Opinion
Docket Nos. 12397 13406.
1948-05-17
GULF POWER COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Roswell Magill, Esq., H. Brice Graves, Esq., and Albert R. Connelly, Esq., for the petitioner. Harold D. Thomas, Esq., for the respondent.
In 1926 and succeeding years petitioner acquired certain public utility properties in Florida at a cost which was approximately $1,700,000 in excess of the cost to the companies which first devoted such properties to public utility purposes. Under the uniform system of accounts subsequently adopted by the Federal Power Commission, petitioner was required to record this excess over original cost in a separate account, 100.5, entitled ‘Electric Plant Acquisition Adjustments.‘ In 1943 the Federal Power Commission ordered the petitioner to charge off approximately $1,000,000 of the amount recorded in account 100.5 against a then existing capital surplus and to amortize the remaining $700,000 at the rate of $48,000 a year. Petitioner still has, and is operating, its public utility properties. Held, the accounting rules of the Federal Power Commission and its orders with respect thereto for purposes of that body's functions are not controlling of tax questions, and petitioner is not entitled to deduct in 1943 the amounts which the Commission ordered it to charge off. Any amounts recorded in account 100.5 which are properly includible in petitioner's tax basis for depreciable property may be recovered through annual depreciation allowances, and any amounts which represent nondepreciable property may be recovered as a part of petitioner's basis for gain or loss upon the sale or other definitive disposition of its property. Roswell Magill, Esq., H. Brice Graves, Esq., and Albert R. Connelly, Esq., for the petitioner. Harold D. Thomas, Esq., for the respondent.
These proceedings were consolidated for hearing and disposition. Docket No. 12397 involves excess profits tax deficiencies for 1941 and 1942 in the respective amounts of $7,675.66 and $78,870.04. Docket No. 13406 involves, for 1943, an income tax deficiency of $123,100.20 and an excess profits tax deficiency of $353,652.96. By affirmative allegations the respondent claims an increase in the income tax deficiency for 1943 in the amount of $33,754.99. Petitioner claims refunds of excess profits tax for 1942 and 1943 in the respective amounts of $171,896.91 and $112,500.
The main issue is whether petitioner is entitled to tax deductions for 1943 for certain amounts charged off to capital surplus and income pursuant to an order of the Federal Power Commission. The deficiencies for 1941 and 1942 involve the question of carry-backs of unused excess profits credit from 1943 and are thus wholly dependent upon the determination of the main issue just stated. A subsidiary question, which will become important with respect to the matter of interest in the event it is determined that petitioner is entitled to a refund, is whether a payment of $112,500 made to the collector of internal revenue on or about March 14, 1944, was a payment of excess profits tax or merely a deposit.
FINDINGS OF FACT.
Petitioner is a Maine corporation, with principal place of business at Pensacola, Florida. Its tax returns for the years in issue were filed with the collector of internal revenue at Jacksonville, Florida.
Petitioner was organized in 1925 for the purpose of owning and operating the Florida electric public utility properties of what is now the Commonwealth & Southern Corporation system. Petitioner acquired the Florida properties and began the active operation of its business during 1926. It has since acquired additional Florida electric public utility properties.
The utility properties ultimately owned and operated by petitioner were acquired by it or affiliated companies in arm's length transactions by purchase from sellers entirely unrelated to petitioner. As of December 31, 1942, the cost of such properties to petitioner in cash or cash equivalent values was $1,708,550.66 more than the cost of the same physical properties to the persons who had first devoted them to public utility purposes.
