in a given industry, coordinate selected issues common to that industry and to resolve those issues uniformly and consistently among all the industry taxpayers.  Under the direction of project coordinators (usually large case branch chiefs), the industry wide examinations were largely successful in achieving uniform and consistent treatment of issues.  Industry wide examinations were conducted in several industries between 1971 and 1979 and the ability to communicate freely across district and regional lines proved to be invaluable to the success of these examinations.


The Industry wide Examination Program had one major drawback.  Since they existed for only two or three tax years and were then terminated, the program failed to provide continuity.  To correct this situation, a major study group was created in 1977 to review the Service's Coordinated Examination Program.  The study recommended that permanent positions be established for several Industry Specialists and a National Industry Coordinator.  In addition, the study group identified basic industries to which it recommended specialists be assigned.  The duties and responsibilities of the Specialists and the Coordinator were to be much broader than the former Project Coordinators whom they replaced.


The recommendations of the study group were implemented greatly expanding the scope and depth of the Industry wide Examination Program.  The term, Industry Specialization Program, eventually evolved as a name that could encompass the varied concepts of Industry Specialists, National Industry Coordinator, Coordinated Issues, and the many refinements suggested by the study group.

D.  History of Ground Transportation ISP






Railroad Industry Specialization Program began with first ISP, John Koetting a Case Manger in St. Louis selected for the position.  John continued to manage two railroad cases during his tenure, which lasted through 1986.


Upon John's retirement, the manager of PSP in St. Louis, Gary Kuper, was selected as ISP.  Shortly thereafter, the National ISP program initiated an expansion to assign a designated district counsel and appeals ISP coordinator for each program.  Bob Fowler of Kansas City District Counsel and Jay Wyatt of St. Louis Appeals were assigned to the railroad program.


National Office authorized the railroad ISP to conduct a study of the trucking industry to determine whether an ISP program for that industry was warranted.


Upon completion of the study, approximately 30 potential issues had been identified and an Assistant ISP position was created within the Railroad program.  The program was renamed as the Ground Transportation Industry, and Larry Akins, a revenue agent in St. Louis, was selected as Assistant ISP.


ISP Gary Kuper retired, Larry Akins, PSP manager, was appointed Acting ISP and Denise Thompson, a revenue agent from St. Louis, was detailed to the Assistant position.


B. Wayne VanDyck, of Roanoke, Virginia, former Sr. Team Coordinator with ten years experience in the railroad industry, was selected as the ISP.  The Assistant ISP position was left vacant and never again filled.


Debbie Carney, an Appeals Officer in St. Louis, was selected as the new Appeals Coordinator.



Robin Herrell replaced Bob Fowler as Ground Transportation Counsel.



Jean S. Yang replaced Debbie Carney as Appeals Coordinator.


B. Wayne VanDyck  retired and Dennis Scobie, a team coordinator with extensive railroad experience, became the technical advisor.


Gary Shuler replaced Robin Harrell as Ground Transportation Counsel


Dennis Scobie retires and Dan Longhi acts as technical advisor (TA) pending the hiring of a new TA

E. Industry Specialist Staffing (Technical Advisors in LB&I)



Name of Specialist


Dan Longhi, Acting Trucking Industry TA


Jacksonville,  FL 

F.  LB&I Industry Staffing

The Industry Specialist is assigned to the Pre-Filing and Technical Guidance Division that is a part of LB&I Headquarters.  Each industry is assigned to one of the five Industry Functional Divisions.  Industry Specialists will be known as technical advisors in LB&I and will be supervised by a Manager, Technical Advisors.  Information relative to the management in the Industry Division that this industry is assigned (Heavy Manufacturing and Transportation, HMT) as well as the Manager: of the Technical Advisor(s) of this industry is as follows:





Laura M. Prendergast

Industry Director HMT


Iselin, NJ

Rosemary E. Daley

Field Operations Director


Downers Grove, IL

Catherine L. Jones

Field Operations Director


Iselin, NJ

Dorothy Livaudais

Manager, Technical Advisors


Paterson, NJ

G.  Description of the Railroad Industry

Includes all taxpayers engaged in the business of providing transportation of freight by either train with special emphasis on the Class I railroads.  Also includes examination issues that arise under the Railroad Retirement Tax Act, with the ISP acting as a liaison to the Chief of Audit of the Railroad Retirement Board.




The following information was obtained from the Association of American Railroads via their website.






The steam locomotive is invented in England.


The first public railway in the world opens in England.



Baltimore merchants charter the first railroad in North America, the Baltimore & Ohio.


The first regularly scheduled steam-powered rail passenger service in the U.S.begins operation in South Carolina, utilizing the U.S.-built locomotive "The Best Friend of Charleston."


A total of 380 miles of rail track are in operation in the U.S.


Five of the six New England states have rail service, as do such frontier states as Kentucky and Indiana  .


More than 2,800 miles of track are in operation.


More than 9,000 miles of track are in operation in the U.S., as much as in the rest of the world combined.


More than 30,000 miles of track are in operation in the U.S.


The Civil War becomes the first major conflict in which railroads play a major role as both sides use trains to move troops and supplies.


President Abraham Lincoln signs the Pacific Railroad Act for the construction of the transcontinental railroad that will ultimately link California with the rest of the nation.


The "golden age" of railroads begins. For nearly half a century, no other mode of transportation challenges railroads. During these years, the rail network grows from 35,000 to a peak of 254,000 miles in 1916.


On May 10, at Promontory, in the Utah Territory, the "Golden Spike" joins the Union Pacific and Central Pacific railroads, marking completion of the first transcontinental railroad.


Presidents from Ulysses S. Grant to Franklin D. Roosevelt travel largely by train. For them, as for virtually every American, the railroad offers the fastest, safest means of travel.


The Federal government seizes control of the railroads for the duration of World War I. By the time they are returned to private ownership in 1920, they are in seriously run-down condition and in need of substantial maintenance and improvement.


Other modes of transportation grow from small beginnings to challenge rail dominance over freight and passenger transportation. By the eve of World War II, automobiles, large buses, trucks, planes and pipelines – supported by government subsidies and less burdened by regulation than railroads -- have become full-fledged competitors to railroads.


The Great Depression exacts a heavy toll on the railroad industry, forcing substantial segments of the industry into bankruptcy.


Railroads remain under private control during World War II and move on average twice the monthly volume of both freight and passengers as during World War I.


Railroads enter the post-war era with a new sense of optimism that leads them to invest billions of dollars in new locomotives, freight equipment and passenger trains. That investment would see retirement of the last steam locomotive by the late 1950s in favor of diesel engines. In spite of this modernization, the decline in rail market share that began before the war resumes.


Intermodal freight -- the movement of containers and highway trailers by rail – is reported as a separate category of freight for the first time. In that year, railroads moved 168,000 carloads of trailers and containers.


Burdened by regulation and faced with subsidized competition, nine Class I railroads, representing almost one-quarter of the industry's trackage, file for bankruptcy protection.


The Rail Passenger Service Act of 1970 creates Amtrak to take over intercity rail passenger service. Amtrak officially begins service on May 1, 1971.


The Railroad Revitalization and Regulatory Reform Act creates the Consolidated Rail Corp. from six bankrupt Northeast railroads. It also included regulatory reforms that were supposed to make the rail regulatory system more responsive to changed circumstances.


The Staggers Rail Act reduces the Interstate Commerce Commission's regulatory jurisdiction over railroads and sparks competition that stimulates advances in technology and a restructuring of the industry, including creation of hundreds of new short line and regional railroads.


Conrail is privatized in what -- at that time -- was the largest share offering in U.S. history as investors pay $1.9 billion to buy shares in the railroad.


After 108 years of existence, the Interstate Commerce Commission goes out of existence and is replaced by the Surface Transportation Board, which assumes responsibility for remaining railroad economic regulation.



U.S. freight railroads move 1.38 trillion ton-miles of freight, more than ever before, setting new safety records in the process.


Intermodal overtakes coal as the primary source of revenue for Class I railroads; intermodal revenue was 22.0 percent of total revenue, or $7.7 billion, while coal revenue was $7.6 billion.


Federal Railroad Administration (FRA) reports continuous improvement in railroad safety, “by nearly every indicator”.


25 years since deregulation of the industry under the Staggers Rail Act of 1980.


Class I railroads set record in hauling 852 million tons of coal (previous record was 804 million tons in 2005).


14.6 million intermodal trailers and containers are moved, eclipsing the 2005 record by 5 percent.


Safest year in the history of the U.S. rail industry.


The industry equaled the 2006 record of hauling 1.77 trillion revenue ton-miles


Due to recession, revenue ton-miles declined 1 percent and intermodal units were down four percent




The following information was obtained primarily from internet sites maintained by the  U.S. Department of Transportation’s Bureau of Transportation Statistics, and the American Association of Railroads (AAR).

In 1975, the nation's railroads—once the cornerstone of the transportation system—were foundering under ICC regulations that dated back to the 19th century. They did not have enough capital to invest in new track and equipment and operated with unsafe and deteriorating equipment. In 1976, more than 47,000 route-miles—about 25 percent of the nation's total—were operated at reduced speeds because of dangerous conditions [AAR 2000a].

The Railroad Revitalization and Regulatory Reform Act of 1976 partially deregulated rail rates and expedited merger processing. That year, government-sponsored Conrail replaced seven bankrupt northeastern rail lines. In 1980, the Staggers Act gave railroads the freedom to set rates, subject to maximum rate regulation, and allowed railroads to abandon service on unprofitable rail lines.

The Staggers Act was the springboard for the U.S. railroad industry. From 1980 to 1998, rail freight rates per ton adjusted for inflation declined an average of 38 percent and Class I (major) freight railroads averaged a 7.5 percent return on their net investment, up from 2 percent in the 1970s.

Over the past 20 years, the railroad industry experienced many changes:

  1. The industry consolidated, and today, there are seven Class I (major) railroads in the United States. Class I railroads now own approximately 100,000 miles of road (route-miles), down from 192,000 in 1975.
  2. Ninety-one thousand miles of rail line were abandoned or sold by major railroads. Many of the lines were sold to new, aggressive regional and short-line railroads. Regional and short-line railroads operated 50,000 miles of road in 1998 [AAR 2000a].
  3. The railroads have undergone productivity growth that far outpaces the American economy as a whole [AAR 2000b].
  4. Railroads established connections with trucking and ocean-shipping companies so that today, intermodal traffic has grown from 3.1 million trailers and containers in 1980 to 8.8 million in 1998 [AAR 2000b].

Between 1981 and 1995, the federal government increased funding to the states for rail freight planning and acquisition, rail facility construction, and rehabilitation. The Railroad Rehabilitation and Improvement Financing (RRIF) Program provides loans and loan guarantees for railroad capital improvements to state and local governments, corporations, railroads, and joint ventures that include at least one railroad for the first time ever in the rail industry.

The resurgence of the freight railroads proved so successful that Conrail was privatized in 1987. At that time, this was the largest initial public offering ever made in the nation's history. In 1999, Conrail was absorbed by CSX and Norfolk Southern in a historic consolidation tying East Coast and Midwest freight traffic to the South through two different systems.

Today, the overall challenges facing the railroad industry is to address issues of safety, congestion, productivity, and cost in an environment of ongoing mergers and consolidation. As the industry moves increasingly to consolidation, it is critical to maintain the competitiveness of the rail industry.

The Federal Railroad Administration expects rail ton-miles to increase from an estimated 1.46 trillion in 2000 to 2.40 trillion in 2025 and the rail freight industry to grow an average of 2 percent per year between now and 2025. This growth reflects the adoption of technological advances in communications, command, and control; more fuel-efficient locomotives; high-capacity, lightweight freight cars; and moderate traffic growth, led by intermodal traffic.

In this decade, the industry's movement toward mergers is expected to continue, and the number of major railroad systems may be reduced from today's seven to as few as two transcontinental railroads. There is uncertainty over the structure the railroad industry will take, however, in large part due to uncertainty over what rules will ultimately be applied to future railroad merger applications. Currently, there is a proceeding underway, initiated by the Surface Transportation Board (STB) proposing a rewrite of the merger rules. These proposed changes would require applicants to explore the consequences of possible merger activities of other railroads, provide service assurances to shippers, and enhance competition for the first time ever. The final rule will influence the speed and extent of future railroad mergers.

In the future, there is the possibility that non-railroads could acquire railroad systems and operate them very differently than they are operated today. Innovative transportation companies, such as the United Parcel Service, could acquire railroads to strengthen their multimodal operations and control the railroad's operation rather than be a customer of that railroad as we have historically seen.

The issue of access to rail lines of competing railroads will continue to be contentious. If, to increase competition, access is mandated by either the STB or Congress, the owning railroads could be faced with reduced financial ability due to more complex operations, and worsened service. Alternatively, such access could provide improved service if the additional carrier can provide innovative, low-cost service. The pricing of access is critical in order not to discourage the owning railroad from investing in roadway.

With increased financial pressures on the major railroads to provide improved service and reduce cost, one solution is to expand capacity. This is possible through adoption of technological improvements, such as Positive Train Control. Positive Train Control (PTC) systems are integrated command, control, communications, and information systems for controlling train movements with safety, security, precision, and efficiency. PTC systems will improve railroad safety by significantly reducing the probability of collisions between trains, casualties to roadway workers and damage to their equipment, and over speed accidents. In addition, out of financial necessity, these railroads may be more amenable to an increased federal government role in funding projects that provide both public and private benefits.



Industry Terms

A. Terms Specific to Railroad Industry

These terms were taken from the Railway Age’s Comprehensive Railroad Dictionary, by Simmons-Boardman Books Inc., January 1992 edition.



Industry Term

Definition or Explanation

The Association of American Railroads (AAR)

An industry association whose purposes include the promotion of railroad interests and the standardization and coordination of operating and mechanical activities within the railroad industry.

Abandonment (of Lines)

As distinguished from curtailment, the complete cessation of service, operations, and maintenance of a railroad (usually a branch line), for which discontinuance permission has been granted by appropriate federal or state agency..

