98 T.C. 242">*242 Cohen, Judge:

In separate notices of deficiency, respondent determined the following deficiencies1992 U.S. Tax Ct. LEXIS 22">*23 in petitioner's Federal income taxes:

After concessions, the issues remaining for decision are whether it was an abuse of respondent's discretion to deny petitioner's application to revoke an election to amortize petitioner's railroad grading under section 185(c); whether deposits received by petitioner for the construction of sidetracks in accordance with industry track agreements constitute income to petitioner during the years in issue; and whether 98 T.C. 242">*243 computer software purchased by petitioner constituted tangible personal property eligible for investment tax credit under section 38. All section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated.

FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference. Petitioner Kansas City Southern Industries, Inc. (Industries or petitioner), is a corporation duly1992 U.S. Tax Ct. LEXIS 22">*24 organized and existing under the laws of the State of Delaware, with its principal office in Kansas City, Missouri. At all material times, Industries was a holding company and the common parent of a group that filed consolidated Federal income tax returns. At all material times, Industries maintained its books and records and filed its Federal income tax returns on a calendar year, accrual basis.

During the years in issue, Industries' railroad operations were conducted principally through two of its subsidiaries, Kansas City Southern Railway Co. (Railway) and Louisiana & Arkansas Railway Co. (L&A). Railway and L&A were engaged in the business of transporting goods and commodities as a rail common carrier for hire and served the States of Missouri, Kansas, Arkansas, Oklahoma, Louisiana, and Texas. Railway operated 894.16 miles of mainline track, and L&A operated 745.51 miles of mainline track.

As used in this opinion, the term "grading" refers to the addition of soil to or the removal of soil from a roadway for the purpose of developing suitable grade and support upon which ballast, ties, and track are laid. The term also includes the preparatory operations of clearing1992 U.S. Tax Ct. LEXIS 22">*25 and grubbing, which must be performed prior to the actual grading of the soil, and construction of protection for the roadway, which is performed after the actual grading is completed.

On its Federal income tax returns for 1962 through 1969, petitioner claimed investment tax credits on grading additions 98 T.C. 242">*244 placed in service during those taxable years. Those years were at issue in the cases at docket Nos. 971-72, 974-72, and 4788-73. In those cases, petitioner also claimed depreciation of grading placed in service by Railway and L&A during the years 1962 through 1969. The cases at docket Nos. 971-72, 974-72, and 4788-73 were tried before the Tax Court in November 1975 and May 1976.

As more fully discussed in the opinion below, in 1969, Congress repealed the investment tax credit and enacted section 185(c), permitting a taxpayer to elect to amortize railroad grading. On its corporate tax return for 1970, filed in 1971, petitioner made such an election for the taxable years ended December 31, 1970, through December 31, 1976. In 1971, Congress reinstated the investment tax credit.

On or about December 13, 1977, petitioner filed an application to revoke section 185(c) election1992 U.S. Tax Ct. LEXIS 22">*26 (the application), seeking to revoke the election for the taxable year ending December 31, 1977, and subsequent taxable years. The application set forth the following reasons for petitioner's requested revocation of its election:

The issue of the amortization of taxpayer's post-1968 and pre-1969 railroad grading with respect to the taxable years ended December 31, 1962 to December 31, 1969, inclusive, is presently awaiting opinion and decision before the United States Tax Court in Kansas City Southern Railway Company, et al. v. Commissioner of Internal Revenue, Docket Nos. 971-72, 974-72, and 4788-73. Sections 185(c) and 185(d) are not applicable to the taxable years before the Tax Court. The Section 38 investment credit issue with respect to the railroad grading additions during the taxable years in issue is also before the Tax Court. Submission of briefs was completed September 14, 1977.

