Minneapolis, St. Paul & Sault Ste. Marie R.R. Co. v. United States

Between 1909 and 1924, Minneapolis, St. Paul & Sault Ste. Marie Railroad Company and/or its successor (the taxpayer) (plaintiff) acquired more than 100,000 shares of stock in Wisconsin Central Railway (Wisconsin Central). Beginning in 1909, the taxpayer operated its own railroad and that of Wisconsin Central as one integrated operation. The taxpayer kept a balance of income and expenses attributable to Wisconsin Central, and if Wisconsin Central’s monthly income was not sufficient to pay for its expenses, the taxpayer would advance the funds to cover those expenses. In 1952, the taxpayer entered into an agreement that set an upper limit to the amount of the outstanding debt the taxpayer could recover from Wisconsin Central. In 1954, the amount the taxpayer would actually recover was set forth in a reorganization plan concerning Wisconsin Central. Wisconsin Central had not been able to meet its obligations to all of its secured creditors for many years, leaving nothing for its unsecured creditors. The taxpayer filed refund claims for: (1) a deduction in tax year 1952 (or alternatively 1954) for unsecured advances made to Wisconsin Central that became wholly worthless in that year and (2) a deduction in tax year 1952 (or alternatively 1954) for certain secured claims against Wisconsin Central memorialized in bond-interest coupons that became wholly or partially worthless in that year.