Auto Rack Car

A flatcar with fixed steel racks, for transporting setup automobiles.  Racks have either two or three levels, and are equipped with tie-down devices.  Auto rack cars carry an A.A.R. mechanical designation of “FA”.


Material selected for placement on the roadbed for the purpose of holding the track in line and at surface.

Ballast Car

A car for carrying ballast for repair and construction work, usually of either the flat, gondola, or hopper type.

Belt Line

A short line railroad operating within and/or around a city; usually organized to be a pickup, delivery and transfer service facility for trunk lines and industrial plants.


A person who assists with train and yard operations.

Branch Line

A secondary line of a railway, as distinguished from the main line.

Business Car

A term frequently applied to a car used by railway officials while traveling.  Equipped with office and living accommodations for eating and sleeping.


A shipment of not less than five tons of one commodity.

Center Sill

The main longitudinal structural member of a car under frame often constructed as a large box section or hat section.  The center sill receives all of the buff and draft forces created in train handling and switching.

Class I Railroad

A railroad having gross operating revenues of more than $319 million annually.  This designation is by statute under STB regulations and is updated periodically. 

Class II Railroad

As defined in STB regulations, a railroad with gross operating revenue > $23.6million and < $319 million.  See also, Regional Railroad below.

Class III Railroad

As defined by STB regulations, a railroad with gross operating revenue < $23.6 million.  See also Short Line Railroad and Switching & Terminal Companies.


The process by which cars are grouped according to their destinations and made ready for proper train movement.

Classification Track

One of the tracks in a classification yard, or a track used for classification purposes.

Classification Yard

A rail yard consisting of a number of usually parallel tracks, used for making-up trains.

Container On Flat Car (COFC)

A type of rail-freight service involving the movement of closed containers on special flat cars equipped for rapid and positive securement of the containers using special pedestals or bolsters.

Common Carrier

One who holds himself out the general public to transport property and passengers, intrastate, interstate or in foreign commerce, for compensation.  Common carriers must operate from one point to another over routes or in territory prescribed by the Interstate Commerce Commission (interstate) and by a Public Service or Public Utilities Commission (intrastate).  See Contract Carrier.

Company Car

In a general sense, a freight car owned by the carrier over whose line it is being operated as opposed to a foreign car.”  Sometimes called a “system car.”


A large, weatherproof box designed for shipping freight in bulk by rail, truck, or steamship.

Continuous Welded Rail (CWR)

Rail lengths welded together end to end into rail strings providing a track without joints.  Also called welded rail or ribbon rail.


Removal of metal from the end of an ingot bloom or rail during its manufacture.  Also, cutting of the ends of used rails that are battered or damaged.

Cross Tie

The transverse member of the track, See Tie.  The transverse member of the track structure to which the rails are spiked or otherwise fastened to provide proper gage and to cushion, distribute, and transmit the stresses of traffic through the ballast to the roadbed.

Cycle Time

The length of time consumed by a freight car from one loading to the next.

Density of Traffic

The tonnage or volume of traffic over any section or division of a railroad measured in terms of carloads or ton-miles.


Distribution Center


A centrally located warehouse where goods shipped long distances by rail are loaded onto trucks for short-haul delivery to receivers, or vise versa.  Also called a reload center, it combines the economies of rail with the flexibility of truck pickup and delivery.

Double Track

Parallel sets of main line tracks, typically found in areas with high densities of traffic.

Double-stack Container

Containers that can be stacked one atop another on a flatcar.

Federal Railroad Administration

An agency of the U.S. Department of Transportation with jurisdiction over matters of railroad safety and research.

Field Manual

One of two manuals that together form the A.A.R. Code of Interchange Rules governing the condition and repair of railway equipment used in interchange service.  The Field Manual contains technical information concerning mechanical condition, wear limits and repair criteria for interchange cars.

Finance Docket

Interstate Commerce Commission’s dockets on which are listed, for consideration and decision, questions relating to abandonment, extensions, consolidations and financing of common carriers.


An open car without sides or roof.

Foreign Car

Any car not belonging to the particular railway on which it is running.


See Federal Railroad Administration.


A track structure used at the intersection of two running rails to provide support for wheels and passageways for their flanges, thus permitting wheels on either rail to cross the other.

Gage (Track)

See Standard Gage.

Gondola Car

The common gondola car is a freight car with low sides and ends, a solid floor, and no roof.  It is used mainly for transportation of coal, iron and steel products and other lading not requiring protection from the weather.

Grade Crossing

An intersection of a highway with a railroad at the same level.  Also, an intersection of two or more railroad tracks at the same elevation.

Gross Ton-Miles

A measure of transportation, being the movement of the combined weight of cars and lading a distance of one mile.

Haulage Rights

Rights obtained by one railroad to have its cars or trains operated by another railroad over that railroad’s tracks, using the other’s crews and usually its locomotives.

Heavy Repairs

As reported to the Association of American Railroads, repairs to revenue freight cars requiring over 20 man-hours.

Hi-Cube Car

A term used to describe any of a series of boxcars whose inside dimensions are such as to produce a cubic capacity of approximately 10,000 cu. Ft., as opposed to the cube of conventional cars, which is usually in the range of 4,000 to 6,000 cu. Ft.

Hopper Car

A freight car, either open or covered, designed for handling bulk commodities such as coal or grain.  Hopper cars have floor sheets that slope from the car sides and ends to form a series of pockets, or hoppers, which when opened, can discharge the bulk lading by gravity through hopper doors operated from outside the car.

Hump Yard

A railroad classification yard in which the classification of cars is accomplished by pushing them over a summit, known as a “hump,” beyond which they run by gravity.


Abbreviation for Interstate Commerce Commission.

Interline Freight

Tonnage passing over the lines of two or more carriers.  The interchange between the carriers is termed an “interline movement.”

Intermodal Car

A rail car designed specifically for handling piggyback trailers or containers, or both.

Intermodal Traffic

Freight moving via at least two different modes of transport.

Less-Than-Carload (LCL)

A term applicable to a quantity of freight that is less than the amount necessary to constitute a carload.

Light Repairs

As reported to the A.A.R., repairs to revenue freight cars requiring 20 man-hours or less.

Line Capacity

The maximum number of trains that can operate safely and reliably over a given segment of track during a given period of time.

Line-haul Service

The movement over the tracks of a carrier from one city to another, not including the switching service.


A self-propelled, non-revenue rail vehicle designed to convert electrical or mechanical energy into tractive effort to haul railway cars.


Main Line

A term referring to the primary or most heavily used tracks of a railroad. Primary rail line over which trains operate between terminals.  It excludes sidings, and yard and industry tracks.

Narrow Gage

A gage narrower than standard gage.  A gage of 24 inches or less is commonly employed for industrial railways. Metric gage is commonly used in foreign countries.

Net Ton-mile

The movement of a ton of freight one mile.

Office Manual

One of two manuals that together form the A.A.R. Code of Interchange Rules governing the condition and repair of railway equipment used in interchange service.  The Office Manual contains the pricing and billing information used for preparing bills for repair work done on foreign cars.  See Interchange Rules and Field Manual.

Operating Ratio

The percentage of revenues that goes into operating the railroad.  It is calculated by dividing railway-operating expenses by railway operating revenues.

Passing Sidings

Tracks adjacent to main line or secondary tracks for meeting or passing trains.

Passing Track

See “Side Track.”

Per Diem

The amount or rate paid by one carrier to another or to a private car owner for each calendar day (or each hour) it uses a car belonging to the other.


A term referring to the practice of transporting highway trailers on railroad flatcars.  See TOFC.


As used in track, a rolled steel shape, commonly a T-section, designed to be laid end to end in two parallel lines on cross ties or other suitable supports to form a track for railway rolling stock.

Rail Anchor

A device attached to the base of a rail bearing against a crosstie to prevent the rail from moving longitudinally under traffic.

Rail Joint

A fastening designed to unite the abutting ends of contiguous rails.

Rail Lubricator

A device designed to apply grease to gage side of the railhead at the beginning of a curve.  In order to minimize wear of the rail and wheel flange or to eliminate noise.

Railroad Retirement Act

An Act of Congress, August 29, 1935, for the purpose of establishing a retirement system for employees subject to the ICC.

Railroad Retirement Board

A board consisting of three members appointed by the President, by and with the consent of the Senate, to administer the Railroad Retirement Act.

Railroad Tie

The transverse member of the track structure to which the rails are spiked or otherwise fastened to provide proper gage and to cushion, distribute, and transmit the stresses of traffic through the ballast to the roadbed.

Regional Railroad

A line haul freight railroad that has operating revenues > $23.6million and < $319 million, as defined by STB regulations.  Generally operate at least 350 miles of road.  See also II Railroads above.

Relay Rails

Rails taken up from tracks where formerly used, which are suitable for relaying in other tracks.

Right of Way

The strip of land on which a railroad truck is built.  The term generally refers to intercity main line tracks, but can also apply to branch lines and sidings.

Rip Track

A small car repair facility, often simply a single track in a classification yard or terminal.  In larger yards, the rip track may be quite extensive with several tracks and shop buildings.  Larger car repair facilities are generally known as “car shops”.  The name “rip track” is derived from the initials RIP, which stand for “repair, inspect and paint.”


The foundation on which the rails and ties of a railroad are placed.

Running Repairs

A term describing minor, itemized standard repairs performed and billed by the railroads in accordance with the Interchange Rules.

Short-line Railroad

As defined by STB regulations, a railroad with gross operating revenue < $23.6 million.  Any freight railroad that cannot be classified as a I or Regional railroad.  Short line railroads may originate or terminate freight traffic on its track, participates in division of revenue and are usually less than 100 miles in length.  See also III Railroads above.

Shoulder (Track)

That portion of the ballast between the end of the tie and the toe of the ballast slope.

Side Track

A track auxiliary to the main track for meeting of passing trains.


The general term used to describe main structural members of a car under frame. See Center Sill, Side Sill, End Sill.

Single Track

One main track, on which trains operate in either direction, distinguished from double or multiple tracks.

Single-line Service

Service by a single railroad between two locations.


A cable less locomotive, which has traction motors, but no means of supplying power to them by itself.  Power cables provide power from an adjacent unit.  Slugs are used where low speeds and high tractive effort are needed, such as in hump yards.


A long steel square nail with a cutting edge used to secure rail in place.

Spur Track

As distinguished from a sidetrack, a spur track is of indefinite length, extending out from main line.

Staggers Rail Act of 1980

An act of Congress that fundamentally altered the regulatory environment of the railroad industry by reducing regulations including the elimination of antitrust immunity in certain areas of activity.

Standard Gage

The standard distance between rails of North American railroads, being 4’ 8-1/2” measured between the inside faces of the railheads.


Any material which is spread on the finished sub grade of the roadbed below the top-ballast to provide better drainage, prevent upheaval by frost, and better distribute the load over the roadbed.

Surface (Track)

The condition of the track as to vertical evenness or smoothness.

Switch Tie

The transverse member of the track structure that is longer than, but functions, as does the cross tie, and in addition supports a crossover or turnout.


Switching service consists of moving cars from one track to another track or to different positions on the same track.   It includes the moving of cars in the make-up and break-up of trains; also moving of cars on industrial switching tracks or interchange tracks, and the general movement of cars within terminals or at junctions.

Switching and Terminal Companies

Carriers performing primarily switching service, or terminal service at stations, stockyards, etc.


A power-driven machine for compacting ballast under ties.


Any straight portion of a railway alignment.  Tangent track means straight track with no curves.

Tank Car

A rail car, the body of which consists of a tank for transporting liquids.  Tank cars may be pressure or non-pressure, and are often equipped with special equipment to enhance their usefulness for handling specific commodities.


A railroad facility used for handling of passengers or freight and the receiving, classifying, assembling, and dispatching of trains.


In track construction, the cross members to which the rails are attached.  The majority of ties are made from wood.  Other materials used in manufacture of ties are concrete, steel and new composites.  See also, Railroad Tie.

Tie Plate

A steel plate interposed between a rail or other track structure and a tie.


An acronym for “trailer or flatcar” intermodal service.


A term denoting the transportation of one ton of freight a distance of one mile.


An assembly of rails, ties, and fastenings over which cars, locomotives and trains are moved.

Track Chart

A map-like representation of the grade and alignment of a section of a railroad

Trackage Rights

The right of one carrier to use track owned by another carrier pursuant to an agreement between them.

Traction Motor

A specially designed direct current series-wound motor mounted on the trucks of locomotives and self-propelled cars to drive the axles.


The name given to a computerized car movement system coordinated by the Association of American Railroads for furnishing information to member railroads about movement of their cars throughout the country.


The complete assembly of parts including wheels, axles, bearings, side frames, bolster, brake rigging, springs and all associated connecting components, the function of which is to provide support, mobility and guidance to a railroad car.


A centrifugal blower driven by an exhaust gas turbine used to supercharge an engine.


An arrangement of a switch and a frog with closure rails by means of which rolling stock may be diverted from one track to another.  Another name for “track switch.”


Acronym for Universal Machine Language Equipment Register.  A computerized file maintained by the Operating Transportation Division of the Association of American Railroads.  UMLER contains specific details on internal and external dimensions of equipment as well as special equipment and the general information shown in The Official Railway Equipment Register.

Uniform Systems of Accounts (U.S.O.A.)

A chart of accounts prescribed by the Interstate Commerce Commission for common and contract carriers.  There are separate systems of accounts for the various types of transport under I.C.C. jurisdiction, such as railroads, motor truck and bus lines, freight forwarders, pipe lines, etc.

Unit Train

A freight train that moves carloads of a single product between two points.  By unloading on arrival and returning promptly for another load, such trains cut costs because they eliminate intermediate stops in yards and reduce cycle times.


An erosion of the permanent roadbed by storm or flood to such an extent as would cause delay of trains, or endanger traffic.


The primary written documentation of every freight shipment that forms the basis for railroad freight revenue accounts.

Welded Rail

See Continuous Welded Rail (CWR).


A system of tracks within defined limits provided for the making up of trains, storing of cars and other purposes.  A system of tracks branching from a common track.

