Southern California Edison Co. v. Comm'r of Internal Revenue

• Decision Date: 04 March 1953
• Docket Number: Docket Nos. 6903,38499.,38498
• Citation: 19 T.C. 935
• Parties: SOUTHERN CALIFORNIA EDISON COMPANY LTD., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.SOUTHERN CALIFORNIA EDISON COMPANY (FORMERLY SOUTHERN CALIFORNIA EDISON COMPANY LTD.), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

19 T.C. 935

SOUTHERN CALIFORNIA EDISON COMPANY LTD., PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.SOUTHERN CALIFORNIA EDISON COMPANY (FORMERLY SOUTHERN CALIFORNIA EDISON COMPANY LTD.), PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 6903

38498

38499.

Tax Court of the United States.

Promulgated March 4, 1953.

A. Calder Mackay, Esq., William L. Kumler, Esq., and Adam Y. Bennion, Esq., for the petitioner.

R. E. Maiden, Jr., Esq., and Raymond B. Sullivan, Esq., for the respondent.

1. In connection with the construction of Boulder Dam petitioner in 1930 contracted to purchase certain minimum specified amounts of electric power to be generated for a period of about 50 years. As the facts developed it was not required to begin taking such power pursuant to its commitment prior to June 1, 1940. The dam was completed and some generating facilities actually began to produce electric energy in 1936. In late 1936 and early 1937, three cities, Los Angeles, Burbank, and Glendale, which had previously purchased their power at wholesale from petitioner for resale through their municipally owned distribution systems, began to buy their power at Boulder. Petitioner did not replace the load which it thus lost until the middle of 1939. Held, petitioner has qualified for relief under section 722(b)(2). However, correction of the abnormality is subject to certain limitations which must be observed.

2. By reason of its own commitment to take Boulder power, petitioner claimed relief under section 722(b)(4). Held, any such relief must be based upon the earnings that petitioner would have realized or upon the level of earnings that it would have attained by the end of the base period within the framework of (b)(4), upon the assumption that the increased capacity were available to it at that time; relief cannot be allowed upon the strength of ‘normal earnings‘ that might be realized in the post-1939 years merely because they might have been foreseeable in the future as of the end of 1939. Even though evidence of post-1939 events may to a limited extent be taken into extent be taken into account of commitment cases, the statute contemplates that the correction of any abnormality arising from the commitment must be be made within the framework of the base period itself.

3. Held, that apart from the possible loss of one unusually large sale of power based upon 100,000-kilowatt capacity, petitioner's sales did not in fact suffer during the base period by reason of any lack or potential lack of productive capacity; the availability during the base period of the Boulder power for which petitioner had committed itself would not have resulted in increased earnings. Correction approved to some extent for the profit that might have been realized on the 100,000-kilowatt sale.

4. In applying the (b)(4) push-back rule, ordinarily only the qualifying factor is pushed back, and it is superimposed upon economic and other conditions as they actually existed during the base period. However, in exceptional situations where certain conditions are inextricably intertwined with the qualifying

factor the push-back rule may operate on those conditions as well. Held, in the circumstances of this case, petitioner's commitment for Boulder power was such an integral part of the Boulder project, that the project itself is subject to the push-back rule as well as petitioner's commitment. Extent to which petitioner has proved that it is in fact entitled to relief in this connection considered.

5. Certain abnormalities relating to interest and depreciation deductions may be corrected in a reconstruction, pursuant to E.PC. 6, and it is therefore unnecessary to determine whether they would otherwise qualify for relief under section 722(b)(5).

6. Petitioner's average base period net income was determined by use of the growth formula in section 713(f), and it thus automatically had the advantage of a considerable amount of relief. The corrections permitted by section 722 must not duplicate any of the corrections that are already reflected in the use of the growth formula. Relief is allowable only to the extent that the constructive average base period net income, computed without regard to the growth formula, exceeds the average base period net income otherwise determined without reference to section 722.

In these three proceedings, consolidated for trail, the Commissioner denied applications for relief under section 722, I.R.C., pertaining to the years 1942, 1943, 1944, and 1945. In Docket No. 6903, he also determined a deficiency of $35,533.53 in income tax for 1941, an overassessment of $778,158.87 in income tax for 1942, and a deficiency of $1,681,572.16 in excess profits tax for 1942.

