Chicago, Burlington & Quincy Railroad v. United States

Nichols, Judge,

dissenting in part:

I join in the opinion and judgment of the court, except as specified. Eespectfully, I cannot subscribe to its treatment of the Mexican Tax Credit issue.

I start with the proposition that Mexicans live, as is their right, under a government and institutions thait are different from ours, and no doubt better for them than ours would be. The Mexican statute established an income tax, but the Mexican authorities, by the agreement and findings, transformed it into something entirely different. We must assume *321 and I do assume they did this lawfully, for American courts may not question the legality of acts of foreign officials in their own country. American Banana Co. v. United Fruit Co., 213 U.S. 347 (1909) per Holmes, J.

What we have in reality is an agreement, that Mexico collects no tax and the Mexican railroads do not pay a per diem car rental in excess of that paid by United States and Canadian railroads. From the Mexican point of view, that is absolutely all. It is true they go through some paper legerdemain but that is only to accommodate these strange Norte Americanos. They assess a tax, so-called, of 100 percent of the so-called differential in the rentals, they purport to withhold it, and lo, the beneficent government in Mexico City grants the withholding to the railroad as a subsidy! The money never moves, but a non-tax becomes a tax, by virtue of this paper shuffling.

I am reminded of those mythical documents, known as invoices, which Hong Kong shopkeepers furnish to American tourists for the benefit, it is supposed, of American Customs.

North of the Rio Grande, there occurs the only result of this that has meaning. The United States railroad adds the paper differential to its income, and will be taxed 52 cents on every dollar of it. But it takes the purported withholding as a tax credit and thus ends up with a saving of 48 cents of United States tax for every dollar of paper differential, up to the limits prescribed by the Internal Revenue Code of 1954 § 904, which prevent the credit from reducing the United States tax on income derived within the United States.

The presumption of the legality of Mexican official acts does not prevent us from having to determine that the so-called Mexican tax is either the substantial equivalent of an income tax as the term is used in the United States or is a tax in lieu thereof. Missouri Pacific RR v. United States, 183 Ct. Cl. 168 , 392 F. 2d 592 (1968). Defendant says that it is not a tax at all if no money goes into the Mexican fisc. What is the Mexican fisc? The Mexican railroads being publicly owned, one may regard them as public instrumentalities and *322 their fisc as part of the public fisc. We must take a broader view of these matters. I prefer to rely on the obvious intent of the framers of the agreement under review, that no money should change hands whatsoever. There is no reason to suppose, on the facts found, that the purported tax and purported subsidy have any recognition at all on the books of the Mexican government and Mexican railroads. Our commissioner notes no provision of law for subsidizing the Mexican railroads out of income tax receipts. This means that I would not, like defendant, include the paper differential in the railroad’s gross income and allow the so-called tax as a cost deduction. I consider that this view is a concession that weakens the defendant’s position without any necessity.

Also, it appears to me, the majority overlooks the salutory rule Mr. Justice Holmes laid down in the American Banana, Co. case, supra. Mexican law decreed that Mexican officials levy an income tax, so we instinctively believe we must discover an income tax, or at least a tax in lieu thereof, somewhere in these proceedings. Were we confronted with the acts of United 'States federal officials, or those of a United States state official, this approach would be proper. We shy away from the obvious fact, that Mexico traded off the income tax for a concession in the car rentals Mexican public-owned railroads paid United States railroads. But, as Holmes said at p.358:

* * * The very meaning of sovereignty is that the decree of the sovereign makes law. * * *

Thus, for us, the Mexican officials’ measures are right because they took them, and we don’t have to twist or distort their nature.

The remaining problem is a difficult one. Defendant has elaborated reasons why this court is not bound by its decision in Missouri-Illinois RR Co. v. United States, 180 Ct. Cl. 1179 , 381 F. 2d 1001 (1967) in which we had under review the same agreement considered again here. Defendant argues that whether the railroad paid a tax is a fact finding, not committing the court by stare decisis. It says it was trapped in an unfortunate stipulation in the Missouri-IUinois case. The majority here is apparently enough impressed by this *323 to consider tlie merits all over again. Interpreting a domestic contract would be a question of law. Here, really, we are interpreting a foreign contract. Our Eule 125 says that determination of foreign law is a legal question. This case illustrates how we trap ourselves in getting away from the old and sounder rule, that foreign law is a question of fact. Thinking, as I do, that we are concerned with what is in reality a tax exemption not a tax, I think the prior decision, whether fact or law, is so plainly wrong as to be within Item (a) of Judge Davis’ tabulation, concurring in Mississippi River Fuel Corp. v. United States, 161 Ct. Cl. 237, 246 , 314 F. 2d 953, 958 (1963), of reasons why we may reconsider one of our prior decisions. I feel trapped, too, and regret I was not astute enough to see the snare when I first stepped into it.

FindiNgs of Fact

1. Plaintiff, the Chicago, Burlington & Quincy Eailroad Company, is an Illinois corporation with its principal offices at 547 West Jackson Boulevard, Chicago, Illinois. Plaintiff is a common carrier by rail in interstate commerce subject to the jurisdiction of the Interstate Commerce Commission.

2. At all times here pertinent, plaintiff maintained its books of account and filed its Federal income tax return on the accrual method of accounting and on the basis of the calendar year.

3. Plaintiff timely filed its Federal income tax return for 1955 with the District Director of Internal Eevenue, Chicago, Illinois. Plaintiff paid income tax with interest for the year 1955 and obtained refunds to date, leaving net unrefunded taxes, all as follows:

Date of Payment Tax Interest

Sept. 15, 1955_ $445, 000. 00 __

Dec. 15, 1955-__ 445, 000. 00 _

Mar. 15, 1956_ 5, 151, 000. 00 _

June 15, 1956_ 4, 799, 051. 48 _

Aug. 15, 1957_ 305, 480. 18 $20, 458. 80

Refund_ (256,349.64) (17,168.40)

Refund_ (2, 756. 83) (184. 63)

Totals_ $10, 886, 425. 19 $3,105. 77

*324 4 Plaintiff timely filed claims for refund with the District Director of Internal Revenue, Chicago, Illinois, as follows:

Date filed Issue Amount

Feb. 16, 1959_Protection Work_ $63, 349. 88

Do_Casualty Loss_ 7, 578. 61

Do_Depreciation, Donated Property. 26, 784. 37

Do_Excess Salvage_ 60, 428. 50

Do_Welded Rail_ 73, 220. 16

Apr. 14, 1959_1341 Computation_ 496, 887. 10

On May 27, 1963, the District Director disallowed plaintiff’s claims.

5. Plaintiff is the sole owner of the claims here relied upon. No action on the claims has been taken by the Congress of the United States or by any department of the Government, except as noted above.