B.  Terms Specific to Transportation Industries Generally



Industry Term

Definition or Explanation

Bill of Lading

Shipping documents which transfers title to the goods.

Cargo Handler

Person that loads freight onto dock and into trailers; also known as swampers, lumpers, stevedores, longshoremen.


An ocean vessel, airfreight or common carrier (trucking) in the business of transporting goods or persons.


In trucking, to transport goods between the freight terminal and cargo carrier.

Charge backs

Uncollectible account receivables that reduce the cash received from factored invoices.


Basically long, thin, steel frame on wheels, which attaches to truck tractors to haul containers.


A freight forwarder that consolidates shipments with another freight forwarder.


The company or individual that receives the shipment of freight.


Purchases container space at a volume price for resale to freight forwarders.  Practice of taking several small separate shipments of freight and organizing them into one container.


A large metal box used to store freight on ocean vessels and rail cars.  Once the vessel arrives in port, the container can be loaded onto either a truck chassis or a railroad car.  They usually come in 20 or 40-foot lengths.

Container Freight Station (CFS)

Customs‑bonded warehouse.

Custom Delivery Order

Delivery order prepared by a customs house broker.

Customs House Broker

A licensed agent authorized to pay customs duties and take possession of goods coming through Customs.  No one may act as a Customs House Broker without a Customs House License. 

Because customs duties may range up to 20 percent plus on some products, the consignees, for cash flow purposes, may elect not to clear customs at point of entry, but instead, through the services of a Customs House broker, wait until the goods are shipped inland before clearing customs and paying the duties.

Custom House brokers have to post a $500,000 bond, to insure that if the goods are damaged or stolen during transportation, the duties on the goods will still be paid to Customs.


A fee charged by the shipping companies if the container is not returned timely.


A fee charged by the railroad if the trailer is not returned timely.


In trucking, pickup at the shippers dock (door) and delivery to the ramp of the railroad, ocean ship or airline carrier.


Pulling a trailer or container (cartage), the charges for transfer and cartage between stations, or to and from vessels on carts or trucks.

Free Time

Amount of time (days) the container can be used without any charges.  Varies with the type of container and mileage distances.

Free Zone

The area within a certain radius of the port‑of‑entry or harbor where a for‑hire carrier is not required to be licensed by the ICC to transport freight between states.

Freight Broker

An agent for the independent contractor that arranges jobs for independent contractors.

Freight Forwarder

An agent who makes the arrangements for the transportation of freight from the shipper to consignee.  The freight forwarder issues a through bill of lading from the origin to the destination, and takes full responsibility of the freight while it is in transit.

Land bridge

Port haulers who transport freight from the harbor to the railroad.

Line haul

In trucking, the movement of freight from the point of origination to point of destination.


Ocean carrier cargo handler that loads and unloads freight at the harbor. 


In trucking, cargo handler of agricultural products that is usually paid by cash.


Schedule of freight pickups and deliveries.

Non‑Vessel Operating Carrier (NVOCC)

A consolidator of freight for an ocean carrier that is regulated by the Federal Maritime Commission.


Loading freight at the shipping end, point of origination.


Unloading freight at the receiving end, final destination.


Where the trailer is loaded onto a rail car.

Piggyback Agent

Shipper's agent that books and schedules freight on railroad.

Port hauler

A sub hauler that picks up freight at the harbor and hauls it to the operations terminal or to the consignee.

Ramp to Door

In trucking, pick up at the railroad and delivery to the consignee's door.


In trucking, refrigerated trailer.


The individual or company sending the freight to the consignee.

Shipper's Agent

A transportation broker that arranges movement of freight.


In trucking, hauling empty trailers back to the rail yard or container company.


Cargo handler that loads and unloads freight from vessels at the harbor (longshoreman).


The process of moving freight from ocean containers to domestic containers and vice versa.  Ocean containers belong to the steamship lines and are not designed for transportation by truck or rail.

C.  Abbreviations & Acronyms

Industry textbooks generally include an extensive glossary of terms and phrases unique to the industry.  Below is a partial list of the more common terms to aid the reader in understanding this document.





Association of American Railroads


Authority for Expenditure


American Railway Engineering Association


American Railway Engineering & Mechanical Association


American Shortline & Regional Railroad Association


Bridge & Structures (Department)


Bad Order


Container on Flat Car


Continuous Welded Rail


Department of Transportation


Distributed Power Unit


Federal Railway Administration


Gondola Car


Gross Ton Miles


Gross Weight


Interstate Commerce Commission (now STB)


Interest During Construction


Joint Facility


Less than Car Load


In trucking, less than Truck Load


Million Gross Tons


Maintenance of Way


Mile Post

MW or M/W

Maintenance of Way


North American Free Trade Agreement


Onboard Terminal


Operating Expense


Other Track Material


Personal Liability/Property Damage


Point of entry


Right of Way


Railroad Retirement Board


Retirement Replacement Betterment (accounting method)


Railroad Retirement Tax Act




Staggers Rail Act


Surface Transportation Board


Standard Transportation Commodity System


Trains & Engines


Train and Engine (personnel)


Tie & Surfacing or Timber & Surfacing


Traffic Control System


Trailer on flat car (that is, piggyback)


Transfer Out to Operations


File maintained by AAR with freight car statistics, by RRD


Uniform System of Accounts

Val (Section)

Valuation Section (of track)


Work Order



Accounting Principles

A.  Regulatory Accounting

The Surface Transportation Board (STB) defines a Class I railroad as one whose gross operating revenue exceeds $319 million per year.  Class I railroads are required to file annual reports with the STB described as Forms R-1.  These reports summarize the accounting transactions for the year and are useful in planning and conducting a Class I tax examination.  Class II and Class III railroads are not required to file R-1 reports.  For definitions of Class I, II, and III railroads, see Section IV.A above.

Generally all railroads’ books of account are maintained in accordance with STB guidelines.  STB provides a chart of accounts for use in regulatory reporting.  The STB's accounting system is contained in the Code of Federal Regulations at Part 1201, Uniform System of Accounts (USOA).  Railroads are required to use the USOA system for regulatory reporting purposes.  For financial and accounting purposes, a railroad may also maintain its own unique system of accounting, separate from the STB system.  Nevertheless, reports to the STB must be in conformity with the USOA.

The USOA system details accounting requirements for selected types of transactions.  Following are some of the important rules followed for STB reporting purposes that may differ from proper tax treatment.  Section 2 of the USOA provides instructions for "Property Accounts" (assets).

  1. [1]The threshold is at $5,000 and prohibits the parceling of purchases in order to fall under the minimum.Assets that cost less than $5,000 are expensed for regulatory purposes.
  2. Section 2-6- provides rules for capitalization of direct and indirect costs used in construction, including:
    1. fringe benefits, payroll taxes,
    2. materials and supplies,
    3. work trains,
    4. transportation,
    5. personal injury and damages, and
    6. interest during construction (see Section 2-1(c).
  3. Section 2-8- additions of complete units of property, either road or equipment, are capital assets subject to the minimum rule.
  4. Section 2-9- additions of less than complete units of property when not in the form of replacements, are assets.In contrast, the replacement of less than a complete unit of property is maintenance.Rehabilitation costs of second hand assets acquired are capital. [This is consistent with proper tax accounting.]
  5. Section 2-11- costs of removal are maintenance expense, [2] as are costs incurred during construction projects for traffic management, including temporary tracks and false work.
  6. Section 2-12- requires the capitalization of rebuild costs.Rebuild costs are defined as those costs incurred which substantially extend the service life or substantially increase the utility of depreciable property.
  7. Section 2-19- provides a three-page list of the "units of property" as referred to above.
  8. Section 2-21- provides instructions for accounting for freight car repairs including heavy program repairs.These are treated as maintenance expense; however, see 2-12 for exceptions in the case of rebuilds.

  9. Section 4-2- requires depreciation rates on a composite basis for each Property Account.The rates are established in accordance with depreciation studies conducted every three years for equipment and every six years for road property.These studies are generally performed by contractors and are only required of Class I roads.

  10. Special rules for "Property Accounts:

    1. Account 2 Land - The STB treatment of removal and relocation of buildings is maintenance expense.

    2. Account 9 Rails and other track materials (OTM) a list is provided of all OTM.Also a list of items considered maintenance is provided.Any work "…not involving the placement of track material…" is maintenance.

    3. Account 11 Ballast - surfacing (surface correction of existing ballast) is maintenance.

  11. Operating Expense Accounting Codes 
    A six-digit code is used for expense accounts, defined as follows.

    • First two digits - natural expense e.g. material, purchased services, loss and damage.
    • Second two digits - activity e.g. running, switching, loco, freight car, administrative.
    • Third two digits - function e.g. loco repairs, dismantling retired property, tunnel repair.
  12. Income Accounts - these are three-digit numbers beginning with digit 5.  Exception is "531" which is reserved for the aggregate railway operating expense total.
  13. Balance Sheet Accounts - these accounts are three-digit numbers beginning with 7.
    • Asset Accounts are 701-744.Liability Accounts are 751-786.
    • Account 731 contains all road and equipment property. Each railroad uses various sub accounts to segregate these assets.
    • Liability Accounts - Accounts 774-784 are accounts of importance to income tax balance sheet audits:
      1. Account 774 Accrued Liability, Casualty and Other Claims - this account shall be credited with the amounts charged to operating expense to provide for the estimated liabilities for claims for deaths or injuries…damage to property…losses of property…revenue overcharges.  Separate sub accounts must be maintained for each type of liability…If settlements for claims are charged to this account, the balances for each year shall be maintained separately.
      2. There is a disconnect in these estimated liability amounts and the amounts allowable as deductions under IRC Section 461.  See Section B. Tax Accounting, below.
      3. Accounts 783 and 784 provide for Deferred Revenue and Deferred Credits.

B. Tax Accounting

There are significant differences in proper tax accounting and the above regulatory accounting practices.  A properly prepared Schedule M-1 should reflect the amounts of these differences, but does not always do so.

A partial list of M-1s commonly found in railroad tax return filings is set forth below.  IRS and railroad taxpayers often are of different opinions as to the propriety of these M-1s and/or amounts of same.

1.  Expense claimed for book not tax

  • State Taxes
  • Fines and Penalties
  • Lobbying Expenses
  • Club Dues
  • Separation Accrual
  • Stock Options
  • Travel Limitations
  • Uniform Capitalization
  • Merger Costs
  • Environmental Reserve
  • Reserve Casualty Loss
  • Reserve Overcharge Claims
  • Assets < $5000 Cost

2.  Expense claimed for tax, not book

  • Roadway Repairs - primarily track, bridge, and structures
  • Equipment Repairs - primarily locomotive and freight car work
  • Bad Debts
  • Vacation Pay Accrual
  • Sick Leave Accrual
  • Amortization- Software
  • Amortization - Start Up Costs
  • Pension Accrual
  • Road Property Retired

3.  Income for book not tax

  • Tax Exempt Interest
  • Capital Loss Carryover

4.  Income for tax not book

[1] Note however, that track removal or “dismantling” costs are required to be debited to the depreciation reserve.

[2] 1 Road Property is distinguished in the railroad industry from Equipment Property.  It consists of all the property associated with the track right of way.  STB accounts 3, 5, 7, 13, 17, 18, 19, 20, 22, 23, 24, 25, 26, 27, 35, and part of 16, are all Road Property.  See U.S.O.A. for a listing of all accounts.


Information Systems

Major railroads maintain extensive computer systems to conduct every aspect of their business. These include many operating systems relative to train locations, logistics, car hire, marketing management, etc.

In addition to routine accounting records maintained by all LMSB taxpayers, systems integral to efficient and effective IRS tax examinations include the following:

  • Asset Tracking Files,
  • Track Work Project Files,
  • Mechanical Department Project Files,
  • Locomotive Maintenance History Files, and
  • Capital Accounting Project Cost Detail Files.

Industry Operating Procedures

The following information was obtained primarily from internet sites maintained by the  U.S. Department of Transportation’s Bureau of Transportation Statistics and the American Association of Railroads (AAR).

A. In General

Railroads are wholesalers of transportation services. They concentrate on hauling bulk commodities and large quantity shipments over long distances. Based on volume, they transport 12.7 percent of the nation’s goods.  In addition, they are the long-distance link in providing intermodal freight services.

B.  Track Ownership, Usage

Each railroad owns the track over which it operates.  In some cases, they operate joint services with or operate over the tracks of another railroad.  Where voluntary access agreements are reached through commercial negotiations, the parties file trackage rights agreements with the Surface Transportation Board (STB) for review and approval.  Where the parties cannot agree, the STB can set compensation levels.  The STB also can require that carriers grant access over their tracks.  This normally occurs when the regulatory agency seeks to preserve competition when approving merger applications.

C.  Industry Composition and Metrics

Railroads in the United States are classified by the Surface Transportation Board as either Class Is, IIs or III, depending on their gross operating revenues.

U.S. Class I railroads are line haul freight railroads with operating revenue in excess of $319 million. In 2007, the seven U.S. Class I railroads were: BNSF Railway, CSX Transportation, Grand Trunk Corporation (owned by Canadian National Railroad), Kansas City Southern Railway, Norfolk Southern Railroad, Soo Line Railroad (owned by Canadian Pacific Railroad), and Union Pacific Railroad. The Class I railroads account for about 71 percent of industry road miles operated and 93 percent of the total rail freight revenues.

The remainder of the industry is composed of Class II railroads, with revenues between $23.6 million and $319 million, and Class III railroads, with revenue below $23.6 million. There are over 400 of these railroads, also referred to as regional or short-line railroads. They often act as feeder services to the Class Is.  Many of them were created as the Class Is downsized in the 1970s and 1980s and spun off their unprofitable and light density lines.  Because of lower operating costs, these smaller carriers have been able to create profitable, more customer oriented operations not possible under a Class Is cost structure and expansive route system. They are divided into two categories—line haul and switching/terminal.

