Railroad Track Maintenance Credit, 63813-63822 [E7-22142]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 72, Number 218 (Tuesday, November 13, 2007)]
[Rules and Regulations]
[Pages 63813-63822]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-22142]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9365]
RIN 1545-BE90


Railroad Track Maintenance Credit

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final Regulations.

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SUMMARY: This document contains final 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 
final regulations reflect changes to the law made by the American Jobs 
Creation Act of 2004, the Gulf Opportunity Zone Act of 2005, and the 
Tax Relief and Health Care Act of 2006.

DATES: Effective Date: These regulations are effective on November 13, 
2007.
    Applicability Date: For dates of applicability, see Sec.  1.45G-
1(g).

FOR FURTHER INFORMATION CONTACT: David Selig, (202) 622-3040 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act (44 U.S.C. 3507(d)) 
under control number 1545-2031.
    The collection of information in these final regulations is in 
Sec.  1.45G-1(d). This information is required to enable the IRS to 
verify the assignments of railroad track miles made under section 
45G(b).
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number.
    Books or records relating to this collection of information must be 
retained as long as their contents might 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 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), and section 423(a) of the 
Tax Relief and Health Care Act of 2006, Public Law 109-432 (120 Stat. 
2922) (TRHCA). On September 8, 2006, the IRS and Treasury Department 
published in the Federal Register temporary and proposed regulations 
(REG-142270-05) under section 45G (71 FR 53009, 71 FR 53053). The IRS 
and Treasury Department issued a correction notice for the temporary 
regulations in TD 9286 on December 8, 2006 (71 FR 71039). No requests 
were received to testify on the proposed regulations and, accordingly, 
no public hearing was held. Written and electronic comments responding 
to the proposed regulations were received. After consideration of all 
the comments, the proposed regulations are adopted as amended by this 
Treasury decision and the corresponding temporary regulations are 
removed.

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) 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(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(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 a Class 
II railroad or Class III railroad.
    Section 45G(d), as amended by section 423(a) of the TRHCA, defines 
the term QRTME to mean gross expenditures (whether or not chargeable to 
capital account) for maintaining railroad track (including roadbed, 
bridges, and related track structures) owned or leased as of January 1, 
2005, by a Class II or Class III railroad (determined without regard to 
any consideration for such expenditures given by the Class II or Class 
III railroad which made the assignment of such track).
    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).
    Under section 45G(f), section 45G applies to QRTME paid or incurred 
during taxable years beginning after December 31, 2004, and before 
January 1, 2008. The amendments to section 45G(d) made by section 
423(a) of the TRHCA apply retroactively to taxable

[[Page 63814]]

years beginning after December 31, 2004.

Summary of Comments

Eligible Taxpayers

    A commentator suggested that the final regulations clarify that a 
Class II or Class III railroad may not be recharacterized as an 
ineligible taxpayer because the railroad is a member of a controlled 
group of corporations under section 45G(e)(2) that includes a Class I 
railroad. Section 45G(c)(1) defines the term eligible taxpayer to 
include any Class II or Class III railroad. Section 45G(e)(1) provides 
that the terms Class II railroad and Class III railroad have the 
respective meanings given such terms by the STB. The controlled group 
rules do not affect the class designations made by the STB. The 
temporary regulations did not prescribe that the class designations 
made by the STB be superseded by the controlled group rules. 
Nevertheless, in response to the comment, the final regulations in 
Sec.  1.45G-1(b)(1) state explicitly that the definitions of Class II 
and Class III railroads are determined without regard to the controlled 
group rules under section 45G(e)(2).