6. (a) Plaintiff’s petition, filed May 7, 1965, raised issues relating to the six claims for refund noted in finding 4. In its answer, filed September 7,1965, and first amended answer, filed October 24, 1967, defendant asserted, as setoffs, four defenses: (a) Mexican tax credit issue, (b) vacation pay accrual issue, (c) rail salvage value issue, and (d) § 1341 of the 1954 Internal Revenue Code computation issue. Defendant subsequently dropped its setoff defense under § 1341; and the parties agreed by pretrial stipulation that, with respect to the § 1341 issue raised in the petition, “* * * the amount of $490,315.14 may be accepted as the correct over payment under this issue.” Accordingly, neither party has requested findings of fact with respect to the § 1341 issue. After trial, defendant conceded that plaintiff “is entitled to the recovery claimed under * * * [the excess salvage] issue.” Thus, no findings of fact are necessary on that issue and plaintiff is entitled to recover with respect thereto. Remaining for resolution are seven issues: (a) donated property depreciation, (b) casualty loss, (c) welded rail, (d) rail salvage value, (e) protective work, (f) vacation pay accrual, and (g) Mexican tax credit.

(b) The parties have agreed that the amount of recovery to which plaintiff is entitled, if any, be reserved for determination by the parties after a decision on the merits of the *325 several issues here in dispute, or for further proceedings under Eule 131 (c), if necessary.

Donated Property Depreciation Issue

7. Prior to June 22, 1954, several states contributed to plaintiff various protective and safety facilities, and plaintiff carried them in its accounts, as noted below:

Jetties (Account 3)_ $5,850.78

Bridges (Account 6)- 52,870.24

Highway Undercrossings (Account 6)- 1,475, 533. 30

Crossing Floodlights (Account 27)_ 1,635.58

Crossing Signals (Account 27)_ 543, 540. 00

Crossing Signs (Account 27)_ 3,701. 24

Highway Overerossings (Account 39)_ 63,009.39

Total_$2,146,140. 53

The dollar figures above indicated and stipulated by the parties represent the adjusted tax basis for each item in the hands of the plaintiff at the time of acquisition. If plaintiff is entitled to depreciation deductions with respect to the above-noted items, the parties have agreed that the proper rate of straight-line depreciation to be applied to the total tax basis of the items is 2.29 percent for account 3; 2.14 percent for account 6; 3.33 percent for account 27; and 2.65 percent for account 39.

8. (a) Starting about 1930, plaintiff entered into many agreements with various midwestem states relating to the facilities noted in finding 7. Though the agreements are not identical in terms, they provide in essence for construction of (a) highway overpasses and underpasses at highway-railroad intersections and (b) grade-crossing protection equipment, such as flashing-light signals and automatic gates. Generally, plaintiff agreed to perform the part of the construction work relating to railroad use, i.e., bridges, track, signal lights, etc., and the states agreed to perform the part of the work relating to highway use, i.e., roads for motor vehicles, approaches, etc. The parties agreed to share the expenses of the work, the states usually paying 50% or more of the total cost.

*326 Pursuant to Federal Highway aid legislation (particularly acts passed in 1933 and 1944), the Federal Government agreed to pay the governmental share of the construction costs. Federal funds were allocated to the states to pay for specific construction projects agreed to by the states and the railroads. Under the Federal Aid Highway Act of 1944, 58 Stat. 839 , ch. 626, costs were to be apportioned between the Government and the railroads, the railroads’ share not to exceed 10 percent. In allocating funds, the fact that a railroad was making profits or losing money was not considered. Nor was there considered the need of the railroad for capital funds.

(b) Most of the agreements do not state expressly whether the respective state or the plaintiff has title to the facilities, though in some of the agreements plaintiff was given title ab initio to certain signal equipment. However, under all of the agreements, plaintiff was obligated to maintain, and replace at its own expense if needed, equipment originally furnished; and plaintiff could not arbitrarily remove equipment. Under all the agreements, plaintiff was required to maintain the facilities directly related to railroad use, such as bridges, roadbeds, track, etc., while the state was required to maintain the facilities directly related to motor-vehicle use, such as highways, approaches, etc. Some of the agreements provided that in the event equipment was no longer needed at a particular location, plaintiff could remove it, subject to approval by the appropriate regulatory bodies, for relocation at other sites. Other agreements provided that equipment no longer needed was to become the property of the state for removal as appropriate, in which event plaintiff was relieved of its obligation for maintenance; and to the extent that plaintiff had replaced equipment at its own expense, such equipment was to be the property of plaintiff. Other agreements provided that if equipment was no longer needed at a particular location, the parties would negotiate regarding its removal and reinstallation elsewhere.

9. The facilities noted in finding 7 were constructed primarily for the benefit of the public to improve safety and to expedite highway traffic flow. Plaintiff, however, received benefits from the facilities, among others, probable lower *327 accident rates, reduced expenses of operating crossing facilities, and, where permitted, higher train speed limits, all of which permitted plaintiff to function more efficiently and presumably less expensively. The decision regarding what facilities to build and where to build them was made after negotiation between the respective states and plaintiff. Factors considered included the accident statistics of the crossing points and the need for improved motor-vehicle traffic flow. On projects done in the 1930’s, there was also considered how many men could be put to work on a project since a principal goal of the Federal Government in giving financial support was to make work for persons unemployed during the economic depression. Another purpose of Federal financing was to curtail long-standing disputes between the states and the railroads concerning the prorata share each would pay for construction and improvement of such facilities.

10. (a) On February 5,19.43, plaintiff requested permission of the Internal Eevenue Service (IES) to change from retirement to depreciation accounting for road property. On April 12, 1943, the IES responded by letter to plaintiff’s request and enclosed a mimeographed form, called “Mimeo 58” and entitled “Change from Eetirement to Depreciation Accounting for Eoad Property.” Mimeo 58, undated and unsigned, was prepared by the IES for circulation to the railroads generally, many of which were seeking to change from retirement to depreciation accounting during World War II. Mimeo 58 sets out guidelines under which the changeover in accounting practice by the railroads would be acceptable to the IES, and it describes information to be furnished by the railroads.

Plaintiff thereafter furnished to the IES the required information which in essence constituted a list of properties subject to depreciation, their cost basis, salvage value, expired life, and estimated normal useful life; and on September 20, 1944, the IES sent plaintiff a terms letter, incorporating the information supplied by plaintiff and some of the requirements set out in Mimeo 58. The terms letter granted plaintiff permission “to change from retirement to depreciation *328 accounting as of January 1, 1943,” to be effective “upon receipt of a letter agreeing to all the terms and conditions set forth herein.” On April 20,1945, plaintiff accepted the terms letter on the condition that “in the event that if any of the terms and conditions stated in said letter should be changed by statutory amendment, by operation of law, or otherwise,” plaintiff shall not be precluded “from the benefits of any such changes” and shall be “entitled to the benefit of any such changes regardless of the acceptance herein contained.” Nothing in the record indicates that the IES objected to or rejected plaintiff’s condition of acceptance of the terms letter.

