Central Power and Light Co. v. Bullock

• Decision Date: 12 December 1984
• Docket Number: No. 14175,14175
• Citation: 696 S.W.2d 30
• Parties: CENTRAL POWER AND LIGHT COMPANY, Appellant, v. Bob BULLOCK, Comptroller of Public Accounts of the State of Texas, et al., Appellees.
• Court: Texas Court of Appeals

Page 30

696 S.W.2d 30

CENTRAL POWER AND LIGHT COMPANY, Appellant, v. Bob BULLOCK, Comptroller of Public Accounts of the State of Texas, et al., Appellees.

No. 14175.

Court of Appeals of Texas Austin.

Dec. 12, 1984.

Rehearing Denied Jan. 9, 1985.

Joe N. Pratt, Kleberg, Dyer, Redford & Weil, Austin, for appellant.

Jim Mattox, Atty. Gen., and David Mendez, Asst. Atty. Gen., Austin, for appellees.

Before SHANNON, C.J., and EARL W. SMITH and BRADY, JJ.

BRADY, Justice.

This is an appeal by Central Power and Light Company from an adverse judgment of the trial court on its suit for a refund of corporate franchise taxes which it paid to the State of Texas. Trial was to the court without a jury, resulting in a take-nothing judgment. We will affirm the judgment of the trial court.

Appellant argues ten points of error, the thrust of which are that there is either "no evidence" to support the findings of fact and conclusions made by the trial court, or that the same are against the "great weight and preponderance of the evidence." The trial court found, inter alia, that the issues here are governed by the holding in Bullock v. Dallas Power & Light Co., 589 S.W.2d 486 (Tex.Civ.App.1979, writ ref'd n.r.e.), and refused to adopt appellant's requested additional findings and conclusions.

In 1975, the Legislature determined that public utilities are by definition monopolies, and that the normal forces of competition in the free-enterprise society do not apply, and thus utilities are to be regulated. The Public Utility Commission of Texas was created to regulate the rates and operations of these utilities in this State. In determining rates, the commission fixes overall revenues at a level which will permit the utility to recover its operating expenses together with a reasonable return on invested capital. It is within this rate-making procedure that the accounting treatment of the federal investment tax credits must be examined.

To stimulate the economy, the Congress of the United States amended the Internal Revenue Code to allow investment credits for corporate investments in capital equipment. This credit against federal income tax allowed appellant and other corporations a tax credit of 10% on its expenditures for new equipment. As stated in Dallas Power & Light, supra, corporate accounting practitioners developed two methods of dealing with this investment credit. The great majority utilize a "flow through method" which recognizes that a reduction in expense (income tax) "flows through" in retained earnings, and therefore surplus in the year it is given, i.e., the year the equipment is purchased. Appellant here, as in Dallas Power & Light, supra, treated this under the deferral method wherein the tax credit amount is stated as a liability. Appellant, in attempting to distinguish its method of accounting, asserts that the amount in the account is never moved into retained earnings "ratably" over the life of the asset for which the credit is given.

The appellant here attempts further to distinguish the case at bar from Dallas Power & Light, stating that it never takes the deferred credits to "surplus." Appellant argues that this is a debt due to its customer ratepayers, and to be paid to such ratepayers in the form of lower utility rates. This accounting method, of course, reduces the utility's state franchise tax obligation.

The Texas franchise tax is a charge made by the State of Texas against a corporation for the privilege of doing business in the state. Calvert v. Capital Southwest Corporation, 441 S.W.2d 247 (Tex.Civ.App.1969, writ ref'd n.r.e.). The franchise tax does not burden any specific asset of a corporation. Texaco, Inc. v. Calvert, 526 S.W.2d 630 (Tex.Civ.App.1975, writ ref'd n.r.e.). The tax is imposed on a corporation's "taxable capital" allocated to this state, which is the sum of the corporation's stated capital and surplus, according to the provisions of the Texas Tax Code. Pursuant to his rule-making authority, the State Comptroller has promulgated Franchise Tax Rule 34 T.A.C. 3.405, Surplus and Undivided Profits (1975), which provides:

1. Definition. "Surplus and Undivided Profits" (herein referred to as surplus) is the excess of the net assets (total assets minus total debts) of a corporation over its stated capital, as reflected on the corporation's books and records of account maintained in accordance with generally accepted accounting principles; it includes all surplus accounts carried on the books and record, such as (but not excluding other surplus accounts not specifically mentioned herein) earned surplus or retained earnings, reduction surplus, realized but unearned income, paid-in capital, appraisal capital from appreciation of assets, deferred investment credit and donated capital. Surplus also includes all surplus reserve accounts, or appropriations from retained earnings, which do not reflect actual liabilities of the corporation (such as reserves for plant expansion or reserves for contingencies). (Emphasis added)

The witnesses who testified for appellant explained that the investment tax credits are carried on its books in a deferred tax credit account. The deferred credits are given specific consideration in rate regulatory processes and are "paid ratably over time to appellant's customers" as a result of the treatment required by rate regulation. Appellant argues that Congress, in enacting the federal investment tax credit, required that appellant make an irrevocable election as to the method it would employ in handling the tax credits, or face the prospect of losing them. The election appellant chose was the deferral method. This does not reduce its rate base by the amount of the credit. Instead, it reduces the utility's cost of service to accomplish a ratable repayment of the credit to its ratepayers. The logic appellant follows is that while the credit is being repaid to the customers ratably over the life of the asset (the purchase of which gave rise to the credit), the utility receives earnings from the use of the credit since the rate base is not reduced by the amount of the unamortized credit. Thus, according to appellant's theory, the benefits of the credit are "shared" with the customer who is entitled to be repaid over a period of years and the utility who is entitled to the use of the funds....