72 T.C. 521 (1979), 8669-74, Madison Gas and Electric Co. v. Commissioner of Internal Revenue
|Citation:||72 T.C. 521|
|Opinion Judge:||SCOTT, Judge:|
|Party Name:||MADISON GAS and ELECTRIC COMPANY, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT|
|Attorney:||Eli H. Schmukler, Leonard S. Sosnowski, John M. Koeppl, William T. Rieser, Gregory E. Scallon, and Joseph R. Barnett, for the petitioner. Joseph R. Peters and Arturo Estrada, for the respondent.|
|Case Date:||June 21, 1979|
|Court:||United States Tax Court|
Held: 1. Since petitioner's computation of cost of coal consumed in generating electric power on the basis of average monthly cost per ton of coal purchased clearly reflected its income because, except on rare occasions, petitioner used each month the same amount of coal purchased that month, respondent abused his discretion in changing petitioner's method of computing cost of coal consumed to in effect an inventory method on a first-in, first-out basis.
2. Petitioner's agreement with two other electric utility companies for construction and operation of a nuclear power plant created a partnership for Federal income tax purposes and startup costs of the partnership are capital expenditures and not deductible ordinary and necessary business expenses under sec. 162(a), I.R.C. 1954.
3. Fair market value of two parcels of real estate contributed by petitioner to a charitable organization determined on basis of the evidence.
Respondent determined deficiencies in petitioner's Federal income tax for the taxable years 1969 and 1970 in the amounts of $36,887.50 and $65,258.31, respectively.
The issues for decision are:
(1) Whether respondent erred in changing petitioner's method of accounting for coal consumed at one of its generating plants;
(2) Whether the amounts of $33,418.45 and $114,434.27 for the years 1969 and 1970 paid by petitioner as training and related expenses of a new nuclear power plant being constructed by petitioner and two other electric utility companies on a joint participating basis are deductible as ordinary and necessary business expenses in the year of payment or are capital expenditures; and
(3) What is the fair market value of two parcels of real estate contributed by petitioner to a charitable organization in 1968 and 1969.
FINDINGS OF FACT
All of the facts with respect to the first two issues have been stipulated and some of the facts with respect to the third issue have been stipulated. The stipulated facts are found accordingly.
Petitioner Madison Gas & Electric Co. is a Wisconsin corporation which had its principal place of business in Madison, Wis., at the time of filing its petition in this case. Petitioner filed timely Federal income tax returns for the calendar years 1969 and 1970 with the Internal Revenue Service Center, Kansas City, Mo.
Petitioner is an operating public utility which is and has been engaged in the production, purchase, transmission, and distribution of electricity and the purchase and distribution of natural gas since its incorporation in 1896. During the years here in issue, petitioner rendered retail electric service to some 73,000 residential and commercial customers in a service area of around 220 square miles in Dane County, Wis. Petitioner also sells a small percentage of its electrical power to other utilities within Wisconsin. Although it sells excess power to other utilities, petitioner's responsibility is to the customers in its service area.
Petitioner is and has been a regulated public utility subject to the jurisdiction of the Public Service Commission of Wisconsin (PSC) and the Nuclear Regulatory Commission (NRC). The Federal Energy Regulatory Commission (FERC), which encompasses the former Federal Power Commission, has or may have jurisdiction over petitioner under the Federal Power Act.
Under law, petitioner is and has been required to furnish reasonably adequate service and facilities to customers within its service area at rates found reasonable and just by the PSC.
Petitioner has exclusive franchises to electric service in most of the geographic region covered by the Wisconsin cities of Madison, Middleton, and Monona, and the adjoining villages of Shorewood Hills and Maple Bluff. The number of customers within petitioner's service area has grown rapidly and continuously over the past 25 years. At the time of the trial of this case, it included approximately 78,000 residential and 11,500 commercial and industrial electric customers. The customer demand for electricity has increased because electricity was substituted for other forms of energy, commercial customers expanded, and high-energy devices such as air conditioning units became prevalent.