(b) Mimeo 58 stated, among other things, that with respect to property properly' includable for depreciation purposes, “[djonated property or contributions or grants hi aid of construction from any source must be excluded.” Such statement was not included in the terms letter of September 20, 1944. However, the schedules of plaintiff’s property, submitted to the IES in 1944 for which straight-line depreciation was requested, did not include the donated property listed in finding 7.

(c) On May 1,1961, plaintiff submitted to the IES revised schedules for depreciable roadway property and requested the benefit of section 94 of the Technical Amendments Act of 1958 (also known as the Eetirement-Straight Line Adjustment Act of 1958, Pub. L. No. 85-866,72 Stat. 1606). On July 26,1961, the IES responded to plaintiff’s request, noting the earlier , terms letter of September 20, 1944, and stating that plaintiff’s revised schedules were acceptable effective January 1, 1956, “provided a timely election has been made under séction 94.” Earlier, December 14, 1959, plaintiff had irrevocably elected to have section 94 of the above-noted act “apply to the determination of its Federal tax liability for all applicable years.” The revised schedules of depreciable property submitted by plaintiff to the IES in 1961 did not include the donated property listed in finding 7.

Casualty Loss Issue

11. During the taxable year 1955, 13 freight cars owned by plaintiff, and being capital assets used in its business, were *329 destroyed by accidents while on lines of other railroads. The original cost to plaintiff for the cars was $76,007.30. The monies paid to plaintiff as compensation for the loss was $83,186.35. The total of amortization and depreciation accrued to the date of loss was $36,886.58, the basis of the property at the time of loss thus being $39,120.72. Plaintiff therefore realized a gain of $44,065.63. Part of the amortization was accrued under § 124A of the 1939 Internal Revenue Code, and a further part of § 168 of the 1954 Internal Revenue Code. The amortization was so-called rapid amortization for emergency facilities, taken in lieu of the usual ratable depreciation used to compute Federal income tax. The excess of amortization accrued against the loss over normal straight-line depreciation was $28,639.22. The freight cars were properly subject to allowance for amortization and depreciation; and at the time of their destruction, they had been held by plaintiff for more than 6 months.

Welded Bail Issue

12. During 1955. and at all other material times, plaintiff used the retirement-replacement-betterment method of accounting for its track accounts and, in particular, for its rail and joint materials (angle bars, bolts and washers). Retirement-replacement-betterment accounting is recognized by the Commissioner of Internal Revenue to be a proper method for determining depreciation. Under this method, as used by plaintiff, no ratable annual depreciation deduction is taken with respect to a particular asset. Rather, a deduction for the total original cost of the asset is taken upon the asset’s ultimate retirement. The total of such deductions in a tax year represents the depreciation deduction with respect to all items accounted for under the method for that year.

In detail, the retirement-replacement-betterment method of accounting, as used by plaintiff, works as below outlined. All assets subject to the method are carried on plaintiff’s books at stated values. When a particular asset, such as a section of rail, is retired from service without being replaced, its stated value on plaintiff’s books is charged to current expense. The retired asset is then assigned a value on plaintiff’s books *330 (as reusable rail or as scrap) and such value is credited to (and thus reduces) current expense. If an asset is replaced in kind (rather than simply retired), the cost of the replacement is charged to current expense and the assigned value of the replaced rail is credited to (and thus reduces) current expense. If the rail laid in replacement is new, its cost as new rail is expensed. If the rail laid in replacement is used rail, the amount expensed is the value of the used rail as carried on plaintiff’s books. Thus, e.g., if 80-pound rail is replaced by 80-pound rail, the cost of the replacement is expensed and the value assigned to the replaced rail (as scrap or reusable rail) is credited to (thus reducing) current expense.

In the case of replacement of rail with heavier rail (a betterment) , the current cost of the betterment portion is capitalized, while the current cost of the replacement portion is expensed. E.g., if 80-pound rail is replaced with 100-pound rail, the current cost of the replacement in kind, i.e., 80-pound rail, is expensed, while the excess of the cost over the cost of replacement by 80-pound rail is capitalized as a betterment. If the 100-pound rail laid in replacement is used-rail taken from plaintiff’s inventory, the value previously assigned to it (ie., when placed in inventory) is the “cost” used to determine the 80-percent expense and 20-percent capitalize amounts. If, on the other hand, the 100-pound rail is new rail, its cost as new rail is the basis for the 80-percent and 20-percent apportionment.

13. In 1955, plaintiff replaced a number of 39-foot lengths of steel rail with 78-foot lengths of heavier rail. The standard length of rail purchased from steel mills was 39 feet. Plaintiff welded together two standard lengths to make the replacements. The total cost for welding such rails in 1955 was $155,748. The portion of the welding cost allocable to the increase in weight of the new rail was $14,940 and it was capitalized, in accordance with plaintiff’s accounting practice noted in finding 12. The portion of the welding cost allocable to the same weight as the replaced rail was $140,808 and it was expensed, in accordance with plaintiff’s accounting practice noted in finding 12. The average cost of welding rail in 1955 was $11.83 per weld, while the cost of joining two *331 rails with angle bars and bolts was about $10 ($9.81 for 112-pound rail; $10.39 for 129-pound rail). In the welding process, no material is added to the rail. In fact, about %" is lost off each end of the rail, at the point of the weld, since the rail ends are fused together under pressure without adding material, thus creating a bead of raised metal at the joint; and the joint must be ground down to eliminate the bead, thereby removing some material.

14. On its books of account, plaintiff treated the cost of replacing bolted rail with welded rail as follows:

(a) The portion of the welding cost attributable to replacements of track in kind was expensed; and the portion attributable to higher-weight rail was capitalized;

(b) the original cost of the replaced joint materials (angle bars, bolts and washers), which cost had been capitalized when the joint was originally installed, was charged to current expense as a retirement; and

(c) nothing was entered on the books of account as a capital item to replace the cost of the retired joint materials except the portion of the welding cost attributable to higher-weight rail.

15. The conventional way of fastening together the ends of rail in a track system is by bolted joints. Bolted joints comprise a pair of angle bars which bridge the rail ends across the rails’ web and are fastened to the web by six bolts and washers. Bolted joints tend to come loose with wear and require maintenance to tighten them. If not tightened, the rail ends move up and down under the load of rolling stock, which batters and laminates the rail ends (called primary batter) and loosens the ties and tie plates. Furthermore, when the ties move up and down, the ballast under the ties becomes pulverized, water enters forming puddles, and the track is made insecure. Maintenance of conventionally bolted rail includes tightening up the bolts the first year after installation and generally each two years thereafter. About every 12-14 years, it is sometimes necessary to remove old bolts and replace them with new bolts. Primary batter, which results in depressions at the rail ends, is corrected by adding weld metal at the depression. The practice is to correct primary *332 batter when the depression is between 0.030 and 0.040 inches. If the depression exceeds 0.060 inches, the rail ends must be cropped and rejoined.

