Sandersville Railroad v. United States (385 F. Supp. 59, 1974)

BOOTLE, Senior District Judge:

This cause came on for trial before the Court without a jury. At the conclusion of the trial, the Court invited counsel to prepare proposed Findings of Fact and Conclusions of Law. Counsel have complied and the Court has carefully considered the proposals made. Having those proposals in mind and based upon all the evidence of record, both testimonial and documentary, including stipulations of counsel, the Court now makes its Findings of Fact and Conclusions of Law as- follows:

FINDINGS OF FACT

I. Background

1.

This is a civil' action instituted by Sandersville Railroad Company (“Plaintiff”) against the United States of America (“Defendant”) for the refund of $445,468.22 of tax, plus interest, assessed and collected from Plaintiff under sections 531-537 of the Internal Revenue Code of 1954, as amended, as tax upon the assertedly unreasonable accumulation of earnings for the calendar years 1965, 1966, 1967, 1968, and-1969, plus costs and interest as provided by law. (P. Ex. 1, Stip. Par. (1)). After suit was filed, the interest paid by Plaintiff, together with interest thereon, was refunded to Plaintiff pursuant to Stipulation and Order filed November 8, 1972. Therefore, there is involved in this case only the amount of accumulated earnings taxes paid by Plaintiff as follows:

1965 $ 63,189.26

1966 $ 79,488.48

1967 $ 79,829.49

1968 $106,503.75

1969 $116,457.24

Total $445,468.22

plus costs and interest to which Plaintiff is entitled on any sums unlawfully assessed and collected as accumulated earnings taxes. The jurisdiction of this Court is not disputed. (P. Ex. 1, Stip. Par. (3) and (4); Pretrial Order Par. 1).

2.

Plaintiff is a Georgia corporation which was incorporated in 1893, and it has been continuously engaged thereafter in the business of operating a shortline railroad in Washington County, Georgia. Plaintiff is, and was at all times, a public utility subject to regulations of the Interstate Commerce Commission and the Georgia Public Service Commission. (P. Ex. 1; Stip. Par. (2); Tr. 63).

3.

Plaintiff was organized by a small group of interested citizens in the Sandersville, Georgia area for the purpose of providing competitive freight service in that area. At that time, the City of Sandersville was served by the Augusta Southern Railroad (later known as the Georgia & Florida Railroad) which ran from Augusta to Tennille through Sandersville, and the Sandersville residents determined that more competitive rates could be secured if a second railroad were built. Plaintiff originally built and operated a four-mile long railroad from Sandersville to Tennille which carried both freight and passengers. The primary freight items carried at that time were cotton and timber. (Tr. 63-64, 66).

4.

Plaintiff had only one rail connection at the time it was formed, with the Central of Georgia Railway, at Tennille, Georgia, and that same situation exists today, except that the Central of Georgia Railway has been acquired by the Southern Railway Company. (Tr. 63, 106-107).

5.

Mr. Ben Tarbutton, Sr. was prevailed upon by the stockholders of Plaintiff to assume control of the Plaintiff in the late 1910’s. (Tr. 64). Plaintiff was in poor financial condition at the time but was needed by the community. The portion of the line of the Georgia & Florida Railroad running from Tennille to Augusta through Sandersville was abandoned in the mid-1930’s. (Tr. 64-65).

6.

At the time Mr. Tarbutton, Sr. assumed operational control of Plaintiff, the area it served was an economically depressed agricultural community, and it remains so today. (Tr. 65-66). Under the guidance of Mr. Tarbutton, Sr., Plaintiff became a major factor in the-industrial development of the Washington County area. During the 1920’s, Mr. Tarbutton, Sr. first sought to interest kaolin companies in locating in Plaintiff’s area of operation, and he made contact with Edward J. Grassman, president and chief executive officer of Georgia Kaolin Company, in an effort to attract the Georgia Kaolin Company to the Sandersville area. (Tr. 65-66, 67-68). Kaolin clay deposits were and are to be found in great quantities in the Washington County area. The kaolin clay is processed into the form of a fine, white powder. The primary industrial use of kaolin is in the filling and coating of high quality paper. Its other uses are many, including serving as a filler in paint and rubber. (Tr. 88-89, 407). Kaolin processing plants are major industrial installations, requiring large capital expenditures and large quantities of land for the plant itself, for railroad sidings and for effluent settlement ponds. (Tr. 68-77, 411-412; P. Ex. 2(a), 2(b), 2(c) and 2(d)).

7.

The first kaolin plant to locate in Sandersville began production in 1938. (Tr. 66). During the 1940’s, three additional kaolin plants were constructed on Plaintiff’s line. (Tr. 66-67). At this time, the kaolin clay was mined, processed and shipped by rail in box cars. The cars were loaded with processed kaolin by means of wheelbarrows and shovels from the platform on the back of the Plaintiff’s offices. (Tr. 66).

8.

After schooling and military service, Ben J. Tarbutton, Jr. and- his brother, Hugh M. Harbutton, the two sons of Ben Tarbutton, Sr., returned to Sanders-ville and were employed full-time by Plaintiff in 1955. (Tr. 62, 537, 1290). Ben Tarbutton, Jr. was designated a vice-president of Plaintiff at that time. (Tr. 62, 316-317, 537).

9.

Around 1955, Mr. Tarbutton, Sr.’s contacts with Mr. Grassman of Georgia Kaolin Company came to fruition, and Mr. Grassman committed a new corporation which was controlled by him, American Industrial Clays, to the construction of a new kaolin plant at a location approximately six miles from Sandersville. The plant was to be built at the site now known as Kaolin, Georgia, after the Plaintiff had acquired the necessary right-of-way and approval of the appropriate regulatory agencies. (Tr. 68, 79, 407-412; P. Ex. 3).

10.

After Plaintiff acquired approval of the Georgia Public Service Commission for construction of the track to Kaolin, Georgia, suit was brought against it to compel it to secure approval of the Interstate Commerce Commission on the grounds that this constituted a major extension of its road and not, as contended by Plaintiff, a mere spur track. (Tr. 170, 283). In Gilmore v. Sandersville Railroad Company, 149 F.Supp. 725 (M.D.Ga.1955), it was determined that this was an extension and that I.C.C. approval was required. Plaintiff then sought approval of the Interstate Commerce Commission, but encountered opposition from individual residents of the Sandersville area. (Tr. 182-185, 284; P. Ex. 10(a)). Among the grounds for objection was the Plaintiff’s alleged lack of financial capability' to construct the desired track extension and the consequent jeopardy to Plaintiff from the venture. (Tr. 184-185, 284, 287; P. Ex. 10(b)). To counter this objection, Mr. Tarbutton, Sr., assured the Interstate Commerce Commission that the track extension would be constructed without resort to borrowing from financial institutions or liquidation of other assets. (Tr. 184). Mr. Tarbutton, Sr. and his sons advanced funds to Plaintiff to enable construction of the track extension to Kaolin, Georgia. (Tr. 184).

11.

