SECTION 8. OPTIONAL SETTLEMENT

FOR TAXPAYERS UNDER EXAMINATION, BEFORE AN AREA APPEALS OFFICE, OR BEFORE THE TAX COURT

.01 In General .02 Terms of Settlement

2001–37 I.R.B. 263 September 10, 2001

.01 Track Structure. “Track structure” means the combination of a taxpayer’s rail and other track material (OTM), ties, and ballast, which provides a track for rail cars and equipment powered by locomotives.

.02 Track Structure Expenditures . “Track structure expenditures” for a particular taxable year are the sum of the taxpayer’s expenditures for that year for current additions (including new track structure), operating items, and removal costs.

.03 Current Additions. “Current additions” are the amounts included in the Form R-1, on Schedule 330 (Road Property and Equipment and Improvements to Leased Property and Equipment), in Column (e) (Balance sheet additions), for Accounts 8 (Ties), 9 (Rail and OTM), and 11 (Ballast), that represent additions to the taxpayer’s track structure, that are taken into account for federal income tax purposes ( see, e.g., §§ 404 and 461). Thus, for example, current additions do not include the assigned value of relay materials - Schedule 330.

.04 New Track Structure. “New track structure” means the amount included in current additions that reflect the taxpayer’s expenditures for (1) track structure laid where none previously existed; (2) existing track structure acquired by the taxpayer; or (3) track structure previously abandoned by the taxpayer that must be rehabilitated or improved to make it suitable for the use intended by the taxpayer, that are taken into account for federal income tax purposes. New track structure includes the cost of acquiring and installing new track structure as well as the cost of any rehabilitation or improvement necessary to put newly acquired or previously abandoned track structure into operation. New track structure does not include new track amounts not reflected in current additions ( i.e., amounts reflected in Column (c) (Expenditures during the year for original road and equipment, and road extensions) or Column (d) (Expenditures during the year for purchase of existing lines, reorganizations, etc.)).

.05 Assigned Value of Relay Materials

– Schedule 330. The “assigned value of relay materials - Schedule 330” means the amounts included on Schedule 330, in Column (e), on Lines 8, 9, and 11, that reflect the taxpayer’s fair market value ad

justments (excluding rewelding and other processing costs) for track materials relaid that were previously retired for financial reporting purposes. The assigned value of relay materials does not include relay track materials purchased by the taxpayer.

.06 Operating Items. “Operating items” are the amounts included in the Form R-1, on Schedule 410 (Railway Operating Expenses), in Column (h) (Total), on Lines 1 (Track - Administration), 12 (Ties - Running), 13 (Ties - Switching), 14 (Rail and OTM - Running), 15 (Rail and OTM - Switching), 16 (Ballast - Running), and 17 (Ballast - Switching), that represent the taxpayer’s repairs and maintenance to its track structure, that are taken into account for federal income tax purposes. Thus, for example, operating items do not include salvage material credits - Schedule 410 or the assigned value of relay materials - Schedule 410.

.07 Salvage Material Credits – Sched- ule 410. “Salvage material credits Schedule 410” means the amounts included on Schedule 410, in Column (h), on Lines 1, 12, 13, 14, 15, 16, and 17, that reflect credits to operating expenses for the value of salvaged materials.

.08 Assigned Value of Relay Materials

– Schedule 410. The “assigned value of relay materials - Schedule 410” means the amounts included on Schedule 410, in Column (h), on Lines 1, 12, 13, 14, 15, 16, and 17, that reflect the taxpayer’s fair market value adjustments (excluding rewelding and other processing costs) for track materials relaid that were previously retired for financial reporting purposes. The assigned value of relay materials does not include relay track materials purchased by the taxpayer.

.09 Removal Costs. “Removal costs” means the amount included in Account 735 (Accumulated Depreciation, Road and Equipment Property) that represents the taxpayer’s expenditures for track removal that are taken into account for federal income tax purposes.