16. Plaintiff first installed welded rail in some of its track lines in 1955, with the expectation that welded joints would prolong rail life and eliminate, or at least substantially reduce, maintenance. Welded joints, unlike bolted joints, do not require bolt tightening and repair as noted in finding 15. 'Savings in rail maintenance labor to date is estimated to be about 40-50 percent. The railroads, including plaintiff, are continuing to install and use welded rails. Though some cracked welds have required service, no maintenance of welded joints has been required to date, other than what is necessary on the rail lines themselves.

17. Though welded joints installed since 1955 have required no maintenance comparable to bolted joints, a phenomenon called secondary batter first became serious in 1967 and will require maintenance in the near future. Secondary batter results from the fact that the fused metal at welded joints is harder than the rail metal on either side of a joint. Thus, the joint wears less rapidly than the main rail. After extensive use and track wear, the metal adjacent either side of the weld tends to dish out as the wheels of railroad cars ride over the weld, i.e., the wheels tend to batter the track downstream of the weld. Furthermore, secondary batter is aggravated if the weld is not ground down initially to the level of the rail ends on either side of the weld. If not properly ground down, the wheels of railroad cars ride up over the weld and drop down on the other side of the weld, thus accelerating dishing out. Secondary batter becomes progressively worse with time and particularly if trains run in both directions on the track. Good engineering practice requires that secondary batter, like primary batter, be corrected when the depressions reach a depth of about 0.030-0.040 inches. In 1967, some of plaintiff’s main lines, with welded joints installed in 1955, showed secondary batter of about 0.025-0.039 inches.

Correction of secondary batter will require grinding down the weld and track to eliminate dished out areas, or, in ex *333 treme cases, cropping out the damaged areas and rewelding the rail ends. Up to 1968, plaintiff had taken no maintenance steps to correct secondary batter, even on welded rail installed as early as 1955. However, because of the uncertainties created by problems of secondary batter and because substantial correction will be needed in the near future, it is not clear on this record whether the long-term costs of maintaining welded rail will be substantially less than bolted rail. The useful life of rail is 40-50 years, during which the rail is picked up from time to time and relaid at other track locations. Because useful life is principally a function of the quality and extent of use of the rail itself, the record does not establish that rail with welded joints will have a useful life longer than rail with bolted joints, except that it is reasonable to infer from the evidence that, properly maintained, welded rail will require less cropping over its years of use than bolted rail.

Bail Salvage Val/ae Issue

18. Secondhand, or used, rail is rail that has been picked up or recovered by plaintiff from one line of its track and is in sufficiently good condition to be relaid later in another line of track. Scrap rail is rail Which has been picked up or recovered and has no remaining usefulness to plaintiff as rail. It is sold to the highest bidder as scrap metal. In accounting for secondhand rail when picked up or relaid, plaintiff used retirement-replacement-betterment accounting, as described in finding 12. Since about 1920, and including 1955, plaintiff has consistently assigned a value of $25 per gross ton ($22.32 per net ton) to. the secondhand rail recovered from replacements or betterments, and has assigned a value of $20 per gross ton ($17.86 per net ton) for scrap rail. In 1955, plaintiff purchased new rail at an average of $93.70 per net ton. In 1955, plaintiff’s average original investment cost, for all rail in use, was $43 per net ton. In 1955, plaintiff realized $49 per gross ton ($43.75 per net ton) from the sale of rail as scrap, and plaintiff reported and paid tax on income arising from the sale of rail as scrap.

*334 19. Secondhand rail, which is capable of reuse, is of greater utility and value than rail which is fit only for sale as scrap. Plaintiff does not sell as scrap any rail that is reusable because of the shortage of rail for industry-track and branch-line uses.

20. In its program for replacing rail in its track lines from time to time, plaintiff customarily lays heavier-weight sections to replace rail of lighter weight. ‘Rail released from main rail lines is usually taken up and relaid on a branch line or a secondary line; and, in turn, rail taken up from secondary lines or 'branch lines is usually relaid in yard tracks or industry tracks. For example, heavy rail, such as 136-pound rail, laid on plaintiff’s main line, is generally used in four cycles before its useful life is completed and it becomes scrap. Thus, rail released from the main line usually is reused three times — in a secondary line, then in a lighter branch line, and finally in yard tracks or industry tracks. Relay rail is classified according to weight and condition so to determine its suitability for reuse. Generally, rail that is recovered and reusable as secondhand rail is relaid within a year. At times, however, reusable rail remains in plaintiff’s inventory for more than a year.

The service life of rail, from the date first installed until picked up and sold as scrap, is between 40 and 50 years. The average age of rail in plaintiff’s main-line tracks at the time it is replaced is 22.69 years.

21. In 19,55, plaintiff laid in replacement 58,529 net tons of rail, of which 40,276 net tons were new rail and 18,253 net tons were secondhand rail. The 40,276 net tons of new rail cost $3,828,545, of which $536,847 was capitalized as bet-terments (representing 5,648 net tons), and $3,291,698 was expensed as replacements (representing 34,628 net tons). Of the 18,253 net tons of secondhand rail laid, 2,255 net tons were capitalized as betterments, at an assigned value of $22.32 per net ton (total $50,359); and 15,998 net tons were ex-pensed as replacements, at an assigned value of $22.32 per net ton (total, $357,196). Plaintiff in 1955 picked up 50,626 net tons of rail, the value of which was credited to (thus *335 reducing) operating expense. The value of rail picked up was $1,004,077, attributable to 22,398 net tons classified as secondhand rail (valued at $22.32 per net ton, thus $499,988), and 28,228 net tons classified as scrap (valued at $17.85 per net ton, thus $504,089).

In sum, considering the debits and credits to operating expense for rail relaid and rail picked up, the result was a net charge to operating expense of $2,644,817, constituting the cost of rail laid in replacement ($3,291,698 plus $357,196), less the assigned value of the rail picked up ($499,988 plus $504,089). ,.ji

In 1955, plaintiff added 839 net tons of rail in new lines and extensions. Of the 839 net tons, 12 net tons were new rail (total cost, $1,202) and 827 net tons were secondhand rail, carrying an assigned value of $22.32 per net ton (total cost, $18,455). Such costs were capitalized.

22. The use of an assigned value (or salvage value) for recovered rail, which value reduces the aggregate charges to operating expense for replacements and retirements without replacement, is an integral part of retirement-replacement-betterment accounting, as employed by plaintiff.

