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In Milwaukee Gas Light. Co. v. Dept. of Taxation, 23 Wis.2d 195, 203, 204, 127 N.W.2d 64 (1964), this court interpreted the word "including" to mean "classifying that which follows as being a component part of the whole.
Summary of this case from Hayne v. Progressive N. Ins. Co.Opinion
March 2, 1964 —
March 31, 1964.
APPEAL from a judgment of the circuit court for Dane county: EDWIN M. WILKIE, Circuit Judge. Reversed.
For the appellant there were briefs by Foley, Sammond Lardner and Theodore C. Bolliger, all of Milwaukee, and oral argument by Mr. Bolliger.
For the respondent the cause was argued by Harold H. Persons, assistant attorney general, with whom on the brief was George Thompson, attorney general.
Action by Milwaukee Gas Light Company (hereinafter the "taxpayer") pursuant to the Wisconsin Administrative Procedure Act (ch. 227, Stats.) against the Wisconsin Department of Taxation (hereinafter the "department") to review a decision and order of the Wisconsin board of tax appeals (hereinafter the "board"), which affirmed the department's denial of the taxpayer's application for abatement and claim of refund of corporate income taxes for the years 1954, 1955, and 1956.
The taxpayer is a public utility as defined in sec. 196.01 (1), Stats., and as such is subject to the regulatory jurisdiction of the public service commission of Wisconsin (hereinafter "PSC"), as to its income, depreciation charges accounting and rates, all as provided in ch. 196, Stats.
On September 6, 1940, the PSC, pursuant to sec. 196.09, Stats., made its first certification of the taxpayer's depreciation rates. It ordered "straight-line" depreciation rates. The exact amounts of "straight-line" depreciation recorded on taxpayer's books pursuant to the 1940 order of PSC have not been questioned by the department and are not in issue in this case.
Starting in 1954 taxpayer for federal income-tax purposes depreciated its income producing property under the "sum-of-the-digits" formula, which was one of the new methods of accelerated depreciation then authorized by sec. 167 of the Internal Revenue Code of 1954 (26 USCA, p. 702, sec. 167). Specifically, this section extended to all taxpayers the right to depreciate new property acquired after December 31, 1953, and having a useful life of three years or more, under either the "Declining-balance" method, or the "sum-of-the-digits" method. These liberalized methods permit much higher deductions in the first few years after acquisition of the new asset than those allowed under the more familiar "straight-line" method, with decreasing amounts being allowed in succeeding years. During the latter part of the service life of an asset, the allowable annual deductions are less than those allowed under the "straight-line" method. Under neither method does the asset become fully depreciated prior to the completion of its estimated useful life.
After the enactment of sec. 167 of the Internal Revenue Code of 1954, there was much uncertainty as to how the PSC would permit Wisconsin public utilities to treat the federal income-tax savings which resulted from using the new accelerated depreciation methods. Early in 1956 Wisconsin Fuel Light Company asked the PSC for a declaratory ruling on this point; and on January 27, 1956, the PSC issued its order directing Wisconsin Fuel Light Company to charge to depreciation expenses and to credit to depreciation reserve "an amount equal to the reduction in federal income taxes effected by use for federal income-tax purposes of the liberalized depreciation provisions of Section 167 of the 1954 Internal Revenue Code." The se amounts were in addition to those previously certified. Thereafter, at least ten other utilities, including taxpayer, applied for and received similar orders.