Effect on Reimbursements

    Commentators stated that the reimbursement rule in Sec.  1.45G-
1T(c)(3)(ii) of the temporary regulations prevents eligible taxpayers 
from being made whole for their expenditures on railroad track 
infrastructure, because the credit is only for 50 percent of eligible 
expenditures. Under Sec.  1.45G-1T(c)(3)(ii), QRTME is treated as not 
paid or incurred during the taxable year to the extent that a taxpayer 
is entitled to reimbursement of any expenditures that would otherwise 
qualify as QRTME. Section 1.45G-1T(c)(3)(ii) further provides that 
reimbursements may consist of amounts paid either directly or 
indirectly to the taxpayer. Examples of indirect reimbursements in the 
temporary regulations include discounted freight shipping rates, price 
markups of railroad-related property, debt forgiveness, and similar 
arrangements. Thus, Sec.  1.45G-1T(c)(3)(ii) limits the QRTME paid or 
incurred to the actual out-of-pocket expenditures paid or incurred by 
an eligible taxpayer.
    On December 20, 2006, Congress enacted the TRHCA, which changed the 
definition of QRTME. Although statutory changes other than technical 
corrections are usually made prospectively, this change to the statute 
was made retroactive to the original date of enactment of section 45G. 
The new definition provides that QRTME is not reduced by the discount 
amount in the case of discounted freight shipping rates, the increment 
in a markup of the price for track materials, or by debt forgiveness or 
cash payments made by the Class II or Class III railroad to the 
assignee as consideration for railroad track maintenance expenditures. 
Consideration received directly or indirectly from persons other than 
the Class II or Class III railroad, however, does reduce the amount of 
QRTME. See Joint Committee on Taxation Staff, General Explanation of 
Tax Legislation Enacted in the 109th Congress, 109th Cong., 2d Sess. 
769 (January 17, 2007).
    Consistent with the change to the statute, the final regulations 
retroactively limit the application of the reimbursement rule in Sec.  
1.45G-1(c)(3)(ii) to consideration received directly or indirectly from 
persons other than the Class II or Class III railroad. A taxpayer that 
relied on the reimbursement rule in Sec.  1.45G-1T(c)(3)(ii) and 
reduced its QRTME reported on Form 8900, ``Qualified Railroad Track 
Maintenance Credit,'' that was filed with the taxpayer's Federal income 
tax return, may amend its return to apply Sec.  1.45G-1(c)(3)(ii) to 
the taxable year provided the taxpayer applies all of Sec.  1.45G-1 to 
the taxable year.

Basis Adjustment

    Commentators suggested that the basis reduction required by section 
45G(e)(3) should only be taken by the Class II or Class III railroad 
owning the railroad track even if an assignee claims the RTMC. Section 
45G(e)(3) requires that if a credit is allowed with respect to any 
railroad track, the basis of such track shall be reduced by the amount 
of the credit so allowed. Section 1.45G-1T(e) of the temporary 
regulations provides rules for adjusting basis for the amount of the 
RTMC claimed by an eligible taxpayer. The temporary regulations provide 
that for purposes of the basis adjustment under section 45G(e)(3), 
railroad track is the asset, if any, to which the QRTME must be 
capitalized, whether the asset is tangible or intangible. Therefore, 
the only basis that is reduced under section 45G(e)(3) is basis created 
by capitalizing the QRTME.
    Congress commonly includes a basis adjustment rule when it enacts 
business tax credits as an investment incentive. See, for example, 
sections 43(d), 44(e), 45D(h), 45F(f), 45H(d), 45L(e), and 280C. The 
purpose of a basis adjustment is to prevent the taxpayer who claims the 
credit from obtaining a double tax benefit by also including the 
expenditures on which the credit was claimed in the basis of the asset 
created by the expenditures. Section 45G(e)(3) is clear and requires 
that the basis be reduced on the track with respect to which the credit 
is allowed. Therefore, to further the intent of Congress by preventing 
the double tax benefit, the basis adjustment rule must require that the 
increase in basis of property that results from the QRTME (without 
regard to the basis adjustment rule) be reduced by the amount of the 
credit allowed with respect to such QRTME. Allowing the reduction in 
basis by a taxpayer other than the taxpayer claiming the credit on 
property other than the property whose basis is increased by the QRTME 
(without regard to the basis adjustment rule) is contrary to the 
statute. Therefore, the final regulations do not adopt the 
commentators' suggestion.
    Commentators also suggested that the definition of railroad track 
under section 45G(e)(3) should be limited to rails, ties, ballast, and 
other track materials. As stated previously, section 45G(e)(3) requires 
that basis be reduced on the track with respect to which the credit is 
allowed. The credit is allowed with respect to QRTME expended on 
railroad track. The definition of railroad track for purposes of the 
basis adjustment must be the same as the definition used for 
determining QRTME. Limiting the definition of railroad track under the 
basis adjustment rule to rails, ties, ballast, and other track 
materials is inconsistent with the intent of the definition of railroad 
track on which expenditures may qualify as QRTME. The definition of 
railroad track for which expenditures may qualify as QRTME was intended 
by Congress to be expansive and includes bridges and other related 
track structures.
    Commentators further suggested that the definition of railroad 
track under section 45G(e)(3) should not include intangibles. 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 for improvements to another 
taxpayer's real property depending upon whether the eligible taxpayer 
owns (leases) the railroad track and improvements or not. (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.) Regardless of whether an asset 
created by QRTME is tangible railroad track owned by the taxpayer, 
leasehold improvement to railroad track, or intangible railroad track 
for improvements to another taxpayer's real property, capitalization