23. Eail picked up by plaintiff in 1955 and classified as scrap was assigned a value of $17.85 per net ton. The total amount so-valued was accounted for by reducing operating expenses (as noted in finding 21) and increasing the inventory (material and supplies) account. When the scrap was later sold (at higher than $17.85 per net ton), the difference between the assigned value ($17.85 per net ton) and the selling price ($43.75 per net ton) was treated as income. Generally and in 1955, plaintiff sold scrap rail almost immediately after pickup.

24. Plaintiff sometimes sells secondhand rail to industry users for laying as connecting track to operating rail lines. Generally, the industry concerned is charged a flat rate per foot of track laid. In 1955 plaintiff’s charges for industry rail laid were about 60 percent of the price of new rail. Sometimes, plaintiff refunds part of charges, based on the extent of use of track by the industrial user.

*336 25. The average price (per net ton) paid by plaintiff for new rail from 1919 to 1961 is as follows:

1919_$35. 83

1920 _ 42.08

1921_ _

1922 _ 36.64

1923 _ 36.93

1924 _ 39.08

1925 _ 38.61

1926 _ 88.62

1927 _ 40. 40

1928 _ 40.12

1929 _ 40. 00

1930 _ 40.02

1931_ 38. 79

1932 _ 36. 47

1933 _ 36.41

1934 _ 33.06

1935 _ 32.94

1936 _ 31.85

1937 _ 38.71

1938 _ 38.10

1939 _ 36.84

1940 _ 36. 71

1941_$36.84

1942 _ 36.74

1943 _ 36.90

1944 _ 38.35

1945 _ 36.48

1946 _ 44.95

1947 _ 53.64

1948 _ 61.62

1949 _ 69.00

1950 _ 73.00

1951_ 73.00

1952 _ 76.50

1953 _ 88.00

1954 _ 90. 50

1955 _ 93.70

1956 _ 97.37

1957 _105. 50

1958 _116. 50

1959 _116. 50

1960 _ _

1961_116. 50

26. Under retirement-replacement-betterment accounting, plaintiff’s capital accounts for rail and joint materials reflect the original cost of the first assets installed, and the betterment portion of subsequent replacements, but all replacements (and the replacement portion of betterments) are ex-pensed. The result is that plaintiff’s capital account for rail and joint materials is a residuum of original costs, and does not reflect current costs, except to the extent of the current cost of betterments. Principal reasons for using retirement-replacement-betterment accounting are ease of recordkeeping for an account with many assets which are repeatedly replaced, and compliance with the accounting methods set forth in the Uniform System of Accounts for Railroad 'Companies prescribed by the Interstate Commerce Commission. A result of using retirement-replacement-betterment accounting (combined with the rising cost of rail after World War II) is that the railroads’ track accounts today are between one- *337 third and one-half of what they would he, 'based on the cost of the rail actually in place.

27. Other railroads used assigned values for secondhand rail in 1955 which differed from plaintiff’s value of $25 per gross ton ($22.32 per net ton). For example, the Baltimore & Ohio Bailroad Company used a value of $43.76 per net ton, the Pennsylvania Railroad Company used $54.09 per net ton, and the Chicago and Northwestern Railroad Company used $63.34 per net ton. Other railroads used values comparable to or lower than plaintiff’s.

28. In 1964, pursuant to a request by plaintiff, the national office of the Internal Revenue Service issued a letter of technical advice which called for valuation of plaintiff’s secondhand rail at fair market value or cost, whichever is lower. In 1967, Rev. Rui. 67-145,1967-1 Cum. Burn.. 54, was issued, which required utilization solely of “fair market value” in the valuation of plaintiff’s secondhand rail. Rev. Proc. 68-46, 1968-2 Cum. Bull. 961, requires that “fair market value” for a year in question be determined by “averaging the new and scrap prices” for rail in that year.

Protective Work Issue

29. In 1955, plaintiff carried out 28 construction projects (total cost: $121,026.70) directed to protecting and maintaining its track facilities near waterways. The work was generally of five types: (a) channel and waterway diversion, (b) construction of dikes, dams and jetties, (c) grade rais-ings, (d) riprap and bank protection, and (e) bridge and culvert extensions or modifications.

(a) One project related to channel and waterway diversion. A creek which ran along plaintiff’s track embankment at Dudley, Iowa, had changed course and was eroding away the embankment soil. To arrest the erosion, the creek channel was straightened so to divert the waterflow away from the embankment. Earlier attempts to arrest erosion by use of riprap were unsuccessful.

(b) Six projects related to construction of dikes, dams and jetties. Five of them involved building rock-filled timber cribs, steel jetties and, in one instance, a retaining wall, in *338 streams or rivers to deflect waterflow away from plaintiff’s •track embankments, thereby to prevent further erosion of the embankments. One of the projects involved placing an earth blanket over seepage points in a levee to protect the levee and a railroad bridge during high water of the Des Moines River. A typical example is construction done at Aurora, Illinois, where a highway bridge, maintained by plaintiff, crossed over the Indian Creek River. Plaintiff’s right-of-way ran alongside the southerly lower bank of the river. As originally constructed, the northern approach to the bridge was grounded on the top of the natural river bank, without any retaining wall. Shortly before 1955, the Indian Creek River changed its course and began to cut against the northerly bank, threatening to undermine the approach and the bridge. To meet the problem, plaintiff placed 43-foot steel sheet piles around the river pier of the bridge and built a permanent retaining wall along the northern bank about 15 feet high and 140 feet long (cost: $12,082.86).

(c) One project related to grade raising. A railroad bridge over the Mississippi River, north of Canton, Missouri, was raised to allow passage thereunder of drift during heavy rains. The river had silted up near the bridge, thus raising its bed. Silting up occurred because a dam was built upstream which changed the waterflow velocity and pattern in the river. The accumulation of drift threatened the integrity of the bridge.

(d) Two projects related to riprap and bank protection. In both projects, riprap was placed along the banks of a river or creek to slow down and divert waterflow and arrest further erosion and deterioration of rail embankments.

(e) Eighteen of the projects related to bridge and culvert extensions or replacements. In general, the projects involved modification of existing culverts, trestles, walls, and pipes to alter or divert waterflow which was eroding and endangering rail lines and embankments. In some instances, new culverts, trestles, walls, or pipes were installed near existing facilities of a like nature in order to accommodate changed overflow patterns which threatened the integrity of the embankments.

30. The Commissioner of Internal Revenue disallowed *339 as business expenses the cost of the projects ¡noted in finding 29.

31. Eailroad embankments bave an indefinite service life. Unless attacked by outside forces, they remain in serviceable condition so long as tbe railroad operates trains over its rail lines. Embankments near waterways are built originally by plaintiff using good engineering practices to provide permanent protection against water erosion. However, unforeseen and unforeseeable changes in waterflow patterns near the embankments sometimes require remedial steps to arrest erosion. It is not possible to predict when remedial steps will be necessary. Plaintiff is engaged in a continuous program of inspection and evaluation of damage to its embankments. When necessary to correct deterioration, the steps taken are intended to arrest the problem and prevent a premature end to the service life of the embankment. The nature of the corrective work done depends upon the severity of damage and the possibility of continued damage. The work is done in the simplest and cheapest manner under the circumstances to insure an end to the particular erosion problem and to keep the rail line in safe operating condition. None of the work here in issue increased the original service life or value of the embankments but rather prevented a premature end to such service life.