Section 185(h) precludes the treatment as Section 38 property of grading which is eligible to be amortized under Section 185. It is taxpayer's present opinion that the issue of investment credit with respect to post-1961 grading additions will be resolved favorably to the taxpayer in the1992 U.S. Tax Ct. LEXIS 22">*27 Tax Court case above referred to. It is therefore taxpayer's desire to revoke its Section 185(c) election in order to claim Section 38 investment credit with respect to grading additions on its income tax returns for the taxable years ended December 31, 1977, and subsequent.

The engineering and valuation branch of the Internal Revenue Service (the IRS) had responsibility to consider and act upon such applications with respect to railroad grading.

By letter dated March 1, 1978, petitioner requested that the IRS confirm petitioner's understanding that action on petitioner's 98 T.C. 242">*245 application would be indefinitely suspended, with the express understanding that:

1. Industries may restore the Application to active consideration at any time by filing a written request; and

2. If the Commissioner takes favorable action upon the Application at such time, it will be retroactive, i.e., the revocation will be effective for the taxable year ended December 31, 1977, and subsequent taxable years.

By letter dated March 10, 1978, under the signature of Geoffrey J. Taylor (Taylor), chief of the engineering and valuation branch, the IRS confirmed petitioner's understanding as follows:

Pursuant1992 U.S. Tax Ct. LEXIS 22">*28 to your telephone conversation of February 23, 1978, with Messrs. F.W. Bone and A.H. Galbraith and your written response of March 1, 1978, this letter will confirm our understanding that we should suspend action for the present on the request of Kansas City Southern Industries, Inc., for permission to revoke its prior election of section 185 for amortization of its railroad grading assets, with such revocation to be effective with the taxable year ending December 31, 1977, and subsequent years. It is further understood that the present request for permission to revoke the section 185 election will be reopened at a later time, with the same effective date for revocation, when you so request by letter.

The agreement between petitioner and the IRS to suspend action on petitioner's application was made for the purpose of allowing additional time for the Tax Court to render its decision on the grading issues previously tried for the taxable years 1962 through 1969. On June 30, 1981, the Court rendered its opinion on petitioner's 1962 through 1969 grading issues in Kansas City Southern Ry. v. Commissioner,76 T.C. 1067">76 T.C. 1067 (1981).

By letter dated March 15, 1992 U.S. Tax Ct. LEXIS 22">*29 1983, petitioner requested that its application be restored to active consideration with said revocation to be effective for the taxable year ended December 31, 1977, and subsequent taxable years. Petitioner submitted its request for restoration of its application to revoke the section 185(c) election because of the Court's decision in favor of petitioner with respect to its 1962 through 1969 grading issues.

On April 15, 1983, Charles O'Malley (O'Malley), an employee of the engineering and valuation branch from July 1978 through September 1, 1983, advised petitioner's counsel, J. Glenn Hahn (Hahn), that the IRS would not act favorably 98 T.C. 242">*246 upon petitioner's application. On or about April 15, 1983, petitioner requested a conference in Washington, D.C., to discuss with the IRS its proposed denial of petitioner's request for revocation of the section 185(c) election.

On May 4, 1983, Walter W. Howland, a representative of petitioner, and Hahn met with Noel J. Sheehan (Sheehan) and O'Malley, representatives of the IRS, at the National Office of the IRS in Washington, D.C., to discuss the proposed denial of petitioner's request to revoke its section 185(c) election. Petitioner1992 U.S. Tax Ct. LEXIS 22">*30 advised the IRS representatives at that meeting that its position was that grading was depreciable property and that it would be eligible for the investment tax credit if petitioner was allowed to revoke its section 185(c) election. Petitioner further advised the IRS representatives of its intent to claim an investment tax credit on grading if its application was granted. Petitioner was advised that it was the IRS position that grading was not eligible for the investment tax credit. The IRS employees indicated that they were aware of the 1981 Tax Court decision in favor of petitioner with respect to petitioner's 1962 through 1969 grading issues.

The IRS did not, at any time, discuss or propose any conditions or limitations upon which petitioner's application would have been granted.

