[Federal Register Volume 71, Number 174 (Friday, September 8, 2006)]
[Rules and Regulations]
[Pages 53009-53020]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-14858]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9286]
RIN 1545-BE91


Railroad Track Maintenance Credit

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: This document contains temporary regulations that provide 
rules for claiming the railroad track maintenance credit under section 
45G of the Internal Revenue Code for qualified railroad track 
maintenance expenditures paid or incurred by a Class II railroad or 
Class III railroad and other eligible taxpayers during the taxable 
year. These temporary regulations reflect changes to the law made by 
the American Jobs Creation Act of 2004 and the Gulf Opportunity Zone 
Act of 2005. The text of these temporary regulations also serves as the 
text of the proposed regulations set forth in the notice of proposed 
rulemaking on this subject in the Proposed Rules section in this issue 
of the Federal Register.

DATES: Effective Date: These regulations are effective September 8, 
2006.
    Applicability Date: For dates of applicability, see Sec.  1.45G-
1T(g).

FOR FURTHER INFORMATION CONTACT: Winston H. Douglas, (202) 622-3110 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    These temporary regulations are being issued without prior notice 
and public procedure pursuant to the Administrative Procedure Act (5 
U.S.C. 553). For this reason, the collection of information contained 
in these regulations has been reviewed, and pending receipt and 
evaluation of public comments, approved by the Office of Management and 
Budget under control number 1545-2031. Responses to this collection of 
information are mandatory.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number.
    For further information concerning this collection of information, 
and where to submit comments on the collection of information and the 
accuracy of the estimated burden, and suggestions for reducing this 
burden, please refer to the preamble to the cross-referencing notice of 
proposed rulemaking published in the Proposed Rules section of this 
issue of the Federal Register.
    Books and records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains amendments to 26 CFR part 1 to provide 
regulations

[[Page 53010]]

under section 45G of the Internal Revenue Code (Code). Section 45G was 
added to the Code by section 245(a) of the American Jobs Creation Act 
of 2004, Public Law 108-357 (118 Stat. 1418) (AJCA), and was modified 
by section 403(f) of the Gulf Opportunity Zone Act of 2005, Public Law 
109-135 (119 Stat. 2577).

General Overview

    Section 38 allows a credit for the taxable year for, among other 
things, the current year business credit. The current year business 
credit is the sum of the credits listed in section 38(b). Section 
245(c)(1) of the AJCA amended section 38(b) of the Code to add to the 
list of credits the railroad track maintenance credit (RTMC) determined 
under section 45G(a).
    Section 45G(a) provides that, for purposes of section 38, the RTMC 
for the taxable year is an amount equal to 50 percent of the qualified 
railroad track maintenance expenditures (QRTME) paid or incurred by an 
eligible taxpayer during the taxable year. Section 45G(d) defines the 
term QRTME to mean expenditures (whether or not chargeable to capital 
account) for maintaining railroad track owned by, or leased to, a Class 
II railroad or Class III railroad as of January 1, 2005. Section 45G(e) 
defines the terms Class II railroad and Class III railroad to have the 
respective meanings given those terms by the Surface Transportation 
Board (STB). Section 45G(c) defines an eligible taxpayer to mean any 
Class II railroad or Class III railroad, and any person who transports 
property using the rail facilities of such a railroad, or who furnishes 
railroad-related property or services to such a railroad, but only with 
respect to miles of railroad track assigned to such person by such a 
railroad.
    Section 45G(b) imposes limitations on the amount of the RTMC for 
any taxable year. The credit allowed under section 45G(a) may not 
exceed $3,500 multiplied by the sum of (1) the number of miles of 
railroad track owned by, or leased to, the eligible taxpayer as of the 
close of the taxable year, and (2) the number of miles of railroad 
track assigned to the eligible taxpayer by a Class II railroad or Class 
III railroad that owns or leases the track as of the close of the 
taxable year.
    Section 45G applies to QRTME paid or incurred during taxable years 
beginning after December 31, 2004, and before January 1, 2008.

Scope

    The temporary regulations define several terms, including eligible 
taxpayer, QRTME, rail facilities, railroad-related property, and 
railroad-related services. The temporary regulations also instruct an 
eligible taxpayer how to determine the RTMC for the taxable year. 
Further, the temporary regulations provide guidance on assignments of 
miles of railroad track for purposes of section 45G, adjustments to 
basis for the RTMC, and the treatment of controlled groups under 
section 45G.

Explanation of Provisions

Eligible Taxpayer

    The temporary regulations provide that only an eligible taxpayer 
may claim the RTMC. An eligible taxpayer is defined in the temporary 
regulations as: (1) A Class II railroad or Class III railroad during 
the taxable year; (2) any person that transports property using the 
rail facilities of a Class II railroad or Class III railroad during the 
taxable year; or (3) any person that furnishes railroad-related 
property or railroad-related services to a Class II railroad or Class 
III railroad during the taxable year. A Class I railroad is an eligible 
taxpayer only if the Class I railroad is in the second or third 
category above and is assigned miles of railroad track for the taxable 
year by a Class II railroad or Class III railroad. A taxpayer in the 
second or third category is an eligible taxpayer only with respect to 
the miles of railroad track assigned to the person for the taxable year 
by a Class II railroad or Class III railroad.
    Consistent with section 45G(e)(1), the temporary regulations 
provide that the terms Class II railroad and Class III railroad have 
the respective meanings given these terms by the STB. As determined by 
the STB, Class II railroads have annual carrier operating revenues of 
less than $250 million but in excess of $20 million after applying the 
railroad revenue deflator formula (Current Year's Revenues x (1991 
Average Railroad Freight Price Index/Current Year's Average Railroad 
Freight Price Index)). 49 CFR part 1201, subpart A, Sec.  1-1(a). In 
general, Class III railroads have annual carrier operating revenues of 
$20 million or less after applying the railroad revenue deflator 
formula. 49 CFR part 1201, subpart A, Sec.  1-1(a).
    The temporary regulations also provide that the rail facilities of 
a Class II railroad or Class III railroad include railroad yards, 
tracks, bridges, tunnels, wharves, docks, stations, and other related 
assets that are used in the transport of freight by a railroad and that 
are owned or leased by the Class II railroad or Class III railroad.
    Railroad-related property is defined in the temporary regulations 
as meaning property that is provided directly to, and is unique to, a 
railroad. Further, this property must be property that, in the hands of 
a Class II railroad or Class III railroad, is described in asset 
classes 40.1 through 40.54 of Rev. Proc. 87-56 (1987-2 CB 674), with 
certain modifications, and is described in the STB property accounts 
for grading, tunnels and subways, and storage warehouses.
    The temporary regulations define railroad-related services as 
meaning services that are provided directly to, and are unique to, a 
railroad. In addition, these services must relate to railroad shipping, 
loading and unloading of railroad freight, or repairs of rail 
facilities or railroad-related property. Examples of railroad-related 
services are the transport of freight by rail, the loading and 
unloading of freight transported by rail, locomotive leasing or rental, 
and maintenance of a railroad's right-of-way (including vegetation 
control). Examples of services that are not railroad-related services 
are general business services, cleaning services, banking services 
(including financing of railroad-related property), and office building 
rental.

Computation of Railroad Track Maintenance Credit

    For purposes of section 38, the temporary regulations provide that 
the RTMC generally is equal to 50 percent of the QRTME paid or incurred 
by an eligible taxpayer during the taxable year. However, this credit 
amount cannot exceed the credit limitation provided by the temporary 
regulations. The credit limitation for a Class II railroad or Class III 
railroad differs from the credit limitation for other eligible 
taxpayers.
    If an eligible taxpayer is a Class II railroad or Class III 
railroad, the temporary regulations provide that the RTMC cannot exceed 
$3,500 multiplied by the sum of: (1) The number of miles of railroad 
track owned or leased by the Class II railroad or Class III railroad 
within the United States at the close of its taxable year (``eligible 
railroad track''), reduced by the number of miles of eligible railroad 
track assigned by the Class II railroad or Class III railroad to 
another eligible taxpayer for that year; and (2) the number of miles of 
eligible railroad track owned or leased by another Class II railroad or 
Class III railroad that are assigned to the Class II railroad or Class 
III railroad for the taxable year.
    If an eligible taxpayer is not a Class II railroad or Class III 
railroad, the temporary regulations provide that the RTMC cannot exceed 
$3,500 multiplied

[[Page 53011]]

by the number of miles of eligible railroad track assigned to the 
eligible taxpayer by a Class II railroad or Class III railroad for the 
taxable year.