The track extension to Kaolin, Georgia, was completed in 1957. (Tr. 68, 79, 536; P. Ex. 3). After the construction at Kaolin of the American Industrial Clay plant and a second kaolin plant by an existing customer, Plaintiff served seven kaolin plants, and kaolin was the primary commodity carried by Plaintiff and generated the greatest part of its freight revenues. (Tr. 68, 87, 95, 214).

12.

Mr. Tarbutton, Sr. died in September, 1962. (Tr. 61, 82-83, 1129). Ben Tar-button, Jr. then succeeded to the presidency of the Plaintiff and Hugh Tar-button became the vice-president. (Tr. 61, 83-85, 1258). At this time, Ben Tarbutton, Jr. was 31 years old and Hugh Tarbutton was 29 years of age. (Tr. 1285-1286).

13.

Following Mr. Tarbutton, Sr.’s death, and through 1969, the stock of the Plaintiff was owned as follows (P. Ex. 1, Stip. Par. 7):

Shares Percentage

Estate of Ben J. Tarbutton, Sr. 1,250 25

Ben J. Tarbutton, Jr. 1.525 30.5

Hugh M. Tarbutton 1.525 30.5

Rosa M. Tarbutton 500 10

C. Findley Irwin 200 4

Rosa M. Tarbutton is the widow of Mr. Tarbutton, Sr. (Tr. 1121). C. Findley Irwin, now deceased, was unrelated to the Tarbutton family. (Tr. 1128-1129).

14.

The general manager of Plaintiff, Herbert Blackman, who had been in charge of the day-to-day operations of the Plaintiff, died in March 1963. (Tr. 82-84).

II. Operating and Financial Policies 1963 to Date

15.

Following the death of their father, Ben and Hugh Tarbutton realized that their most important task was the convincing of their customers, banking connections, mainline connection and suppliers of their ability to continue to operate Plaintiff efficiently and prudently. They decided that this result could best be accomplished by providing the very highest quality of service and equipment to their customers and by increasing the financial strength of Plaintiff. (Tr. 251-252).

16.

Ben and Hugh Tarbutton also determined that Plaintiff would adopt a policy of growth and would seek aggressively to exploit all opportunites for growth. They believed that Plaintiff would benefit directly from growth by increased freight revenues and indirectly by a broadening of the industrial base of the Sandersville community. In order for Plaintiff to pursue a policy of growth, they believed that its financial posture had to be strengthened. (Tr. 185-186, 188, 213, 1349-1351).

17.

Consistent with their basic operating philosophy, the Tarbutton brothers adopted a conservative approach to the financing of new property and equipment. They recognized, following their father’s death, that major expenditures would be required to maintain and improve service to existing customers and to provide service to new customers. To the extent possible, they desired to pay cash for these new properties and equipment. When borrowing appeared necessary, they sought to make the largest down payment possible at the time and to repay the loan over the shortest possible period. Once major debt was assumed, they desired to reduce the indebtedness substantially before incurring another major liability. (Tr. 255-256, 535, 1292-1293, 1748).

18.

During the period 1965 to 1970, Plaintiff acquired the capital assets described on the attached Exhibit A to these Findings of Fact and Conclusions of Law, at the cost and terms shown thereon. (P. Ex. 1, Stip. Ex. H). The total annual amounts of those capital acquisitions were (P. Ex. 1, Stip. Ex. H):

Year Cost

1965 1,279,488

1966 202,618

1967 316,510

1968 275,267

1969 4,310

1970 . 1,228,941

Total: 3,307,134

Of this total, $2,078,193 is attributable to the years 1965 through 1969.

19.

Consistent with the conservative financial policies adopted by Plaintiff’s new management, Plaintiff has acquired capital assets for cash when possible and has utilized borrowed funds on a basis deemed least likely to jeopardize its business. For example, a new locomotive was acquired in 1964 for cash at a cost of approximately $140,000. (Tr. 137, 632; P. Ex. 14, Minutes of Directors Meeting of August 5, 1964). Roadway and roadway property acquisitions, substantial in amount, were always made by cash payments. (Tr. 1499-1500; P. Ex. 1, Stip. Ex. H). Plaintiff’s policy in purchasing cars was to pay as much as possible in cash out of its own funds and borrow the balance of the purchase price from the Citizens & Southern National Bank, repayable on an installment basis over a period of years not to exceed five or six, with the purchased cars put up as security. Plaintiff sought to accelerate its payments whenever possible so as to feel free to continue its car purchase program and meet other needs. (Tr. 535). Plaintiff purchased cars in 1961, 1965, 1970, 1972, and 1974. In 1961, the loan on the car purchase was for approximately 80 percent of the purchase price, was at the prime rate of interest, and was repaid in twenty-two months. (Tr. 1292-1293; P. Ex. 14, Minutes of Directors Meeting of July 20, 1961). In 1965, Plaintiff paid down 21 percent, or $230,050, on the purchase of the fifty aluminum hopper cars, repayable over six years. In 1970, Plaintiff paid down 52 percent on the cars; in 1972, 21 percent; and in 1974, 64 percent down. (Tr. 1772-1773). It accelerated payments on the 1972 debt. (Tr. 1752-1753). Out of a total cost of capital acquisitions of $2,078,193 in the years 1965-1969, only $182,075 of the debt incurred to acquire those assets remained outstanding at the end of 1969, and of that amount, only $83,561 represented long-term debt. not due within twelve months. (P. Ex. 1, Stip. Ex. F and H).

III. Plaintiff’s Business Needs

A. Working Capital Requirement

20.

The working capital of a corporation consists of its current assets available for current operating needs. It is measured by subtracting current liabilities from current assets. If current liabilities exceed current assets, this is commonly denoted as a deficit in working capital. An excess- of current assets over current liabilities is often referred to in terms of a ratio as 1% to 1, 2 to 1, et cetera. (Tr. 1163-1164, 1193-1194, 1222-1223). Plaintiff’s actual working capital position during the years in suit, as shown on its books, was (P. Ex. 1, Stip. Ex. F; P. Ex. 29):

1965 1967 1968 1969 1966

Current Assets $231,635.33 $341,045.32

Current Liabilities $324,246.52 $357,150.41 $365,570.18 $373,615.64 $372,372.39

Net Current Assets ($141,980.31) ($ 31,327.07) ($ 82,055.30) $ 21,191.90 $154,654.41

21.

“Working capital needs,” as the term is used for purposes of this case, represents that amount of current assets in excess of current liabilities which will permit the corporation to pay its current liabilities and operate for a period of time without dependence upon future earnings. Both parties have made a determination of Plaintiff’s current working capital requirements at the end of each taxable year by reference to the avérage operating expenses incurred for a particular period of time. The principal difference between them is over what should be the length of that period of time. Defendant supports a determination varying from approximately 21 to 26 days, or from 5.98 percent to 7.19 percent. of the operating expenses of the taxable year. (Tr. 1552-1554, 1563; Def. Ex. 8). Plaintiff supports a period of four months, or one-third of the operating expenses of the particular year in question. (Tr. 216, 678). A current asset to current liability ratio of 2 to 1 is frequently utilized in financial analysis as a desirable working capital position. (Tr. 1226). See Sterling Distributors, Inc. v. United States, 313 F.2d 803, 808 (5th Cir. 1963). Defendant’s working capital allowance would result in a ratio of approximately 1.2 to 1, while Plaintiff’s would have provided a ratio of between 1.5 to 1 and 1.9 to 1.