On June 16, 1936, under authority of the Federal Power Act, approved August 26, 1935, the Federal Power Commission adopted Order No. 42, effective January 1, 1937, prescribing a new uniform system of accounts for public utility companies. Each such company subject to the Commission's jurisdiction was ordered to reclassify its plant account in accordance with the new uniform system of accounts. That system required, with respect to properties acquired as operating units, that there be determined the cost to the utility of acquiring the property and the original cost of that property to the person first devoting it to public service. The difference between the cost of acquisition and the original cost was required to be charged to an account entitled ‘Account 100.5, Electric Plant Acquisition Adjustments.‘ The uniform system also required that there be determined and charged to any account entitled ‘Account 107, Electric Plant Adjustments‘ any amounts included in the plant account on the books of the utility company which did not represent actual cost to the company or which did not represent items includible in the plant account under the uniform system.
Pursuant to the requirement of the uniform system of accounts, petitioner in 1940 originally determined that it had paid $1,872,987.30 more for its electric plant assets than the original cost to the companies first devoting the properties to public service. That amount was accordingly recorded on petitioner's books in account 100.5. Of that amount, petitioner originally classified an amount of about $52,000 as tangible plant costs and the balance as intangibles. The $52,000 item was eliminated by retirement some time prior to December 31, 1942. The figure of $1,872,987.30 was subsequently reduced, as the result of adjustments and retirements reflected in account 100.5, to $1,708,550.66 as of December 31, 1942. Petitioner has not included that amount in its basis of depreciable property.
With respect to account 100.5, the uniform system of accounts provides: ‘The amounts recorded in this account with respect to each property acquisition shall be depreciated, amortized, or otherwise disposed of, as the Commission may approve or direct.‘
On September 7, 1943, the Commission ordered petitioner to dispose of the $1,708,550.66 classified in account 100.5 by charging $1,005,587.47 to a then existing capital surplus in that amount and by amortizing the remaining $702,963.19, beginning January 1, 1943, by monthly charges of $4,000 to account 537, ‘Miscellaneous Amortization.‘ In compliance with the Commission's order, petitioner during 1943 charged off to capital surplus $1,005,587.47 of the amount classified in account 100.5 and charged $48,000 of the remainder to account 537.
The capital surplus account on petitioner's books had been created by a reduction in the stated value of petitioner's common stock. After the charge thereto of $1,005,587.47 from account 100.5, there remained no capital surplus. Petitioner had earned surplus of $493,352.57 before charging off the annual amortization of $48,000.
A part of the total amount of $1,708,550.66 classified by petitioner in account 100.5 represented the capitalization of amounts which had already been deducted for tax purposes. Petitioner claims deduction of only $650,221.82 on account of the $1,005,587.47 charge to capital surplus. The parties have stipulated that if the claimed deductions of $650,221.82 and $48,000 are otherwise determined by the Court to be allowable, those amounts are part of the tax basis of petitioner's plant assets.
According to the petitioner's books before the Commission's order of September 7, 1943, petitioner's total capitalization was $10,866,540.04, of which bonds constituted 51.53 per cent, preferred stock 10.15 per cent, and common stock equity 38.32 per cent. After giving effect to the Commission's order, petitioner's books reflected a reduction in capitalization to $9,812,952.57, of which bonds constituted 57.07 per cent, preferred stock 11.24 per cent, and common stock equity 31.69 per cent.
In statements to its security holders and to the public, petitioner is required by the Securities & Exchange Commission rules to show its assets in accordance with the Federal Power Commission's order; that is, by eliminating the items which the Commission ordered charged off, and an accountant could not properly certify, without qualification, a financial statement which did not give effect to the Commission's order.