Vacation Pay Accrual Issue

32. In 1955, plaintiff accrued and took as a deduction on its Federal income tax return an amount estimated to be its liability for vested vacation pay earned by its employees in 1955 and payable in 1956. Because plaintiff did not know how much it would in fact pay out in 1956 for vacation liability accrued in 1955, it had to estimate its liability on the basis of past experience.

33. Prior to 1955, plaintiff used the following method to estimate its vacation pay liability accrued during a given year: To calculate its accrued liability, say for 1952 as an example, plaintiff first determined the actual payments made to its employees in 1952 (for vacation pay liability accrued in 1951). The amount of actual payments made in 1952 was *340 then adjusted for any prospective salary changes, changes in employees’ vacation brackets, or prospective changes in employment status, and the adjusted figure became the estimated liability for 1952 (to be paid out in 1958). As a hypothetical and simplified example, if plaintiff actually paid out in 1952 (for vacations accrued in 1951) the sum of $5,000,000, and a 3-percent wage increase was effective in 1952 (with no prospective changes in vacation brackets or employee status), then plaintiff would estimate its accrued liability for 1952 to be $5,000,000, plus 3 percent of $5,000,000 ($150,000), or a total of $5,150,000. If subsequent experience in 1953 resulted in payment of more or less than $5,150,000, then the next year’s estimate was adjusted accordingly.

Following the above example one step further, the tax deduction taken for 1952 would be $5,150,000, adjusted by an amount to compensate for any difference between what was actually paid in 1952 ($5,000,000) and the actual deduction taken in 1951. Thus, if the deduction for 1951 was $5,500,000 ($500,000 more than was subsequently paid out in 1952), the deduction for 1952 would be correspondingly reduced, i.e., $5,150,000 less $500,000, or $4,650,000.

34. (a) Starting in 1955, plaintiff changed its method of estimating accrued vacation pay liability. Although plaintiff maintained its books of account on the basis of the calendar year, it closed its books for vacation pay liability purposes at the end of the first 10 months of 1955. Thus, plaintiff did not calculate the payments made for vacations taken during the last 2 months of 1955. Rather, plaintiff estimated the payments made during the last 2 months of 1955 by looking back to the actual payments made in 1954. In 1954,19.69 percent of all vacation payments for the whole year were made in the last 2 months; therefore, plaintiff assumed the same percentage would prevail in 1955. Plaintiff’s accrued liability for 1955 was thus calculated by summing up three figures: the actual payments made in the first 10 months of 1955; 19.69 percent of that amount; 1 and any adjustments for wage *341 increases, etc., in 1955. The total figure then became the estimated accrued liability for 1955, to be paid out in 1956.

(b) In a letter to the Internal Revenue Service dated June 8, 1962, plaintiff made the following explanation of why it changed its method of estimating accrued vacation pay liability for 1955:

Hs * * * *

Prior to 1954 vacation pay liability was not accrued in the books of account, being accrued for tax purposes only. It was therefore possible at times to make estimates after the accounts were closed for the year, making for greater accuracy. For example, the estimate for vacation pay liability for the year 1948 was not made until March 1949 and the actual amount of $2,602,666 was available.

Beginning in the year 1954 vacation pay liability has been accrued in the books of account making it necessary to base the accrual on information available at the time the books are closed. This results in some variance between estimates and actual payments in the following years.

* * * * *

35. Based on the method outlined in finding 34(a), plaintiff estimated it would pay out in 1956, $5,544,003.52 for vacation time taken (calculated by summing (a) $4,372,-649.93, the amount actually paid out in the first 10 months of 1955, (b) $860,974.77, which is 19.69 percent of $4,372-649.93, 2 and (c) $310,378.82, representing wage increases in 1955). In fact, plaintiff paid out, in 1955, $4,926,897, which is $306,727.70 less than the sum of (a) and '(b) above. Plaintiff’s tax return for 1955 was filed June 15,1956, and plaintiff was on the accrual method of accounting for the calendar year. Plaintiff therefore knew, or should have known, the exact amount paid out for vacations in 1955 ($4,926,897) before it filed the 1955 return since, under calendar-year accounting, the books were closed on December 31, 1955; and therefore it was unnecessary for plaintiff to make an estimate for item (b) above.

36. The deduction claimed on plaintiff’s 1955 tax return for liability for accrued vacation pay was $5,405,201. The *342 amount actually paid out for vacations in 1956 was $5,116,-219, a difference of about 5.3 percent.

Mexican Tax Credit Issue

37. In 1955, certain rolling stock owned by plaintiff was operated by Mexican railroads over lines located in Mexico. Plaintiff received rental payments from the Mexican railroads for their use of its rolling stock.

38. The Association of American Railroads (AAR) sets per diem rental rates for freight cars which are operated off the line owning the car and on other railroad lines. The freight car per diem rate for 1955 was $2.40, which was the amount that one United States or Canadian railroad paid another United States or Canadian railroad for each calendar day a freight car owned by the second railroad remained on the first railroad’s lines. The per diem rate paid by the Mexican railroads in 1955 for use of American freight cars was $3.40, of which $1.00 was withheld by the Mexican railroads as payment for tax due the Mexican Government and $2.40 was paid to the American railroad whose cars were used. For 1955, plaintiff claims payment of taxes to Mexico of $85,656.87, for which it claims a tax credit of $74,767.97 under §§ 901-904 of the Internal Revenue Code for 1954.

39. The facts relating to the Mexican income tax law and its relationship to per diem charges for the use by Mexican railroads of American freight cars are set out in findings 12 through 20, 24,25,27, 28, and 31, in Missouri-Illinois R.R. v. United States, 180 Ct. Cl. 1179 , 381 F. 2d 1001 (1967). The evidence in this case is fully consistent with those findings; and for convenience they are set out below, substantially verbatim, as findings 40 through 53, the only significant changes being those necessary to reflect the tax year here in issue and the fact of a different plaintiff.

40. In the past the practice had been for a Mexican railroad which used a oar of United States or Canadian ownership to pay to the car owner the Mexican per diem rate minus a percentage of that rate (usually 10 percent) which it was required to withhold under the Mexican income tax law. The amount withheld by the Mexican railroad was turned over *343 to the Mexican treasury, and the United States or Canadian car owner received credit for the tax payment. At the end of the taxable year, Messrs. Basham, Binge & Correa, a firm of attorneys in Mexico City, filed a Mexican income tax return on behalf of the car owner, and the car owner paid the difference between the amount withheld by the Mexican railroad and the full amount for which it was liable under the graduated income tax scale.