22.

Defendant’s determination of working capital needs was stated to have been made in accordance with the so-called Bardahl formula. (Tr. 1544-1547, 1549-1553, 1560, 1563). Under this formula, an amount equal to the average of the accounts receivable at the beginning and end of each year is divided into the gross operating revenues for the year to determine the number of times the accounts receivable may be assumed to have “turned over” during that year. This figure is then divided into 360, representing the number of days of the year, to obtain a number of days representing an “operating cycle” or, in other words, the number of days in which on the average the accounts receivable will “turn over”. By dividing this by 360, the number of days of the year, the “operating cycle” is then expressed in terms of a percentage which is then multiplied by the total expenses of the year, less depreciation, to obtain a figure representing “working capital needs” for an average “operating cycle”. (Tr. 1552-1554; Def. Ex. 8).

23.

The largest part of Plaintiff’s revenues are collected from consignees of kaolin through settlements with Plaintiff’s connecting roads. (Tr. 564). However, the average length of time for the collection of accounts receivable during the year is short. (Tr. 678). Plaintiff has no inventory of goods held for sale which, for a manufacturing company, increases the numerator of -the fraction used in determining the length of the operating cycle and increases the length of the operating cycle itself. As explained by the Revenue Agent called as a witness by the Defendant, t)ie Bardahl formula does not take into account contingent liabilities which would not be reflected on the balance sheet as current liabilities but which, under normally accepted principles of accounting, would have to be disclosed in footnotes to any published financial statement. (Tr. 1065-1074, 1576-1577). Nor, according to the Revenue Agent, does the formula utilized by the Defendant in this case take into account unusual items of expense which might occur from time to time but are not regular and recurring items. (Tr. 1584-1586). For example, in December 1969, Plaintiff incurred unusually large road maintenance expenses of approximately $80,000, attributable to the purchase of rail for roadway replacement. (Tr. 1192; P. Ex. 35, Railway Operating Expenses Schedule, 1969). Except for unusual items of this sort, the current operating expenses of the Plaintiff were spread fairly evenly over a period of a year. Similarly, Defendant’s computation gave no consideration to the fact of a constant and anticipated increase in the level of Plaintiff’s expenditures, which rose from $569,314 in 1965 to $1,028,067 in 1969. (P. Ex. 29).

24.

In its determination of working capital needs Plaintiff undertook to take into consideration not only its normal expenditures but also contingent liabilities or potential claims including those outstanding and those which might be expected to arise from time to time in the operation of the business but which were not known at the end of the year. (Tr. 216-217, 226-229, 1450-1453.) Known contingencies of this description existing at various times during the taxable years included: contingent personal liability and liability for damage to the equipment of the Southern Railway resulting from the wreck of the Nancy Hanks passenger train in December 1965; the unusual requirement for substantial repair of fifty aluminum hopper cars which arose in March 1968 and was not concluded until after ’taxable years; and Defendant’s claim for tax deficiencies for the years 1965, 1966, and 1967, which arose in 1968 and culminated in payment after December 31, 1969. (Tr. 216-222, 227-229, 678, 1450-1454). The amount of the proposed tax deficiency outstanding at the end of 1968 and 1969 was approximately $243,000. (Tr. 1072, 1073).

25.

Plaintiff in its operations faces the hazard of an interruption or restriction in its current operating income as a result of such possibilities as a strike, energy shortages, the development of environmental problems, and the existence of a national emergency such as war or a period of recession. (Tr. 1449-1454). The Plaintiff’s operations could be affected by a strike on the Southern Railway, or other roads on which Plaintiff is dependent, on the part of the kaolin plants on its line, or in major consignees of its customers. Plaintiff experienced such a strike in July 1971, when its connecting carrier, the Southern Railway, was forced to stop operation for seventeen days. (Tr. 447-448, 1265-1269). Plaintiff had prepared for the strike and was able to continue its service to its customers for fifteen days, despite its inability to ship cars outbound beyond Tennille. (Tr. 448, 991-992, 1265-1270, 1521-1522). A professor of finance at the university level, called by the Defendant as an expert, testified that it was widely recognized that in determining standards of cash adequacy one should take into account “the risk of the firm’s running out of cash, particularly in recession periods.” (Tr. 1638). It is considered reasonable, moreover, in making such determinations, to take into account the maximum and most probable adverse limits of recession cash flows and balances. (Tr. 1638).

26.

Many of Plaintiff’s employees, both those working within the office and those working on the road, have long experience in railroad operations and would be most costly to replace. (Tr. 1271-1276, 1392-1393, 1450-1451). These include for example: the general superintendent, with almost thirty years of railroad experience in bookkeeping, car distribution, securing of cars and freight agency supervision; the interline accounting expert, with twenty-five years of experience; the office manager, with thirty years of experience; and the auditor-comptroller, with over forty years of railroad accounting experience. (Tr. 1271-1274). Most of these people were brought to Sandersville by the Plaintiff and replacements would not be available from within Sandersville but would have to be found from among the employees or former employees of other roads. (Tr. 1274, 1277). Moreover, the men of each train crew are experienced in working as a team. The work is hazardous to both life and property and the members of the crew bear a heavy responsibility. (Tr. 1274-1276). The rate of turnover of the members of the crew has been very low. (Tr. 1274). Employee relations have been good and the morale of the employees has been good. (Tr. 824, 1271-1277). During the periods of interrupted service or reduced income, Plaintiff’s management would carry its full complement of employees for an extended period, not less than six months, before considering the release of employees. (Tr. 1276-1277, 1451-1452, 1454). Replacements would generally be costly and time consuming. (Tr. 1277).

27.

Taking into account all of the foregoing factors, the reasonable needs of the Plaintiff for working capital at the end of each of the taxable years was equivalent to one-third of the operating expenses for the year, less depreciation, amounting to the following (P. Ex. 29):

Year Annual Expenses Working Capital Needs (%) of Annual Expenses

1965 $ 569,313.80 $189,771.26

1966 $ 853,216.89 $284,405.63

1967 $ 799,761.04 $266,587.01

1968 $ 887,041.01 $295,680.33

1969 $1,028,086.77 $342,695.58

B. Covered Hopper Car Needs

28.

Plaintiff’s principal operations consisted of delivering empty cars to its customers each morning, picking up loaded cars later in the day and carrying them to the mainline connection at Tennille for delivery to their ultimate destination. In addition, it carried a small amount of inbound freight. About ninety percent of its total traffic was kaolin from the kaolin plants on its line during the years 1965 to 1969. (Tr. 214). Kaolin can be carried in dry form in bulk by box cars or by covered hopper cars, in bags by box cars, or in a liquid “slurry” form by tank cars. (Tr. 89). The majority of Plaintiff’s kaolin traffic was carried in covered hopper cars during the years in suit. (Tr. 89).