By stipulation the parties have settled many of the issues raised by the pleadings, leaving primarily to be decided petitioner's right to relief under section 722.

FINDINGS OF FACT.

The parties have entered into various stipulations of fact, and a number of joint exhibits have been introduced in evidence in lieu of being incorporated in the stipulations. The stipulations are hereby adopted as part of our findings and are incorporated herein by reference together with the joint exhibits.

Petitioner in each of these proceedings is, and since 1909 has been, a corporation organized under the laws of the State of California. Its principal place of business is located at Los Angeles, California. Its stock is widely held. For the years in issue, petitioner filed its Federal tax returns with the collector of internal revenue for the sixth district of California.

Petitioner is an operating public utility engaged in the business of generating, transmitting, distributing, and selling electric energy for light, power, and heat to domestic, commercial, industrial, agricultural, and municipal consumers and other utilities in the central and southern portions of the State of California. It provides electric service within a territory of approximately 17,500 square miles, measured by the area of the judicial townships in which service is rendered, including 75 incorporated cities, more than 240 unincorporated communities, and the outlying rural territory. Petitioner is also engaged, incidentally, in the operation of a small oil field located on its utility properties; its gross revenues in 1939 from this enterprise were slightly over 1 per cent of its gross revenues from electric operations. Petitioner owns and operates electric property serving Los Angeles County (except the cities of Los Angeles, Pasadena, Glendale, Burbank, and Azusa), Ventura County, and portions of Orange, Riverside, San Bernardino, Santa Barbara, Tulare, Kern, and Kings Counties. Petitioner's territory covers a portion of the citrus fruit-growing and agricultural region of southern California, where electricity is used for pumping irrigation water and for refrigeration.

Petitioner is subject to regulation by the California Public Utilities Commission, referred to herein as the ‘Utilities Commission,‘ and formerly known as the California Railroad Commission.

Petitioner's Production Resources.

Petitioner's system for generating electricity involves the use of both ‘hydro‘ and steam facilities: that is, it has hydro plants, which utilize water power to run the generators, and it has steam plants, which depend upon fuel for that purpose. During and prior to the base period, its hydro plants were of two kinds: stream-flow plants and reservoir-supported plants. (1) There were 19 stream-flow plants during the base period, with 47 generators, having a total ‘rated‘ or ‘installed‘ operating capacity of approximately 92,000 kilowatts.¹ Of these the three largest plants, with a rated capacity of 66,500 kilowatts, were located on the Kern River, north of Los Angeles; the other 16 stream-flow plants were small, ranging in rated capacity from 200 to 4,000 kilowatts. (2) There were five reservoir-supported plants, known as the ‘Big Creek plants,‘ containing 15 generators with a rated operating capacity of approximately 397,000 kilowatts, located in the Sierra Mountains approximately 260 miles north of Los Angeles.

Supplementing its hydro plants, petitioner had three steam plants during the base period. the three steam plants (at which 11 generators were installed) were located at Long Beach, California, and had a total rated capacity of about 415,000 kilowatts. In addition, petitioner had a diesel plant (with five generators) at Vernon City, California, with a rated generating capacity of 24,250 kilowatts.

During the base period, the rated productive capacity of petitioner's plants thus totaled about 930,000 kilowatts. At the beginning of 1937, one steam plant, with a rated capacity of about 60,000 kilowatts, was leased by petitioner to the City of Los Angeles, leaving petitioner with a rated capacity of about 870,000 kilowatts.

Petitioner's plants, both hydro and steam, were subject to ‘outages,‘ when production from particular plants either declined or stopped completely. Such outages might be scheduled, as when units were ‘taken off the line‘ for annual overhaul or routine maintenance, or they might be unscheduled or ‘forced,‘ resulting from actual or imminent breakdown in equipment or from other ‘trouble.‘

Because of these outages, and also because of adverse water conditions affecting the operation of the hydro plants, petitioner's ‘effective‘ productive capacity, representing the maximum power petitioner could deliver at a particular time, might be less than its ‘rated‘ or ‘installed‘ capacity. Petitioner also lost power over its lines in the course of transmission and distribution.

Production from stream-flow plants depended upon the volume of water running in the streams, which in turn was dependent on precipitation and run-off conditions in the watershed supplying the streams. tHose plants were in operation at all times, except during outages, because the water flowing down...