41. On December 31, 1953, a new Mexican federal income tax law was published which took effect on January 1,1954.

42. This Mexican statute, entitled “Ley del Impuesto Sobre la Benta” (which in English is “Income Tax Law”), was applicable to the rentals earned by the plaintiff in Mexico in 1955.

43. Schedule VI of this Mexican statute (entitled “Imposition of Capital”), in part imposes a tax on income derived from:

XIV. — Eentals, prizes, royalties and retributions of all kinds which are received, as owners or holders of personal property or of rolling stock from the persons to whom they grant the use or exploitation of the same without transferring the ownership thereof.

Under Article 129th, the lessor of rolling stock is entitled to certain deductions. However, paragraph XIV provides that those taxpayers to which paragraph III of Article 6th refers, who receive income for any of the reasons set forth in paragraph XIV, shall pay the tax in Schedule I. The plaintiff is a taxpayer within paragraph III of Article 6th. Schedule I provides in Article 26th that the basis of the tax in said schedule shall be the taxable profit which is the difference between the income received by the taxpayer during a period and the deductions authorized by the law. Article 28th of Schedule I provides that when because of the nature and characteristics of the operations carried out by the taxpayer it is not possible, by ordinary procedures, to determine with exactness the taxable income, the department of the treasury may enter into agreements for the determination of the tax base.

*344 44. Under Schedule I of the Mexican statute, deductions are permitted which are very similar to deductions in the United States statute.

45. The Mexican treasury department considered that it was difficult to determine the taxable income of the foreign companies leasing rolling stock into Mexico and to check and verify the expenses and taxable income of these companies. Therefore, the Mexican Government decided to enter into agreements, under Article 28 of the income tax law, for the payment of the tax.

46. On December 31, 1954, an agreement was executed by representatives of United States and Canadian railroads, of the Government of Mexico and of the Government-owned railways of Mexico, with respect to the payment of the tax on the income received by the United States and Canadian railroads from Mexican railroads. This agreement recited that certain United States and Canadian railroads (including the plaintiff herein) received income from sources located in the Republic of Mexico from the rental of rolling stock to the National Railways of Mexico and the Mexican Railway, which income was held to be subject to the Mexican income tax law. The agreement thereafter provided that the income received from the rental of rolling stock while in the Republic of Mexico, by the United States and Canadian railroads which do not operate in Mexico through agencies or branches, was subject to payment of Mexican income tax under Schedule VI of the income tax law; that the Mexican railways were authorized and obligated to retain the tax for which the United States and Canadian railroads were liable, and to account to the Mexican treasury for the amount so retained ; that the amounts retained shall be equal to the tax due; that the payment of the amounts so retained, to the Mexican Government, would be in full satisfaction of the obligations of the United States and Canadian railroads for Mexican income taxes on the rolling stock rentals; that each United States and Canadian railroad was obligated to file an income tax return setting forth all income from the Mexican railroads for the rental of rolling stock and the total Mexican income tax due thereon, and that the department of the treasury *345 and public credit of tbe Republic of Mexico agreed tbat the retention of the difference between the basic per diem rate and the Mexican per diem rate would fully satisfy the obligations of each of the United States and Canadian railroads for Mexican income taxes on rolling stock rentals. A similar agreement was executed July 18, 1955, covering rentals received from some of the privately owned railroads in Mexico. These privately owned lines constitute a very small part of the railroads in Mexico, with the main railroads being agencies of the Mexican Government.

47. The agreement, referred to in the preceding finding, was executed by representatives of United States and Canadian railroads, the Government of Mexico and the National Railways of Mexico and Mexican Railway, relating to the manner of payment of the income tax obligations of the United States and Canadian railroads (including the plaintiff). Its signatories were W. T. Faricy, President of the American Association of Railroads (on behalf of American and Canadian railroads), the Minister of Finance and Public Credit (on behalf of the Government of Mexico), and the General Manager (on behalf of the National Railways of Mexico and Mexican Railway, which were Government-owned). Faricy signed the agreement on October 6, 1954, and the Mexican officials signed it on December 31, 1954. A correct translation of the full text of the agreement, omitting the declarations as to its execution and signatures, is as follows:

AGREEMENT reached on one part by the Ministry of Finance and Public Credit, represented by the Minister himself Lie. Antonio _ Carillo Flores, the American and Canadian Railroads mentioned in enclosure “A”, [which list includes plaintiff here] represented by Mr. W. T. Faricy, — President of the Association of American Railroads, and the — National Railways of Mexico and Mexican Railway, represented by the General Manager, Licendiado Roberto Amoros, with a view to outline the basis to determine and withhold the income tax payments derived from revenues received through rental of— American and Canadian rolling stock while in the Republic of Mexico.

*346 STATEMENT

Some American and Canadian Railroads receive revenues from sources located in the Republic of Mexico through renting of rolling stock to the National Railways of Mexico and Mexican Railway, said revenue now sub] ect to the Income Tax Law in Mexico.

The Code of Rules on Per-Diem of Freight is outlined in — Circular No. T-225, its supplements and reissues, published by the Association of American Railroads. This Code, in Rule 1, establishes the rate for the use of freight cars which is to be paid for each natural day, and in the future these rates will be called “Per-Diem Basic Rates”. Note No. 1 of _ Rule 1 establishes the per-diem rate for the use of freight cars of American and Canadian ownership while in the Republic of Mexico. This rate, in the future, will be called “Mexican Per-Diem Rate”, which is higher than the basic Per-Diem rate, which difference consists of the amount of the Mexican Income Tax due through revenues for account of rental of rolling stock, which the owners need to pay to the Mexican Government.

Article 201 of the Law decrees the obligation to withhold and pay the accrued tax to persons making payments to subjects of — the tax located abroad from revenues that are taxable under said Law.

With authority provided for in Article 28 of the Income Tax Law and with a view to comply with the tax payment accrued through the rental of rolling stock, this Agreement is reached with the — following provisions:

clauses:

1. The revenue received by American and Canadian Railroads not operating in Mexico through agencies or branches derived from rental of rolling stock while in the Republic of Mexico, is subject to the payment of income tax, as per Item VI.

2. The National Railways of Mexico and Mexican Railway, with authority provided for in Article 201 of the Income Tax Law, are — compelled to withhold the tax accrued by the American and Canadian-Railroads on payments derived from rental of rolling stock while in the Republic of Mexico. The withholding is to be made on the total of the tax accrued and, therefore, the American and Canadian Railroads are exempt from the obligation decreed in Article 169 of — Rulings of the Income Tax Law, which in essence is the payment of the *347 tax through the cancellation of stamps on receipts issued to — the National Railways of Mexico and Mexican Railway for taxes derived from the rental of rolling stock while in the Republic of Mexico.