29.

The kaolin plants on Plaintiff’s line were vitally concerned with freight costs, the efficiency of the cars in respect to the costs and convenience of loading and unloading, and the availability of cars. (Tr. 90-99, 982-985). The freight cost was a substantial part, as much as one-half, of the total cost of the kaolin to the consignees of Plaintiff’s kaolin shippers. Consequently, a shipper with higher freight costs than his competition could be seriously disadvantaged. (Tr. 92-94, 449, 983). Moreover, the type of car utilized affected the costs both of shipment and of loading and unloading. (Tr. 91-92, 413-414, 564, 983). Car availability was crucial to the kaolin plants on Plaintiff’s line, since they had little or no storage facilities. (Tr. 89, 413). In order to operate smoothly they needed a regular supply of empty cars for loading, and in turn, their customers had little storage capacity and were dependent upon regular deliveries. (Tr. 465, 982-994).

30.

During the later 1950’s and the 1960’s there was a trend in the railroad industry to design freight cars to meet specialized needs of shippers and consignees. (Tr. 90-91). This was reflected in a strong movement to covered hopper ears for bulk commodities, replacing box cars and open gondolas, and in the design of different sizes of covered hopper cars for particular needs. (Tr. 334, 582-584). The covered hopper car was becoming the type of car preferred by users of processed kaolin, especially paper manufacturers, since it aided in keeping impurities out of the product and it facilitated mechanical loading and unloading. (Tr. 89, 91-92, 999-1000). To service its kaolin customers Plaintiff therefore began leasing covered hopper cars and it purchased 25 covered hopper cars in 1961, when Central of Georgia decided to acquire simultaneously 75 cars of the same design. (Tr. 335, 541, 1289). The 25 cars purchased in 1961 by Plaintiff cost approximately $332,000, weighed empty approximately 69.000 pounds, and had a capacity of approximately 3,800 cubic feet and 95 tons of kaolin. (Tr. 113, 335-336, 686-687, 1292). Through the 1960’s, Plaintiff continued to make domestic shipments of kaolin in box cars, but this was primarily done where either the shipper or the recipient lacked the required facilities for loading or unloading of kaolin with a covered hopper car. (Tr. 89-92, 583-584). Shipments of bagged clay for export by ship were also made in box cars during this period. (Tr. 39, 1522).

31.

Because of the structure of freight rates imposed upon the shipment of kaolin, and because the cost of freight is a large portion of the cost of kaolin to the kaolin user, the capacity in cubic feet and tons of a covered hopper car was also of primary importance. (Tr. 983, 1428-1430). As freight rates were changed throughout the 1960’s by the Interstate Commerce Commission, it became increasingly advantageous economically to ship kaolin in larger capacity covered hopper cars. (Tr. 486-487, 582, 1427-1430). The trend in covered hopper cars in the 1960’s was toward securing the maximum tonnage possible in a car having a loaded weight not in excess of the maximum fixed by the Association of American Railroads, as authorized by the Interstate Commerce Commission, This maximum load limit, which includes the weight of both the car and the freight, was in 1965 and remains today 263.000 pounds. (Tr. Ill, 828-830, 1300-1301). Thus, if a freight car weighed in excess of 63,000 pounds, the most economically desirable quantity of kaolin, 200,000 pounds, or one hundred tons, could not be loaded into the car, regardless of the cubic capacity. (Tr. Ill, 419, 486, 1301, 1430). Initially, a fifty-ton hopper car had been utilized for kaolin traffic. (Tr. 576, 983). Thereafter, as the tonnage capacity increased, cars with a capacity of less than one hundred tons were rendered obsolete. (Tr. 90, 92-95, 575-583, 1428-1429; P. Ex. 14, Minutes of Stockholders Meeting of December 15, 1967).

32.

The rapidly increasing preference for covered hopper cars by bulk commodity shippers produced a shortage of this type of car. Moreover, a shortage of all types of cars was increasing in the early 1960’s, and was of considerable concern to the Interstate Commerce Commission during the years in suit. In December 1963, the Interstate Commerce Commission initiated an investigation, designated Ex Parte 241, to deal with the adequacy of freight car ownership and utilization.. (Tr. 850; F.R.Doc. 64-70, I.C.C. Order of December 20, 1963, in Ex Parte No. 241, 29 Fed.Reg. 119 (Jan. 4, 1964) (copy attached to Plaintiff’s Supplementary Listing of Documents submitted December 10, 1973). The Interstate Commerce Commission collected considerable data from the nation’s significant railroads, including Plaintiff, and initially proposed a requirement that each railroad own a sufficient quantity of cars to carry all freight originating on that railroad’s track. This proposal was withdrawn, at least temporarily, in the late 1960’s, but the I.C.C. took an alternative approach of increasing freight and “car hire” rates to induce railroads to purchase more ears. (Tr. 419, 519, 894-895; P. Ex. 24, pp. 4, 23-25, 43, 55-58). Plaintiff shared in the revenues from the freight charges with respect to all freight moved on its road, regardless of the ownership of the car in which the freight was carried. (Tr. 826-827). Also, under Interstate Commerce Commission rules in effect during the taxable years and subsequently, Plaintiff received from other roads “car hire” for the use of cars owned by Plaintiff, consisting of a fixed rate per diem for each day the car was on another road (loaded or empty) plus a rate per mile travelled on other roads (loaded or empty). Conversely, Plaintiff paid “car hire” when the cars of other roads were on its line. (Tr. 827-828, 894, 895-898, 1434-1439). The I.C.C. revised the covered hopper “car hire” rates’ upward to encourage car purchase. (Tr. 894-895). The Interstate Commerce Commission’s policies were of great concern to Plaintiff’s management and influenced their car acquisition program. (Tr. 519; P. Ex. 14, Minutes of Directors Meeting of December 10, 1966).

33.

Other features of covered hopper cars of importance to the Plaintiff’s customers were the pattern of discharge or unloading of the kaolin from the bottom of the covered hopper cars and the angle of the discharge gates. (Tr. 91, 421). Two discharge patterns were available: the center discharge car, referred to as a “center-flow”, had a row of discharge gates running along the middle of the car’s bottom; while the side discharge car had two rows of discharge gates, one along either side of the car. The customers of .the kaolin plants served by the Plaintiff standardized their unloading equipment to accept only the side discharge pattern. (Tr. 421, 983, 1001). Plaintiff’s managers also determined that kaolin “flowed” or discharged better, without “bridging” or jamming, from a squared body design than from a rounded design. (Tr. 413-414). For the convenience and efficiency of its customers and their consignees, as well as itself, Plaintiff therefore sought in the 1960’s to “standardize” its hopper cars to a side discharge, rather than a center discharge, and to a squared type body, rather than a rounded type. (Tr. 1305-1306, 1326-1327).

34.