On March 14, 1944, petitioner filed with the collector a tentative excess profits tax return for 1943, which reflected on its face an estimated tax of $450,000 and an estimated payment due March 15, 1944, of $112,500. On the same date petitioner filed its tentative income and declared value excess profits tax return for 1943, which reflected an ‘estimated payment‘ of $190,000 and an estimated payment due March 15, 1944, of $47,500. The returns were accompanied by a letter with which were enclosed two checks to the collector's order in amounts of $100,000 and $60,000:
* * * in payment of the estimated quarterly payment due March 15, 1944, segregated as follows:
+---------------------------------------------------------------------+ ¦(a) Estimated Corporation Income and Declared Value Excess¦ ¦ +----------------------------------------------------------+----------¦ ¦Profits Tax--$190,000.00 ¦ ¦ +----------------------------------------------------------+----------¦ ¦Estimated Quarterly Payment due March 15, 1944 ¦$47,500.00¦ +----------------------------------------------------------+----------¦ ¦(b) Estimated Corporation Excess Profits Tax—$450,000.00 ¦ ¦ +----------------------------------------------------------+----------¦ ¦Estimated Quarterly Payment due March 15, 1944 ¦112,500.00¦ +----------------------------------------------------------+----------¦ ¦Total ¦160,000.00¦ +---------------------------------------------------------------------+
No part of the $112,500 shown above has been refunded to petitioner. Respondent did not allow any credit for that amount in determining the excess profits tax deficiency for 1943. Petitioner filed a claim for refund of the $112,500 on or about June 13, 1944.
The final excess profits tax return of petitioner for 1943 was filed on June 15, 1944, reflecting no excess profits tax liability.
During 1946 petitioner filed an application for a tentative carry-back adjustment of its income tax for 1943 by reason of a claimed net operating loss carry-back from 1945, and the respondent after a limited examination refunded to petitioner, on or about October 4, 1946, $33,754.99 of the income tax it had previously paid. In determining the income tax deficiency for 1943, the respondent neglected to make adjustment for the refund of the $33,754.99, and he now claims a deficiency increased by that amount.
The respondent refused to allow the deductions of $650,221.82 and $48,000 claimed by petitioner for 1943.
OPINION.
ARUNDELL, Judge:
In acquiring its Florida utility properties, petitioner paid approximately $1,700,000 more than the cost of such properties to the companies which first devoted them to utility purposes. This excess over original cost petitioner carried in account 100.5. Petitioner characterizes it as ‘integration value,‘ said to be an intangible asset attributable to the advantages and possible economies resulting from integrating many small utility plants and distribution systems into one large system with centrally located generating plants and interconnected power transmission lines.
In 1943 the Federal Power Commission ordered petitioner to charge off approximately $1,000,000 of the amount in account 100.5 to a then existing capital surplus, and to amortize the $700,000 balance at the rate of $4,000 a month, or $48,000 a year. By reason thereof petitioner contends it is entitled to a loss deduction under section 23(f) of the code in the amount of $650,221.82 (its tax basis on the amount charged off to capital surplus) and a depreciation or obsolescence deduction of $48,000 under section 23(l).
Petitioner's somewhat novel theory is that the Federal Power Commission conclusively determined that $1,000,000 of its assets had completely lost their useful value and that $700,000 of its assets would lose their useful value over a period of 15 years at the rate of $48,000 a year. There is nothing, however, in the findings or the order of the Commission, a copy of which the parties have stipulated, to support such a view. The Commission was concerned only with questions of proper accounting under the uniform system of accounts, not with whether petitioner had sustained losses; and in no sense did its order purport to be a determination of a fact that a loss had been sustained in 1943 or that an asset of the petitioner was gradually losing its useful value over a period of years. Certainly it was no mere coincidence that the amount of $1,005,587.47 ordered to be charged off immediately was exactly equal to petitioner's then existing capital surplus. Nor do we agree with petitioner that American Telephone & Telegraph Co. v. United States, 299 U.S. 232, means that a finding of loss necessarily inheres in the Commission's order.
In attempting to prove that it actually sustained a loss, petitioner presented the opinion testimony of an accountant, an engineer in the public utility field, a banker who was a member of the public utility department credit committee of his bank, and the president of the Commonwealth & Southern Corporation. In general, these witnesses testified that the Commission's order would be an adverse or unfavorable factor for rate-making purposes, for credit purposes, and perhaps even for sale purposes. We think this testimony falls far short of establishing that petitioner sustained a loss which is deductible under the income tax laws. Even assuming that the Commission's order might have some unfavorable effect on the sale of the petitioner's property, it is clear enough that there has been no sale or other closed transaction to fix definitely the amount of the loss.