By letter dated August 11, 1983, the IRS formally denied petitioner's application. That letter set forth the IRS view as follows:

Since enactment of section 185 of the Code taxpayers have had two alternatives for recovering the cost of railroad grading and tunnel bores incurred after 1968. The first is to recover the entire cost of the property at the time of its retirement or abandonment, the second1992 U.S. Tax Ct. LEXIS 22">*31 is to ratably deduct the cost over a 50-year life as provided by section 185 of the Code with no deduction allowable for retirement or abandonment unless the retirement or abandonment is attributable primarily to fire, storm or other casualty. * * *

The stated reason for denial of petitioner's application was set forth as follows:

The taxpayer made an effective election on its 1970 calendar year income tax return to amortize the cost of qualified property under the provisions of section 185(c) for 1970 and subsequent tax years. Taxpayer now requests revocation of this election in order to claim investment credit with respect to additions of this property. Inasmuch as investment credit is not available to property that is eligible for amortization under section 185 of the Code, 98 T.C. 242">*247 the taxpayer's request necessarily implies that the property would be treated as depreciable. Granting the taxpayer's request to revoke the election would, therefore, amount to facilitating the taxpayer's adoption of a method of cost recovery that is not consistent with either of the acceptable methods discussed above. Permission is, therefore, not granted to the taxpayer to revoke its election1992 U.S. Tax Ct. LEXIS 22">*32 under section 185(c) to amortize the cost of railroad grading and tunnel bores.

O'Malley had the primary responsibility for making the initial determination on whether to grant or deny petitioner's application. O'Malley prepared the original draft of the August 11, 1983, letter denying petitioner's application. The draft was then reviewed by O'Malley's immediate supervisor, Sheehan, a group chief in the engineering and valuation branch from 1977 through 1983. Sheehan signed the letter on behalf of Taylor.

Not having obtained IRS consent to revoke petitioner's section 185(c) election, petitioner continued to claim amortization pursuant to section 185(c) on its Federal income tax returns for the years in issue.

Pursuant to the stipulation of the parties, except with respect to the effect of section 185, if any, petitioner is properly entitled to depreciation deductions under the double-declining balance method of depreciation with respect to Railway's and L&A's post-1976 grading in the following amounts:

Petitioner claimed on its Federal income tax returns for 1978 through1992 U.S. Tax Ct. LEXIS 22">*33 1981, as qualified investments under section 46, the total cost of Railway's and L&A's respective grading placed in service for said taxable years.

Petitioner is entitled to treat the cost of its grading as "new section 38 property" and is entitled to qualified investment under section 46 and investment tax credits under section 38 with respect to the grading placed in service during the years in issue in the following amounts: 98 T.C. 242">*248

A "sidetrack" is a segment of a railroad track connecting an industry facility to a railroad's running track. The term "industry track agreement" refers to a written agreement between existing or potential industry shippers and the carrier railroad for the construction, maintenance, and operation of a sidetrack. A "headblock" is a point on the railroad's running track where a switch is installed that allows railcars to be diverted from the running track1992 U.S. Tax Ct. LEXIS 22">*34 onto the sidetrack.

From time to time, prior to and during the years in issue, as part of the conduct of their railroad transportation business, Railway and L&A entered into certain industry track agreements with various shippers. At issue in these cases are 39 industry track agreements entered into by Railway and L&A with various industry shippers.