Taxpayer filed a similar application with PSC on August 24, 1956. Prior to making such application taxpayer had credited to "Taxes Accrued" the savings in federal income taxes for the two prior years of 1954 and 1955 resulting from use of the "sum-of-the-digits" method of computing depreciation. The theory underlying this treatment of the tax saving was that taxpayer would be subjected to higher federal income taxes in subsequent years when the rate of depreciation charged would be less than that previously permitted by the PSC under the "straight-line" method of depreciation. On August 30, 1956, the PSC issued its order which provided in part as follows:
"IT IS THEREFORE ORDERED:
"1. That, with respect to depreciation expense on amounts of each plant account or portions thereof on which a liberalized depreciation allowance, under Section 167 of the Internal Revenue Code of 1954, is claimed for federal income tax purposes, and in addition to amounts of depreciation computed at the rates certified in this docket on August 4, 1955, Milwaukee Gas Light Company be and is hereby authorized, commencing with the calendar year 1956, to elude in account 503, Depreciation, with contra entry in the appropriate subdivision of account 250, Reserve for Depreciation of Utility Plant, an amount determined as the product of the federal income tax rate times the difference between (a) the annual amount of liberalized depreciation allowance on such plant, and (b) the annual amount of depreciation on such plant computed at the certified depreciation rates,
"2. That, for any period prior to January 1, 1956, for which liberalized depreciation provisions are claimed for federal income tax purposes without effect having been given thereto as provided in paragraph 1 above, Milwaukee Gas Light Company shall transfer from account 229, Taxes Accrued, to appropriate subdivisions of account 250, Reserve for Depreciation of Utility Plant, amounts estimated to give substantially the same result as though the provisions of paragraph 1 above had been in effect during such prior period."
The amounts of savings in federal income taxes for the three years in question, which this order directed taxpayer to credit to its reserve for depreciation of utility plant, are as follows:
1954 ..................... $ 23,366.48 1955 ..................... 81,657.06 1956 ..................... 166,361.20 ----------- $271,384.74 Taxpayer in its 1956 state income-tax return took a deduction for depreciation which included the above item of $166,361.20. The department on January 30, 1958, gave appellant notice of an additional assessment of Wisconsin income taxes on income of the calendar years 1954, 1955, and 1956, aggregating $11,408.64. For the most part, and so far as here concerned, this assessment was based upon the disallowance of the $166,361.20 portion of the depreciation deduction taken in the 1956 return. Taxpayer duly filed an application for abatement and claims for a refund, contending that:(a) A deduction should be allowed in 1956 not only for the $166,361.20 disallowed but also an additional 1956 depreciation deduction totaling $105,023.54, being the total of the federal tax savings of $23,366.48 in 1954 and $81,657.06 in 1955, and a refund of 1956 tax resulting therefrom; or that
(b) The $166,361.20 should be allowed as depreciation in 1956 and the additional federal tax savings in 1954 and 1955 respectively should be allowed as additional depreciation in those years respectively with the resulting refunds of 1954 and 1955 taxes by reason thereof.
The department denied the application for abatement and the alternative claims for-refund. Upon review thereof the board by its decision and order on September 15, 1961, affirmed this action. The circuit court affirmed such decision and order by a judgment entered August 5, 1963. Taxpayer has appealed from this judgment.
The issue raised by this appeal is whether a public utility taxpayer is permitted to deduct from gross income, for purposes of computing its net income subject to Wisconsin income tax, the additional amounts which it was ordered to charge to depreciation and to credit to its reserve for depreciation under the PSC order of August 30, 1956. This issue is one of first impression in Wisconsin. It arises solely because of the complete statutory scheme of public-utility regulation and the legal impact of such regulation on all of taxpayer's accounting, income, and property values, and has no application to nonutility businesses.
The controlling statute is sec. 71.04 (2), Stats., which provides:
"Every corporation, . . . shall be allowed to make from its gross income the following deductions:
"(2) Other ordinary and necessary expenses actually paid within the year out of the income in the maintenance and operation of its business and property, including a reasonable allowance for depreciation by use, wear and tear of property from which the income is derived . . ."
The term "actually paid" includes the accrual-basis taxpayers under the definition of that term in sec. 71.02 (3), Stats. The instant taxpayer reports on an accrual basis.
The determination of whether this statute permits the deduction of these amounts of depreciation requires the resolving of these two questions:
(1) Are such amounts ordinary and necessary business expenses of taxpayer?
