[Code of Federal Regulations]
[Title 26, Volume 1]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.281-4]

[Page 745-747]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.281-4  Taxable years affected.

    (a) In general. Except as provided in paragraph (b) of this section, 
the provisions of section 281 and Sec. Sec. 1.281-2 and 1.281-3 shall 
apply to all taxable years to which either the Internal Revenue Code of 
1954 or the Internal Revenue Code of 1939 apply.

[[Page 746]]

    (b) Taxable years ending before October 23, 1962. (1)(i) In the case 
of a taxable year of a terminal railroad corporation ending before 
October 23, 1962, section 281 (a) shall apply only to the extent that 
the terminal railroad corporation (a) computed its taxable income on its 
return for such taxable year as if the ``reduced amount'', described in 
paragraph (c) of Sec. 1.281-2, were not received or accrued, and (b) 
did not decrease its otherwise allowable deductions for such taxable 
year on account of that ``reduced amount''. Similarly, in the case of a 
taxable year of a shareholder of a terminal railroad corporation ending 
before October 23, 1962, section 281(b) shall apply only to the extent 
that such shareholder computed its taxable income on its return for such 
taxable year as if the shareholder had neither received or accrued as a 
dividend nor paid or incurred as an expense the ``reduced amount'' 
described in paragraph (c) of Sec. 1.281-2. Such return must have been 
filed on or before the due date (including the period of any extension 
of time) for filing the return for the applicable taxable year. The fact 
that an amended return or claim for refund or credit of overpayment was 
subsequently filed, or a deficiency subsequently assessed, based upon a 
computation of taxable income which is inconsistent with the manner in 
which the taxable income was computed on the timely filed return, is 
immaterial.
    (ii) The provisions of this paragraph may be illustrated by the 
following examples:

    Example 1. The G Company is a terminal railroad corporation which in 
1960 reduced the liabilities resulting from charges to its shareholders, 
pursuant to a 1947 written agreement, by its income from nonshare holder 
sources. For the calendar year 1960, the G Company's related terminal 
income was $24,000, of which $3,000 is attributable to income from the 
United States in payment for facilities and services in connection with 
mail handling. Although the shareholders' liabilities were reduced by 
$24,000 as a result of taking related terminal income earned during the 
taxable year into account, on its timely filed 1960 income tax return 
the G Company treated the $3,000 of liabilities which were reduced on 
account of income from mail handling as gross income received or accrued 
during the year. Assuming that the provisions of Sec. 1.281-2 otherwise 
apply, their application to the determination of the 1960 tax liability 
of the G Company shall not extend to the entire ``reduced amount'' of 
$24,000, but shall be limited to $21,000 of that amount.
    Example 2. Assume the same facts as in Example 1, and the following 
additional facts. The G Company had three shareholders in 1960, and an 
equal discharge of liability of $8,000 resulted for each of them on 
account of related terminal income. Each shareholder treated, on its 
timely filed 1960 income tax return, $1,000 of its liabilities, which 
were so reduced and were attributable to income from the United States 
in payment for facilities and services in connection with mail handling, 
as if it had received $1,000 from the G Company as a dividend and paid 
that $1,000 to the G Company for services. Each shareholder treated the 
remaining $7,000 of its liabilities which were so reduced as if the 
liabilities which were reduced had never been incurred. Assuming that 
the provisions of Sec. 1.281-2 otherwise apply, each shareholder shall 
not be considered to have received or accrued as a dividend, nor to have 
paid or incurred as an expense $7,000 (instead of $8,000).

    (2) For any taxable year of a terminal railroad corporation ending 
before October 23, 1962, a claim for refund or credit of overpayment of 
income tax based upon section 281 may be filed, even though such refund 
or credit of overpayment was otherwise barred by operation of any law or 
rule of law on October 23, 1962, subject to the conditions set forth in 
paragraph (b)(2)(i) through (v) of this section.
    (i) The claim for refund or credit of overpayment must not have been 
barred by a closing agreement (under either section 3760 of the Internal 
Revenue Code of 1939 or section 7121 of the Internal Revenue Code of 
1954), or by a compromise (under section 3761 of the Internal Revenue 
Code of 1939 or section 7122 of the Internal Revenue Code of 1954);
    (ii) The claim for refund or credit of overpayment shall be allowed 
only to the extent that the overpayment of income tax results from the 
recomputation of the terminal railroad corporation's taxable income in 
the manner described in paragraph (a) of Sec. 1.281-2;
    (iii) The claim for refund or credit of the overpayment must have 
been filed prior to October 23, 1963;
    (iv) The claim for refund or credit of overpayment shall be allowed 
only to the extent that the manner in which the terminal railroad 
corporation's

[[Page 747]]

taxable income is recomputed is the manner in which the terminal 
railroad corporation's taxable income was computed on its timely filed 
income tax return for such taxable year; and
    (v) Each railroad corporation which was a shareholder of the 
terminal railroad corporation during such taxable year must consent in 
writing to the assessment, within such period as may be agreed upon with 
the district director, of any deficiency for any year (even though 
assessment of the deficiency would otherwise be prevented by the 
operation of any law or rule of law at the time of filing the consent) 
to the extent that:
    (A) The deficiency is attributable to the recomputation of the 
shareholder's taxable income in the manner described in paragraph (b) of 
Sec. 1.281-2, and
    (B) The deficiency results from the shareholder's allocable portion 
of the ``reduced amount'' (described in paragraph (c) of Sec. 1.281-2) 
which gives rise to the refund or credit granted to the terminal 
railroad corporation under this subparagraph.

[T.D. 7356, 40 FR 23737, June 2, 1975]