All of the industry track agreements entered into by Railway and L&A and the various industry shippers at all pertinent times prior to and during the years in issue contained substantially identical terms and provisions, except for slight modifications arising as a result of negotiations with certain industry shippers, which modifications are not material to the resolution of the issues in these cases. All of the industry track agreements contained the following provisions relating to:

(a) Identification of the parties thereto;

(b) industry's obligation to provide a right-of-way sufficient for proper construction, maintenance, and operation of the sidetrack;

(c) the costs of construction of the sidetrack and refund of the actual cost of construction to the industry;

(d) obligations for maintenance of the sidetrack;

(e) necessary change, 1992 U.S. Tax Ct. LEXIS 22">*35 rearrangement, extension, or enlargement of the sidetrack;

(f) title and ownership of the sidetrack;

(g) Railway's or L&A's rights to use the sidetrack;

98 T.C. 242">*249 (h) industry's obligation to maintain certain clearances and keep the sidetrack free from obstructions;

(i) industry's obligation to indemnify Railway or L&A for claims arising from loss or damage as a result of operation of the sidetrack;

(j) industry's obligation to maintain continuous operations;

(k) liability for damages resulting from discontinuance of operation of the sidetrack; and

(l) cancellation and termination of the agreement and Railway's or L&A's right to remove components of the sidetrack.

The industry track agreements typically provided that Railway or L&A, at the industry's expense, would furnish labor and material, exclusive of grading, drainage, and subgrade stabilization, for construction of that portion of the sidetrack from the headblock on Railway's or L&A's line to the railroad's property right-of-way line.

The industry track agreements customarily provided that the industry would, prior to construction, deposit with Railway or L&A a sum representing the estimated cost of construction of that portion1992 U.S. Tax Ct. LEXIS 22">*36 of the sidetrack from the headblock on Railway's or L&A's running line to the railroad's property right-of-way line. If the actual cost of the work covered by the deposit was more than the estimate, the industry agreed to pay the additional cost upon presentation of a bill therefor by Railway or L&A. If the actual cost of the work was less than the amount deposited, the difference would be refunded by Railway or L&A to the industry upon completion of the work. The industry track agreements customarily provided that Railway or L&A would periodically refund to the industry, at a specified rate, the actual cost of constructing that portion of the sidetrack from the headblock to the railroad's property right-of-way line.

An industry track agreement between L&A and Grocery Supply Co. dated August 17, 1978, contained a refund provision typical of those contained in the industry track agreements for 1978 through 1981. The agreement provided for refund to the shipper of the amount deposited at the rate of $ 10 per car on cars originating on or destined to the subject sidetrack, provided that the mainline haul revenue with respect thereto amounted to $ 200 or more per car. The term "mainline1992 U.S. Tax Ct. LEXIS 22">*37 haul revenue" means revenue from freight shipments originating on or destined to a point on Railway's or L&A's mainline.

98 T.C. 242">*250 An industry track agreement between Railway and P.Q. Corp. dated July 13, 1982, contained a refund provision typical of those contained in the industry track agreements entered into for 1982 and 1983. The agreement provides for refund of the amount deposited at the following rate:

The industry track agreements customarily provided that refunds would be made quarterly on the basis of statements submitted by the industry and verified by Railway or L&A of cars handled over the sidetrack.

The industry track agreements, among other things, contained the following provisions:

Failure to Operate Plant. -- 9. If Industry shall fail for a period of three consecutive months in any period of twelve months to operate and carry on said business therein, to accommodate which the said sidetrack is to be operated, or if Industry shall fail or refuse for thirty days after demand made therefor to comply with1992 U.S. Tax Ct. LEXIS 22">*38 and carry out any of the covenants or agreements of the Industry herein, or if Industry shall dispose of said business or assign this contract or any right or interest herein or hereunder without the written consent of the Railway Company, then said Railway Company may, at its option expressed in writing, terminate its obligation herein further to operate said sidetrack, and at its option may take up and remove said sidetrack [only that portion owned by Railway Co.], and any notice of such option shall be sufficiently given and expressed if mailed in an envelope addressed to Industry at the aforesaid place of business or left thereat with any person in charge; but no termination shall release Industry from any liability which may have attached or accrued previous to or at the time of such termination, nor from any obligation of indemnity herein contained, or covenant to hold Railway Company harmless or to pay damages or judgments.