During the early 1960’s, these many factors of rate design, type, size, weight, cubic capacity, configuration and structural strength were causing rapid changes in the design of covered hopper cars. The rapidity of the rate of change in the design of hopper cars is illustrated by the fact that the obsolescence of cars purchased by Plaintiff in 1961 was accelerated by the development of larger but lighter aluminum cars of a type purchased by Plaintiff in 1965, which Plaintiff then considered the “car of the future” for kaolin, and the fact that the aluminum cars were soon made obsolete for Plaintiff’s use by their failure to bear up under the strain of such heavy weight and their replacement by a newly developed cheaper and stronger lightweight steel hopper ear. (Tr. 115, 119-120). Consequently, cars purchased by Plaintiff in 1961 and 1965, ordinarily expected to be in use twenty-five to thirty-five years, had been entirely removed from Plaintiff’s service by the end of 1973. (Tr. 114-115).

35.

The Plaintiff’s sources of covered hopper cars during the 1960’s were as follows:

(a) Cars supplied by its mainline connection, the Central of Georgia Railway, which was acquired by Southern Railway in 1963. (Tr. 99-100, 106). Almost all shortline railroads in the United States rely entirely upon their connecting mainline and other mainline railroads for their supply of cars. (Tr. 101, 740-741).

(b) Cars supplied by other mainline roads. Following the Southern’s acquisition of the Central of Georgia in 1963, the Southern opposed Plaintiff’s prior practice of heavy reliance on these sources of cars. For one thing, their use generally was tied to “short hauls” over Southern lines and “long hauls” on the other lines. Plaintiff felt required to acquiesce in Southern’s demands but urged Southern to undertake a car purchase program to replace the supply of cars customarily received from other lines. (Tr. 107 — 109, 1314-1317).

(c) Leased cars. There were market sources from which, on occasion, covered hopper cars could be leased. (These “bona fide” leases are to be distinguished from arrangements to finance purchases designed in the form of leases.) Because of Plaintiff’s specialized requirements, it was generally not possible for Plaintiff to lease the type of car it wanted. (Tr. 100, 360-361, 488-490, 586, 988, 1022-1023,1317). From time to time Plaintiff did lease covered hopper ears which, though not entirely suitable, were useable in Plaintiff’s service. .(Tr. 532, 591).

(d) Purchased cars. Cars owned by Plaintiff, as well as cars leased by it, were in “assigned service”, so that under Interstate Commerce Commission rules other roads could not use these ears but were required to return them empty to the owning railroad as soon as the shipments were delivered. (Tr. 100, 305, 833, 891-892, 1318-1320).

36.

In 1963, Plaintiff began to experience an increasing shortage of covered hopper cars which continued throughout the years in suit despite the increased capacity per ear of the covered hopper cars used by Plaintiff. (Tr. 95-96, 117-118, 307, 984, 1337-1341; P. Ex. 14, Minutes of Directors Meetings of December 13, 1965, December 10, 1966, and December 12, 1969, Minutes of Stockholders Meetings of December 17, 1964, December 13, 1965, December 10, 1966, December 13, 1968 and December 12, 1969; P. Ex. 15 (a)-(e) and 25). It was unable to secure from its connecting line a sufficient number of cars in addition to the cars it owned and leased to supply the demands of its customers. (Tr. 95-96, 1291). Plaintiff w;as frequently unable to supply the number and type of car requested by its customers. (Tr. 90, 984-985, -1291, 1337-1341, 1479; P. Ex. 15(a)-(e) and 25). Plaintiff’s customers were repeatedly required to accept cars less suitable than those ordered by them, which adversely affected the cost of freight as well as the cost of loading and unloading. (Tr. 90-92, 421, 483-487, 1522-1524). On numerous occasions during the taxable years, the shortage of covered hopper cars caused Plaintiff’s customers to restrict production for limited periods of time. (Tr. 90, 457, 561,1479).

37.

In locating their plants on Plaintiff’s line and in planning their expansions, Plaintiff’s customers often talked with Plaintiff’s management about their concern over the car supply and their reliance on the Plaintiff to supply cars. (Tr. 96, 421-422, 462-464, 987). In the mid 1950’s Plaintiff’s largest customer, in negotiating the location of its plant at Kaolin, Georgia, had secured an agreement from Ben Tarbutton, Sr. that the Plaintiff would seek to own and control enough hopper cars to be independent of other lines. (Tr. 102, 408, 414-416). The assurance that Plaintiff would buy and control its own cars was given by Ben Tarbutton, Jr. and Hugh Tarbutton to Plaintiff’s kaolin customers repeatedly after their father’s death and during the taxable years. (Tr. 97-98, 414-418, 473-474, 987, 1008, 1009). For example, in 1963, American Industrial Clays was planning a major plant expansion, but its president, Mr. Grassman, wrote to Plaintiff that the plant expansion would not be undertaken, and that a plant would be built elsewhere, unless Plaintiff could assure Mr. Grassman that the needed cars would be made available. (Tr. 96, 308-310; P. Ex. 16). Plaintiff gave this assurance and it was relied upon by Mr. Grassman. (Tr. 96-97). Plaintiff’s customers preferred Plaintiff to own its own cars, rather than rely upon connecting railroads to supply its needs. (Tr. 416,988-989,1011-1013).

38.

In June 1963, the Southern Railway acquired control of the Central of Georgia Railway. (Tr. 106). As a result of this change in control, many employees of the Central of Georgia were discharged and many operating changes were made which affected the movement of freight originating on the Plaintiff’s road. Plaintiff's managers were greatly concerned over the potentially adverse effects of this change of control upon the Plaintiff’s operations . and upon the supply of covered hopper cars to Plaintiff by Southern Railway. Plaintiff’s managers began intensive efforts to build relationships with operating personnel of the Southern Railway and to acquaint these individuals with the importance of kaolin traffic to the Southern Railway. (Tr. 106-111, 1313-1320; P. Ex. 14, Minutes of Directors Meeting of December 4, 1963).

39.

After the death of Mr. Ben Tarbutton, Sr., Mr. William E. Dillard, president of the Central of Georgia from 1954 to 1968 and an outstanding railroad man of long and diverse experience, had strongly advised Ben and Hugh Tarbutton that they should make every effort to become independent in their supply of cars. (Tr. 104-106, 720-721, 742, 1291-1292). He pointed out that the general needs for specialized equipment were increasing rapidly and the mainline roads would have increasing difficulty in meeting their own needs. He advised that Plaintiff could not safely rely on other roads for its cars. (Tr. 103-105, 743). Mr. Dillard remained as president of the Central of Georgia after the acquisition of the Central of Georgia by the Southern Railway. He again pointed out to Ben and Hugh Tarbutton that in times of shortage a mainline connection would naturally tend to respond more fully to the needs of the kaolin plants served directly by it, with which its employees had direct relations, rather than the plants located on the Plaintiff’s line with which Southern’s contacts were indirect. (Tr. 105-106, 744-745, 764). This concern was also expressed very pointedly to Plaintiff by its customers in support of their insistence that Plaintiff adopt a program to obtain self sufficiency in hopper cars. (Tr. 416, 742-746, 988-989).

40.