Determination of QRTME Paid or Incurred

    The temporary regulations provide that QRTME is equal to the amount 
of expenditures paid or incurred during the taxable year by an eligible 
taxpayer for maintaining railroad track, roadbed, bridges, and related 
track structures that are located within the United States and owned or 
leased as of January 1, 2005, by a Class II railroad or Class III 
railroad. These expenditures may or may not be chargeable to a capital 
account. The regulations also define railroad track, roadbed, bridges, 
and related track structures as meaning property described in certain 
STB property accounts (``qualifying railroad structure'').
    The temporary regulations also define the term ``paid or incurred'' 
with respect to a taxpayer using an accrual method of accounting. In 
this case, paid or incurred means a liability incurred within the 
meaning of Sec.  1.446-1(c)(1)(ii). Consequently, a liability may not 
be taken into account under section 45G prior to the taxable year 
during which the liability is incurred. Further, the temporary 
regulations provide that QRTME is not paid or incurred during the 
taxable year to the extent that a taxpayer is entitled to reimbursement 
of any such expenditures. The temporary regulations provide that 
reimbursements may consist of amounts paid either directly or 
indirectly to the taxpayer. Examples of indirect reimbursements are 
discounted freight shipping rates, price markups of railroad-related 
property, debt forgiveness, or other similar arrangements. Thus, the 
temporary regulations limit the QRTME paid or incurred to the actual 
out-of-pocket expenditures paid or incurred by a taxpayer.
    If an eligible taxpayer (assignee) pays a Class II railroad or 
Class III railroad (assignor) an amount in exchange for an assignment 
of one or more miles of eligible railroad track, the temporary 
regulations provide that the amount is treated as QRTME paid or 
incurred by the assignee, and not the assignor railroad, at the time 
and to the extent the assignor pays or incurs QRTME. Consistent with 
the preceding paragraph, this QRTME would be reduced by any direct or 
indirect reimbursements made to the assignee during the taxable year 
with respect to that assignment.

Assignment of Railroad Track Miles

    For purposes of section 45G, the temporary regulations provide that 
an assignment of a mile of railroad track is not a legal transfer of 
title, but merely a designation. This designation must be in writing 
and must include the names and taxpayer identification numbers of the 
Class II railroad or Class III railroad (assignor) making, and the 
eligible taxpayer (assignee) receiving, the assignment of eligible 
railroad track miles, the date of this assignment, and the number of 
miles of eligible railroad track that is assigned by the assignor to 
the assignee for a taxable year. The regulations also provide that the 
designation need not specify the location of the assigned mile of 
eligible railroad track and the assigned mile of eligible railroad 
track does not have to correspond to the mile of eligible railroad 
track on which the QRTME is paid or incurred by an eligible taxpayer.
    Consistent with section 45G(b), the temporary regulations provide 
that only a Class II railroad or Class III railroad may assign a mile 
of eligible railroad track. Thus, if a Class II railroad or Class III 
railroad assigns a railroad track mile to an eligible taxpayer, the 
assignee is not permitted to reassign any eligible railroad track mile 
to another eligible taxpayer. The regulations also provide that the 
maximum number of miles of eligible railroad track that may be assigned 
by a Class II railroad or Class III railroad (assignor) for any taxable 
year are the total miles of eligible railroad track owned by, or leased 
to, the assignor reduced by the eligible railroad track miles that the 
assignor retains for itself in determining the RTMC.
    The temporary regulations also provide that the assignment is 
treated as being made by the Class II railroad or Class III railroad at 
the close of Class II railroad's or Class III railroad's taxable year 
in which the assignment is made. The assignee takes the assignment into 
account for its taxable year that includes the date the assignment is 
treated as being made by the assignor railroad under the preceding 
sentence.
    The temporary regulations require that a taxpayer must file Form 
8900, ``Qualified Railroad Track Maintenance Credit,'' with its timely 
filed (including extensions) Federal income tax return for the taxable 
year for which the taxpayer: (1) Claims the RTMC; (2) assigns any miles 
of eligible railroad track; or (3) receives an assignment of any miles 
of eligible railroad track. Thus, for example, a Class II railroad or 
Class III railroad (assignor) that assigns all of its miles of eligible 
railroad track during a taxable year will need to file Form 8900 even 
though the assignor is not claiming any RTMC for that year.
    As required by the temporary regulations, an assignor must attach 
to its Form 8900 an information statement identifying the name and 
taxpayer identification number (TIN) of each assignee, the total number 
of the assignor's eligible railroad track miles, the number of eligible 
railroad track miles assigned by the assignor to each assignee for the 
taxable year, and the total number of eligible railroad track miles 
assigned by the assignor to all assignees for the taxable year. 
Further, an eligible taxpayer (assignee) that received an assignment of 
railroad track miles during its taxable year from an assignor Class II 
railroad or Class III railroad and that claims the RTMC for that 
taxable year must attach to its Form 8900 a statement providing the 
total number of eligible railroad track miles assigned to the assignee 
for the taxable year and attesting that the assignee has in writing, 
and has retained as part of the assignee's records for purposes of 
Sec.  1.6001-1(a), information identifying the name and TIN of each 
assignor railroad, the date of each assignment, and the number of 
eligible railroad track miles assigned by each assignor railroad for 
the assignee's taxable year. If the Federal income tax return of a 
Class II railroad or Class III railroad, or another eligible taxpayer, 
for a taxable year ending after December 31, 2004, and ending before 
September 7, 2006, is filed before October 10, 2006, and the Class II 
railroad, Class III railroad, or other eligible taxpayer wants to apply 
the temporary regulations to that taxable year but did not include with 
that return the applicable information statement specified above, the 
regulations require the information statement to be attached to the 
taxpayer's next filed Federal income tax return or to the taxpayer's 
amended Federal income tax return filed pursuant to the effective date 
provisions in the temporary regulations (discussed later), provided 
this amended return is filed before the taxpayer's next filed Federal 
income tax return.
    The temporary regulations also address situations in which a Class 
II railroad or Class III railroad (assignor) assigns more miles of 
eligible railroad track than the total number of miles that it owns or 
that are leased to it at the end of the taxable year in which the 
assignment is made. If the assignor does not own or have leased to it 
any eligible railroad track at the end of that year, the temporary 
regulations provide that any assignment made during that year is not 
valid, regardless of whether the

[[Page 53012]]

assignment is properly reported. Similarly, if an assignor assigns more 
miles of eligible railroad track than it owned or are leased to it as 
of the end of the taxable year in which the assignment is made, the 
temporary regulations provide that the assignment is valid only with 
respect to the name of the assignee and the number of miles listed by 
the assignor on the information statement attached to its Form 8900 for 
that year and only to the extent of the maximum number of miles of 
eligible railroad track that may be assigned by the assignor Class II 
railroad or Class III railroad for the taxable year.

Special Rules

    The temporary regulations provide rules for adjusting basis for the 
amount of the RTMC claimed by an eligible taxpayer. All or some of the 
QRTME paid or incurred by an eligible taxpayer during the taxable year 
may be required to be capitalized under section 263(a) as a tangible 
asset or as an intangible asset (see, for example, Sec.  1.263(a)-
4(d)(8), which generally requires capitalization of amounts paid or 
incurred by a taxpayer to produce or improve real property owned by 
another). The basis of the tangible asset or intangible asset includes 
the capitalized amount of the QRTME. Thus, for purposes of section 
45G(e)(3), the regulations provide that railroad track is qualifying 
railroad structure (railroad track, roadbed, bridges, and related track 
structures) and intangible assets to which the QRTME is capitalized.
    Consequently, if an eligible taxpayer claims the RTMC, the 
temporary regulations provide that the adjusted basis of these tangible 
and intangible assets must be reduced by the amount of the RTMC 
allowable. This reduction is taken into account at the time the QRTME 
is paid or incurred by an eligible taxpayer and before the depreciation 
deduction is determined for the taxable year for which the RTMC is 
allowable. If the amount of the QRTME is capitalized to more than one 
asset (for example, railroad track and bridges), whether tangible or 
intangible, the reduction to the basis of these assets is allocated 
among each of the assets subject to the reduction in proportion to the 
unadjusted basis of each asset at the time the QRTME is paid or 
incurred during that taxable year.
    The temporary regulations also address the issue of how section 45G 
coordinates with section 61. Except as specifically provided in the 
Code, section 61 and Sec.  1.61-1(a) provide that gross income means 
all income from whatever source derived. Section 1.61-1(a) further 
provides that gross income includes income realized in any form, 
whether in money, property, or services. Section 45G does not provide, 
and its legislative history does not refer to, any exception to this 
rule. Accordingly, pursuant to section 61 and the regulations under 
section 61, the owner of the tangible assets (for example, railroad 
track and roadbed) with respect to which the QRTME is paid or incurred 
by another person that does not have a depreciable interest in those 
assets has gross income in the amount of that QRTME. However, the 
application of section 61 to QRTME paid or incurred with respect to 
eligible railroad track that is leased by a Class II railroad or Class 
III railroad raises a question as to under what circumstances the owner 
or lessee should recognize gross income with respect to QRTME. The IRS 
and Treasury Department request comments on this issue.
    Finally, if an eligible taxpayer is a member of a controlled group 
of corporations, section 45G(e)(2) provides that rules similar to rules 
of section 41(f)(1) apply. Accordingly, the temporary regulations 
provide rules similar to those of Sec.  1.41-6T for determining the 
amount of the controlled group's RTMC, and rules for allocating the 
credit among members of the group.