Local line haul or short-line railroads operate like Class Is but only on a much smaller scale. Switching and terminal railroads operate in specific urban areas.  Their function is to facilitate the interchange of rail shipments among the railroads in their area, normally Class I carriers, as well as to serve the needs of the rail customers within their territories.  It is not unusual for one or more than one Class I railroad to own this type of carrier.  Regional railroads, accounting for less than 6 percent of the industry, are substantially smaller than their Class I counterparts but operate almost as much total mileage as the local short-lines.  Because they are smaller than Class I railroads, regional carriers can offer cost effective, customer oriented services like short-lines.  Since they are larger than short line railroads, they have larger territories in which to build a customer base like Class Is.

In 2004, Class I railroads in the United States transported the highest originating tonnage ever, 1.8 billion tons (AAR 2005a). This record level tonnage reflects steady growth in rail traffic for six straight years, since 1998. Coal accounted for 43 percent of the rail tonnage in 2004, followed by chemicals and related products with 9 percent, and farm products and non-metallic products with 8 percent each. By revenue, coal accounted for 20 percent ($8.4 billion) of the Class I rail industry-wide gross revenues ($41.6 billion), followed by miscellaneous mixed shipments (mostly intermodal) with 15 percent, and chemicals and related products with 12 percent (AAR 2005a).

U. S. freight trains are carrying more loads and traveling farther than in 1980. The average freight train carried over 3,100 tons of freight in 2004, also a record high for the rail industry. By comparison, the average train load in 1980 was about 2,200 tons. While the average load per train rose, the average cargo weight per rail car dropped from 67 tons in 1980 to 61 tons in 2004, reflecting the higher growth rate of lighter freight that is typical of intermodal shipments. During this same period, the freight trains traveled more miles on average. The average length of haul was 902 miles per ton in 2004, up from 616 miles per ton in 1980. Since 1980, the length of haul has grown at an average annual rate of about 1.6 percent per year. Railroads improved on their operational efficiency as they carried more loads farther. Net ton-miles per train-hour, one measure of industry efficiency, increased 49 percent from 40,400 in 1980 to 60,300 in 2003 (AAR 2005b). This is a measure of the number of tons hauled and the miles traveled during an average hour of freight train's operation. The peak for net ton-miles per train-hour was in 1991 when the industry averaged about 66,300 ton-miles every train hour (AAR 2004).

U.S. freight railroads serve almost every economic sector in the nation that handles goods, including manufacturing, mining, wholesale, and retail trade. They move not only bulk commodities but also time-sensitive goods. According to the composite estimates, rail as a single mode carried about 3 percent of nation’s freight shipments, measured by value, and 10 percent of the weight, hauling over long distances everything from coal to vegetables, lumber to orange juice, and finished automobiles and parts to grain. Rail accounted for 31 percent of the estimated total ton-miles, despite having a more spatially concentrated network than the highway system and in spite of declines in miles of rail roadway operated due to rail abandonment and industry consolidation. Miles of rail roadway have been declining for decades. In 2004, Class I railroads operated about 99,000 miles of rail roadways, down from about 160,000 miles in 1980.

Rail’s shares of overall shipment value and weight primarily reflect the fact that low value-per-ton primary raw materials like metallic ores (e.g., bauxite), logs and wood products, and grains account for the bulk of rail shipments. Coal and chemicals alone accounted for over half (52 percent) of the rail tonnage in 2004 (AAR 2005a). Rail’s share of ton-miles reflects the high weight and the longer length of haul of the products moved by rail. For example, in 2002, coal was shipped an average of 671 miles per ton, cereal grain averaged 841 miles per ton, and fertilizers about 747 miles per ton.

Some of the largest rail freight flows by tonnage are coal shipments originating in the Powder River Basin in Wyoming and from West Virginia, Illinois, Kentucky, and Pennsylvania. These are vital economic flows because the vast majority of coal shipments are to coal-fired power plants for generating electricity. In 2003, these five states accounted for more than three-quarters (79 percent) of the total tonnage of coal originations. In 2003, the leading states for total rail tons originated included Wyoming, Illinois, West Virginia, Pennsylvania, and Kentucky. The leading states by tons terminated included Texas, Illinois, Florida, Ohio, and California.

D.  Railroads and Their Transportation Partners

  1. Airlines
    Railroads’ relationships with the other modes range from virtually no interaction (air freight) to a sometimes-uneasy customer/competitor dichotomy (trucking).  There is little interaction with air carriers because of differing products and service needs.  Airfreight carriers handle high value, light weight shipments which must be moved within very sensitive time frames, often as little as 24 hours.  Railroads handle low value, high volume loads that very rarely require completed service within 24 hours or less.  In short, the two modes each handle distinct and separate segments of the freight industry.

  2. Maritime Carriers
    Railroads and ocean-going international or maritime carriers, by and large, have very cooperative relations.  They regularly partner to provide seamless transportation services for their bulk and intermodal customers.  It was the cooperative efforts of railroads and U.S.-flag maritime ship operators that created the double stack train service that spurred the intermodal revolution.  Double stack service is when one shipping container is placed on a rail car and another container is placed on top of it.  This allows almost twice the freight volume to be handled with the equipment needed to operate a single train.

  3. Trucking & Barge Operators
    Railroads face competition primarily from two sources — trucks and barges.  Trucks provide competition on higher value shipments such as intermodal and finished vehicle transport.  Barges compete on the more traditional low value goods such as coal and grains.  Barge competition is essentially limited to commodities moving in the central portions of the U.S. where there are navigable waterways, such as the Mississippi, Ohio, and Missouri Rivers.

  4. Unique Relationship: Trucking, Railroads, and Intermodal Transportation
    The relationship between railroads and truck lines is probably the most complicated of the modes because trucks have the ability to both generate freight for the railroads and take it away from them.  Railroads and trucks are business partners in providing intermodal services.  Trucks provide the short haul connections between the firm sending the freight and the railroad as well between the railroad and the customer receiving the freight.  Trains provide the long haul service between origin and destination.

    When trucks and trains compete, they compete for types of traffic — mostly the goods that give the railroads their higher profit margins — intermodal, transportation equipment (automobiles — finished products as well as assembly supplies), chemicals, and good products.  Intermodal freight is subject to competition from long distance trucking companies.  As a result, even when there is a rail/truck business relationship with one motor carrier for an intermodal move, there is a competitive tension with other long distance truckers seeking to capture the same business.

    In developing a profile of intermodal freight, distance is a factor.  Because the inter-change of freight equipment between carriers is costly, intermodal service is chosen only in those instances where the economies of scale for changing modes outweighs the expense of doing so.  These interchanges, on average, account for 15 - 20 percent of the cost to the shipper and, can run as high as 25 percent.  For general freight, which usually ranges between 10,000 and 40,000+ pounds, the minimum distance for cost-effective rail/truck interchanges is about 700-750 miles.  The economies of scale are more pronounced at distances of 1,000 miles and 1,500 or more miles.

    Intermodal is a popular choice in moving international traffic across the U.S.   About 70 percent of intermodal tonnages are these international shipments.  A fierce competitor on other types of shipments, intermodal is one area where trucking and rail carriers work together to create a seamless service for these customers.

    As noted earlier, double stack train service was crucial in developing the international freight flows for this segment of the freight industry.  These flows basically are west/east and east/west moves.  West/east traffic primarily moves Pacific Rim goods through the major gateway ports of Los Angeles/Long Beach and Seattle/Tacoma.  This traffic is destined for delivery in the Midwest and East Coast, with some goods moving in land bridge service to Europe.  East/west shipments come from Europe and Central/South America primarily through the gateway port areas of New York/New Jersey, Hampton Roads, VA, and Charleston, SC. Freight is sent to Midwest and West Coast locations, with some traffic moving in land bridge service.  As the Pacific Rim’s new manufacturing centers move west into India and other countries, some shipments are being routed through the Suez Canal across the Atlantic to the U.S. due to shorter transit times. 

    Since railroads are privately owned and have regional infrastructure, it is necessary for intermodal shipments to be switched between carriers for delivery to destination. 

    Chicago is the major interchange point, with Kansas City and St, Louis, Missouri as second and third choices respectively.  This railroad-to-railroad interchange normally occurs by either a switching railroad moving the goods between carrier yards or trucks transporting containers and trailers from one carrier’s intermodal yard to its connection’s intermodal facility. 

  5. Railroads and the Government
    The railroad’s relationship with government is a long-standing one.  The Federal government’s first independent regulatory agency, the Interstate Commerce Commission, was created in 1886 to ensure fair play among railroads and act as a referee between the rail industry and its customers, especially its “captive” customers — entities whose cargoes depend on rail transportation because they cannot readily be transported by other modes, and who have service from only one railroad.
  • ICC / STB
    From 1886 through the early 1970s, railroads were subject to increasing levels of government control over the pricing of their services and safety of their operations.  In 1980, Congress ended economic controls over a sizeable portion of rail operations by enactment of the Staggers Act.  It limited Federal oversight to those matters where there were concerns about a lack of competition.  In 1995, Congress further eased these economic controls.  The Surface Transportation Board is the Federal entity now administering the remaining regulatory functions.  The STB is an independent unit with the Department of Transportation.
  • FRA
    Since its creation in 1967, the DOT’s Federal Railroad Administration has administered Federal rail safety regulations and the programs they generate.  Unlike economic regulatory controls, Congress has increased these safety requirements over the last 20 years.



Government Regulatory Requirements

A. Federal Requirements

Environmental Protection Agency - In general the industry falls under Federal regulation with respect to environmental clean up, hauling of hazardous waste, and various other pollution regulations such as the Clean Air Act.

Under the Code of Federal Regulations (CFR) 40, Parts 85,89 and 92 the EPA established emission standards for locomotives and locomotive engines in 1998. The standards took effect beginning in 2000, but are being phased in gradually for existing Class I fleets as locomotives are "remanufactured", as defined by EPA. For new locomotives the standards apply beginning in the 2001 model year. The standards apply to railroads and manufacturers alike. Smaller railroads as defined by the Small Business Administration, are exempt from the regulations as they apply to "remanufacture". According to the regulations, the EPA intended to encompass the remanufacturing practices of Class I railroads, and not those of the rest of the industry.

In May 2004, as part of the Clean Air Nonroad Diesel Rule, the EPA finalized new requirements for nonroad diesel fuel that will decrease the allowable levels of sulfur in fuel used in locomotives by 99 percent.

In March 2007, EPA proposed a three part program that would dramatically reduce emissions from diesel locomotives of all types; line-haul, switch, and passenger rail.  The proposal aims to cut particulate matter emissions from these engines by 90 percent and nitrogen oxides emissions by 80 percent.

The proposal would set new, Tier 3 exhaust emissions standards and idle reduction requirements for locomotives that would begin in 2009.  The proposal would also tighten emission standards for existing locomotives when they are remanufactured to take effect as soon as certified systems are available (as early as 2008) but no later than 2010.  Finally, the proposal would set long-term, Tier 4 standards for newly-built engines based on the application of high-efficiency catalytic after treatment technology, beginning in 2015 for locomotives.

Federal Railroad Administration - The primary responsibility of the FRA is safety.  The FRA finds its authority to regulate safety in the railroad industry under the Code of Federal Regulations at Title 49.  Among its regulations are the following, which interface with IRS audit issues, all found at Title 49, Subtitle B, Chapter II, Parts 200 - 266: 

213 Track Safety Standards
215 Freight Car Safety Standards
225 Railroad Accidents & Reporting
229 Locomotive Safety Standards
230 Locomotive Inspection Requirements

The ISP maintains a set of the Title 49 regulations.

  • By law, FRA has the responsibility for ensuring railroad safety throughout the Nation.  To monitor railroad compliance with Federally mandated safety standards; FRA employs more than 415 inspectors operating out of 8 regional offices nationally.

  • FRA's traditional site-specific safety inspection program has produced substantial gains in railroad safety.  Between 1978 and 1993, the number of railroad accidents declined by more than 75 percent.  The railroad accident rate per million train miles dropped by more than two-thirds, and the number of rail-related fatalities and injuries fell by three-fourths during this period.  These substantial safety improvements occurred even as freight railroad traffic and train density increased to record high levels following economic deregulation of the industry as a result of the Staggers Rail Act of 1980.

  • Beginning in 1993, FRA reassessed its safety program to focus on results.  The new Safety Assurance and Compliance Program (SACP) is intended to complement FRA's traditional safety enforcement program with a comprehensive approach in which SACP participants work with FRA to identify and correct root causes of problems across an entire railroad system.    The office of SACP oversees and manages the day-to-day operations of the five rail safety disciplines: Motive Power and Equipment; Operating Practices; Hazardous Materials; Track; and Signal and Train Control.

  • More information on FRA's approach to safety and regulation and its accomplishments can be found through use of their website.  (See "Useful Websites at section XI.A below.)

Surface Transportation Board - The Surface Transportation Board (STB) was created by the Interstate Commerce Commission Termination Act of 1995at the same time the Interstate Commerce Commission (ICC) was abolished.  The STB was created to replace the ICC.. The STB is an independent adjudicatory and regulatory body administratively affiliated with the Department of Transportation, responsible for the economic regulation of interstate surface transportation, primarily railroads, within the United States.  The STB's mission is to ensure that competitive, efficient, and safe transportation services are provided to meet the needs of shippers, receivers, and consumers.  The STB has jurisdiction over:

  • Railroad rate and service issues,
  • Rail restructuring transactions (mergers, line sales, new line construction, and old line abandonments),
  • Certain trucking company, moving van, and non-contiguous ocean shipping company rate matters,
  • Certain intercity passenger bus company structure, financial, and operational matters, and
  • Rates and services of certain pipelines not regulated by the Federal Energy Regulatory Commission.