At a special meeting of the Board of Directors on May 1, 1963, at a time when the acquisition by Southern Railway was anticipated, Ben and Hugh Tarbutton secured approval of a program to move toward self sufficiency in hopper cars by purchase and by leasing. (Tr. 1293-1294; P. Ex. 14, Minutes of Directors Meeting of May 1, 1963). They anticipated that the Interstate Commerce Commission would approve charges for “car hire” which would make the ownership of cars increasingly more profitable. They also believed that, with experience in the utilization of cars, they could improve .their efficiency and make the ownership of cars increasingly profitable for the Plaintiff. (Tr. 1291).

41.

The long range goal of Plaintiff was to own substantially all of the hopper ears regularly required on its line. (Tr. 1294,1412). This was necessarily a long-range goal because of the cost of cars and the financial limitations of the Plaintiff. (Tr. 1295). Plaintiff experienced an average “turn-around” time for its hopper cars of twenty-five days, meaning that on the average twenty-five days elapsed between sending a loaded car from Sandersville until its return empty. Thus, each one hundred cars would supply an average of four cars per day. (Tr. 101). During the years in suit, Plaintiff’s managers anticipated a cost of $18,-500 per car. (Tr. 111). At the end of 1965, the total number of hopper cars required to provide self sufficiency was around 500 to 550 and at the end of 1969 around 600 to 650, or a total investment in cars during all five years in suit of around $10,000,000 to $12,000,000. (Tr. 1295, 1524). At the end of 1973, Plaintiff’s. management considered that the number of cars required to attain its goal of self sufficiency had increased beyond 650 cars. (Tr. 1524).

42.

The covered hopper cars purchased by Plaintiff in 1961 had been manufactured by the Pullman-Standard Division of Pullman, Incorporated. (Tr. 335). In 1964, Plaintiff sought to buy from Pullman-Standard steel covered hopper cars of 100 ton, 4,000 cubic feet capacity. (Tr. 337, 1300; P. Ex. 14, Minutes of Directors Meeting of July 10, 1964 and August 5, 1964). No steel car had been developed at that time which was deemed structurally sound to carry 200,000 pounds (100 tons) of kaolin and which would weigh empty 63,000 pounds or less. (Tr. 359, 1300-1301). Consequently, in 1964 Plaintiff contracted to buy from another source, Magor Car Corporation, 50 aluminum hopper cars meeting these specifications. The aluminum cars cost $22,000 each, approximately $6,000 more than the steel car was expected to cost. (P. Ex. 14, Minutes of Directors Meeting of September 11, 1964 and Stockholders Meeting of December 17, 1964). The aluminum hopper car was a new design and Plaintiff was one of the first lines in the country to buy the car. (Tr. 1301). The Southern Railway had encountered some structural problems on an earlier purchase of aluminum cars from Magor but Plaintiff felt assured that its cars were strengthened so as to overcome the deficiencies found by Southern. (Tr. 119-120, 1301-1303). These cars were delivered in May 1965. (P. Ex. 14, Minutes of Stockholders Meeting of December 13, 1965). Because of the additional cost and untested design, Plaintiff’s officers had decided to purchase only 50 cars initially. (Tr. Ill, 116-117).

43.

One of the major categories of Plaintiff’s capital expenditures since 1963 has been freight cars, specifically, covered hopper cars designed for carrying processed kaolin. (P. Ex. 1, Stip. Ex. H; Tr. 91). In 1965, Plaintiff purchased 50 aluminum hopper cars at a cost of $1,-092,965, borrowing $862,915 to be repaid in six years at $150,000 per year. (P. Ex. 1, Stip. Ex. H; Tr. 114-117, 1297). In 1970, Plaintiff purchased 50 steel covered hopper cars at a cost of $922,038, borrowing $450,000 to be repaid in five years at $90,000 per year. (P. Ex. 1, Stip. Ex. H; Tr. 1297). In 1971, Plaintiff contracted to purchase 100 steel covered hopper cars for delivery in mid-1972, at a cost of $1,900,000, borrowing $1,500,000. (Tr. 135, 1297, 1750, 1752-1753, 1772). In 1973, Plaintiff contracted to purchase 100 steel covered hopper cars, for delivery in January, 1974, at a cost of approximately $1,960,-000, borrowing approximately $660,000. (Tr. 135, 1298, 1749, 1753).

Car Needs at the End of 1965, 1966 and 1967

44.

Plaintiff was advised by its customers of their planned expansions, and Plaintiff’s managers anticipated increased tonnage production by existing customers in each of the years in suit. (Tr. 395, 417-418). Plaintiff’s kaolin customers made substantial expansions in their plants “coming on stream” in 1965 and 1966. (Tr. 118). In 1965, Plaintiff received on a confidential basis from a representative of Southern Railway the estimate that the covered hopper car needs of Plaintiff’s kaolin customers would increase from the equivalent of 513 cars of 100 ton capacity per month in 1964 to the following (Tr. 1332-1337; P. Ex. 34 (the last five customers listed)):

Year

Monthly Car Requirements

1966 738

1967 754

1968 774

1969 814

1970 863

The output of American Industrial Clays increased five times from 1957 to 1968. (Tr. 412). The output of Anglo-American Clays doubled from 1965 to 1970. (Tr. 986, 1006-1007, 1031). Similar expansions occurred for Plaintiff’s other kaolin shippers, and Plaintiff’s transport of kaolin increased correspondingly. The total tons of freight carried by Plaintiff, of which kaolin was approximately 90 percent, increased from 808,197 in 1965 to 1,255,905 in 1969. (P. Ex. 30(a)). Cars of all types used for kaolin transport numbered 11,747 in 1965 and 15,782 in 1969, while the Plaintiff’s usage of covered hopper cars for kaolin transport increased from 6,253 cars in 1965 to 7,-695 ears in 1969. (Tr. 96; P. Ex. 25 and 30(a)). The average tonnage of the covered hopper cars was known to be increasing during this period. (Tr. 111).

45.

At the end of 1965, Plaintiff’s management knew that Pullman-Standard, which had lost substantial orders to Magor, was striving to design a lightweight steel car which would have a light weight of not more than 63,000 pounds and could carry 100 tons without exceeding the maximum allowable weight of 263,000 pounds. (Tr. 130-132, 338). The aluminum covered hopper cars had not yet proven their reliability to Plaintiff’s managers and customers, and Plaintiff’s management believed that in the near future Pullman-Standard would have a competitive car at much less cost. (Tr. 338, 417, 468-470, 717-718, 1303-1304). Plaintiff’s managers had decided to purchase all future cars from Pullman-Standard, assuming that Pullman-Standard developed, as expected, a lightweight steel hopper ear. (Tr. 1303-1305). At the end of 1965, Plaintiff’s management also believed that its liabilities, known and contingent, should be reduced before substantial commitments were made for additional cars. (Tr. 597, 600, P. Ex. 14, Minutes of Directors Meeting of December 13, 1965). The Nancy Hanks wreck had occurred on December 26, 1965, and Plaintiff’s management feared that the damages to the crew and passengers of the Nancy Hanks, and to the Southern Railway locomotive and cars could be as high as $1,000,000. (Tr. 600). At the end of 1965, Plaintiff also had other immediate needs which it took into account in appraising its financial position, including the unpaid balance of $524,514 on the 1965 car purchase and the need for a new locomotive and track improvements. (Tr. 600; P. Ex. 1, Stip. Ex. F; P. Ex. 14; Minutes of Directors meeting, December 13, 1965).