(2) Is the statutory word "including"a word of limitation so as to exclude from the operation of the statute any expense charge of a public utility labeled "depreciation" which otherwise qualifies as an ordinary business expense?
Ordinary and Necessary Business Expenses.
The PSC, acting as an arm of the state, has full jurisdiction under ch. 196, Stats., over taxpayer's depreciation charges, accounting, and gas rates. Pursuant to such authority, the PSC periodically, by order under sec. 196.09, Stats., finds the reasonable and proper expense which taxpayer, as a public utility, is required to charge against its income under the designation of "depreciation" and is required to record in the depreciation reserve on its books. Under sec. 196.09 (8), the amounts so recorded in its depreciation reserve can be used only to charge off losses on property actually retired from service. Under the PSC's rate-making methods, the exact amounts in the depreciation reserve are deducted directly from the original cost of taxpayer's property in determining the fair value of property on which taxpayer is allowed to earn a reasonable return. The annual depreciation charges found reasonable and proper by the PSC thus directly and exactly reduce the value of taxpayer's property since they decrease its earning ability.
Because of these attributes of the regulatory power of the PSC over public utilities such as taxpayer, it necessarily follows that any amounts which PSC properly orders to be deducted as depreciation expense and which it orders to be included in a utility's depreciation reserve, are ordinary and necessary business expenses of such utility. Neither the circuit court nor the board made any finding that these depreciation expenses were not ordinary and necessary business expenses. The matter of the amount of a depreciation charge is one peculiarly within the province of the PSC and is not to be disturbed by a court except in a clear case. Wisconsin Telephone Co. v. Public Service Comm. (1939), 232 Wis. 371, 381, 287 N.W. 167.
"Including" as a Word of Limitation.
Both the board and the circuit court decisions are based on the ground that the questioned amounts were in essence charges for obsolescence which were excluded by the statutory words, "including a reasonable allowance for depreciation by use, wear and tear of property from which income is derived." (Emphasis supplied.) While the order of the PSC says nothing about obsolescence, the decisions of the board and circuit court were grounded on the premise that only "straight-line"' depreciation could reflect depreciation due to use, wear and tear so that a method, which charged larger percentages of depreciation during the early years and declining smaller percentages in later years, necessarily embodied a charge for obsolescence. From this premise, the conclusion was reached that nothing in the nature of obsolescence can ever be deducted under sec. 71.04 (2), Stats., because of this court's holding in Wisconsin Box Company v. Wisconsin Tax Comm. (1929), 198 Wis. 439, 224 N.W. 483.
Once the determination is made that the questioned depreciation charges are ordinary and necessary business expenses, they are necessarily deductible for the state income-tax purposes of this public utility taxpayer unless the statutory word "including" is to be interpreted as limiting or restricting the statutory language which precedes it.
Courts have found the word "including" a perplexing one to interpret. An examination of the cases discloses that it has at least three generally accepted meanings: (1) As a term of enlargement; (2) as a word of limitation or enumeration; and (3) as referring to things which form a part of the principal thing mentioned. See 42 C. J. S., Including, pp. 525, 526, and cases cited in footnotes. This court in Schluckebier v. Arlington Mut. Fire Ins. Co. (1959), 8 Wis.2d 480, 483, 484, 99 N.W.2d 705, stated that "include" has two acceptable shades of meaning, namely, (1) the only thing included, or (2) that which follows constitutes only a part or a component of the whole. The court then went on to hold that it is in this second sense in which the word is most commonly used. The United States supreme court in Federal Land Bank v. Bismarck Lumber Co. (1941), 314 U.S. 95, 100, 62 Sup. Ct. 1, 86 L.Ed. 65, pointed out "that the term `including' is not one of all-embracing definition, but connotes simply an illustrative application of the general principle."
