Appalachian Power Co. v. American Institute of CPA

• Court: U.S. District Court — Southern District of New York
• Writing for the Court: LEVET
• Citation: Appalachian Power Co. v. American Institute of CPA, 177 F. Supp. 345 (S.D. N.Y. 1959)
• Decision Date: 20 May 1959
• Parties: APPALACHIAN POWER COMPANY, Ohio Power Company and Indiana & Michigan Electric Company, Plaintiffs, v. AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS, L. H. Penney, William W. Werntz and Carman G. Blough, Defendants.

177 F. Supp. 345

APPALACHIAN POWER COMPANY, Ohio Power Company and Indiana & Michigan Electric Company, Plaintiffs, v. AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS, L. H. Penney, William W. Werntz and Carman G. Blough, Defendants.

United States District Court S. D. New York.

May 20, 1959.

Simpson, Thacher & Bartlett, New York City, Whitney North Seymour, Richard M. Dicke, William J. Manning, New York City, of counsel, for plaintiffs.

Howard C. Westwood, Fontaine C. Bradley, Stanley L. Temko, Washington, D. C., and Covington & Burling, Washington, D. C., Rinaldo L. Bianchi, George C. Christie, Washington, D. C., Phil R. Stansbury, Washington, D. C., of counsel, for defendants.

LEVET, District Judge.

This is a motion for preliminary injunction to restrain the defendants from the promulgation or distribution of certain opinions recommending certain accounting practices which allegedly affect plaintiff's financial statements, unless a waiting period of 60 days elapses, and certain other prerequisites are complied with.

The above-named plaintiffs, public utility companies, engaged in the sale of power, seek a preliminary injunction to enjoin the defendant American Institute of Certified Public Accountants (hereinafter called "Institute") and the individual defendants, certain officers or Committeemen of said Institute, from adopting, issuing, promulgating, circulating, printing or in any manner publishing to the members of the defendant Institute or to any members of the accountancy profession a certain proposed letter. This letter is to the effect that the said defendant Institute or its Committee on Accounting Procedure (hereinafter called "Committee") is of the opinion or recommends that charges made to income in recognition of the deferral of income taxes should not, in accordance with generally accepted accounting principles, be credited to earned surplus or to any other account included in the stockholders' equity section of the balance sheet. The plaintiffs seek to enjoin the distribution of said letter until such time as the defendants and the Committee shall have submitted a draft thereof to certain persons; a period of not less than 60 days shall thereafter have elapsed, and the Institute's and its Committee's practices and procedures with respect to the publication of accounting research bulletins shall otherwise have been complied with.

The letter in dispute is as follows:

"American Institute of Certified Public Accountants "270 Madison Avenue New York, 16, N. Y "April 15, 1959 "To the Members of the American Institute of Certified Public Accountants

"Gentlemen:

"Question has been raised with respect to the intent of the committee on accounting procedure in using the phrase `a deferred tax account' in Accounting Research Bulletin No. 44 (revised), Declining-balance Depreciation, to indicate the account to be credited for the amount of the deferred income tax (see paragraphs 4 and 5).

"The committee used the phrase in its ordinary connotation of an account to be shown in the balance sheet as a liability or a deferred credit. A provision in recognition of the deferral of income taxes, being required for the proper determination of net income, should not at the same time result in a credit to earned surplus or to any other account included in the stockholders' equity section of the balance sheet.

"Three of the twenty-one members of the committee, Messrs. Jennings, Powell and Staub, dissented to the issuance at this time of any letter interpreting Accounting Research Bulletin No. 44 (revised).

"Committee on Accounting Procedure "By William W. Werntz, Chairman"

By cross-motion the defendants have moved for an order pursuant to Rule 12 (b) of the Federal Rules of Civil Procedure, 28 U.S.C.A., dismissing the complaint on the ground that it fails to state a claim against them upon which relief can be granted. Since matters outside the pleadings have been presented to the court, and since the parties have submitted such proof, I am treating this motion as one for summary judgment as provided in Rule 56 of the Federal Rules of Civil Procedure.