[[Page 63815]]

of the QRTME creates the basis in railroad track that must be reduced 
under section 45G(e)(3) if the RTMC is claimed on such expenditures. 
The rules requiring capitalization of amounts paid or incurred by a 
taxpayer to produce or improve real property owned by another under 
section 263(a) were prescribed prior to the enactment of section 45G. 
The provision in these final regulations that specifically references 
intangible assets is a reminder that, for purposes of section 
45G(e)(3), it is possible that the basis that must be reduced is the 
basis of an intangible asset.

Coordination With Section 61

    The temporary regulations, as corrected, do not contain a specific 
provision relating to the application of section 61, because such a 
provision would need to be placed in regulations under section 61. 
Section 1.45G-1T was never intended to provide rules for determining 
gross income under section 61. Section 61 and its regulations apply to 
certain transactions involving section 45G regardless of these 
regulations or the temporary regulations, and additional regulations 
under section 61 are not necessary. As stated in the preamble to the 
temporary regulations, there is no provision in section 45G that 
prevents the application of section 61 to certain transactions under 
section 45G. Taxpayers are reminded, therefore, that certain 
transactions under section 45G may generate gross income.

Other Changes

    The final regulations contain other various changes that clarify 
the application of section 45G.

Effective Dates

    Section 245(a) of the AJCA provides that section 45G applies to 
taxable years beginning after December 31, 2004 and beginning before 
January 1, 2008. Section 423(b) of the TRHCA provides that the 
amendments made by section 423(a) to section 45G(d) take effect as if 
included in section 245(a) of the AJCA. The final regulations provide 
that Sec.  1.45G-1 is effective for taxable years ending on or after 
September 7, 2006 (the effective date of Sec.  1.45G-1T). Section 
1.45G-1(g)(2) provides that a taxpayer may apply Sec.  1.45G-1 to 
taxable years beginning after December 31, 2004, and ending before 
September 7, 2006, provided that the taxpayer applies all provisions in 
Sec.  1.45G-1 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 has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations, and because the 
regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Therefore, a Regulatory Flexibility Analysis under the 
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. 
Pursuant to section 7805(f) of the Internal Revenue Code, the notice of 
proposed rulemaking was submitted to the Chief Counsel for Advocacy of 
the Small Business Administration for comment on its impact on small 
business.

Drafting Information

    The principal author of these regulations is David Selig, 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.

Adoption of 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-0 is added to read as follows:


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

    This section lists the table of contents for Sec.  1.45G-1.

Sec.  1.45G-1 Railroad track maintenance credit.
(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) No carryover of amount that exceeds limitation.
(3) Determination of amount of QRTME paid or incurred.
(i) In general.
(ii) Effect of reimbursements received from persons other than a 
Class II or Class III railroad.
(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 returns filed prior to November 9, 2007.
(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) Adjustments to basis.
(1) In general.
(2) Basis adjustment made to railroad track.
(3) Examples.
(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/applicability date.
(1) In general.
(2) Taxable years ending before September 7, 2006.
(3) Special rules for returns filed prior to November 9, 2007.


Sec.  1.45G-0T  [Removed]

0
Par. 3. Section 1.45G-0T is removed.

[[Page 63816]]


0
Par. 4. Section 1.45G-1 is added to read as follows:


Sec.  1.45G-1  Railroad track maintenance credit.