  • The Code of Federal Regulations, Title 49, Subtitle B, Chapter X, Parts 1000 - 1300 provides the STB's authority over the nation's railroads.There are many STB functions that are relevant to IRS examinations.The ISP maintains a complete copy of Title 49.Among the pertinent regulations are:

Part 1005 Loss & damage and salvage claims processing
Part 1150 Certificate to construct, acquire, and operate a rail line
Part 1152 Abandonment of rail line
Part 1180 Railroad acquisition, control, merger, consolidation, trackage rights & lease procedures
Part 1201 Uniform System of Accounts (USOA)
Part 1241 Annual Reports Form R-1
Part 1245 Annual reports of employees, service, and compensation
Part 1262 Uniform system of records of property changes

  • Part 1152 Abandonments of Rail Line - The STB requires carriers to submit application for approval to abandon existing lines.  In some instances the abandoned line is made available for the Rails to Trails program.  Railroads also donate the right of way to municipalities for use in passenger (light rail) service.  The rights of way are also at times sold to municipalities for continued use as either freight or scenic railroads.  In these instances, application for abandonment is often made, even though the abandonment does not ultimately take place.

An important part of the abandonment application process is the computation of net liquidation value.  Subpart D of Part 1152, starting at 1152.30 specifies the requirement for computation of Return on Value.  This computation requires the computation of net liquidation value per 1152.34(c)(1)(iii): "The net liquidation value for the highest and best use for non-rail purposes…shall be determined by computing the current appraised market value of such properties…less all costs of dismantling and disposition of improvements necessary to make the properties available for their highest and best use."  In the event that a railroad claims a deduction for the donation of a property, copies of the application and computations submitted by the railroad to STB should be requested in order to make comparisons of the net liquidation value with other taxpayer supplied appraisals.

  • Part 1180 Railroad acquisition, control, merger, consolidation, trackage rights & lease procedures - when one of these events occurs, the railroad taking the action must submit application to the STB.At the conclusion of the process, a Finance Docket is prepared by the STB.This package contains all information pertinent to the transaction and the approval process.Copies of the finance docket can be obtained from the STB through the ISP and may also be available off the STB website.One tax implication of railroad mergers is the award of trackage rights

  • Part 1201 Uniform System of Accounts (USOA) - this part of the CFR specifies the accounting codes (chart of accounts) that railroads are required to use for regulatory purposes.It also details accounting requirements for selected types of transactions.Among these are treatments of equipment rebuild costs, track maintenance costs, minimum capitalization rules, certain accrued liabilities, estimated liabilities and others.For financial and accounting purposes, a railroad may also maintain its own unique system of accounting, separate from the STB system.Reports to the STB must be in conformity with the USOA.See Section V.A. above for details regarding the USOA.

  • Part 1241 Annual Reports Form R-1 - Class I railroads must file annual reports with the STB containing all significant accounting results.This report includes information of significance to Federal income tax examinations.A copy should be obtained from the railroad.Excerpts from the R-1 are available on the STB website.Some of the information included in the R-1 that can impact an examination are the number of freight cars rebuilt, the miles of rail laid, and the number of crossties installed and related costs of same.
  • Part 1262 Uniform system of records of property changes - these regulations prescribe the records to be maintained with respect to railroad construction projects.Every railroad will maintain them.Included are:
    1. Authority for Expenditure (AFE)
    2. Register for AFEs
    3. Completion Report for Projects
    4. Records of Property Changes

  • Part 1245 Annual reports of employees, service, and compensation - information submitted to the STB under these regulations can be useful in the examination of Form CT-1 filed by all railroad employers for RRTA liabilities.

Railroad Retirement Board -the Railroad Retirement Board (RRB) is responsible for administering comprehensive retirement-survivor and unemployment-sickness benefit programs for the nation's railroad workers and their families, under the Railroad Retirement Act and the Railroad Unemployment Insurance Act.  Their activities and responsibilities are similar to those of the Social Security Administration.  Likewise, the IRS' responsibilities with respect to the Railroad Retirement Tax Act, RRTA, parallel those of the IRS under the Social Security system.  

Code of Federal Regulations Title 45 - Railroads-CITE- 45 USC TITLE 45 - Title 45 of the CFR covers a variety of regulations impacting railroads.  Included among its chapters are:

Chapter 9 Railroad Retirement Act
Chapter 11 Railroad Unemployment Insurance Act

Code of Federal Regulations Title 20 - Department of Labor - CITE- 20 USC TITLE 20 - Title 20, Chapter II, of the CFR provides the administrative rules and authority of the Railroad Retirement Board.

B.  State Requirements

State regulations imposed on the railroad industry have little or no Federal tax implications.

C.  Local Requirements

Local regulations imposed on the railroad industry have little or no Federal tax implications.


Significant Law and Important Issues

A. Coordinated Issues




Brief Summary of Issue

None for this Technical Area


B. Emergining or Other Significant Issues




Brief Summary of Issue

Track Maintenance

Whether amounts spent on annual track program maintenance, generally paid from railroad Capital Budgets, are capital improvements for tax purposes.

Revenue Procedures 2002-65, for Class II and III railroads, and 2001-46, for Class I’s, provide safe harbor methods to determine whether track expenditures are currently deductible or capital expenditures. Most of the major railroads have adopted these methods.

Like-Kind Exchanges of Track Property

TAM 200424001 outlines the proper interpretation of Section 1031 with respect to exchanges involving track property, including whether line segments qualify as like-kind for uninstalled components; determination of track as real vs. personal property, and treatment of Section 1031 required basis adjustments under Revenue Procedure 2001-46..

Cyclical Overhauls of Locomotives

Railroads periodically overhaul locomotive engines, in many instances, contemporaneously with overhauls/replacements/maintenance of other locomotive parts. The expenditures are capital if they were paid or incurred to add to the value, or substantially prolong the useful life, of the locomotive or to adapt the locomotive to a new or different use. Treas. Reg. Sec. 1.263(a)-1(b). If the expenditures neither materially add to the locomotive's value nor appreciably prolong its useful life, but keep it in an ordinarily efficient operating condition, they are incidental repairs. Treas. Reg. Sec. 1.162-4. Revenue Ruling 2001-04 applies to these expenditures. .

Donations and Bargain Sales of Railway Rights-of-Way.

Railroads claim charitable contribution deductions for contributions or bargain sales of rights-of-way, often for trail use under the Rails to Trails Act, 16 U.S.C. Sec. 1247(d).  In many instances, the taxpayers own only an easement subject to termination on cessation of rail use rather than a fee simple interest in all or part of the donated property. TAM 2006100017 states that if these transfers otherwise satisfied the requirements of IRC 170, the transfers would constitute deductible charitable contributions, only if the possibility that the property will revert to the taxpayer or its assigns is remote under Income Tax Regulations § 1.170A-7(a)(3). The determination of remoteness is factual for each conveyance.

Property Received from Users of Rights-of-Way for Fiber Optics Cables




Railroads enter into bartering transactions with telecommunications companies where, in exchange for use of their right of way, they receive income in the form of property, such as fiber optic strands, equity interest in the telecom company, etc.  Generally, gain on the exchange of property for another property is included in income for tax purposes. In a typical exchange, the taxable gain will be the excess of the value of the asset transferred to the taxpayer over the adjusted basis of the assets transferred by the taxpayer. IRC 1031   permits certain types of exchanges to be made without current recognition of gain or loss. In those instances, generally, the gain or loss is postponed until the taxpayer disposes of the asset received in the exchange. However, unless one of the special provisions dealing with tax free exchanges applies, the entire gain must be recognized.

RRTA and Supplemental Employment Benefits Payments (SUB-Pay)

Railroads may offer severance pay to employees who voluntarily leave their employ.  Typically, the option for early out is only available to employees who meet minimum eligibility requirements such as age and years of service.     

The taxpayers argue that these payments are excludable from wages because they represent supplemental unemployment payments (SUB).

Revenue Ruling 75-44, 1975-1 C.B. 15, holds that severance pay is compensation for past services.

Revenue Ruling 56-249, 1956-1 C.B. 488, provides a limited exception from the definition of wages for FICA, FUTA and Federal income tax withholding for certain payments made upon the involuntary separation of an employee from the service of the employer.  It sets forth eight criteria for determining if payments meet the limited exception.

Subsequent revenue rulings have broadened the scope of Rev. Rul. 56-249.  Rev. Rul 58-128, 1958-1 C.B. 89, concludes that the wage conclusions in Rev. Rul 56-249 would be the same if the plan had been unilaterally instituted by the employer.  Rev. Rul 60-330, 1960-2 C.B. 46, further concludes that the fact that benefits are not paid from a trust does not alter the conclusion of Rev. Rul. 56-249.

Rev. Rul. 65-251, 1965-2 C.B. 395, holds that certain lump sum separation and severance allowances paid to laid-off employees in the railroad industry constitute compensation for RRTA purposes and wages for income tax withholding purposes.

Rev. Rul. 71-408, 1971-2 C.B. 340, holds that payments to employees pursuant to an agreement with a union upon the termination of their employment due to the discontinuance of the company's operations constitute wages for FICA, FUTA, and federal income tax withholding purposes. The payments described in  Rev. Rul. 71-408 do not meet the eligibility factors described in Rv. Rul. 56-249 and are not designed to provide a supplement to unemployment compensation.

Rev. Rul. 77-347, 1977-2 C.B. 362, amplifies and modifies Rev. 56-249 and 58-128.  Rev. Rul 77-347 provides that benefits under a plan do not have to be tied to state unemployment compensation benefits in order for the benefits to constitute SUB pay for FICA, FUTA, and federal income tax withholding purposes.

Rev. Rul 90-72, 1990-2 C.B. 211, provides the portion of Rev. Ru. 77-347 concluding that benefits do not have to be linked to state unemployment compensation in order to be excluded from the definition of wages for FICA and FUTA tax purposes is inconsistent with the underlying premises for the exclusion and is therefore hereby revoked. This action restores the distinction between SUB pay and dismissal pay by re-establishing the link between SUB pay and state unemployment compensation set forth in Rev. Rul 56-249.

Four 1999 decisions on FICA cases held voluntary severance payments to be compensation: Associated Electric Cooperative Inc. v. United States, 42 Fed.  Cl. 867 (1999), aff'd, 226 F.3d 1322 (Fed. Cir. 2000); Cohen v. United States, 63 F. Supp. 2d 1131 (C.D. Cal. 1999); Abrahamsen v. the United States, 44 Fed. Cl. 260 (1999), aff'd, 228 F.3d 1360 (Fed. Cir.), cert. denied, 532 U.S. 957 (2001); and Abbott v. United States, 76 F. Supp. 2d 236 (N.D.N.Y. 1999), aff'd 231 F.3d 889 (2d Cir. 2000), cert. denied, 532 U.S. 957 (2001)...

A fifth case held that early retirement payments made to tenured faculty members were payments made for the purchase of a property interest, namely tenure: North Dakota State University v. United States, 84 F. Supp.2d 1043 (D.N.D. 1999), aff'd, 255 F.3d 599 (8th Cir.2001).

In CSX Corp. Inc. v. United States, 52 Fed Cl. 208 (2002), the court considered the IRS’s definition of SUB-pay as set out in Revenue Ruling 56-249, the last modification to which was made by Revenue Ruling 90-72. The court rejected the IRS’s definition. Instead it looked to the definition of “supplemental unemployment compensation benefits” in IRC § 3402(o)(2), which applies to income tax withholding. Under this definition, the court found that some payments were compensation and some were not.

The parties subsequently filed motions for summary judgment.  CSX Corp. v. United States, 58 Fed. Cl. 341 (2003).  In revoking a private letter ruling (PLR), the IRS took the position that because the taxpayers' benefit recipients were disqualified from receiving government unemployment benefits, the benefits at issue were subject to tax as dismissal payments and did not qualify as supplemental unemployment compensation benefits (SUB pay) for purposes of the RRTA. The court addressed whether the favorable tax treatment accorded the taxpayers in the PLR was correct as a matter of law and whether the IRS's decision to revoke that favorable treatment lacked a rational basis and was thus an unlawful exercise of administrative authority. The court could not conclude that the IRS's decision to revoke the PLR deprived the taxpayers of any benefit to which similarly situated taxpayers were entitled.  Rev. Rul 90-72 did not apply because the taxpayer's plan was not qualified. It was more accurate to say that the revocation of the letter ruling withdrew a benefit not available to other taxpayers: the right to treat as SUB pay, payments made to employees who had volunteered for separation from employment. The fact that the ruling was revoked for admittedly incorrect reasons added nothing to the case.   The court granted the IRS's motion and denied CSX's' motion.

In a supplemental opinion, the court clarified that certain separation payments made to employees who declined a forced transfer were subject to federal employment taxes and that the railroad company's proof of the layoff status of its employees was sufficient.  See CSX Corp, Inc. v. United States, 71 Fed. Cl. 630 (2006).

CSX Corp, Inc. v. United States, 71 Fed. Cl. 630 (2006) was appealed. The appellate court overturned the court of claims decision stating that even if payments satisfied the definition of SUB-Pay in § 3402(o), concerning income tax withholding, they are still taxable under FICA and RRTA (see Rev. Rul. 90-72, for guidance relative to SUB that is not taxable under FICA or RRTA). See CSX v. U.S., 518 F.3d 1328 (March 2008) 

Whether amounts paid to employees from a Productivity Fund constitute compensation for purposes of RRTA.

In order to reduce costs, every major railroad has negotiated agreements with their employees to reduce the size of the crews operating their trains.  In return for agreeing to reduce the size of the crew, the employees receive additional payments from the employer.

The employer generally establishes a trust fund (Productivity Fund) and agrees to set aside a certain amount of money throughout the course of the year, based on the number of trains operated with a reduced crew.  Then, after year-end, each employee who participated in the operation of a train with a reduced crew receives a pro rata share of the funds set aside by the employer.

Some railroads do not treat these payments as compensation. 

While there are no cases directly on point, consideration should be given to the following.  In STA of Baltimore – ILA Container Royalty Fund v. United States, 621 F. Supp. 1567 (D. Md.1985), aff’d, 804 F.2d 296 (4th Cir. 1986), the court held that payments made by employers into a “container royalty fund” that were subsequently shared by eligible employees were “wages” for FICA and FUTA purposes.

Also consider other cases where payments were made from funds other than payroll funds and the courts concluded that the payments were wages.  NYSA-ILA Container Royalty Fund v. Commissioner, 847 F.2d 50 (2d Cir. 1988); Lane Processing Trust v. United States, 25 F.3d 662 (8th Cir. 1995); and Sheet Metal Workers Local 141 Supplemental Unemployment Benefit Trust Fund v. United States, 64 F.3d. 245 (6th Cir. 1995), cert. denied, 516 U.S. 1049 (1996).