The complaint herein, seeking permanent injunctive relief, was filed on April 15, 1958. This application apparently is based upon the following assertions of the plaintiffs:

(1) Plaintiffs, three operating electric utility companies, have recorded on their books of account, pursuant to certain alleged applicable requirements of state regulatory agencies, an aggregate of more than $65,000,000 in accounts designated as "Earned Surplus Restricted for Future Federal Income Taxes." In this connection plaintiffs contend that these amounts have been so accrued by them in accordance with accounting principles which heretofore have been generally accepted over a period of years by all of the well-known accounting firms experienced in utility accounting.

(2) The defendant Institute, through its Committee, from time to time publishes accounting research bulletins which are allegedly "accepted" by state and federal regulatory agencies, including the Securities and Exchange Commission, members of the accounting profession and interested members of the business community as establishing the accounting principles which must be followed by the accounting profession.

(3) Prior to the present dispute in reference to pertinent accounting procedures, it is said that the Institute had adopted procedures prerequisite to the publication of such opinions and recommendations. These procedures included, it is said, the circulation of so-called "exposure drafts of any proposed opinion" to a certain group so that the members might comment thereon, and a further procedure involving the submission of a so-called "ballot draft" to members of the Committee so that they could vote upon the proposed opinion.

(4) Plaintiffs aver that the defendants have known accounting practices of plaintiffs in reference to these matters and have had full knowledge that plaintiffs have accumulated more than $65,000,000 in these accounts.

(5) It appears that in a proceeding before the Securities and Exchange Commission the Chairman of defendant's Committee and its Director of Research stated that they were about to mail under the authority of the Institute and the Committee to members of the Institute and other recipients of bulletins a letter with respect to the deferred tax account to the effect that "a provision in recognition of the deferral of income taxes, being required for the proper determination of net income, should not at the same time result in a credit to earned surplus or to any other account included in the stockholders' equity section of the balance sheet."

(6) Plaintiffs claim that the defendants in preparing and intending to publish this letter are "without legal justification," that their acts "bear no reasonable relationship to any benefits which the defendants may be seeking or to any legitimate purpose," and that the actions of the defendants in connection with the proposed distribution of the said letter and the opinion contained therein are "in wanton, reckless and wilful disregard of the said consequences of their proposed action."

(7) As a result, plaintiffs assert that substantial numbers of accountants, financial institutions, etc., will question the plaintiffs' continued inclusion of credits for deferred taxes in earned surplus and as a result plaintiffs "will be seriously interfered with in their dealings," etc. and, as stated by Donald C. Cook, a vice-president of each of the plaintiff corporations:

"* * * The removal of more than $65,000,000 from the common stock equity of the plaintiffs would, in the first instance, have the effect of limiting the short term borrowing power of plaintiffs under applicable statutes so as to decrease the amounts which plaintiffs can borrow from banks by $6,500,000. * * *" (Affidavit sworn to May 6, 1959, item 21, p. 13.)

The defendants in their opposing papers point out that:

(1) The letter, the issuance of which, without certain preliminaries, plaintiffs oppose, was adopted by the Committee in conformity with its established procedures; was specifically approved by over two-thirds of the 21 members of the Committee; that under the Committee's procedure a two-thirds vote—that is, 14 out of 21 members—is sufficient to adopt an opinion or recommendation.

(2) The opinions of the Committee have no official effect.

(3) The Committee procedures do not require the so-called "exposure" in draft form of the proposed letter, though on occasion in the past, this "exposure" procedure has been employed.

(4) a. The Committee's position as to the accounting practice in question is followed by Arthur Andersen & Co., public accountants, who audit the accounts of one-third of the utility companies in the country;

b. Based on a survey of the 1957 published stockholders' reports of 353 utility companies, of 226 companies reporting an accumulated credit resulting from the use of the liberalized depreciation under § 167 of the Internal Revenue Code, 26 U.S.C.A. § 167, 176 treated the credit outside the equity-capital section of the balance sheet and only 50 treated the credit as either earned surplus or restricted surplus;

c. The Public Service Commission of the State of Indiana has ordered all companies subject to its regulations, including plaintiff Indiana & Michigan Electric Company, to cease treating the credit for deferred income taxes as a surplus account;

d. The Federal Power Commission on May 29, 1958, issued an order to the effect that all public utility companies subject to its regulations shall not include credit for deferred income taxes in a surplus account;

e. The Securities and Exchange Commission has promulgated a proposed policy in accord with the Committee's views.

Jurisdiction herein is based upon diversity of citizenship. Hence, the law of the State of New York is applicable. The plaintiffs predicate the...