In argument, petitioner treats the amount carried in account 100.5 which it calls ‘integration value,‘ as a separate and distinct asset, such as a patent, copyright, lease, or license. It cites cases involving deductions for depreciation or for the loss of useful value of intangible assets of that character and points out that the regulations allow depreciation on patents and copyrights used in the trade or business. Regulations 111, sec. 29.23(1)-3. If, in fact, the account 100.5 item does properly represent intangible rather than tangible value, it would seem to be more analogous to good will or going concern value. See American Power & Light Co. v. Securities & Exchange Commission, 158 Fed.(2d) 771, 775. Though conservative accounting might warrant the write-off or amortization of such intangibles as good will, going concern value, or integration value over a comparatively short period for purposes of public utility regulation, it does not follow that tax deductions are warranted thereby. The regulations expressly provide that no deduction for depreciation or obsolescence is allowable in respect of good will. See Regulations 111, sec. 29.23(1)-3. Moreover, many business concerns, as a matter of conservative accounting, frequently write down the value of intangible assets, such as patents, to some nominal value; but surely it could not be contended that the write-down gives rise to a tax deduction.
It seems to us that the Commission required the charge-offs here in issue for accounting purposes in accordance with its own rules. Rules of accounting, however, which may be required of a business concern by some other Federal body are not binding upon the Commissioner of Internal Revenue, nor are they controlling of tax questions. See Old Colony R. Co. v. Commissioner, 284 U.S. 552, and Gulf, Mobile & Northern R. Co. v. Commissioner, 83 Fed.(2d) 788, with respect to accounting rules of the Interstate Commerce Commission, and National Airlines, Inc., 9 T.C. 159, with respect to accounting rules of the Civil Aeronautics Board.
The amount in question here simply represents the excess of cost to petitioner over the cost to the original owners first devoting the properties to public utility purposes. Petitioner still has, and is operating, those properties. Notwithstanding that what petitioner characterizes as ‘integration value‘ was segregated and carried in a separate account on petitioner's books for accounting purposes, it is an indivisible part of the cost of its entire plant. If the amount in account 100.5 is properly to be treated as an intangible, it is of a kind which could no more be separated from plant value and disposed of than could good will, independently of the business with which it is associated. In effect, petitioner is claiming deduction for an undivided portion of the cost of its entire operating system.
No deduction is allowable for a mere decline, diminution, or shrinkage in value. Weiss v. Wiener, 279 U.S. 333; C. F. Mueller Co., 40 B.T.A. 195; cf. United States v. White Dental Mfg. Co., 274 U.S. 398. At most, the effect of the Commission's order is of that nature— that is, a possible diminution in the value of petitioner's property. The order did not make the petitioner's property, or any severable part of it, worthless.
Since the petitioner's entire case is based on the effect of the Commission's order, we hold that there is no merit in its claims for deductions. At the same time, it should be clearly understood we are not holding that, for tax purposes, the amount carried in account 100.5 represents in its entirety nondepreciable intangible property. What we do decide is that accounting rules and practices required of this petitioner by the Federal Power Commission for purposes of that body's functions are not controlling of tax questions and do not by their own force give rise to tax deductions. By the same token, neither do such rules or orders of that Commission determine petitioner's basis for depreciable property, taxwise. If any part of the amount carried in account 100.5 is properly includible in petitioner's basis for depreciable property, nothing we here say or decide will prevent petitioner's recovering its investment through depreciation allowances. And if any part or all of the amount in that account represents tangible or intangible property which is nondepreciable for tax purposes, neither our decision here nor the Power Commission's order means that such amount is not includible in petitioner's tax basis for gain or loss upon the sale or other definitive disposition of its property. The instant proceedings present no such issues.
Decisions will be entered under Rule 50.