46.

Although facing large debt and uncertainty over the Nancy Hanks claims, at the end of 1965 Ben and Hugh Tarbutton intended to make an additional purchase of 100 cars, of 100 ton, 4,000 cubic foot capacity (“c. f. c.”), as soon as it became financially prudent to do so. (P. Ex. 14, Minutes of Stockholders Meeting of December 13, 1965). This was viewed as the next step in the long range program of self sufficiency in cars. A prime factor which caused a delay in placing an order for additional cars was the need to await Pullman-Standard’s development and testing of a cheaper but stronger lightweight steel car to replace the aluminum covered hopper car. (Tr. 512-513, 518-519). Plaintiff had a reasonable and reasonably anticipated need for a minimum of 100 additional cars at the end of 1965, at an estimated cost of $18,-500 per car. (Tr. 118, 717, 1303).

47.

At the end of 1966, Plaintiff’s management was aware that the Southern Railway had placed an order for a new type lightweight steel covered hopper car of 100 ton, 4,000 c. f. c. with Pullman-Standard. (Tr. 1304). Although plaintiff’s officers had decided that Plaintiff would acquire all of its cars in the future from Pullman-Standard because of that company’s reliability, they had no question but that they should see the new Pullman-Standard steel car in operation before ordering it. (Tr. 1304-1305, 1526-1527). Because Plaintiff was a small railroad and had only a single use for the cars, they felt they could not make such a large financial commitment on equipment they had not seen in operation. (Tr. 524, 531).

48.

At the end of 1966, Plaintiff needed and intended to buy 100 additional cars as soon as it became financially prudent to do so and a steel car of the desired type had proven itself reliable in actual use. (Tr. 118). Plaintiff’s managers anticipated this would be in the near future. Plaintiff had a reasonable and reasonably anticipated need for a minimum of 100 additional cars at the end of 1966.

49.

Plaintiff had experienced severe covered hopper car shortages in 1965, 1966 and 1967, and Plaintiff sought to alleviate this problem by the temporary expedient of leasing cars until its needs could be met through its purchase program. (Tr. 532, 591). At the end of 1967, Plaintiff had 109 cars leased to it under .long-term contracts, none of which was of the desired 100 ton, 4,000 c. f. c., side discharge design. (P. Ex. 14, Minutes of Directors Meeting of December 10, 1966 and Stockholders Meeting of December 10, 1966; P. Ex. 33). Because of the unsuitability of these leased cars, Plaintiff’s customers were not satisfied and they continued to press Plaintiff to carry on its purchase program; moreover, Plaintiff earned no “car hire” with leased cars as it did with owned cars, so it was financially motivated to purchase additional cars. (Tr. 400-401, 419-420, 475, 772-773, 988, 1329-1330).

50.

The new lightweight steel covered hopper cars of 100 ton and 4,000 c. f. c., purchased by Southern from Pullman-Standard first began coming into use on Plaintiff’s line in the latter part of 1967. After observing these ears in use for several months, Ben and Hugh Tarbutton concluded that this car, rather than the aluminum car of Magor, was its “car of the future” for its kaolin customers. This conclusion was reached by early 1968. At the end of 1967, Plaintiff’s management felt that its immediate needs were for 100 cars, and this was a reasonable and reasonably anticipated need of its business. (Tr. 118, 1307, 1475-1478, 1496).

Car Needs at the End of 1968 and 1969

51.

In March 1968, the attention of Ben and Hugh Tarbutton became absorbed by the discovery that their fifty aluminum cars were not standing up under the heavy loads of kaolin but were showing serious signs of undue stress. (Tr. 533, 1481). This first came to their attention with the report of the collapse of one of their loaded aluminum cars in Texas. (Tr. 115, 119-20). An immediate inspection disclosed weaknesses in other cars. (Tr. 119-121; P. Ex. 4(a) through 4(h)). Approximately 12-15 of the aluminum cars were removed from service and, to avoid other breakdowns which might cause other roads to reject their aluminum cars altogether, Plaintiff began “light loading” the remaining aluminum cars at seventy tons, at the expense and inconvenience of Plaintiff and its customers. (Tr. 123, 126, 1528-1529). It pressed Magor Car Corporation and Fruehauf, Inc., which had acquired Magor, to assume responsibility for the cars. (Tr. 314). This Magor refused to do. (Tr. 115, 120-129, 310-311; P. Ex. 17). Plaintiff sued to recover approximately $100,000, the initially estimated cost of repair which eventually was settled with Plaintiff bearing a repair cost of around $94,000 and Freuhauf the balance. (Tr. 120, 127-128, 589). The repairs were completed in 1970. (Tr. 127). In 1968 and 1969, Ben and Hugh Tarbutton felt that their entire investment of $1,100,000 in the aluminum cars was threatened and they gave priority to reducing this risk and resolving their claims against Magor. (Tr. 128, 533-534, 1528-1529, P. Ex. 14, Minutes of Directors Meetings of December 13, 1968 and December 12, 1969). They did not have confidence in the cars even after repair and had disposed of them before the trial of this case. (Tr. 128, 132). Magor and its successor, Fruehauf, have gone out of the business of manufacturing railroad cars and an aluminum covered hopper car is no longer being made. (Tr. 334-335, 1527).

52.

In 1968, Plaintiff’s management contacted a sales representative of Pullman-Standard in the hope of locating a larger order for 100 ton and 4,000 c. f. c. lightweight steel covered hopper cars to which it could “tack”. (Tr. 718, 1307, 1481, 1483). Plaintiff desired to “tack”, or add, its order for cars to an order placed by another party for a larger number of cars because it could thereby secure a lower per unit cost, a more prompt delivery schedule, and the benefit of the engineering done for the larger order. (Tr. 133, 338-339, 348, 1308,1468, 1485). Near the end of 1968, they were advised by the Pullman-Standard representative that he had a good prospect in the offing. (Tr. 1307, 1483). When this did not materialize during the course of the next six months, Plaintiff’s management decided that it could wait no longer for an opportunity to “tack” its order to a larger one and Pullman-Standard was asked for quotes on 50 and 100 such ears. (Tr. 131-132, 1309, 1483). In August 1969, it gave to Plaintiff a detailed quote on 50 cars at $17,485 per car and 100 cars at $16,350 per car. (P. Ex. 18(e)). Plaintiff’s management then consulted with the president of the Citizens & Southern National Bank about a loan to cover not more than eighty percent of the purchase price of 100 cars. (Tr. 132-133, 1310, 1464-1465, 1482-1483). The Bank officer referred to the serious credit shortage of that time and asked if the cars could be leased. He was advised that this was not possible. He then stated that he would prefer that they wait for a few months, when he expected some relief in the national shortage of funds, but that he would make the loan if Plaintiff’s managers felt they could not wait until the money market improved. Plaintiff’s management decided to delay the purchase and not press for a bank loan at that time. (Tr. 133-134, 528, 1310-1311, 1464-1465, 1483, 1514).