Some cases hold that "includes" or "including" is ordinarily a word of enlargement and not of limitation. United States v. Gertz (9th Cir. 1957), 249 F.2d 662; People v. Western Air Lines, (1954), 42 Cal.2d 621, 268 P.2d 723; Penn Dairies v. Milk Control Comm. (1942), 148 Pa. Super., affirmed in 344 Pa. 635, 26 A.2d 431; El Paso Electric Co. v. Safeway Stores (Tex.Civ.App. 1953), 257 S.W.2d 502, Cf. Department of Treasury of Indiana v. Meussel (1941), 218 Ind. 250, 32 N.E.2d 596, wherein it was held that the use of "including" as a term of enlargement is exceptional.
We are satisfied that to interpret the word "including" in sec. 71.04 (2), Stats, as being a word of limitation or restriction would be to accord it the exceptional rather than the commonly accepted meaning. It is much more likely that the legislature employed such term to make sure that depreciation due to use, wear and tear was deductible as an ordinary and necessary business expense. Therefore, we accord to "including" its more commonly accepted meaning of classifying that which follows as being a component part of the whole.
The attorney general cites State ex rel. Stern Milling v. Tax Comm. (1920), 170 Wis. 506, 175 N.W. 931, for the proposition that the portion of sec. 71.04 (2), Stats., which follows the word "including" is a limitation upon that part of the statute which precedes it. The Stern Milling Co. Case is concerned with an entirely different principle of statutory construction, viz., where there is a general statute and a specific statute, either of which standing alone would be applicable, the specific statute controls. Here we are concerned with a single sentence of a statute where the key word to be interpreted is "including."
The attorney general also cites and places his chief reliance on Wisconsin Box Co. v. Wisconsin Tax Comm., supra. In that case the taxpayer depreciated a sawmill on its income-tax returns for a period of years on the basis how long the supply of timber owned by it would last plus the assumption that it would be able to buy an equal amount of timber from other sources to operate the mill. The tax commission disallowed this method of depreciation and in its opinion stated (pp. 57, 58 of printed case):
"The record shows that in arriving at its base for computing depreciation in this manner the appellant took into consideration the timber which it owned and `took into consideration the acquisition of a like amount.' This was rather an arbitrary method of determining the number of logs which the mill might cut, and the Commission finds that the method is so arbitrary that it cannot be allowed, The rate allowed by the Commission adequately covers the wear and tear of this saw mill and does not depend on whether the future log supply of this mill has been over or under-estimated. The appellant could not know in advance whether it would be able to purchase this tract or that tract of timber or whether the logs from this or that tract of timber would be sawed at its mill. The method, therefore, is at best only a very rough guess which is open to serious inaccuracies due to subsequent events over which the corporation has no control and of which the corporation had no knowledge at the time."
The circuit court affirmed the Tax Commission's decision and on appeal this court held that only depreciation for use, wear and tear, and not for obsolescence, could be allowed under the then sec. 71.03 (2), Stats., now sec. 71.04 The opinion does not discuss the question of whether obsolescence could ever be deducted as an ordinary and necessary business expense. In view of the obvious arbitrary method by which the taxpayer in that case had determined obsolescence, there was little occasion for the opinion to have touched upon this question.
Furthermore, we do not consider that the Wisconsin Box Co. Case should control our determination of the issue of whether a particular expense charge which a public utility is ordered by the PSC to make on its books is an ordinary and necessary business expense within the meaning of sec. 71.04 (2), Stats. The fact that the PSC labeled the amounts in question as "depreciation" is of little moment because labels do not and should not determine what is an ordinary and necessary business expense of a public utility. What is controlling is how the PSC requires the utility to handle the deduction on its books.
In view of the foregoing we determine that inasmuch as the questioned depreciation charges constitute ordinary and necessary business expenses, the language of sec. 71.04 (2), Stats., following the word "including," does not limit or restrict the deduction of such expenses by taxpayer for state income-tax purposes. By the Court. — Judgment reversed, with directions that the circuit court set aside the decision and order of the board and remand the case to the board for further proceedings not inconsistent with this opinion.
WILKIE, J., took no part.