Petitioner is required to keep its books and records in accordance with the FERC Uniform System of Accounts for Public Utilities and Licensees (Class A) and in accordance with the National Association of Regulatory Utility Commissioner's Uniform Systems of Accounts for Class A and B Electric Utilities as modified by the PSC. Petitioner has maintained its books and records in accordance with these systems. Petitioner has always maintained its books and records on an accrual basis of accounting and reported its income on a calendar year basis. Throughout the years in issue, petitioner maintained adequate books and records as required by the Internal Revenue Code and the regulations thereunder. The books are clear and were maintained in a fair, honest, and accurate manner.
Throughout its existence, petitioner has used the same method of accounting for coal consumed at its Blount Street facility in filing its State and Federal income tax returns as it has used in maintaining its corporate books and in preparing all reports to its shareholders, to the PSC, to the FERC, and for all purposes. This is true of petitioner's overall method of accounting as well as the way in which it accounts for coal.
Throughout its operating history, petitioner has sought to insure that electrical energy was always available to the customers within its service area and that the rates paid by its customers were as low as reasonably possible. In keeping with this objective, petitioner has continuously analyzed the present and future demand for electricity within its service area and has kept abreast of technological developments and methods available to supply its customer demand.
Within the last 20 years, the following alternative sources
have been available to petitioner for producing or obtaining the electrical power which is sold to its customers:
(a) Steam-driven turbine generators-steam produced by burning coal.
(b) Steam-driven turbine generators-steam produced by burning natural gas.
(c) Steam-driven turbine generators-steam produced by burning oil or other petroleum products.
(d) Steam-driven turbine generators-steam produced by nuclear fission.
(e) Direct natural gas or petroleum powered turbine generators-no steam, similar to jet engine.
(f) Interconnection with, and power purchasing agreements with, other electrical utilities.
(g) The undertaking of any of the above with another utility in a cost-sharing arrangement to take advantage of the economies of scale.
Each time petitioner decided that its electrical supply required expansion to meet rising demand, it considered all of the above alternatives in light of the following factors:
(a) The cost and availability of fuel supplies, labor, and capital;
(b) ecological considerations; and
(c) a variety of other pertinent factors.
For much of its operating history, petitioner was able to meet its customer demand by operation of its Blount Street facility (Plant 1) located in downtown Madison. As a result of petitioner's analysis of the various factors described above, Plant 1 was originally constructed to produce electricity primarily from coal fired steam turbine generators. The number of these units, however, has increased from time to time and has been supplemented by both gas and oil fired steam generators which have brought the plant's maximum continuous capacity to 194,000 kilowatts. The decision to use gas and oil generators to supplement the coal fired steam generators, rather than using additional coal fired units as a supplement, was based upon petitioner's analysis of costs and the availability of alternative sources at the times the decisions to expand Plant 1 were made.
After making a similar analysis, petitioner installed several gas powered turbine generators at other locations within its service area between 1964 and 1973. These units were designed
to help handle peak demand loads and increased petitioner's wholly owned maximum continuous capacity to 309,000 kilowatts.
At other times during its operating history, petitioner's customer demand and its analysis of the cost and technological considerations have led it to interconnect its transmission systems with those of Wisconsin Power & Light Co. and Wisconsin Electric Power Co., enter into contracts covering the purchase and sale of excess electrical power, and to own and operate additional facilities in conjunction with other electrical utilities.
Plant 1 consisted of several acres of land upon which were located coal fired boilers used to produce steam for turning generators in the production of electricity. Also, located at Plant 1 was additional electrical generating apparatus. Across the street from Plant 1 was another parcel of land owned by the petitioner which served as a coal yard.
Throughout the years of petitioner's existence, coal has been the primary fuel for producing steam in the Plant 1 boilers. None of the coal was acquired by petitioner for resale.
In the earlier years of petitioner's...
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