Effective Date

    These temporary regulations apply to taxable years ending on or 
after the date these regulations are filed in the Federal Register and 
beginning before January 1, 2008. However, a taxpayer may apply the 
temporary regulations to taxable years beginning after December 31, 
2004, and ending before these regulations are filed in the Federal 
Register, provided that the taxpayer applies all provisions in these 
regulations to the taxable year.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations. For the 
applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), 
please refer to the Special Analyses section of the preamble to the 
cross-reference notice of proposed rulemaking published in the Proposed 
Rules section in this issue of the Federal Register. Pursuant to 
section 7805(f), these temporary regulations have been submitted to the 
Chief Counsel for Advocacy of the Small Business Administration for 
comment on their impact on small business.

Drafting Information

    The principal author of these regulations is Winston H. Douglas, 
Office of the Associate Chief Counsel (Passthroughs and Special 
Industries). However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Amendments to the Regulations

0
Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *


0
Par. 2. Section 1.45G-0T is added to read as follows:


Sec.  1.45G-0T  Table of contents for the railroad track maintenance 
credit rules (temporary).

    This section lists the major paragraphs contained in Sec.  1.45G-
1T.


Sec.  1.45G-1T  Railroad track maintenance credit (temporary).

    (a) In general.
    (b) Definitions.
    (1) Class II railroad and Class III railroad.
    (2) Eligible railroad track.
    (3) Eligible taxpayer.
    (4) Qualifying railroad structure.
    (5) Qualified railroad track maintenance expenditures.
    (6) Rail facilities.
    (7) Railroad-related property.
    (8) Railroad-related services.
    (9) Railroad track.
    (10) Form 8900.
    (11) Examples.
    (c) Determination of amount of railroad track maintenance credit 
for the taxable year.
    (1) General amount.
    (2) Limitation on the credit.
    (i) Eligible taxpayer is a Class II railroad or Class III railroad.
    (ii) Eligible taxpayer is not a Class II railroad or Class III 
railroad.
    (iii) Effect of double track.
    (3) Determination of amount of QRTME paid or incurred.

[[Page 53013]]

    (i) In general.
    (ii) Effect of reimbursements.
    (4) Examples.
    (d) Assignment of track miles.
    (1) In general.
    (2) Assignment eligibility.
    (3) Effective date of assignment.
    (4) Assignment information statement.
    (i) In general.
    (ii) Assignor.
    (iii) Assignee.
    (iv) Special rule for 2005 returns.
    (5) Special rules.
    (i) Effect of subsequent dispositions of eligible railroad track 
during the assignment year.
    (ii) Effect of multiple assignments of eligible railroad track 
miles during the same taxable year.
    (6) Examples.
    (e) Special rules.
    (1) Adjustments to basis.
    (i) In general.
    (ii) Basis adjustment made to railroad track.
    (iii) Examples.
    (2) Coordination with section 61.
    (f) Controlled groups.
    (1) In general.
    (2) Definitions.
    (i) Trade or business.
    (ii) Group and controlled group.
    (iii) Group credit.
    (iv) Consolidated group.
    (v) Credit year.
    (3) Computation of the group credit.
    (4) Allocation of the group credit.
    (i) In general.
    (ii) Stand-alone entity credit.
    (5) Special rules for consolidated groups.
    (i) In general.
    (ii) Special rule for allocation of group credit among consolidated 
group members.
    (6) Tax accounting periods used.
    (i) In general.
    (ii) Special rule when timing of QRTME is manipulated.
    (7) Membership during taxable year in more than one group.
    (8) Intra-group transactions.
    (i) In general.
    (ii) Payment for QRTME.
    (g) Effective date.
    (1) In general.
    (2) Application of regulation project REG-142270-05 to pre-
effective date.
    (3) Special rules for 2005 returns.

0
Par. 3. Section 1.45G-1T is added to read as follows:


Sec.  1.45G-1T  Railroad track maintenance credit (temporary).

    (a) In general. For purposes of section 38, the railroad track 
maintenance credit (RTMC) for qualified railroad track maintenance 
expenditures (QRTME) paid or incurred by an eligible taxpayer during 
the taxable year is determined under this section. A taxpayer claiming 
the RTMC must do so by filing Form 8900, ``Qualified Railroad Track 
Maintenance Credit,'' with its timely filed (including extensions) 
Federal income tax return for the taxable year for which the RTMC is 
claimed. Paragraph (b) of this section provides definitions of terms. 
Paragraph (c) of this section provides rules for computing the RTMC, 
including rules regarding limitations on the amount of the credit. 
Paragraph (d) of this section provides rules for assigning miles of 
railroad track. Paragraph (e) of this section contains special rules. 
Paragraph (f) of this section contains rules for computing the amount 
of the RTMC in the case of a controlled group, and for the allocation 
of the group credit among members of the controlled group.
    (b) Definitions. For purposes of section 45G and this section, the 
following definitions apply:
    (1) Class II railroad and Class III railroad have the respective 
meanings given to these terms by the Surface Transportation Board 
(STB).
    (2) Eligible railroad track is railroad track located within the 
United States that is owned or leased by a Class II railroad or Class 
III railroad at the close of its taxable year. For purposes of section 
45G and this section, a Class II railroad or Class III railroad owns 
railroad track if the railroad track is subject to the allowance for 
depreciation under section 167 by the Class II railroad or Class III 
railroad.
    (3) Eligible taxpayer is--
    (i) A Class II railroad or Class III railroad during the taxable 
year;
    (ii) Any person that transports property using the rail facilities 
of a Class II railroad or Class III railroad during the taxable year, 
but only with respect to the miles of eligible railroad track assigned 
to the person for that taxable year by that Class II railroad or Class 
III railroad under paragraph (d) of this section; or
    (iii) Any person that furnishes railroad-related property or 
railroad-related services to a Class II railroad or Class III railroad 
during the taxable year, but only with respect to the miles of eligible 
railroad track assigned to the person for that taxable year by that 
Class II railroad or Class III railroad under paragraph (d) of this 
section.
    (4) Qualifying railroad structure is property located within the 
United States that is described in the following STB property accounts 
in 49 CFR part 1201, subpart A:
    (i) Property Account 3, Grading.
    (ii) Property Account 4, Other right-of-way expenditures.
    (iii) Property Account 5, Tunnels and subways.
    (iv) Property Account 6, Bridges, trestles, and culverts.
    (v) Property Account 7, Elevated structures.
    (vi) Property Account 8, Ties.
    (vii) Property Account 9, Rails and other track material.
    (viii) Property Account 11, Ballast.
    (ix) Property Account 13, Fences, snowsheds, and signs.
    (x) Property Account 27, Signals and interlockers.
    (xi) Property Account 39, Public improvements; construction.
    (5) Qualified railroad track maintenance expenditures (QRTME) are 
expenditures for maintaining, repairing, and improving qualifying 
railroad structure that is owned or leased as of January 1, 2005, by a 
Class II railroad or Class III railroad. These expenditures may or may 
not be chargeable to a capital account.
    (6) Rail facilities of a Class II railroad or Class III railroad 
are railroad yards, tracks, bridges, tunnels, wharves, docks, stations, 
and other related assets that are used in the transport of freight by a 
railroad and that are owned or leased by the Class II railroad or Class 
III railroad.
    (7) Railroad-related property is property that is provided directly 
to, and is unique to, a railroad and that, in the hands of a Class II 
railroad or Class III railroad, is described in--
    (i) The STB property accounts 3, Grading; 5, Tunnels and subways; 
and 22, Storage warehouses, in 49 CFR part 1201, subpart A; and
    (ii) Asset classes 40.1 through 40.54 in the guidance issued by the 
Internal Revenue Service under section 168(i)(1) (for further guidance, 
for example, see Rev. Proc. 87-56 (1987-2 CB 674), and Sec.  
601.601(d)(2)(ii)(b) of this chapter), except that any office building, 
any passenger train car, and any miscellaneous structure if such 
structure is not provided directly to, and is not unique to, a railroad 
are excluded from the definition of railroad-related property.
    (8) Railroad-related services are services that are provided 
directly to, and are unique to, a railroad and that relate to railroad 
shipping, loading and unloading of railroad freight, or repairs of rail 
facilities or railroad-related property. Examples of railroad-related 
services are the transport of freight by rail; the loading and 
unloading of freight transported by rail; railroad bridge services; 
railroad track construction; providing railroad track material or 
equipment; locomotive leasing or rental; maintenance of railroad's 
right-of-way (including vegetation control);

[[Page 53014]]

piggyback trailer ramping; rail deramping services; and freight train 
cars repair services. Examples of services that are not railroad-
related services are general business services, such as, accounting and 
bookkeeping, marketing, legal services; cleaning services; office 
building rental; banking services (including financing of railroad-
related property); and purchasing of, or services performed on, 
property not described in paragraph (b)(7) of this section.
    (9) Except as provided in paragraph (e)(1) of this section, 
railroad track is property described in STB property accounts 8 (ties), 
9 (rails and other track material), and 11 (ballast) in 49 CFR part 
1201, subpart A.
    (10) Form 8900. If Form 8900 is revised or renumbered, any 
reference in this section to that form shall be treated as a reference 
to the revised or renumbered form.
    (11) Examples. The application of this paragraph (b) is illustrated 
by the following examples. In all examples, the taxpayers use a 
calendar taxable year, and are not members of a controlled group:

    Example 1.  A is a manufacturer that in 2006, transports its 
products by rail using the railroad tracks owned by B, a Class II 
railroad that owns 500 miles of railroad track within the United 
States on December 31, 2006. B properly assigns for purposes of 
section 45G 100 miles of eligible railroad track to A in 2006. A is 
an eligible taxpayer for 2006 with respect to the 100 miles of 
eligible railroad track.
    Example 2.  C is a bank that loans money to several Class III 
railroads. In 2006, C loans money to D, a Class III railroad, who in 
turn uses the loan proceeds to purchase track material. Because 
providing loans is not a service that is unique to a railroad, C is 
not providing railroad-related services and, thus, C is not an 
eligible taxpayer, even if D assigns miles of eligible railroad 
track to C for purposes of section 45G.
    Example 3.  E leases locomotives directly to Class I, Class II, 
and Class III railroads. In 2006, E leases locomotives to F, a Class 
II railroad that owns 200 miles of railroad track within the United 
States on December 31, 2006. F properly assigns for purposes of 
section 45G 200 miles of eligible railroad track to E. Because 
locomotives are property that is unique to a railroad, and E leases 
these locomotives directly to F in 2006, E is an eligible taxpayer 
for 2006 with respect to the 200 miles of eligible railroad track 
assigned to E by F.

    (c) Determination of amount of railroad track maintenance credit 
for the taxable year--(1) General amount. Except as provided in 
paragraph (c)(2) of this section, for purposes of section 38, the RTMC 
determined under section 45G(a) for the taxable year is equal to 50 
percent of the QRTME paid or incurred (as determined under paragraph 
(c)(3) of this section) by an eligible taxpayer during the taxable 
year.
    (2) Limitation on the credit--(i) Eligible taxpayer is a Class II 
railroad or Class III railroad. If an eligible taxpayer is a Class II 
railroad or Class III railroad, the RTMC determined under paragraph 
(c)(1) of this section for the Class II railroad or Class III railroad 
for any taxable year must not exceed $3,500 multiplied by the sum of--
    (A) The number of miles of eligible railroad track owned or leased 
by the Class II railroad or Class III railroad, reduced by the number 
of miles of eligible railroad track assigned under paragraph (d) of 
this section by the Class II railroad or Class III railroad to another 
eligible taxpayer for that taxable year; and
    (B) The number of miles of eligible railroad track owned or leased 
by another Class II railroad or Class III railroad that are assigned 
under paragraph (d) of this section to the Class II railroad or Class 
III railroad for the taxable year.
    (ii) Eligible taxpayer is not a Class II railroad or Class III 
railroad. If an eligible taxpayer is not a Class II railroad or Class 
III railroad, the RTMC determined under paragraph (c)(1) of this 
section for the eligible taxpayer for any taxable year must not exceed 
$3,500 multiplied by the number of miles of eligible railroad track 
assigned under paragraph (d) of this section by a Class II railroad or 
Class III railroad to the eligible taxpayer for the taxable year.
    (iii) Effect of double track. For purposes of this paragraph 
(c)(2), double track is treated as multiple lines of railroad track, 
rather than as a single line of railroad track. Thus, one mile of 
single track is one mile, but one mile of double track is two miles.
    (3) Determination of amount of QRTME paid or incurred--(i) In 
general. The term paid or incurred means, in the case of a taxpayer 
using an accrual method of accounting, a liability incurred (within the 
meaning of Sec.  1.446-1(c)(1)(ii)). A liability may not be taken into 
account under section 45G and this section prior to the taxable year 
during which the liability is incurred.
    (ii) Effect of reimbursements. The amount of QRTME treated as paid 
or incurred during the taxable year shall be reduced by any amount to 
which the taxpayer is entitled to be reimbursed, directly or 
indirectly, whether or not such reimbursement takes place during the 
taxable year in which the QRTME is, but for this sentence, paid or 
incurred by the taxpayer. Examples of indirect reimbursements include 
discounted freight shipping rates, markup of the price for track 
materials, and debt forgiveness. Similarly, any amount that an eligible 
taxpayer (assignee) pays a Class II railroad or Class III railroad 
(assignor) in exchange for an assignment of one or more miles of 
eligible railroad track under paragraph (d) of this section, is 
treated, for purposes of this section, as QRTME paid or incurred by the 
assignee, and not by the assignor, at the time and to the extent the 
assignor pays or incurs QRTME.
    (4) Examples. The application of this paragraph (c) is illustrated 
by the following examples. In all examples, the taxpayers use an 
accrual method of accounting and a calendar taxable year, and are not 
members of a controlled group:

    Example 1. Computation of RTMC; section 45G credit limitation is 
not exceeded. (i) G is a Class II railroad that owns or has leased 
to it 1,000 miles of railroad track within the United States on 
December 31, 2006. H is a manufacturer that in 2006, transports its 
products by rail using the rail facilities of G. In 2006, for 
purposes of section 45G, G assigns 100 miles of eligible railroad 
track to H and does not make any other assignments of railroad track 
miles. H did not receive any other assignments of railroad track 
miles in 2006. During 2006, G incurred QRTME in the amount of $2.5 
million and H incurred QRTME in the amount of $200,000.
    (ii) For 2006, G determines the tentative amount of RTMC under 
paragraph (c)(1) of this section to be $1,250,000 (50% multiplied by 
$2,500,000 QRTME incurred by G during 2006). G further determines 
G's credit limitation under paragraph (c)(2)(i) of this section for 
2006 to be $3,150,000 ($3,500 multiplied by 900 miles of eligible 
railroad track (1,000 miles owned by, or leased to, G on December 
31, 2006, less 100 miles assigned by G to H in 2006)). Because G's 
tentative amount of RTMC does not exceed G's credit limitation 
amount for 2006, G may claim a RTMC for 2006 in the amount of 
$1,250,000.
    (iii) For 2006, H determines the tentative amount of RTMC under 
paragraph (c)(1) of this section to be $100,000 (50% multiplied by 
$200,000 QRTME incurred by H during 2006). H further determines H's 
credit limitation under paragraph (c)(2)(ii) of this section for 
2006 to be $350,000 ($3,500 multiplied by 100 miles of eligible 
railroad track assigned by G to H in 2006). Because H's tentative 
amount of RTMC does not exceed H's credit limitation amount for 
2006, H may claim a RTMC in the amount of $100,000.
    Example 2. Computation of RTMC; section 45G credit limitation is 
exceeded. (i) The facts are the same as in Example 1, except that G 
assigned for purposes of section 45G only 50 miles of railroad track 
to H in 2006 and, during 2006, H incurred QRTME in the amount of 
$400,000.
    (ii) For 2006, G determines the tentative amount of RTMC under 
paragraph (c)(1) of this section to be $1,250,000 (50% multiplied by 
$2,500,000 QRTME incurred by G during 2006). G further determines 
G's credit

[[Page 53015]]