Productivity Fund Buyout

Some railroads, having negotiated a productivity fund system as described above, have subsequently offered employees a lump sum payment in exchange for the employees’ giving up any rights to receive future payments from the productivity fund.  The timing of the payments vary, with some plans including future payment features.  Some railroads treat these payments as the purchase of a contractual right, not subject to RRTA.  In Revenue Ruling 58-301, 1958-1 C.B. 23,   the employer purchased the remaining years of an employment contract from an employee for a lump sum.  The ruling excludes the payment from compensation and treats it as the purchase of a contract right.  Thus, the payment is not subject to FICA and Federal income tax withholding.

Revenue Ruling 74-252, 1974-1 C.B. 287, concludes that payments made by an employer to an employee, following involuntary termination, under the provisions of a three-year contract are wages for FICA, FUTA, and Federal income tax withholding purposes. Under the terms of the contract, the employer could terminate the relationship at any time, provided the employee was paid an amount equal to an additional six months salary. The ruling distinguishes Rev. Rul. 58-301 on the basis that these payments are in the nature of dismissal payments provided for under the terms of the contract, rather than as consideration for the relinquishment of interests the employee had in the employment contract.

Revenue Ruling 75-44, 1975-1 C.B. 15, involves an employer's payment to a railroad employee as consideration for the employee's agreement to perform a different type of work and refrain from asserting his employment rights acquired pursuant to his past service under a general contract of employment.   The ruling concludes that the payment received by the employee is ordinary income in the taxable year of receipt and is "compensation" for purposes of the Railroad Retirement Tax Act (RRTA) and "wages" for purposes of Federal income tax withholding.   This ruling distinguishes Rev. Rul 58-301 on the basis that in Rev. Rul. 58-301 the lump sum payment was primarily in consideration of the cancellation of the employee's original contract rights rather than primarily in consideration of the past performance of services through which the relinquished employment rights were acquired.

Revenue Ruling 58-301 is modified and superceded by Revenue Ruling 2004-110, 2004-2 C.B. 960.  In the latter ruling, an employee performed services under a written employment contract. The contract did not provide for any payments to be made by either party in the event the contract was cancelled by mutual agreement. Before the end of the contract period, the parties agreed to cancel the contract and negotiate a payment to the employee in consideration for the employee's relinquishment of his contract rights. The Code and regulations provided that amounts an employer paid an employee as remuneration for employment were wages unless a specific exception applies under sections 3121(a), 3306(b), and 3401(a) and sections 31.3121(a)-1(b), 31.3306(b)-1(b), and 31.3401(a)-1(a)(1) of the regulations. As the employee did not provide clear, separate, and adequate consideration for the employer's payment that was not dependent upon the employer-employee relationship, the payment to the employee was wages for purposes of FICA, FUTA, and federal income tax withholding.

The proper treatment of this type payment is dependent on the facts.  If the correct technical position is unclear, consideration should be given to requesting a Technical Advice.

Railroad Grading Costs

Railroad grading and tunnel bores are all improvements resulting from excavations and tunneling, construction of embankments, clearings, diversions of roads and streams, sodding of slopes, and from similar work necessary to provide, construct, reconstruct, alter, protect, improve, replace, or restore a roadbed or right-of-way for railroad track. (I.R.C. § 168(e)(4))

“Any railroad grading or tunnel bore” is 50-year property (I.R.C. § 168(c)); depreciated on a straight-line basis (I.R.C. § 168(b)(3))
Grading is defined by the Surface Transportation Board (STB) in their uniform system of accounts, Account 3 (49 C.F.R. § 1201.3), to include “the cost of clearing and grading the roadway, and of constructing protection for the roadway, tracks, embankments and cuts.”

Class I Railroads must account for Grading Costs on their annual STB reports, Forms R-1 (see handout)

The American Association of Railroads (AAR) defines the term “Grading” as a verb, meaning “to prepare the ground for the reception of ballast and track.”

Generally, expenditures to reconstruct, alter, protect, replace, or restore an asset might be currently deductible.  However, all costs attributable to “railroad grading or tunnel bore” must as required by statute to be amortized over 50 years, and may not currently deducted. 

Any grading expenditures, even those to reconstruct, alter, protect, improve, replace, or restore a roadbed or right-of-way for railroad track must be capitalized and depreciated on a straight-line basis over a 50-year period

C.  Recent or Pending Legislation



Effective Date


Summary and Impact of Legislation

None at this time



D.  Specific Industry Related Tax Law



Effective Date

Code Section

Summary and Impact of Law



Provides a depreciation system for property placed in service between 12-31-70 and 12-31-80.  Also provides system of expensing and capitalizing costs for same property.

With proper annual elections and record keeping, railroads can continue to use the CLADR repair allowance system with respect to this property that includes separate classes for rolling stock and road property such as bridges.



Limits ACRS deduction to straight line method for grading and tunnel bores



Specifies a 50 year recovery period for grading and tunnel bores



Defines railroad grading and tunnel bores




Permits an annual election to expense amounts paid in connection with the rehabilitation of non-locomotive rolling stock, that would otherwise be considered additions to the capital account, up to a maximum of 20 percent of the basis of the property.

No longer effective


Under RRB accounting, ties installed of any type material are afforded replacement, not betterment treatment.


Chapter 22: Sections 3201 - 3233

Railroad Retirement Tax Act.  See also; index to Code for other miscellaneous related sections.

Not effective

Sec 3321

Railroad Unemployment Repayment Tax – no longer in effect, but could be reinstituted by the Railroad Retirement Board.


12-31-04 to 1/1/08

§ 45G

Provides a 50% credit for any work performed, not only on track; but also on roadbed, bridges, and related track structures. The undefined term "related track structures" is taken to mean all the other structures along the track such as culverts, tunnels, stations, storage buildings, etc. The law permits Class II and III railroads to claim the credit; but also includes provisions for Class I railroads to claim it under certain circumstances.

E.  Important Revenue Rulings or Revenue Procedures



Effective Date

Title and Number

Summary and Impact of Ruling and Procedure

1968 - Fwd

Rev Rul 67-22

Under the RRB accounting method, initial welding costs were considered betterment, and replacement-welding costs were expensed as a replacement.  This ruling has limited application after 12-31-86; but lends support to the argument that welding costs are a part of the capital asset rail’s cost basis under depreciation accounting.  The ruling states that welded rail reduces track renewal costs, prolongs the life of the rail and rolling stock, and substantially reduces maintenance and overhead costs.


Rev Rul 68-291


Where a taxpayer grants an easement that affects only a specific portion of an entire tract of land, only the basis allocable to the affected portion is reduced by the proceeds from the easement in determining gain.


Rev Rul 68-37

Where a taxpayer is awarded severance damages in a condemnation proceeding for damage done to a specific portion of his retained property, only the basis in that portion is reduced in determining the gain realized.


Rev Rul 70-164

Loss on casualty to grading is limited to the FMV of the property before the casualty minus the FMV of the property after the casualty.  Cost of new grading must be capitalized. 


Rev Rul  73-161

Taxpayer, a land holding company, granted a 50 foot wide easement to a pipeline transmission company across a tract of its land.  Held, the proceeds from granting the easement are first used to offset the basis of that 50-foot wide strip of land and the excess over that basis is treated as gain.


Rev Rul 68-418

Under RRB accounting the costs of concrete ties used in replacement of wooden ties, was betterment.  However, see Rev Rul 84-22, which held to contrary.


Rev Rul 69-116

Describes certain expenditures with respect to freight cars that prolong or extend the useful life of freight cars.

1969- Fwd

Rev Rul 69-200


Describes airline industry expendable spare parts and rotable spare parts.  Holds that the former must be inventoried and expensed as used and that the latter must be depreciated identically to airplane itself.  Has potential application in railroad industry for locomotives.


Rev Rul 69-229

Railroad was required to bear portion of cost of highway bridge running above its tracks, but state, not railroad, held title to bridge.  Held, railroad was required to capitalize its share of the costs as an intangible asset in the form of a long-standing direct business benefit.

1969- Fwd

Rev Rul 69-476

The costs of rearranging a classification yard were treated as follows under the RRB method of accounting.  The installation of new track was capitalized.  The removal without replacement of other tracks was expensed, and the replacement of existing tracks was capitalized to the extent of betterment.  This ruling has limited application after 12-31-86.


Rev Rul 70-1

Railroad removed ballast to just below ties and then replaced with new ballast.  Under RRB method the cost of either a different, higher priced ballast or an increased depth of ballast constituted an improvement.  This ruling has limited application after 12-31-86.


Rev Rul 70-392

Taxpayer utility company relocated some of its existing assets that were already in use to a new location and continued their use, without extending their useful life or adding to their value.  Held, the costs to relocate were deductible under section 162.  This ruling has similar facts to railroad industry removal of rail and ties.


Rev Rul 73-203

A utility company was required by government to relocate its power transmission lines wherever they interfered with the construction of a new expressway.  These costs were required to be capitalized because they “rendered the property more valuable for the taxpayer’s use by bringing the property into compliance with applicable regulations.”  The costs of temporary relocation of the system for a period of less than a year for the purpose of maintaining service during construction were deductible.


Rev Rul 75-557

A connection fee which included a construction charge for the installation of a service line and water meter, that a new subdivision lot owner paid to obtain water service was includible in the public utilities gross income and was not a contribution to capital excludible under Section 118.


Rev 77-478

Railroad, to prevent recurrent damage to its track embankment, undertook a project to construct a channel diversion of the river along with concrete dikes, dams and installed riprap along their embankment.  Bridges were extended and raised and pole driving and pressure grouting were used to firm up the embankment.

Relying on W.J. Wehrli v. Commissioner, 400 F. 2d 686 (10th Circuit, 1968) and Bank of Houston v. Commissioner, T.C. Memo 1960-110, the Service held that the entire costs of the project were part of a general plan of rehabilitation, modernization and improvement and must be capitalized.  Also held that incidental pressure grouting and pole driving at various unrelated spot locations were deductible.


Rev Rul 84-22

As the result of the decision in the case of Florida East Coast Railway v. United States (Ct. Cl. 1982), 82-2 USTC 9511, where due to developmental problems, concrete ties were held to not constitute a betterment, this Ruling held that concrete ties were not a betterment over wood ties.  Rev Rul 68-418 revoked.

1-186 Fwd

Rev Proc 87-56

MACRs Class Lives for railroad property are included here at Class 40.  The most common property classes are:

40.1 All machinery and equipment – freight cars locos, shop equipment etc. (7 years)

40.2   Structures and Similar improvements – Bridges, culverts, fences, shops, public improvements, roadway terminal buildings.  (20 years)

40.3   Wharves and docks, coal ore docks (15 years)

NOTE: Tunnels, tunnel bores and right of way grading have a 50 year life per Code Section 168 (c).


Rev Rul 88-57

A railroad that engages in the cyclical rehabilitation of its freight cars, where the car is stripped to its frame and completely rebuilt, must capitalize the costs under Section 263.


Rev  Rul 98-25

The costs to replace underground storage tanks with tanks that comply with currently environmental laws are deductible.  This ruling has application to government required changes to railroad property such as crossings, bridges, etc.  However, see cases such as Teitelbuam v. Commissioner which held to the contrary


Rev Rul 2000-7

When taxpayer removes and retires an “asset”, the cost of removal must be offset against any proceeds from retirement salvage proceeds and should not be associated with the costs of a corresponding asset replacement project.

This ruling has some relevance to track projects to the extent that the “asset” is removed and retired.

2001 - Fwd

Rev. Rul. 2001-04

Costs incurred by a taxpayer to perform work on its aircraft airframe as part of a heavy maintenance visit generally are deductible as ordinary and necessary business expenses under section 162 of the Code.  This ruling has some relevance to maintenance performed on locomotives.


Rev. Proc. 2001-46

This revenue procedure provides a safe harbor method of accounting for track expenditures paid or incurred by Class I railroads.


Rev. Proc. 2002-65

This revenue procedure provides a safe harbor method of accounting for track expenditures paid or incurred by Class II or Class III railroads. Railroads not electing this, fall under a facts and circumstances accounting method.

F.  RRTA Rulings:



Effective Date

Title and Number

Summary and Impact of Ruling and Procedure



Rev Rul 69-391

Whether the value of housing accommodations provided by a railroad to its section foremen is taxable compensation under RRTA.

If the parties have agreed that the value of housing accommodations are a part of the employee's total remuneration, then the value is compensation for RRTA purposes; otherwise, the amount is not compensation.

1974 - Fwd

Rev Rul 74-121

With respect to RRTA taxes, this revenue ruling adopted the position take in Southern Development Company v. Railroad Retirement Board, 243.2d 352 (8th Cir. 1957) which held that a subsidiary of a railroad was an employer within the meaning of the Railroad Retirement Act and the Railroad Unemployment Insurance Act under the jurisdiction of the Railroad Retirement Board.


Rev Rul 75-279

Generally, allowances for travel expenses are not wages subject to RRTA taxes if the employee is required to take a period for substantial rest away from home, or if the employee is away from home overnight while on service, and made a full accounting for the allowance.

Other allowances for shorter trips when the employee does not require substantial rest away from home or is not away from home overnight are includible in wages subject to RRTA taxes.


Rev Rul 75-565

Railroad employees' lump sum back pay is subject to RRTA taxes to the extent and at the rate of tax applicable when it was actually paid, unless the employee requests under Section 3231(e)(2) that these determinations be made on the basis of when the compensation was actually earned.


Rev Rul 90-72

Payments made to employees as result of plant closings, layoffs, reductions in force have to be linked to state unemployment compensation in order to be excluded from the definition of wages for employment tax purposes.  Also, lump sum payments are specifically not considered linked to state unemployment compensation for this purpose and are therefore not excludible as SUB (Supplemental Unemployment Benefits) pay.