•3. The National Railways of Mexico and Mexican Railway agree to pay without discounts to each of the American and Canadian Railroads listed on enclosure “A” signed by each party and included in this — Agreement, the basic Per-Diem rate in effect at the time it is due, to retain the difference between the basic Per-Diem rate and the Mexican Per-Diem rate, and to pay the1 amounts withheld to the Mexican 'Government as the total obligations of the American and Canadian Railroads, in accordance with the Income Tax Law of Mexico regarding the rental of rolling stock.

4. The American and Canadian Railroads are to file with the Ministry of ’Finance and Public Credit during the month of January of each year a declaration of Income Tax earned the previous year, wherein all of the revenues received by the Mexican Railroads through the rental of rolling stock are to be mentioned and the total of the tax due on same.

5. It is agreed that the declarations of Income Tax filed individually by the American and Canadian Railroads listed on enclosure “A”, will include a statement of the total of the taxes mentioned as earned and withheld by the National Railways of Mexico and Mexican Railway, in accordance with Articles 201 and 28 of the Income Tax Law of Mexico. It is also agreed that the revenue for the rental of rolling stock mentioned in said declarations will be computed at the basis of the Mexican Per-Diem rate.

6. The Ministry of Finance and Public Credit of the Republic of Mexico agrees that the withholding of the difference between the Basic Per-Diem rate and the Mexican Per-Diem rate mentioned in — Clause 3, will cover completely all obligations of each of the American and Canadian Railroads listed on enclosure “A” of the Income Tax Law of Mexico on rental of rolling stock. The Ministry agrees, in addition, to furnish to each of the American and Canadian Railroads through a receipt or other form, a statement certifying said obligations.

7. The Ministry of Finance and Public credit will grant the National Railways of Mexico and the Mexican Railway for as long as — this obligation of payment of tax on rental of rolling stock exists, a subsidy equal to the amount of taxes withheld.

*348 8. It is expressly agreed that in the case when some of the American or Canadian Bailroads forming part of this agreement withdraw from same, said railroad or railroads will have the right to do it through advance notice in writing, stating its determination,. 60-days in advance, to the Association of American Bailroads, the Ministry of Finance and Public Credit of the Bepublic of Mexico and — the National Bailways of Mexico and Mexican Bailway, with the understanding that this will not destroy the other portions of this agreement, which will continue in effect.

9. It is expressly agreed that the Agreement will have a retroactive character to January 1954, in view of the fact that negotiations between all parties took place from that — date when actually the Agreement was put into effect.

‡ $ H* $

48. On July 18, 1955, a similar agreement was signed by Faricy on behalf of the United States and Canadian railroads and the Minister of Finance and Public Credit of Mexico relating to the manner of payment of the Mexican income tax on the income received from the lease of rolling stock to four privately owned Mexican railway firms.

49. The tax withheld by the Mexican railroads which were parties to the tax agreements was computed, in accordance with such agreements, as the difference between the basic per diem rate and the Mexican per diem rate. In the case of railroads not parties to the agreements, the tax was 10 percent of the gross rental.

50. In the absence of any tax agreements, specific provisions of the Mexican income tax statute provided for the withholding of 10 percent of the gross rentals. In such instances, while the rental income would also be taxed under Schedule I of the Mexican income tax law, deductions would be permitted (such as salaries, overhead, depreciation, and professional services).

51. The Mexican railroads which were not parties to the tax agreements were obligated to pay the amount of the tax withheld from the gross rentals earned, directly to the Mexican treasury department.

52. The Mexican income tax law does not provide for a subsidy to the Mexican railroads, but this law does hold those *349 obligated to withhold amounts as tax, liable at all times jointly with the taxpayer for payment of the tax.

53. The tax imposed by the Mexican income tax law upon the per diem freight rentals earned by the plaintiff while its freight cars were in Mexico, and which tax was withheld by the Mexican railroads for the account of the Mexican treasury, is a foreign income tax within the meaning of the United States Interna] Revenue Code.

54. In Missouri Pacific R.R. v. United States, 301 F. Supp. 839 (E.D. Mo. 1987), aff'd in part, rev'd in part and remanded, 411 F. 2d 327 (8th Cir. 1969), cert. denied, 396 U.S. 1037 (1970), the District Court for the Eastern District of Missouri held, on facts materially identical to those in the instant case, that the taxpayer was entitled to a tax credit for taxes withheld by the Mexican railroads and paid to the Mexican Government. On appeal to the Eighth Circuit Court of Appeals, 411 F. 2d 327, 328 (1969), that court held—

The primary question below was whether the taxes paid to the Republic of Mexico constituted an income tax so as to permit the taxpayer to credit that amount against its United States income tax liability under §§ 901 and 903 of the 1954 Internal Revenue Code, subject to the limitations set forth in § 904 of the Code. The trial court held that the taxes paid to the Republic of Mexico did qualify as income taxes and the government does not appeal this issue.

55. In response to a request for admissions submitted by plaintiff to defendant, defendant admitted as follows:

* * * if, in fact, a tax was imposed on plaintiff by the Government of Mexico, and if, in fact, a tax was paid by the plaintiff to the Government of Mexico, then for purposes of this litigation such tax may be deemed an income tax, or a tax in lieu of an income tax, within the meaning and contemplation of Sections 901-904 of the Internal Revenue Code of 1954.

56. Plaintiff’s net income from Mexico, attributable to per diem charges earned from the rental of plaintiff’s freight cars to Mexican railroads in 1955, was determined in accordance with this court’s decision in Missouri-Pacific R.R. v. United States, 183 Ct. Cl. 168 , 392 F. 2d 592 (1968). Accord *350 ingly, plaintiff is entitled to a credit against its 1955 Federal income taxes of $74,768.97.

CONCLUSION OK LAW

Upon the foregoing findings of fact and opinion, which are adopted by the court and made a part of the judgment herein, the court concludes as a matter of law that plaintiff is entitled to recover, together with interest as provided by law, on the claims relating to (1) § 1341 computation, (2) excess salvage value, (3) donated property depreciation, (4) casualty loss, (5) welded rail, (6) protective work, and (7) Mexican tax credit, and judgment is entered to that effect. The court further concludes that plaintiff’s recovery shall be subject to the setoffs raised by defendant with respect to (1) rail salvage value 'and (2) vacation pay accrual. The amount of recovery will be determined in subsequent proceedings under Rule 131 (c).

The estimate for the last 2 months was incorrectly calculated by plaintiff. It should be 19.69 percent of an amount which is equal to the actual payments made in the first 10 months, divided by (1-0.1969). See n. 2, infra.

As noted in n. 1 (finding 34), the correct calculation should have been 19.69 percent of $4,372,649.93/(1-0.1969), which is about $1,070,000. rather than $860,974.77.