limitation under paragraph (c)(2)(i) of this section for 2006 to be 
$3,325,000 ($3,500 multiplied by 950 miles of eligible railroad 
track (1,000 miles owned by, or leased to, G on December 31, 2006, 
less 50 miles assigned by G to H in 2006)). Because G's tentative 
amount of RTMC does not exceed G's credit limitation amount for 
2006, G may claim a RTMC in the amount of $1,250,000.
    (iii) For 2006, H determines the tentative amount of RTMC under 
paragraph (c)(1) of this section to be $200,000 (50% multiplied by 
$400,000 QRTME incurred by H during 2006). H further determines H's 
credit limitation under paragraph (c)(2)(ii) of this section for 
2006 to be $175,000 ($3,500 multiplied by 50 miles of eligible 
railroad track assigned by G to H in 2006). Because H's tentative 
amount of RTMC exceeds H's credit limitation amount for 2006, H may 
claim a RTMC in the amount of $175,000 (the credit limitation 
amount). There is no carryover of the amount of $25,000 (the 
tentative amount of $200,000 less the credit limitation amount of 
$175,000).
    Example 3. Railroad track miles assigned for payment. (i) J is a 
Class II railroad that owns or has leased to it 1,000 miles of 
railroad track within the United States on December 31, 2006. K is a 
corporation that sells ties, ballast, and other track material to 
Class I, Class II, and Class III railroads. During 2006, K sold 
these items to J and J incurred QRTME in the amount of $1 million. 
Also, on December 6, 2006, J assigned for purposes of section 45G 
150 miles of eligible railroad track to K and K paid J $800,000 for 
that assignment. K did not pay or incur any QRTME during 2006.
    (ii) For 2006, in accordance with paragraph (c)(3)(ii) of this 
section, J is treated as having incurred QRTME in the amount of 
$200,000 ($1 million QRTME actually incurred by J less the $800,000 
paid by K to J for the assignment of the railroad track miles in 
2006). For 2006, J determines the tentative amount of RTMC under 
paragraph (c)(1) of this section to be $100,000 (50% multiplied by 
$200,000 QRTME treated as incurred by J during 2006). J further 
determines J's credit limitation amount under paragraph (c)(2)(i) of 
this section for 2006 to be $2,975,000 ($3,500 multiplied by 850 
miles of eligible railroad track (1,000 miles owned by, or leased 
to, J on December 31, 2006, less 150 miles assigned by J to K in 
2006)). Because J's tentative amount of RTMC does not exceed J's 
credit limitation amount for 2006, J may claim a RTMC in the amount 
of $100,000.
    (iii) For 2006, K is an eligible taxpayer because, during 2006, 
K provided railroad-related property to J and received an assignment 
of eligible railroad track miles from J. Under paragraph (c)(3)(ii) 
of this section, K is treated as having incurred QRTME in the amount 
of $800,000 (the amount paid by K to J for the assignment of the 
railroad track miles in 2006). For 2006, K determines the tentative 
amount of RTMC under paragraph (c)(1) of this section to be $400,000 
(50% multiplied by $800,000 QRTME treated as incurred by K during 
2006). K further determines K's credit limitation amount under 
paragraph (c)(2)(ii) of this section for 2006 to be $525,000 ($3,500 
multiplied by 150 miles of eligible railroad track assigned by J in 
2006). Because K's tentative amount of RTMC does not exceed K's 
credit limitation amount for 2006, K may claim a RTMC in the amount 
of $400,000.
    Example 4. Reimbursement of QRTME. (i) L is a Class III railroad 
that owns or has leased to it 500 miles of railroad track within the 
United States on December 31, 2006. M is a manufacturer that in 2006 
transports its products by rail using the rail facilities of L. 
During 2006, L did not incur any QRTME. Also, in 2006, L assigned 
for purposes of section 45G 200 miles of eligible railroad track to 
M and agreed to reduce L's freight shipping rates to M by $250,000 
in exchange for M upgrading these railroad track miles. 
Consequently, during 2006, M incurred QRTME of $500,000 to upgrade 
these 200 miles of railroad track and L reduced L's freight shipping 
rates for M by $250,000.
    (ii) For 2006, M is an eligible taxpayer because, during 2006, M 
transported property using the rail facilities of L and received an 
assignment of eligible railroad track miles from L. Under paragraph 
(c)(3)(ii) of this section, the amount of QRTME paid or incurred by 
M during 2006 is $250,000 ($500,000 QRTME actually incurred by M, 
less the reimbursement of $250,000 by L to M). For 2006, M 
determines the tentative amount of RTMC under paragraph (c)(1) of 
this section to be $125,000 (50% multiplied by $250,000 QRTME 
incurred by M during 2006). M further determines M's credit 
limitation amount under paragraph (c)(2)(ii) of this section for 
2006 to be $700,000 ($3,500 multiplied by 200 miles of eligible 
railroad track assigned by L to M in 2006). Because M's tentative 
amount of RTMC does not exceed M's credit limitation amount for 
2006, M may claim a RTMC in the amount of $125,000.

    (d) Assignment of track miles--(1) In general. An assignment of any 
mile of eligible railroad track under this paragraph (d) is a 
designation by a Class II railroad or Class III railroad that is made 
solely for purposes of section 45G and this section of a specific 
number of miles of eligible railroad track as being assigned to another 
eligible taxpayer for a taxable year. A designation must be in writing 
and must include the name and taxpayer identification number of the 
assignee, and the information required under the rules of paragraph 
(d)(4)(iii)(B) of this section. A designation requires no transfer of 
legal title or other indicia of ownership of the eligible railroad 
track, and need not specify the location of any assigned mile of 
eligible railroad track. Further, an assigned mile of eligible railroad 
track need not correspond to any specific mile of eligible railroad 
track with respect to which the eligible taxpayer actually pays or 
incurs the QRTME. For purposes of this paragraph (d), double track is 
treated as multiple lines of railroad track, rather than as a single 
line of railroad track. Thus, one mile of single track is one mile, but 
one mile of double track is two miles.
    (2) Assignment eligibility. Only a Class II railroad or Class III 
railroad may assign a mile of eligible railroad track. If a Class II 
railroad or Class III railroad assigns a mile of eligible railroad 
track to an eligible taxpayer, the assignee is not permitted to 
reassign any mile of eligible railroad track to another eligible 
taxpayer. The maximum number of miles of eligible railroad track that 
may be assigned by a Class II railroad or Class III railroad for any 
taxable year is its total miles of eligible railroad track less the 
miles of eligible railroad track that the Class II railroad or Class 
III railroad retains for itself in determining its RTMC for the taxable 
year.
    (3) Effective date of assignment. If a Class II railroad or Class 
III railroad assigns a mile of eligible railroad track, the assignment 
is treated as being made by the Class II railroad or Class III railroad 
at the close of its taxable year in which the assignment was made. With 
respect to the assignee, the assignment of a mile of eligible railroad 
track is taken into account for the taxable year of the assignee that 
includes the date the assignment is treated as being made by the 
assignor Class II railroad or Class III railroad under this paragraph 
(d)(3).
    (4) Assignment information statement--(i) In general. A taxpayer 
must file Form 8900, ``Qualified Railroad Track Maintenance Credit,'' 
with its timely filed (including extensions) Federal income tax return 
for the taxable year for which the taxpayer assigns any mile of 
eligible railroad track, even if the taxpayer is not itself claiming 
the RTMC for that taxable year.
    (ii) Assignor. Except as provided in paragraph (d)(4)(iv) of this 
section, a Class II railroad or Class III railroad (assignor) that 
assigns one or more miles of eligible railroad track during a taxable 
year to one or more eligible taxpayers must attach to the assignor's 
Form 8900 for that taxable year an information statement providing--
    (A) The name and taxpayer identification number of each assignee;
    (B) The total number of miles of the assignor's eligible railroad 
track;
    (C) The number of miles of eligible railroad track assigned by the 
assignor to each assignee for the taxable year; and
    (D) The total number of miles of eligible railroad track assigned 
by the assignor to all assignees for the taxable year.
    (iii) Assignee. Except as provided in paragraph (d)(4)(iv) of this 
section, an eligible taxpayer (assignee) that has

[[Page 53016]]

received an assignment of miles of eligible railroad track during its 
taxable year from a Class II railroad or Class III railroad, and that 
claims the RTMC for that taxable year, must attach to the assignee's 
Form 8900 for that taxable year a statement--
    (A) Providing the total number of miles of eligible railroad track 
assigned to the assignee for the assignee's taxable year; and
    (B) Attesting that the assignee has in writing, and has retained as 
part of the assignee's records for purposes of Sec.  1.6001-1(a), the 
following information from each assignor:
    (1) The name and taxpayer identification number of each assignor;
    (2) The date of each assignment made by each assignor (as 
determined under paragraph (d)(3) of this section) to the assignee; and
    (3) The number of miles of eligible railroad track assigned by each 
assignor to the assignee for the assignee's taxable year.
    (iv) Special rule for 2005 returns. If an eligible taxpayer's 
Federal income tax return for a taxable year beginning after December 
31, 2004, and ending before September 7, 2006, is filed before October 
10, 2006, and the eligible taxpayer wants to apply paragraph (g)(2) of 
this section but did not include with that return the information 
specified in paragraph (d)(4)(ii) or (iii) of this section, as 
applicable, the eligible taxpayer must attach a statement containing 
the information specified in paragraph (d)(4)(ii) or (iii) of this 
section, as applicable, to either--
    (A) The eligible taxpayer's next filed original Federal income tax 
return; or
    (B) The eligible taxpayer's amended Federal income tax return that 
is filed pursuant to paragraph (g)(2) of this section, provided that 
amended Federal income tax return is filed by the eligible taxpayer 
before its next filed original Federal income tax return.
    (5) Special rules--(i) Effect of subsequent dispositions of 
eligible railroad track during the assignment year. If a Class II 
railroad or Class III railroad assigns one or more miles of eligible 
railroad track that it owned or leased as of the actual date of the 
assignment, but does not own or lease any eligible railroad track at 
the close of the taxable year in which the assignment is made by the 
Class II railroad or Class III railroad, the assignment is not valid 
for that taxable year for purposes of section 45G and this section.
    (ii) Effect of multiple assignments of eligible railroad track 
miles during the same taxable year. If a Class II railroad or Class III 
railroad assigns more miles of eligible railroad track than it owned or 
leased as of the close of the taxable year in which the assignment is 
made by the Class II railroad or Class III railroad, the assignment is 
valid for purposes of section 45G and this section only with respect to 
the name of the assignee and the number of miles listed by the assignor 
Class II railroad or Class III railroad on the statement required under 
paragraph (d)(4)(ii) of this section and only to the extent of the 
maximum miles of eligible railroad track that may be assigned by the 
assignor Class II railroad or Class III railroad as determined under 
paragraph (d)(2) of this section. If the total number of miles on this 
statement exceeds the maximum miles of eligible railroad track that may 
be assigned by the assignor Class II railroad or Class III railroad (as 
determined under paragraph (d)(2) of this section), the total number of 
miles on the statement shall be reduced by the excess amount of miles. 
This reduction is allocated among each assignee listed on the statement 
in proportion to the total number of miles listed on the statement for 
that assignee.
    (6) Examples. The application of this paragraph (d) is illustrated 
by the following examples. In none of the examples are the taxpayers 
members of a controlled group:

    Example 1. Assignor and assignee have the same taxable year. (i) 
N, a calendar year taxpayer, is a Class II railroad that owns 500 
miles of railroad track within the United States on December 31, 
2006. O, a calendar year taxpayer, is not a railroad, but is a 
taxpayer that provides railroad-related property to N during 2006. 
On November 7, 2006, N assigns for purposes of section 45G 300 miles 
of eligible railroad track to O. O receives no other assignment of 
eligible railroad track in 2006. O pays or incurs QRTME in the 
amount of $100,000 in November 2006, and $50,000 in February 2007. N 
and O each file Form 8900 with their timely filed Federal income tax 
returns for 2006 and attach the statement required by paragraph 
(d)(4)(ii) and (iii), respectively, of this section reporting the 
assignment of the 300 miles of eligible railroad track to O.
    (ii) The assignment of the 300 miles of eligible railroad track 
made by N to O on November 7, 2006, is treated as made on December 
31, 2006 (at the close of the N's taxable year). Consequently, the 
assignment is taken into account by O for O's taxable year ending on 
December 31, 2006. For 2006, O is an eligible taxpayer because, 
during 2006, O provides railroad-related property to N and receives 
an assignment of 300 eligible railroad track miles from N. For 2006, 
O determines the tentative amount of RTMC under paragraph (c)(1) of 
this section to be $50,000 (50% multiplied by $100,000 QRTME paid or 
incurred by O during 2006). O further determines the credit 
limitation amount under paragraph (c)(2)(i) of this section for 2006 
to be $1,050,000 ($3,500 multiplied by 300 miles of eligible 
railroad track assigned by N to O on December 31, 2006). Because O's 
tentative amount of RTMC does not exceed O's credit limitation 
amount for 2006, O may claim a RMTC for 2006 in the amount of 
$50,000.
    Example 2. Assignor and assignee have different taxable years. 
(i) The facts are the same as in Example 1, except that O's taxable 
year ends on March 31.
    (ii) The assignment of the 300 miles of eligible railroad track 
made by N to O on November 7, 2006, is treated as made on December 
31, 2006. As a result, the assignment is taken into account by O for 
O's taxable year ending on March 31, 2007. Thus, for the taxable 
year ending on March 31, 2007, O determines the tentative amount of 
RMTC under paragraph (c)(1) of this section to be $75,000 (50% 
multiplied by $150,000 QRTME incurred by O during its taxable year 
ending March 31, 2007). Because O's tentative amount of RTMC does 
not exceed O's credit limitation amount for 2006, O may claim a RMTC 
for 2006 in the amount of $75,000.
    Example 3. Assignment location differs from QRTME location. (i) 
P, a calendar-year taxpayer, is a Class III railroad that owns or 
has leased to it 200 miles of railroad track within the United 
States on December 31, 2006. P owns 50 miles of this railroad track 
and leases 150 miles of this railroad track from Q, a Class I 
railroad. On February 8, 2006, P assigns for purposes of section 45G 
50 miles of eligible railroad track to R. R is not a railroad, but 
is a taxpayer that ships products using the 50 miles of eligible 
railroad track owned by P, and R paid $100,000 in 2006 to P to 
enable P to upgrade these 50 miles of eligible railroad track. In 
March 2006, P also assigns for purposes of section 45G 150 miles of 
eligible railroad track to S. S is not a railroad, but is a taxpayer 
that provides railroad-related property to P, and S paid $400,000 to 
P to enable P to upgrade P's 200 miles of eligible railroad track. 
For 2006, P pays or incurs QRTME in the amount of $500,000 to 
upgrade the 150 miles of eligible railroad track that it leases from 
Q and pays or incurs no QRTME on the 50 miles of eligible railroad 
track that it owns. For 2006, P receives no other assignment of 
eligible railroad track miles and did not retain any eligible 
railroad track miles for itself. Also, R and S do not pay or incur 
any other amounts that would qualify as QRTME during 2006. P, R, and 
S each file Form 8900 with their timely filed Federal income tax 
returns for 2006 and attach the statement required by paragraph 
(d)(4)(ii) or (iii) of this section, whichever applies, reporting 
the assignment of eligible railroad track by P to R or S in 2006.
    (ii) For 2006, in accordance with paragraph (c)(3)(ii) of this 
section, P is treated as having incurred QRTME in the amount of $0 
($500,000 QRTME actually incurred by P less the $100,000 paid by R 
to P for the assignment of the 50 miles of eligible railroad track 
and the $400,000 paid by S to P for the assignment of the 150 miles 
of eligible railroad track). Further, P assigned all of its eligible 
railroad track miles to R and S for 2006. Accordingly, for 2006, P 
may not claim any RTMC.

[[Page 53017]]

    (iii) For 2006, R is an eligible taxpayer because, during 2006, 
R ships property using the rail facilities of P and receives an 
assignment of 50 eligible railroad track miles from P. In accordance 
with paragraph (c)(3)(ii) of this section, R is treated as having 
incurred QRTME in the amount of $100,000 (the amount paid by R to P 
for the assignment of the eligible railroad track miles in 2006) 
even though no work was performed on the 50 miles of eligible 
railroad track that was assigned by P to R. For 2006, R determines 
the tentative amount of RTMC under paragraph (c)(1) of this section 
to be $50,000 (50% multiplied by $100,000 QRTME treated as incurred 
by R during 2006). R further determines the credit limitation amount 
under paragraph (c)(2)(ii) of this section to be $175,000 ($3,500 
multiplied by 50 miles of eligible railroad track assigned by P to R 
in 2006). Because R's tentative amount of RTMC does not exceed R's 
credit limitation amount for 2006, R may claim a RTMC for 2006 in 
the amount of $50,000.
    (iv) For 2006, S is an eligible taxpayer because, during 2006, S 
provides railroad-related property to P and receives an assignment 
of 150 eligible railroad track miles from P. In accordance with 
paragraph (c)(3)(ii) of this section, S is treated as having 
incurred QRTME in the amount of $400,000 (amount paid by S to P for 
the assignment of the eligible railroad track miles in 2006). For 
2006, S determines the tentative amount of RTMC under paragraph 
(c)(1) of this section to be $200,000 (50% multiplied by $400,000 
QRTME treated as incurred by S during 2006). S further determines 
the credit limitation amount under paragraph (c)(2)(ii) of this 
section to be $525,000 ($3,500 multiplied by 150 miles of eligible 
railroad track assigned by P to S in 2006). Because S's tentative 
amount of RTMC does not exceed S's credit limitation amount for 
2006, S may claim a RTMC for 2006 in the amount of $200,000.
    Example 4. Multiple assignments of track miles. (i) T, a 
calendar-year taxpayer, is a Class III railroad that owns or has 
leased to it 200 miles of railroad track within the United States on 
December 31, 2006. T owns 75 miles of this railroad track and leases 
125 miles of this railroad track from U, a Class I railroad. V and W 
are not railroads, but are both taxpayers that provide railroad-
related services to T during 2006. On January 15, 2006, T assigns 
for purposes of section 45G 200 miles of eligible railroad track to 
V. V agrees to incur, in 2006, $1.4 million of QRTME to upgrade a 
portion of/segment of these 200 miles of eligible railroad track. 
Due to unexpected financial difficulties, V only incurs $250,000 of 
QRTME during 2006 and on May 15, 2006, T learns that V is unable to 
incur the remainder of the QRTME. On June 15, 2006, T assigns for 
purposes of section 45G the 200 miles of railroad track to W. In 
2006, W incurs $1,100,000 of QRTME to upgrade a portion of/segment 
of the railroad track. For 2006, T receives no other assignment of 
eligible railroad track miles and did not retain any eligible 
railroad track miles for itself. V and W do not receive any other 
assignments of miles of eligible railroad track miles from a Class 
II railroad or Class III railroad during 2006. T and W each file 
Form 8900 with their timely filed Federal income tax returns for 
2006, and attach the statement required by paragraph (d)(4)(ii) and 
(iii), respectively, of this section, reporting the assignment of 
200 miles of eligible railroad track to W.
    (ii) Because T did not retain any miles of eligible railroad 
track for itself for 2006, the maximum miles of eligible railroad 
track that may be assigned by T for 2006 is 200 miles pursuant to 
paragraph (d)(2) of this section. On the statement required by 
paragraph (d)(4)(ii) of this section, T assigned a total of 200 
miles of eligible railroad track to W. Consequently, because T did 
not list V as an assignee on T's statement required by paragraph 
(d)(4)(ii) of this section, V did not receive an assignment of 
eligible railroad track miles from T during 2006 and V is not an 
eligible taxpayer for 2006. Thus, for 2006, V may not claim any RTMC 
even though V incurred QRTME in the amount of $250,000.
    (iii) For 2006, W is an eligible taxpayer because, during 2006, 
W provides railroad-related services to T and receives an assignment 
of 200 eligible railroad track miles from T. W determines the 
tentative amount of RTMC under paragraph (c)(1) of this section to 
be $550,000 (50% multiplied by $1,100,000 QRTME incurred by W during 
2006). W further determines the credit limitation amount under 
paragraph (c)(2)(ii) of this section to be $700,000 ($3,500 
multiplied by the 200 miles of eligible railroad track assigned by T 
to W in 2006). Because W's tentative amount of RTMC does not exceed 
W's credit limitation amount for 2006, W may claim a RTMC for 2006 
in the amount of $550,000.
    Example 5. Multiple assignments of track miles. (i) Same facts 
as in Example 4, except T, to its Form 8900 for 2006, attaches the 
statement required by paragraph (d)(4)(ii) of this section assigning 
200 miles of eligible railroad track to W and 200 miles of eligible 
railroad track to V.
    (ii) Because T did not retain any miles of eligible railroad 
track for itself for 2006, the maximum miles of eligible railroad 
track that may be assigned by T for 2006 is 200 miles pursuant to 
paragraph (d)(2) of this section. However, on the statement required 
by paragraph (d)(4)(ii) of this section, T assigned a total of 400 
miles of eligible railroad track (200 miles to W and 200 miles to 
V). Consequently, the 400 miles of eligible railroad track on this 
statement must be reduced to the 200 maximum miles of eligible 
railroad track available for assignment for 2006. Because the 
statement reports 200 miles of eligible railroad track assigned to 
each W and V, the reduction of 200 miles (400 total miles of 
eligible railroad track on the statement less 200 maximum miles of 
eligible railroad track available for assignment) is allocated pro-
rata between W and V and, therefore, 100 miles each to W and V. 
Thus, pursuant to paragraph (d)(5)(ii) of this section, the number 
of miles of eligible railroad track assigned by T to W and V for 
2006 is 100 miles each.
    (iii) For 2006, V is an eligible taxpayer because, during 2006, 
V provides railroad-related services to T and receives an assignment 
of 100 eligible railroad track miles from T. V determines the 
tentative amount of RTMC under paragraph (c)(1) of this section to 
be $125,000 (50% multiplied by $250,000 QRTME incurred by V during 
2006). V further determines the credit limitation amount under 
paragraph (c)(2)(ii) of this section to be $350,000 ($3,500 
multiplied by the 100 miles of eligible railroad track assigned by T 
to V in 2006). Because V's tentative amount of RTMC does not exceed 
W's credit limitation amount for 2006, V may claim a RTMC for 2006 
in the amount of $125,000.
    (iv) For 2006, W is an eligible taxpayer because, during 2006, W 
provides railroad-related services to T and receives an assignment 
of 100 eligible railroad track miles from T. W determines the 
tentative amount of RTMC under paragraph (c)(1) of this section to 
be $550,000 (50% multiplied by $1,100,000 QRTME incurred by W during 
2006). W further determines the credit limitation amount under 
paragraph (c)(2)(ii) of this section to be $350,000 ($3,500 
multiplied by the 100 miles of eligible railroad track assigned by T 
to W in 2006). Because W's tentative amount of RTMC exceeds W's 
credit limitation amount for 2006, W may claim a RTMC for 2006 in 
the amount of $350,000 (the credit limitation). There is no 
carryover of the amount of $200,000 (the tentative amount of 
$550,000 less the credit limitation amount of $350,000).