Rev Proc 94-25

Established a safe harbor number for taxpayers to use in calculating the supplemental annuity tax (SAT) under the RRTA.  The safe harbor number of hours per employee per month is 164.  The safe harbor is optional, but must be applied to all employees for the entire calendar year if elected.

G.  Important Court Cases




Date Opinion Issued

Name of Court Case and Citation

Summary of Importance of Court Case



Teitelbaum v. Commissioner, 294 F.2d 541, (1961) cert denied, 368 U.S. 987 (1962)


Municipal building ordinance required taxpayer to convert from DC to AC electrical current.  Held, the mere fact that the conversion was involuntary and made only to comply with city ordinance did not render it an ordinary expense.

Even though the change may not improve the property by increasing its attractive appearance or efficiency or prolonging its useful life, the property is more valuable because it is brought into compliance with applicable regulations.

This ruling has application to government required changes to railroad property such as crossings, bridges, etc.


Bank of Houston v. Commissioner, T.C. Memo 1960-110 & W.J. Wehrli v. Commissioner, 400 F. 2d 686 (10th Cir. 1968)

Both of these cases held that the costs of a project undertaken in an effort to carry out a “general plan” of rehabilitation, modernization, and improvement must be capitalized, even though some of the costs, standing alone, would be properly viewed as routine repair or maintenance items.

These cases have application to various types of railroad projects such as tunnel and bridgework, redesign of train yards, multi-component track replacement work, and building projects.


True v. United States,, 894 F.2d 1197 (10th Cir. 1990)

Taxpayer relocated gas-processing machinery to another field because it had become uneconomical to operate in its present location.  Taxpayer dismantled, moved and reconstructed the property and in the process, repaired and overhauled it.  On appeal, the court reversed, holding that the cost of moving machinery, like the cost of repairing it, could result in a capital improvement.  Also, that the general plan of improvement espoused in Wherli does apply to costs other than simply repairs. 

Although many cases have held that relocating assets is a deductible expense, the court reached a different conclusion because it found that the moving expense at issue affected the long term income-producing capability of the asset moved.

This case has relevance to the track removal and relocation (cascading) issue.


Mountain Fuel Supply Company v. United States, 449 F.2d 816 (10th Cir.), cert. denied, 405 U.S. 989 (1972)

Fuel company’s reconditioning of pipeline was a capital expenditure.  Taxpayer removed and reworked leak prone segments of the pipeline in 30-40 foot lengths, leaving some sections intact, replacing some with new pipe (about 10 percent) and reworking others.  The pipe had been in place 30 - 40 years.  After the reconditioning the pipe could transmit gas at a higher pressure than before. 

Relying in part on the general plan of improvement doctrine, the 10th Circuit overturned the lower court's decision and required the costs to be capitalized.

This case has relevance to the railroad industry track rehabilitation issue.


Wolfsen Land & Cattle Co. V. Commissioner, 72 T.C. 1 (1979)

Rather than adopting a program of annual maintenance, taxpayer permitted its asset (irrigation system) to deteriorate over a period of years until it became dysfunctional.  At that time it expended considerable sums to restore it to original capacity.

Held, taxpayer was within its rights to eschew annual maintenance, but cost to restore it is a capital expenditure.

This case has application to the issue of deferred track maintenance, particularly as it relates to Class II and III railroads.


Norwest Corp. v. Commissioner, 108 T.C.265 (1997)

Taxpayer decided to completely remodel their office building.  In the process, asbestos was removed and the cost of same was expensed.  Held, the asbestos removal was one part of an intertwined, general plan of rehabilitation and renovation that improved the building, and was required to be capitalized to that project.

This case is relevant to railroad projects involving track removal, bridge / tunnel component removal, and other similar right of way construction work.


Cincinnati, New Orleans & Texas Pacific Railway Co. v. United States, 424 F.2d 563 (Ct. Cl. 1970), AND             Union Pacific Railroad Co. v. United States, 524 F.2d 1343 (Ct. Cl. 1975), cert. denied, 429 U.S. 827 (1976).

Whether railroads subject to regulation by the Interstate Commerce Commission (ICC) should be allowed to deduct currently expenditures incurred in acquiring "small items" with a cost of less than $500 each, as required by the ICC for financial accounting purposes.

The court held that while the accounting procedures required by the ICC are not binding upon the Commissioner, they had probative value in determining whether the taxpayer had a bona fide method of accounting.  The court concluded that items costing less than $500 did not constitute permanent improvements and that the taxpayer's method of accounting was in accordance with generally recognized accounting principles.

The AOD CC-1977-77 (July 15, 1977) on the CNOTP case states that although the issue should not be raised in pending railroad cases, the issue will be raised if a minimum capitalization rule is unreasonably high so that its use for tax purposes results in a definite and substantial reduction of the taxpayer's income.



Kansas City Southern Railway Co. v. United States 112 F.Supp.164 (Ct. Cl. 1953)


Taxpayer corrected an immediate problem of limited and localized water pockets that developed in the sub grade below the track structure, by driving six-inch poles into the roadbed.  Held, this merely made the roadbed serviceable and did not improve or extend the life of it.



Kansas City Southern Railway Co. v. United States 112 F.Supp.164 (Ct. Cl. 1953)

Side Track Deposits are not taxable income they are refundable deposits.



Florida East Coast Railway v. United States, 82-2 USTC 951 (Ct. Cl. 1982), aff'd, 231 Ct. Cl. 1040 (1982)1

Concrete ties had extensive developmental failures.  Thus, they were held not to constitute “betterments” under RRB accounting.

This case is listed so that the point can be made that modern day concrete tie installations, in replacement of wood, do constitute an improvement.  There are no more developmental failures.


Denver Rio Grande Western R. R. Co v. Commissioner. 279 F. 2d 368 (10th Cir. 1960)

The taxpayer replaced 800 feet of floor planks and 85-90 percent of the stringers in a viaduct.  Held, the expenditure resulted in a substantial restoration, strengthening and improving the viaduct.  It was the replacement of a major portion of the viaduct that could no longer be repaired.


Inaja Land Co., Ltd. V Commissioner, 9 T.C. 727 (1947), acq. 1948-1 C.B. 2

A taxpayer who granted certain easements to allow a city to divert foreign waters into a river that flowed over his property was allowed to offset the proceeds against the basis in his entire property because it was impossible to know what portion of his land would have been affected by the flooding.


Fasken v. Commissioner, 71 T.C. 650 (1979, acq. 1979-2 C.B. 1)

The proceeds realized from the granting of four easements to their property must be offset only against that portion of their basis in the property that is allocable to the acreage affected by the easements.

This case is relevant to the allocation of basis in railroad right of way in determining gain from proceeds due to easements granted across same.


Iske v. Commissioner, T.C. Memo 1980-61

In determining gain realized on granting easements across his land, the basis allocable to the easements and not the entire basis is used.  Taxpayer could not show that it was impossible to allocate basis to areas affected.

This case is relevant to the allocation of basis in railroad right of way in determining gain from proceeds due to easements granted across same.


Chicago, Burlington, and Quincy R.R. Co. v. United States, 455 F. 2d 993 (Ct. CL. 1972) rev’d and rem’d on other grounds, 412 U.S. 401 (1973)

Cost of projects to modify existing improvements to divert water flow that was eroding a rail embankment were allowed as expense by lower court non-acq.

Taxpayer entered into a series of contracts with various states which provided that the states were to fund some or all of the costs of construction of grade separations (bridges over, or tunnels under the railroad track for use by highway vehicles) and grade safety equipment.  The railroad was to bear at least part of the costs of maintenance and replacement of the improvements once they had been installed.

The Supreme Court held that the cost of improvements made by the states were not contributions to capital on the railroad’s books.  Therefore, the taxpayer was not entitled to claim depreciation on the states’ portion of the costs.


Southern Pacific Transportation Co. v. Commissioner 75 T.C. 497 (1980).

Among many issues addressed by this case were the following:

Whether railroad could depreciate assets paid for by governmental bodies.  Typically, the costs borne by governments resulted from the replacement of railroad assets that were prematurely retired as the result of other government construction projects.  For example, the gov't built a dam which submerged railroad's property, built an Air Force runway that interfered with railroad's property, built a highway across railroad property, etc.  In each instance the government paid for relocation, reconstruction etc., to make railroad whole.

Held, the amounts spent by governments were not contributions of capital to the railroad, and thus were not depreciable (under the then existing statute).   Under the current statute, it would not be depreciable in any event even if it were a capital contribution

Held that the installation of welded rail in place of jointed rail was a betterment under RRB accounting.  (This rationale applies to depreciation accounting under current law.)


Helvering v. Claiborne-Annapolis Ferry Co., 93 F.2d 875 (4th Cir. 1938)

Payments by the state to maintain a ferry were considered to be income and not a capital contribution.  Payments were not for capital items but for operating expenses.


Springfield Street Railway Company vs. United States, 577 F.2d 700 (Ct. Cl. 1978)


Taxpayer was not required to use grants from the state to acquire capital assets.  The court ruled that these grants were not capital contributions.

The five tests set forth in the Chicago Burlington and Quincy case are controlling.


Detroit Edison Co. vs. Commissioner   319 U.S. 98 (1943)

Payments to the taxpayer by customers for the construction of facilities to provide service for these customers were not contribution of capital but were payments for service.


Union Pacific Railroad Company, Inc. vs. United S.tates,524 F.2d 1343;(Ct. Cl. 1975), cert. denied, 429 U.S. 829 (1976)

Payments by the government to relocate a portion of a rail line that was going to be submerged as the result of the construction of the dam were not capital contributions.  The Court ruled that the simple replacements of an existing facility left the railroad no better off than before and did not materially contribute to the production of additional income by the railroad.


Louisville and Nashville Railroad v. Commissioner, 66 T.C. 962 (1976), aff'd in part, rev'd in part, 641 F.2d 435 (6th Cir. 1981)

This case provides a detailed discussion of the characteristics, lives, and differences between relay rail, welded rail, and heat-treated rail.

This case provides extensive discussion of the process of rebuilding various types of freight cars, the costs involved, etc.  See below for Circuit Court opinion on this issue.

A third issued addressed is whether the railroad may treat the cost of highway grade crossing facilities paid for from public funds as contributions to capital, and depreciate them.  The state governments in which taxpayer operated, made grade crossing improvements that either provided bridges over the railroads tracks or tunnels beneath them.  The construction and design characteristics and other details were pursuant to written contracts with the railroad.  None of the agreements contained provisions with respect to legal title.  (To the extent that the railroad bore any costs involved, there was no dispute before the court.  Those costs were properly depreciable.)

The court held that they were not contributions to capital and thus not depreciable.  See also Supreme Ct case - United States v. Chicago, Burlington  & Quincy RR.  Co. 412 U.S. 401 [32 AFTR 2d 73-5042] (1973)



Louisville and Nashville Railroad v. Commissioner 641 F.2d 435 (6th Cir.1981)2


Circuit Court upheld lower court’s decision that railroad must capitalize as part of the cost of new and rebuilt freight cars: vacation pay, holiday pay, health and welfare benefits, and cost of transporting on its own lines the materials used in the project, but Circuit Court allowed the deduction of payroll taxes incurred relative to labor costs of project.


Commissioner v. Idaho Power Co., 418 U.S. 1 (1974)


With respect to what costs are to be included in the cost of self constructed assets, the court stated that where a taxpayer’s generally accepted method of accounting is made compulsory by the regulatory agency, and that method clearly reflects income, it is almost presumptively controlling of Federal income tax consequences.


Old Colony Railroad Co. v. Commissioner, 284 U.S.  552, (1932)

Regulatory agency imposed compulsory accounting practices do not necessarily dictate tax consequences.


Commissioner v. Lincoln Savings and Loan Assn,, 403 U.S. 34 (1971)

The dictates of regulatory authorities as to appropriate accounting practices are not irrelevant and may be accorded some significance in determining proper tax treatment.

H. RRTA Cases



Date Opinion Issued

Name of Court Case and Citation

Summary of Importance of Court Case


1946- Fwd

Despatch Shops, Inc. v. Railroad Retirement Board, 153
F.2d 644 (2nd   Cir. 1946)

Whether Despatch was an employer within the meaning of the Railroad Unemployment Insurance Act.

The taxpayer argued that it should not be treated as a railroad employer because it was a separately incorporated manufacturing company distinct from its parent, a railroad, and because it was doing heavy repairs and manufacturing similar to that done by other, similar non-railroad companies.  The court rejected the argument.

1946- Fwd

Railroad Retirement Board v. Duquesne Warehouse Co., 326 U.S. 446(1946).

Whether Duquesne, a corporation owned by a railroad, was an employer within the meaning of the Railroad Retirement Act and the Railroad Unemployment Insurance Act.  The burden of loading and unloading railroad freight fell on the owner of the freight.  Duquesne charged the owner of the freight for loading and unloading the freight and performed other handling services in connection with the receipt and delivery of freight.  The Supreme Court held that service in connection with the transportation of property includes those activities which would be transportation services when performed by a railroad, but which it chooses to have performed by its affiliates.

1987- Fwd

Standard Office Building Corp. v. United States., 819 F.2d 1371 (7th Cir. 1987).

In this case, Standard, owner and operator of an office building, was controlled by a railroad and the office building was more than half occupied by offices of the railroad.

The appellate court held that the taxpayer was not covered by RRTA because it was incorporated prior to the passage in 1937 of the RRTA, and because its employees would have secured a pension windfall if covered under RRTA.  The portion of the building occupied by the railroad did not exceed 57 percent during the period in question.


Southern Development Co. v Railroad Retirement Board, 243 F.2d 351 (8th Cir. 1957).


Taxpayer was controlled by a railroad and owned an office building, 64 percent of which was occupied by offices of the railroad.  The railroad paid 73 percent of the total rents of the building equal to 39 percent of Southern’s total income.  Although Southern owned other properties all of its employees were engaged in the operation of the office building.  Based on these facts, Southern was held to be an employer within the meaning of the Railroad Retirement Act and the Railroad Unemployment Insurance Act.  For purposes of the RRTA, the rationale of Southern was adopted in Revenue Ruling 74-121, l974-l C.B. 300.