    (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 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 rules for adjusting basis for 
the amount of the RTMC claimed by an eligible taxpayer. 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) 
without regard to the controlled group rules under section 45G(e)(2).
    (2) Eligible railroad track is railroad track (as defined in 
paragraph (b)(9) of this section) 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 
(as defined in paragraph (b)(6) of this section) of a Class II railroad 
or Class III railroad during the taxable year, but only is an eligible 
taxpayer 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 (as 
defined in paragraph (b)(7) of this section) or railroad-related 
services (as defined in paragraph (b)(8) of this section), to a Class 
II railroad or Class III railroad during the taxable year, but only is 
an eligible taxpayer 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 (as defined in paragraph (b)(4) of this section) 
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 following STB property accounts in 49 CFR Part 1201, 
Subpart A:
    (A) Property Account 3, Grading;
    (B) Property Account 5, Tunnels and subways;
    (C) Property Account 22, Storage warehouses; 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 (as defined in paragraph (b)(6) of this section) or 
railroad-related property (as defined in paragraph (b)(7) of this 
section). 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); 
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; janitorial 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)(2) 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. 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.
    (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

[[Page 63817]]

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.
    Example 4. The facts are the same as in Example 3, except that E 
leases passenger trains, not locomotives, to F. Because passenger 
trains are not railroad-related property for purposes of section 
45G, E is not an eligible taxpayer even if F assigns miles of 
eligible railroad track to E for purposes of section 45G.

    (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) No carryover of amount that exceeds limitation. Amounts that 
exceed the limitation under paragraph (c)(2)(i) of this section or 
paragraph (c)(2)(ii) of this section, may never be carried over to 
another taxable year.
    (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. 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.
    (ii) Effect of reimbursements received from persons other than a 
Class II or Class III railroad. The amount of QRTME treated as paid or 
incurred during the taxable year by an eligible taxpayer under 
paragraphs (b)(3)(ii) and (iii) of this section shall be reduced by any 
amount to which the eligible taxpayer is entitled to be reimbursed, 
directly or indirectly, from persons other than a Class II or Class III 
railroad.
    (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 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). Under paragraph (c)(2)(iii) of this section, there is no 
carryover of the $25,000 (the tentative amount of $200,000 less the 
credit limitation amount of $175,000) that exceeds the limitation.
    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

[[Page 63818]]

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 other 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.
    (iv) The results in this Example 3 would be the same if K sold 
the ties, ballast, and other track material with a fair market value 
of $1 million to J for $200,000 in exchange for the assignment by J 
of 150 miles of eligible railroad track to K.
    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. The amount of 
QRTME paid or incurred by M during 2006 is $500,000 and is not 
reduced by the reimbursement of $250,000 by L to M because, under 
paragraph (c)(3)(ii) of this section, QRTME is not reduced by 
reimbursements from Class II or Class III railroads. For 2006, M 
determines the tentative amount of RTMC under paragraph (c)(1) of 
this section to be $250,000 (50% multiplied by $500,000 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 $250,000.

    (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.
    (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 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;
    (3) The number of miles of eligible railroad track assigned by each 
assignor to the assignee for the assignee's taxable year.
    (iv) Special rules for returns filed prior to November 9, 2007. If 
an eligible taxpayer's Federal income tax return for a taxable year 
beginning after December

[[Page 63819]]

31, 2004, and ending before November 9, 2007, was filed before December 
13, 2007, and the eligible taxpayer is not filing an amended Federal 
income tax return for that taxable year pursuant to paragraph (g)(2) of 
this section before the eligible taxpayer's next filed original Federal 
income tax return, 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 the taxable year ending 
March 31, 2007, O may claim a RMTC for the taxable year ending March 
31, 2007, 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.
    (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.

[[Page 63820]]

    (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) Adjustments to basis--(1) 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.
    (2) 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)(2), 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 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)(2) 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.
    (3) Examples. The application of this paragraph (e) is illustrated 
by the following examples. In each example, all taxpayers use a 
calendar taxable

[[Page 63821]]

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)(2) 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 o