    (e) Special rules--(1) Adjustments to basis--(i) In general. All or 
some of the QRTME paid or incurred by an eligible taxpayer during the 
taxable year may be required to be capitalized under section 263(a) as 
a tangible asset or as an intangible asset. See, for example, Sec.  
1.263(a)-4(d)(8), which requires capitalization of amounts paid or 
incurred by a taxpayer to produce or improve real property owned by 
another (except to the extent the taxpayer is selling services at fair 
market value to produce or improve the real property) if the real 
property can reasonably be expected to produce significant economic 
benefits for the taxpayer. The basis of the tangible asset or 
intangible asset includes the capitalized amount of the QRTME.
    (ii) Basis adjustment made to railroad track. An eligible taxpayer 
must reduce the adjusted basis of any railroad track with respect to 
which the eligible taxpayer claims the RTMC. For purposes of section 
45G(e)(3) and this paragraph (e)(1), the adjusted basis of any railroad 
track with respect to which the eligible taxpayer claims the RTMC is 
limited to the amount of QRTME, if any, that is required to be 
capitalized into the qualifying railroad structure or an intangible 
asset. The adjusted basis of the railroad track is reduced by the 
amount of the RTMC allowable (as determined under paragraph (c) of this 
section) by the eligible taxpayer for the taxable year, but not below 
zero. This reduction is taken into account at the

[[Page 53018]]

time the QRTME is paid or incurred by an eligible taxpayer and before 
the depreciation deduction with respect to such railroad track is 
determined for the taxable year for which the RTMC is allowable. If all 
or some of the QRTME paid or incurred by an eligible taxpayer during 
the taxable year is capitalized under section 263(a) to more than one 
asset, whether tangible or intangible (for example, railroad track and 
bridges), the reduction to the basis of these assets under this 
paragraph (e)(1)(ii) is allocated among each of the assets subject to 
the reduction in proportion to the unadjusted basis of each asset at 
the time the QRTME is paid or incurred during that taxable year.
    (iii) Examples. The application of this paragraph (e)(1) is 
illustrated by the following examples. In each example, all taxpayers 
use a calendar taxable year, and no taxpayers are members of a 
controlled group.

    Example 1. (i) X is a Class II railroad that owns 500 miles of 
railroad track within the United States on December 31, 2006. During 
2006, X incurs $1 million of QRTME for maintaining this railroad 
track. X uses the track maintenance allowance method for track 
structure expenditures (for further guidance, see Rev. Proc. 2002-65 
(2002-2 CB 700) and Sec.  601.601(d)(2)(ii)(b) of this chapter). 
Assume all of the $1 million QRTME is track structure expenditures 
and none of it was expended for new track structure.
    (ii) For 2006, X determines the tentative amount of RTMC under 
paragraph (c)(1) of this section to be $500,000 (50% multiplied by 
$1 million QRTME incurred by X during 2006). X further determines 
the credit limitation amount under paragraph (c)(2)(i) of this 
section for 2006 to be $1,750,000 ($3,500 multiplied by 500 miles of 
eligible railroad track). Because X's tentative amount of RTMC does 
not exceed X's credit limitation amount for 2006, X may claim a RTMC 
for 2006 in the amount of $500,000.
    (iii) Of the $1 million QRTME incurred by X during 2006, X 
determines under the track maintenance allowance method that 
$750,000 is the track maintenance allowance under section 162 and 
$250,000 is the capitalized amount for the track structure. In 
accordance with paragraph (e)(1)(ii) of this section, X reduces the 
capitalized amount of $250,000 by the RTMC of $500,000 claimed by X 
for 2006, but not below zero. Thus, the capitalized amount of 
$250,000 is reduced to zero. X also deducts under section 162 a 
track maintenance allowance of $750,000 on its 2006 Federal income 
tax return.
    Example 2. (i) Y is a Class II railroad that owns or has leased 
to it 500 miles of eligible railroad track within the United States 
on December 31, 2006. Z is not a railroad, but is a taxpayer that, 
in 2006, transports its products using the rail facilities of Y. In 
2006, Y assigns for purposes of section 45G 300 miles of eligible 
railroad track to Z. Z does not receive any other assignments of 
eligible railroad track miles in 2006. During 2006, Z incurs QRTME 
in the amount of $1 million, and Y does not incur any QRTME. Y and Z 
each file Form 8900 with their timely filed Federal income tax 
returns for 2006 and attach the statement required by paragraph 
(d)(4)(ii) and (iii), respectively, of this section reporting the 
assignment of the 300 miles of eligible railroad track to Z.
    (ii) For 2006, Z determines the tentative amount of RTMC under 
paragraph (c)(1) of this section to be $500,000 (50% multiplied by 
$1 million QRTME incurred by Z during 2006). Z further determines 
the credit limitation amount under paragraph (c)(2)(ii) of this 
section for 2006 to be $1,050,000 ($3,500 multiplied by 300 miles of 
eligible railroad track assigned by Y to Z in 2006). Because Z's 
tentative amount of RTMC does not exceed Z's credit limitation 
amount for 2006, Z may claim a RTMC for 2006 in the amount of 
$500,000.
    (iii) For 2006, Z also must determine the portion of the $1 
million QRTME that Z incurs that is required to be capitalized under 
section 263(a), and the portion that is a section 162 expense. 
Because Z is not a Class II railroad or Class III railroad, Z cannot 
use the track maintenance allowance method. Assume that all of the 
QRTME constitutes an intangible asset under Sec.  1.263(a)-4(d)(8) 
and, therefore, is required to be capitalized by Z under section 
263(a) as an intangible asset. In accordance with paragraph 
(e)(1)(ii) of this section, Z reduces the capitalized amount of $1 
million by the RTMC of $500,000 claimed by Z for 2006. Thus, the 
capitalized amount of $1 million for the intangible asset is reduced 
to $500,000. Further, pursuant to Sec.  1.167(a)-3(b)(1)(iv), Z may 
treat this intangible asset with an adjusted basis of $500,000 as 
having a useful life of 25 years for purposes of the depreciation 
allowance under section 167(a).