1983- Fwd

Missouri Pacific Truck Lines, Inc. v. United States, 3 CL. Ct. 14 (1983), aff'd per curiam,. 736 F.2d 706. (Fed. Cir.1984)

The activities of petitioner were found to fall within the trucking service exception under IRC 3231 and thus exempt from RRTA.

1986- Fwd

Atlantic Land & Improvement Co. v. United States, 790 F.2d 853 (11 Cir. 1986)

Owner of loading facility leased to railroad was an RRTA employer, and longshoremen were its employees.  Also, the expiration of the statute of limitations on the FICA returns filed on the longshoremen did not bar the assessment of taxes on those employees when converted under RRTA.

1991 - Fwd

City of Galveston, Texas v. United States, 33 Fed Cl. 685; (1995), aff'd without opinion, 82 F.3d 433 (Fed. Cir. 1996)

Held, the IRS has both the statutory authority and responsibility for determining whether a company is a carrier under RRTA.  The Railroad Retirement Board does not preclude the IRS from independently making these determinations despite the absence of a similar determination.

1983 Fwd.

Union Pacific Corporation v. United States, 26 Ct. Cl. 739 (1992), aff’d. 5F.3d 523 (Fed. Cir. 1993)

Held, the parent corporation and its railroad subsidiary were not "under common control" as defined under Section 3231(a) and thus the parent holding company did not meet the definition of an RRTA employer.


Montana Rail Link v. United States, 873 F. Supp.1415 (D. Mont. 1994) aff’d. 76F.3d 991 (9th Cir. 1996)

This case upheld the validity of the retroactive effect of the Omnibus Budget Reconciliation Act as it applied to the taxability of employer contributions to Section 401(k) plans.  Although it generally only applied for years after 12-31-89, it did also apply to remuneration paid before 1-1-90, which the employer treated as compensation when paid.


CSX v. U.S., 518 F.3d 1328 (March 2008)

even if payments satisfied the definition of SUB-Pay in § 3402(o), concerning income tax withholding, they are still taxable under FICA and RRTA (see Rev. Rul. 90-72, for guidance relative to SUB that is not taxable under FICA or RRTA)


Trans-Serve Inc. v. U.S., 521 F.3d 462 (March 2008)).

A cross-tie manufacturer under common control with a railroad, to which it sold rail ties, was found to be a railroad employer, and therefore subject to RRTA taxes.

I.  Other Employment Tax Cases Potentially Impacting RRTA Issues



Date Opinion Issued

Name of Court Case and Citation

Summary of Importance of Court Case



STA of Baltimore—ILA Container Royalty Fund v. U.S. 621 F. Supp.  1567 (1985), aff’d, 804 F.2d 296 (4th Cir. 1986)

 Court held that the payments from the non-payroll, Container Royalty Fund were compensation.


NYSA-ILA Container Royalty Fund by Bowers v. Commissioner, 847 F.2d 50 (2d Cir. 1988)

Court held that the payments from the non-payroll, Container Royalty Fund were compensation.


Lane Processing Trust v. United States, 25 F.3d 662 (8th Cir. 1995)

Court held that the payments from a non-payroll, trust fund were compensation.


Sheet Metal Workers Local 141 Supplemental Unemployment Benefit Trust Fund v. United States, 64 F.3d. 245 (6th Cir. 1995), cert. denied, 516 U.S. 1049 (1996)

Court addressed whether the source of funds used to make payments controls or impacts their treatment as compensation.  Court held that the payments from the non-payroll, Supplemental Unemployment Benefit Trust Fund were compensation.


Associated Electric Cooperative Inc. v. United States, 42 Fed. Cl. 867 (1999), aff'd, 226 F.3d 1322 (fed. Cir. 2000);

Voluntary severance payments made to employees and former employees under workforce reduction plans held to be wages under FICA.


Cohen v. United States, 63 F. Supp. 2d 1131 (C.D. Cal. 1999)

Voluntary severance payments made to employees and former employees under workforce reduction plans held to be wages under FICA.


Abrahamsen v. United States, 44 Fed. Cl. 260 (1999), aff'd, 228 F.3d 1360 (fed. Cir. 2000), cert. denied, 532 U.S. 957 (2001)

Voluntary severance payments made to employees and former employees under workforce reduction plans held to be wages under FICA.


Abbott v. United States, 76 F. Supp. 2d 236 (N.D. N.Y. 1999)


Voluntary severance payments made to employees and former employees under workforce reduction plans held to be wages under FICA.




North Dakota State University vs. U.S. 255 F.3d 599 (8th Cir. 2001)

Early retirement payments made to tenured faculty members held to be payments for the purchase of tenure rights and not wages under FICA.


Associated Electric Cooperative, Inc., v. United States, 42 Fed. Cl. 867 (1999), aff'd 226 F.3d 1322 (Fed. Cir. 2000)

Severance pay and early out payments paid to former employees constituted "wages" for purposes of Federal Insurance Contribution Act taxes. This case may have bearing on RRTA issues



Abrahamsen v. United States, 44 Fed. Cl. 260 (1999), aff’d 228 F.3d 1360 (Fed. Cir. 2000), cert. denied, 532 U.S. 957 (2001)

Downsizing payments received by taxpayer employees upon signing a general release against their former employer were subject to federal income and Federal Insurance Contribution Act taxes as income and wages. This case may have bearing on RRTA issues



Smith v. Commissioner, 330 F.3d 1023 (9th Cir. 2002), aff'g Vanalco, Inc. v. Commissioner, T.C. Memo. 1999-265

The Ninth Circuit upheld the Tax Court's ruling that the taxpayer must capitalize the costs of replacing both the linings of its aluminum reduction cells and portions of the brick floors in its cell rooms in its aluminum smelting facility. In upholding capitalization of the cell lining replacement, the Court explained that "the significance of the part under repair to the operation of the property is a critical inquiry." Thus, the Court found the Tax Court did not err in focusing on the essential functional nature of the cell lining rather than on whether its replacement added value to the cell. Further, given that the relining process effectively rebuilt the cell, the Tax Court did not err in ruling that relining conferred a new life expectancy on the cell equal to the three-year life expectancy of the lining.

This case is   pertinent to the locomotive cyclical maintenance issue.

J.  Technical Advice Memorandums - Field Service Advices








Sep 20 1990

TAM 9050061

Certain severance payments made to non-union workers did not constitute wages for purposes of RRTA. 

Dec 21 1993

TAM 9416003

Revoked TAM 9050061 due to omission of material fact.  The workers in TAM 9050061 were prohibited from applying for state unemployment benefits by the terms of their SUB plan, but this fact was not disclosed in original submission of facts.

Sep 15 1993

FSA 1999-1117

The Service concluded that, under the matching principle, the costs to remove old railroad track during capitalized track installations should be capitalized and recovered over the depreciable life of the new track.

January 23, 1996

TAM 9618004

Cost incurred by the taxpayer for major inspections of aircraft engines may not be deducted as ordinary and necessary business expenses under IRC 162; but instead must be treated as capital expenditures under IRC 263. The major inspection costs had the effect of replacing the engine with a newly inspected and reconditioned engine

March 10, 2006

TAM 200610017

The taxpayer’s conveyances of its railroad rights-of-way are transfers of partial interests in real property. Provided that the transfers otherwise satisfy the requirements of I.R.C. § 170, the transfers would constitute deductible charitable contributions, only if the possibility that the property will revert to the taxpayer or its assigns is remote under Income Tax Regulations § 1.170A-7(a)(3). The determination of remoteness is factual for each conveyance.

June 11, 2004

TAM 200424001

Components of railroad track that are assembled and attached to the land and considered real property for state law purposes are not of like-kind to unassembled railroad track components considered personal property for state law purposes.

If the requirements of § 1031 are met, gain or loss is deferred when a taxpayer acquires railroad track components in a like-kind exchange notwithstanding that the taxpayer is unable to substantiate whether the acquired property was used for repair, program replacement, or new track construction.

The taxpayer’s practice of deeming § 1031 replacement property to be used first for capitalized track expenditures (including the 60% capitalized portion of the program replacement expenditures) is not proper. In particular, the first to capital convention of allocation is not consistent with the requirements of Rev. Proc. 2001-46 and may violate the reasonableness requirements of § 1.263A-1(f) of the Income Tax Regulations.



Alternative Issue Resolution Considerations

None, currently


Industry Resources

A. WEB Sites


Name of Site

Summary and Available Information


History, current events, important legislation, position papers, news digests, and Rail Link, which provide over 25 website links to member railroads and others, related to the industry.


History, meeting dates, member services.


The Federal Railroad Administration, an agency of the Department of Transportation, is primarily responsible for safety. The site has significant information on matters of safety, research and development, and high speed ground transportation. Regulations with respect to required inspections / maintenance for locomotives, other equipment, track, signals etc. are referenced.


Comprehensive information regarding the Railroad Retirement Act, taxability of benefits, eligibility for benefits, copies of employer reporting forms, etc.


News, economic data (R-1s), publications, mergers and acquisitions, decisions, etc.



B. Trade Associations





Purpose, Goals, Objectives, etc.


Association of American Railroads



50 F Street NW
Washington DC 20001

The Association of American Railroads represents North America’s major freight railroads and Amtrak. AAR strives to help make the rail industry increasingly safe, efficient and productive by:

  • Conducting and coordinating research, development and other support programs;
  • Facilitating the seamless exchange of electronic information among railroads, their customers and suppliers;
  • and Advocating the interests of railroads in the public policy arena

American Shortline and Regional Railroad Association


1120 G Street NW
Suite 520
Washington DC 20005





The ASLRRA provides a variety of services. Among them are:

Representing the industry before the Federal government; monitoring and analyzing legislative and regulatory initiatives, commenting on behalf of its members, testifying before Congressional committees and, in general, educating Congress and the agencies on the unique role of small railroads.

Representing members in their relationships with the major railroads.

Developing model programs for Federally mandated procedures such as random alcohol and drug testing, engineer certification and environmental regulations, and roadway worker protection.

C. IRS and Other Training Courses/Videotapes



Name of Course

Course Number

Delivery Method

Developer of Course and Procedures to Secure Material


RRTA Desk Reference


Self Use

OETAC & GT ISP developed course. Copy of text can be obtained by contacting Railroad TA.

D. Trade Magazines and Newsletters

Railway Age.
Simmons-Boardman Publishing 1809 Capital Ave Omaha, NE 68102 (800) 228-9670

Progressive Railroading.
Trade Press Publishing Corp, 2100 West Florist Ave. Milwaukee, WI 53209. Tel. 414-228-770-1, Fax 414-228-1134.

RT&S Simmons-Boardman
345 Hudson St. St. New York, NY 10014 (800) 228-9670

IRJ Simmons-Boardman
PO Box 926 Omaha, NE 68101-0926 (212)620-7200

The Pocket List of Railroad Officials,
K-III Directory Corp. 424 West 33rd St. 11th Fl. New York, NY 10001 (212)714-3100, (800)221-5488

The Official Railway Guide,K-III Directory Corp.
424 West 33rd St. 11th Fl. New York, NY 10001 (212)714-3100, (800)221-5488

The Official Intermodal Guide,
K-III Directory Corp. 424 West 33rd St. 11th Fl. New York, NY 10001
(212)714-3100, (800)221-5488

Traffic World
1230 National Press Building, Washington, DC 20045 (202) 783-1101

Kalmbach Publishing Co. 21027 Crossroads Circle PO Box 1612 Waukeshaw, WI 53187 (800)446-5489

E. Industry Books



Date of Latest Edition


Summary of Contents


Railroad Dictionary of Car and Locomotive Terms

166 pages of terms on the subject.

Second Ed. 1993

Dictionary of Railway Track Terms

221 pages of terms on the subject.

Rev. Oct. 87

Uniform System of Accounts for RR Companies

Excerpts from the ICC [now STB] prescribed accounting rules and charts of accounts as set forth in Title 49, Transportation Code of Federal Regulations

Third Ed. 1990

The Railroad

What It Is, What It Does

243 pages of detailed text on the industry from how a locomotive works to the route system to terminal operations. A good overview for someone new to the industry.

10th Ed. 1985

The Track Cyclopedia

A comprehensive look at all track components, maintenance and installation practices etc.

5th Ed. 1984

The Car and Locomotive Cyclopedia

A comprehensive look at car types, locomotive types, discussion of component systems' functions and designs; detailed drawings, pictures, maintenance facilities, etc.

2nd Ed. 1982

Railroad Engineering by William W. Hay

Over 700 pages of discussion of track from an engineering perspective.

F.  Internal Revenue Manual Citations



IRM Section


Summary of Information Included and

Part 11 – Communications and Liaison

Provides authorization to disclose certain information to the RRB including copies of Forms 4668 and audit assessments. 

Part 32 – Published Guidance to Taxpayers

Provides guidelines for coordination of matters involving technical questions as to the RRTA / RRA.

Part – 4.23 Employment Tax Handbook

Addresses RRTA Examination Report writing, including modifications to Form 4668 for RRTA purposes

Part – 4.23 Employment Tax Handbook

Special Rules Relating to FICA, FUTA, and RRTA; use of CT-1, RUIA and FUTA, RRTA coverage determinations, Disclosure, FICA conversions, erroneous RRTA payments, and Processing and Submission of Adjustment Forms

Part – 4.23 Employment Tax Handbook

Addresses RRTA on Tip Income

Part – 4.23 Employment Tax Handbook

Addresses Statute Control generally, and specifically with respect to FICA to RRTA conversions.

Part – 4.23 Employment Tax Handbook

This links to the IRS/RRB Coordination Agreement, which addresses each agencies responsibilties, disclosure issues , information sharing, and general administrative procedures.

Part 20, Penalty and Interest

Provides Filing requirements for Form CT-1 and related information on deposits in the event of penalty situations.

G.  AICPA Auditing Standards and Publications

There are no industry unique FASBs that impact railroads, and no transportation issues shown on the AICPAWebsite.

H.  Market Segment Specialization Program (MSSP)


Page Last Reviewed or Updated: 05-Mar-2015