The reduction must be made (directly or indirectly) on the books of the terminal railroad corporation, and in fact, for the same taxable year for which the charge would be made or for which the liability is incurred. The reduction of the charge or liability must be taken into account by the terminal railroad corporation in ascertaining the income, profit, or loss for such taxable year for the purpose of reports to shareholders and the Interstate Commerce Commission, and for credit purposes.
Source | Gross income | Allowable deductions | Income (or loss) |
Related terminal services performed: | |||
For shareholders | $80,000 | $65,000 | $15,000 |
For nonshareholders | 46,000 | 37,000 | 9,000 |
Related terminal income | 126,000 | 102,000 | 24,000 |
Nonrelated terminal income | 30,000 | 18,000 | 12,000 |
Total | 156,000 | 120,000 | 36,000 |
The liability of each shareholder is, pursuant to the agreement, discharged in part by the T Company crediting $12,000 against the rental due from each shareholder for a total discharge of liabilities of $36,000 (the net income from all sources), resulting in net shareholder liabilities owing to the T Company at the end of 1973 of $44,000 ($80,000 less $36,000): $23,000 from the X Company, $13,000 from the Y Company, and $8,000 from the Z Company.
Gross income ($156,000 less $24,000) | $132,000 |
Less allowable deductions | 120,000 |
Taxable income | 12,000 |
Before the application of sec. 281 | After the application of sec. 281 | |
Gross income: | ||
From sources other than T Co | $146,000 | $146,000 |
Dividend considered received because of T Co.'s discharge of liabilities of $12,000 | 12,000 | 4,000 |
Total | 158,000 | 150,000 |
Less allowable deductions: | ||
From sources other than T Co | 69,600 | 69,600 |
85 percent dividend received deduction under sec. 243 attributable to dividend considered received because of T Co.'s discharge of liabilities | 10,200 | 3,400 |
Expenses for accrued charges for related terminal services performed by T Co | 35,000 | 27,000 |
114,800 | 100,000 | |
Taxable income | 43,200 | 50,000 |
Assume the same facts as in Example 1, except that the charges to each of the shareholders for related terminal services for 1973 were as follows: $35,000 to the X Company, $40,000 to the Y Company, and $5,000 to the Z Company. Assume further that the Z Company, prior to the reduction in liabilities at the end of 1973, owed the T Company an additional $4,000 resulting from charges for 1972 for related terminal services and $6,000 resulting from the purchase of equipment. Since only $21,000 (X Company $8,000, Y Company $8,000, Z Company $5,000) of the liabilities which were discharged resulted from charges made for 1973 for related terminal services, the reduced amount to which this section applies is $21,000 (instead of $24,000 as in Example 1). Thus, the T Company's taxable income for 1973 would be $15,000 ($36,000 less $21,000 reduced amount) and the amount which shall be considered not to have been received or accrued as a dividend nor paid or incurred as an expense of each shareholder is $8,000 for the X Company, $8,000 for the Y Company, and $5,000 for the Z Company.
Source | Gross income | Allowable deductions | Income (or loss) |
Related terminal income | $126,000 | $102,000 | $24,000 |
Nonrelated terminal income | 30,000 | 39,000 | (9,000) |
Total | 156,000 | 141,000 | 15,000 |
The liability of each shareholder is nevertheless discharged in part, pursuant to the agreement, by the T Company crediting $8,000 against the rental due from each shareholder for a total discharge of liabilities of $24,000 (the net income from each source of revenue that produced income). Assume further that none of the modifications specified in section 172(d) apply. If the limitation under paragraph (c)(4) of this section were not applied, the reduced amount for the purposes of this section would be $24,000, and the operation of this section would result in a net operating loss of $9,000, since the allowable deductions of $141,000 would exceed the gross income of $132,000 ($156,000 less discharged liabilities of $24,000) by that amount. Because of the limitation under paragraph (c)(4) of this section, however, $9,000 is not included in the reduced amount to which this section applies. Accordingly, the reduced amount is $15,000 (instead of $24,000 as in Example 1). Thus, the T Company's taxable income for 1973 would be zero ($15,000 less the $15,000 reduced amount), and the amount which each shareholder shall be considered not to have received or accrued as a dividend nor paid or incurred as an expense is $5,000.
Source | Gross income | Allowable deductions | Income (or loss) |
Related terminal services performed: | |||
For shareholders | $65,000 | $65,000 | 0 |
For nonshareholders | 46,000 | 37,000 | $9,000 |
Related terminal income | 111,000 | 102,000 | 9,000 |
Nonrelated terminal income from nonshareholders | 30,000 | 18,000 | 12,000 |
Total | 141,000 | 120,000 | 21,000 |
For the calendar year 1973, the TR company's charges to its shareholders are $23,000 ($30,000 less $7,000) to the M company, $13,000 ($20,000 less $7,000) to the N company, and $8,000 ($15,000 less $7,000) to the O company for a total of $44,000 for related terminal services.
Gross income ($141,000 less $9,000 charges not made) | $132,000 |
Less allowable deductions | 120,000 |
Taxable income | 12,000 |
Before the application of sec. 281 | After the application of sec. 281 | |
Gross income: | ||
From sources other than TR Co | $146,000 | $146,000 |
Dividend considered received because of TR Co.'s reduction of charges | 7,000 | 4,000 |
Total | 153,000 | 150,000 |
Less allowable deductions: | ||
From sources other than TR Co | 69,600 | 69,600 |
85 percent dividend received deduction under sec. 243 attributable to dividend considered received because of TR Co.'s reduction of charges | 5,950 | 3,400 |
Expenses for accrued charges for related terminal services performed by TR Co | 30,000 | 27,000 |
105,550 | 100,000 | |
Taxable income | 47,450 | 50,000 |
26 C.F.R. §1.281-2