Discontinuance. -- 10. Any and all loss or damage sustained in consequence of any temporary or permanent elimination of said sidetrack, shall be assumed by Industry, or in event the disposition of the property of Railway Company or its future use or development1992 U.S. Tax Ct. LEXIS 22">*39 shall make it impracticable in the judgment of the Chief Engineer of Railway Company to continue the connection, Industry hereby waives any and all claims therefor.

Cancellation, Termination and Removal. -- 11. This agreement shall be terminable upon thirty (30) days' written notice from either party to the other.

98 T.C. 242">*251 Upon termination of this agreement Railway Company shall have the right to enter upon the property of Industry and remove any or all of the material owned by Railway Company, and shall not be liable to account in any way to anyone for any monies paid or expended on account of any of the track or tracks covered by this agreement, nor for any damages resulting from the removal of any or all of the material owned by Railway Company. In the event the rules and regulations of the Railroad Commission of the aforesaid state (in which said sidetrack is located), now or hereafter, require that no siding, switches or spur tracks shall be removed without the approval or consent of said Railroad Commission, then and in that case, it is hereby expressly agreed that Industry will use its best efforts to secure the approval or consent of said Railroad Commission for the removal1992 U.S. Tax Ct. LEXIS 22">*40 of said sidetrack upon the written request of Railway Company so to do. If Industry fails, refuses or neglects to secure the approval or consent of such Railroad Commission for the removal of said sidetrack [only that portion owned by Railway Co.] for the period of sixty days after receiving a request in writing so to do from Railway Company, then it is hereby expressly agreed that Railway Company may remove said sidetrack; and Industry hereby expressly agrees to protect, indemnify and forever save harmless Railway Company from all claims and all liability arising from or by reason of any action, complaint or proceeding instituted in any court or before such Railroad Commission because of the removal of said track.

Until terminated as hereinbefore provided, this agreement shall inure to the benefit of and be binding upon parties hereto, their heirs, executors, administrators, successors and assigns.

During the years in issue, Railway and L&A refunded deposits pursuant to industry track agreements with various industry shippers in the following total amounts:

1992 U.S. Tax Ct. LEXIS 22">*41 The industry track agreements customarily provided that deposits would be refunded within 5 years from the date of completion of construction of the sidetrack. Any balance of the deposit remaining unrefunded at the end of such 5-year period could be forfeited to Railway or L&A. The refund period under the industry track agreements was extended approximately 50 percent of the time.

98 T.C. 242">*252 Although petitioner occasionally extended the time in which shippers could seek a refund of their sidetrack deposit, such an extension of time was a voluntary action by petitioner not required by the industry track agreement.

Not all industry shippers were required to enter into industry track agreements and make deposits for the construction of sidetracks. A decision whether to require an industry shipper to enter into an industry track agreement was based on the business potential of the shipper.

During the years in issue, Railway and L&A were required to maintain, and they did maintain, their books of account, including those relating to sidetrack deposits, under the uniform system of accounts for railroad companies prescribed by the Interstate Commerce Commission (as revised to October1992 U.S. Tax Ct. LEXIS 22">*42 1, 1979) (ICC Uniform System of Accounts) in effect during the years in issue.

Railway's and L&A's accounting for sidetrack deposits involved the following account classifications prescribed by the ICC Uniform System of Accounts:

Railway's and L&A's account No. 701, cash, was a general ledger current asset account, supported by subsidiary or subaccounts, including subaccount No. 70101, cash.

Railway's and L&A's account No. 731, road and equipment property, was a general ledger fixed asset account, supported by subsidiary or subaccounts, including subaccount No. 73101, road property, and subaccount No. 73190, construction in progress.

Railway's and L&A's account No. 782, other liabilities, was a general ledger liability account, supported by subaccounts, including subaccount No. 78201, deposits on industrial tracks.