    (2) Coordination with section 61. Except as specifically provided 
in the Code and regulations under the Code, the owner of qualifying 
railroad structure has gross income if another person paid or incurred 
QRTME for the owner's qualifying railroad structure and that person 
does not have a depreciable interest in the tangible improvements made 
by the QRTME. See, for example, section 109, which excludes from gross 
income of the lessor, the value of property attributable to buildings 
or other improvements made by a lessee.
    (f) Controlled groups--(1) In general. Pursuant to section 
45G(e)(2), if an eligible taxpayer is a member of a controlled group of 
corporations, rules similar to the rules in Sec.  1.41-6T apply for 
determining the amount of the RTMC under section 45G(a) and this 
section. To determine the amount of RTMC (if any) allowable to a trade 
or business that at the end of its taxable year is a member of a 
controlled group, a taxpayer must--
    (i) Compute the group credit in the manner described in paragraph 
(f)(3) of this section; and
    (ii) Allocate the group credit among the members of the group in 
the manner described in paragraph (f)(4) of this section.
    (2) Definitions. For purposes of section 45G(e)(2) and paragraph 
(f) of this section--
    (i) A trade or business is a sole proprietorship, a partnership, a 
trust, an estate, or a corporation that is carrying on a trade or 
business (within the meaning of section 162). Any corporation that is a 
member of a commonly controlled group shall be deemed to be carrying on 
a trade or business if any other member of that group is carrying on 
any trade or business;
    (ii) Group and controlled group means a controlled group of 
corporations, as defined in section 41(f)(5), or a group of trades or 
businesses under common control. For rules for determining whether 
trades or businesses are under common control, see Sec.  1.52-1 (b) 
through (g);
    (iii) Group credit means the RTMC (if any) allowable to a 
controlled group;
    (iv) Consolidated group has the meaning set forth in Sec.  1.1502-
1(h); and
    (v) Credit year means the taxable year for which the member is 
computing the RTMC.
    (3) Computation of the group credit. All members of a controlled 
group are treated as a single taxpayer for purposes of computing the 
RTMC. The group credit is computed by applying all of the section 45G 
computational rules (including the rules set forth in this section) on 
an aggregate basis.
    (4) Allocation of the group credit--(i) In general. (A) To the 
extent the group credit (if any) computed under paragraph (f)(3) of 
this section does not exceed the sum of the stand-alone entity credits 
of all of the members of a controlled group, computed under paragraph 
(f)(4)(ii) of this section, such group credit shall be allocated among 
the members of the controlled group in proportion to the stand-alone 
entity credits of the members of the controlled group, computed under 
paragraph (f)(4)(ii) of this section:

[[Page 53019]]

[GRAPHIC] [TIFF OMITTED] TR08SE06.000

    (B) To the extent that the group credit (if any) computed under 
paragraph (f)(3) of this section exceeds the sum of the stand-alone 
entity credits of all of the members of the controlled group, computed 
under paragraph (f)(4)(ii) of this section, such excess shall be 
allocated among the members of a controlled group in proportion to the 
QRTMEs of the members of the controlled group:
[GRAPHIC] [TIFF OMITTED] TR08SE06.001

    (ii) Stand-alone entity credit. The term stand-alone entity credit 
means the RTMC (if any) that would be allowable to a member of a 
controlled group if the credit were computed as if section 45G(e)(2) 
did not apply, except that the member must apply the rules provided in 
paragraphs (f)(5) (relating to consolidated groups) and (f)(8) 
(relating to intra-group transactions) of this section.
    (5) Special rules for consolidated groups--(i) In general. For 
purposes of applying paragraph (f)(4) of this section, a consolidated 
group whose members are members of a controlled group is treated as a 
single member of the controlled group and a single stand-alone entity 
credit is computed for the consolidated group.
    (ii) Special rule for allocation of group credit among consolidated 
group members. The portion of the group credit that is allocated to a 
consolidated group is allocated to the members of the consolidated 
group in accordance with the principles of paragraph (f)(4) of this 
section. However, for this purpose, the stand-alone entity credit of a 
member of a consolidated group is computed without regard to section 
45G(e)(2).
    (6) Tax accounting periods used--(i) In general. The credit 
allowable to a member of a controlled group is that member's share of 
the group credit computed as of the end of that member's taxable year. 
In computing the group credit for a group whose members have different 
taxable years, a member generally should treat the taxable year of 
another member that ends with or within the credit year of the 
computing member as the credit year of that other member. For example, 
Q, R, and S are members of a controlled group of corporations. Both Q 
and R are calendar year taxpayers. S files a return using a fiscal year 
ending June 30. For purposes of computing the group credit at the end 
of Q's and R's taxable year on December 31, S's fiscal year ending June 
30, which ends within Q's and R's taxable year, is treated as S's 
credit year.
    (ii) Special rule when timing of QRTME is manipulated. If the 
timing of QRTME by members using different tax accounting periods is 
manipulated to generate a credit in excess of the amount that would be 
allowable if all members of the group used the same tax accounting 
period, then the appropriate Internal Revenue Service official in the 
operating division that has examination jurisdiction of the return may 
require each member of the group to calculate the credit in the current 
taxable year and all future years as if all members of the group had 
the same taxable year and base period as the computing member.
    (7) Membership during taxable year in more than one group. A trade 
or business may be a member of only one group for a taxable year. If, 
without application of this paragraph (f)(7), a business would be a 
member of more than one group at the end of its taxable year, the 
business shall be treated as a member of the group in which it was 
included for its preceding taxable year. If the business was not 
included for its preceding taxable year in any group in which it could 
be included as of the end of its taxable year, the business shall 
designate in its timely filed (including extensions) federal income tax 
return for the taxable year the group in which it is being included. If 
the business does not so designate, then the appropriate Internal 
Revenue Service official in the operating division that has examination 
jurisdiction of the return will determine the group in which the 
business is to be included. If the Federal income tax return for a 
taxable year beginning after December 31, 2004, and ending before 
September 7, 2006, is filed before October 10, 2006, and the business 
wants to apply paragraph (g)(2) of this section but did not designate 
its group membership in that return, the business must designate its 
group membership for that year either--
    (i) In its next filed original Federal income tax return; or
    (ii) In its amended Federal income tax return that is filed 
pursuant to paragraph (g)(2) of this section, provided that amended 
Federal income tax return is filed by the business before its next 
filed original Federal income tax return.
    (8) Intra-group transactions--(i) In general. Because all members 
of a group under common control are treated as a single taxpayer for 
purposes of determining the RTMC, transfers between members of the 
group are generally disregarded.
    (ii) Payment for QRTME. Amounts paid or incurred by the owner (or 
lessor) of eligible railroad track to another member of the group for 
QRTME shall be taken into account as QRTME by the owner (or lessor) of 
the eligible railroad track for purposes of section 45G only to the 
extent of the lesser of--
    (A) The amount paid or incurred to the other member; or
    (B) The amount that would have been considered paid or incurred by 
the other member for the QRTME, if the QRTME was not reimbursed by the 
owner (or lessor) of the eligible railroad track.
    (g) Effective date--(1) In general. (i) Except as provided in 
paragraphs (g)(2) and (g)(3) of this section, this section applies to 
taxable years ending on or after September 7, 2006, and beginning 
before January 1, 2008.
    (ii) The applicability of this section expires on September 7, 
2009.
    (2) Application of regulation project REG-142270-05 to pre-
effective date. A taxpayer may apply this section to taxable years 
beginning after December 31, 2004, and ending before September 7, 2006, 
provided that the taxpayer applies all provisions in this section to 
the taxable year.
    (3) Special rules for 2005 returns. If a taxpayer's Federal income 
tax return for

[[Page 53020]]

a taxable year beginning after December 31, 2004, and ending before 
September 7, 2006 is filed before October 10, 2006, and the taxpayer is 
not filing an amended Federal income tax return for that taxable year 
pursuant to paragraph (g)(2) of this section before the taxpayer's next 
filed original Federal income tax return, see paragraphs (d)(3)(iv) and 
(f)(7) of this section for the statements that must be attached to the 
taxpayer's next filed original Federal income tax return.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

0
Par. 4. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.


0
Par. 5. In Sec.  602.101, paragraph (b) is amended by adding the 
following entry in numerical order to the table to read as follows:


Sec.  602.101  OMB control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
 CFR part or section where identified and
                 described                     Current OMB control No.
------------------------------------------------------------------------
 
                                * * * * *
1.45G-1T..................................  1545-
 
                                * * * * *
------------------------------------------------------------------------


Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E6-14858 Filed 9-7-06; 8:45 am]
BILLING CODE 4830-01-P