53.

Near the end of 1969, Plaintiff’s management was advised by Pullman-Standard that it had received a large order for covered hopper cars of Plaintiff’s type and design to which Plaintiff could tack an order. They replied that they wished to take advantage of this opportunity to tack. At the end of 1969, Plaintiff’s managers intended to tack 100 cars to the order. (Tr. 132, 1464-1465, 1482). However, in early 1970, Plaintiff was advised by Pullman-Standard that the order to which it was planning to tack had been cancelled. The cancellation was attributed to financial reasons. (Tr. 344, 718-719, 1311). In May 1970, finding no order on which to tack, and faced with a continuation of the national money shortage, Plaintiff’s management decided nevertheless, to proceed with a purchase from Pullman-Standard of 50 lightweight steel cars with 100 ton, 4,000 c. f. c. and of a side discharge, square body type. (Tr. 134, 335, 1484).

54.

Pursuant to its car acquisition program existing during the years in suit, the 100 covered hopper ears ordered by Plaintiff from Pullman-Standard in 1971 and again in 1973 were lightweight steel of the side discharge, square body type, 100 ton, 4,000 c. f. c., with per car empty weights of less than 63,000 pounds. (Tr. 135, 335-336, 339, 1297-1299).

55.

The “ear hire” earned by Plaintiff on its fleet of owned hopper cars has become a significant revenue source to Plaintiff. Gross receipts rose to $153,-658 in 1968, but declined to $119,618 in 1969 due to the removal from service of Plaintiff’s aluminum hopper cars. (P. Ex. 1, Stip. Ex. G). Subsequently, gross car hire receipts have risen to approximately $500,000. (Tr. 1330).

56.

At the end of 1968 and 1969, Plaintiff’s management intended to buy 200 additional ears as soon as they reasonably could do so. (Tr. 118-119, 135). They felt that this could be accomplished in the near future. They took steps to place a specific order for 100 cars in the summer and early fall of 1969 but were deterred by circumstances beyond their control, including a nationwide shortage in lendable funds. (Tr. 1464, 1482-1483). At the end of 1968 and 1969, their immediate needs were for not less than 200 additional hopper cars, at a minimum cost of $18,500 per car.

57.

Following the end of 1969 and by January 1974, Plaintiff had actually purchased 250 covered hopper cars, all of the desired design and by the preferred manufacturer, at a total cost of approximately $4,782,038.

58.

To recap, Plaintiff’s reasonable needs for the purchase of covered hopper cars at the end of each of the taxable years, which it recognized and intended to satisfy, were as follows:

Year Number of Cars Needed Estimated Cost

1965 100 $1,850,000

1966 100 $1,850,000

1967 100 $1,850,000

1968 200 $3,700,000

1969 200 $3,700,000

C. Locomotives

59.

An essential piece of equipment for a railroad is a locomotive. Prior to 1964, Plaintiff owned only one locomotive. (Tr. 136). This locomotive had been purchased in 1953 and its obsolescence was accelerated in 1959 when the manufacturer ceased producing locomotives. (Tr. 136).

60.

Plaintiff acquired a new locomotive in each of the years 1964, 1968, and 1970. (Tr. 137, 534; P. Ex. 1, Stip.Ex.H). Plaintiff paid cash for the 1964 locomotive, but financed the 1968 locomotive one hundred percent because of other financial needs. (Tr. 137, 535).

61.

In 1965,1966, and 1967, Plaintiff needed an additional new locomotive, but deferred purchasing one until a satisfactory new unit was developed by the desired manufacturer. (Tr. 137). Its managers recommended the purchase in 1966 and estimated the cost of this additional locomotive at approximately $150,000. (P. Ex. 14, Minutes of Directors Meeting of December 10, 1966 and Shareholders Meeting of December 10, 1966). The purchase was authorized by the directors in December 1966. (P. Ex. 14, Minutes of Directors Meeting of December 10, 1966). Plaintiff ordered a new locomotive in 1967 after the desired design improvements were made, which it received in 1968 and which cost $157,825. (Tr. 137; P. Ex. 1, Stip. Ex. H).

62.

In 1968 and 1969, Plaintiff needed a third new locomotive to serve its new and expanding customers. (Tr. 137-138; P. Ex. 14, Minutes of Directors Meeting of December 13, 1968 and December 12, 1969). It ordered a third locomotive in 1969 and received it in 1970. (Tr. 138). Plaintiff anticipated paying cash for this third locomotive and it accumulated the estimated purchase price, $170,000, in a special bank account. (Tr. 139; P.Ex. 14, Minutes of Stockholders Meeting of December 12, 1969). This special reserve fund was identified on the books and financial statements of the Plaintiff. (P.Ex. 35, General Balance Sheet, December 31, 1969, Aect. No. 703). However, other financial needs in 1970 caused Plaintiff to finance the purchase. (Tr. 139). Plaintiff paid $171,948 for .this third locomotive. (Tr. 139; P. Ex. 1, Stip. Ex. H).

D. Roadway and Roadway Equipment

63.

In order to run its cars and locomotives, Plaintiff obviously needed to maintain the condition of its existing railway. To serve new customers and to construct switching yards, Plaintiff' had to have land, ballast, ties and rail. During the decade from 1961 through 1971, Plaintiff added approximately six miles of sidings and yard tracks to its road, much of it in accordance with the recommendations of an independent engineering study in 1966. (Tr. 140-141, 143, 212-213, 254; P. Ex. 14, Minutes of Directors Meeting of December 10, 1966). Plaintiff also sought, during the years in suit, to improve its existing railway track-age to facilitate the carrying of hopper cars of increasing laden weight. (Tr. 140-141; P. Ex. 14, Minutes of Directors Meeting of December 13, 1965, December 10,1966, Stockholders Meeting of December 13, 1965, December 15, 1967). In order to accomplish these functions, Plaintiff had recognized and reasonable needs for roadway and roadway equipment during each of the suit years. As an approximation of needs known at the end of each year, Plaintiff’s management took the predictable expenditures which were actually made in the immediately succeeding year (except that a two-year estimate was used at the end of 1968 because financial pressures and other facts caused a delay during 1969). (Tr. 139-143, 1345, 1499-1500). The major items needed, planned for and acquired during the period 1965-1970 were land and spur tracks, yard tracks and railway maintenance equipment such as the $55,-500 tamper and the $11,500 tractor acquired in 1970. (Tr. 140-143; P.Ex. 1, Stip. Ex. H; P. Ex. 14, Minutes of Directors Meetings of December 13,1965, December 10, 1966, December 15, 1967 and Stockholders Meetings of December 10, 1966, December 15, 1967, December 13, 1968 and December 12, 1969). Plaintiff's reasonable and reasonably anticip