Railway's and L&A's account No. 784, other deferred credits, was a general ledger account supported by subaccounts, including subaccount No. 78404, suspense.

At all material times prior to and during the years in issue, all amounts originally received1992 U.S. Tax Ct. LEXIS 22">*43 by Railway and L&A under the industry track agreements were recorded on their books as a 98 T.C. 242">*253 debit to account No. 70101, cash, and a credit to account No. 78404, other deferred credits/suspense. The cost of construction of the sidetrack was recorded on the books of petitioner as a debit to account No. 73190, construction in progress, and a credit to account No. 70101, cash.

Upon completion of construction of the sidetrack, a completion report was prepared by Railway's or L&A's engineering department setting forth the actual cost of construction of such sidetrack; this completion report was then forwarded to Railway's or L&A's industrial department and accounting department for approval. Upon approval of the completion report, the accounting department compared the actual cost of construction of the sidetrack with the amount deposited by the industry.

During the years in issue, petitioner's railroads, upon completion of sidetrack construction projects and approval of the completion reports for such projects, credited account No. 78201, deposits on industrial tracks, in the following total amounts:

1992 U.S. Tax Ct. LEXIS 22">*44 Petitioner had full use of the funds deposited by the shipper under the respective industry track agreements. The funds were commingled with petitioner's other funds in a general bank account. Petitioner paid no interest on any refunds made to the shippers under the respective industry track agreements.

During the taxable years 1976, 1977, 1980, 1981, 1982, and 1983, petitioner and certain of its subsidiaries purchased computer software for use in their respective trades or businesses. The computer software consisted of magnetic tapes or disks containing programs compatible with petitioner's computers. Software designed by and acquired from Systec Data Management, Inc. (Systec), a member of petitioner's 98 T.C. 242">*254 consolidated group, was used for "mainline business applications" and was owned by petitioner or its subsidiary acquiring the software. Software obtained from third parties was for general purpose business applications and could not be resold without violating the vendor's license rights.

OPINION

Each of the three issues set forth at the beginning of our opinion has, to some extent, been the subject of at least one prior opinion of this Court. 1992 U.S. Tax Ct. LEXIS 22">*45 Our resolution of each issue is controlled by those prior opinions, and we have found no reason to either reconsider or reject them.

The grading issues in these cases arise out of congressional action of repealing the investment tax credit in the Tax Reform Act of 1969, Pub. L. 91-172, sec. 703(a), 83 Stat. 660, and restoring it by the Revenue Act of 1971, Pub. L. 92-178, sec. 101, 85 Stat. 497 (1971). Concurrent with the 1969 repeal of the investment tax credit, section 185 was added to the Internal Revenue Code. Pub. L. 91-172, sec. 705(a), 83 Stat. 670. During the years in issue, the relevant parts of section 185 provided as follows:

SEC. 185. AMORTIZATION OF RAILROAD GRADING AND TUNNEL BORES.

(a) General Rule. -- In the case of a domestic common carrier by railroad, the taxpayer shall, at his election, be entitled to a deduction with respect to the amortization of the adjusted basis (for determining gain) of his qualified railroad grading and tunnel bores. The amortization deduction provided by this section with respect to such property shall be in lieu of any depreciation deduction, or other amortization deduction, with respect to such property1992 U.S. Tax Ct. LEXIS 22">*46 for any taxable year to which the election applies.

(b) Amount of Deduction. --

(1) In general. -- The deduction allowable under subsection (a) for any taxable year shall be an amount determined by amortizing ratably over a period of 50 years the adjusted basis (for determining gain) of the qualified railroad grading and tunnel bores of the taxpayer. Such 50-year period shall commence with the first taxable year for which an election under this section is effective.

(2) Special rule. -- In the case of qualified railroad grading and tunnel bores placed in service after the beginning of the first taxable year for which an election under this section is effective, the 50-year period with 98 T.C. 242">*255 respect to such property shall begin with the year following the year the property is placed in service.