Connecticut Light & Power Co. v. Comm'r of Internal Revenue

• Decision Date: 26 June 1963
• Docket Number: Docket No. 49321.
• Citation: 40 T.C. 597
• Parties: THE CONNECTICUT LIGHT AND POWER COMPANY, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

40 T.C. 597

THE CONNECTICUT LIGHT AND POWER COMPANY, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 49321.

Tax Court of the United States.

Filed June 26, 1963.

[40 T.C. 598]

J. Marvin Haynes, N. Barr Miller, and Arthur H. Adams, for the petitioner.

Arnold I. Weber, for the respondent.

1. SEC. 722.— Held, the respondent failed to establish error in his partial allowance of relief because of numerous affirmatively alleged contra-adjustments to the reconstruction. Held, further, that petitioner established (b)(4) base period changes in the character of the business consisting of a difference in capacity for production or operation entitling it to application of the 2-year pushback rule. The amount of the CABPNI determined.

2. SEC. 722.— Held, that petitioner is entitled to additional adjustment for base period abnormality in interest and debt expense.

3. SEC. 722.— Held, that petitioner is not entitled to additional adjustment to eliminate alleged base period abnormality of excessive depreciation, under E.P.C. 6.

4. SEC. 722.— Held, that petitioner's sales promotion activities and voluntary inductive rate reductions are not qualifying (b)(4) changes in the character of the business.

5. SEC. 722.— Held, that under the (b)(4) commitment rule the word ‘taxpayer’ limits the applicability of such rule and, further, that a committed for change in capacity by another taxpayer corporate entity is not equally committed for by petitioner because of an interchange agreement respecting the use of the energy to be produced by the new facility.

6. JURISDICTION— STANDARD ISSUES.— Held, that this Court will no longer follow its decision in Mutual Lumber Co., 16 T.C. 370, and, on authority of the decisions of the various circuit Courts of Appeal reversing the Tax Court on this issue, we take jurisdiction of the standard issues properly raised herein.

7. STATUTE OF LIMITATIONS.— Held, that the assessment and collection of additional excess profits taxes are not barred for the years 1941 and 1942, but are barred for the years 1943, 1944, and 1945.

8. PLEADINGS.— Petitioner's motion to strike amended answers raising standard issues relative to 1940, for carryover purposes, and taxable years 1941 and 1942 is denied. Further, petitioner's motion to strike all of paragraph 11 of second amended answer raising standard issues relative to taxable years 1943, 1944, and 1945 is granted in part but denied as to that portion raising an alternative issue as to the correct excess profits credit for purpose of determining whether there is an actual overpayment for those years.

9. UNUSED CREDIT CARRYOVER.— Held, that the respondent erred in computing the amount of any unused excess profits credit for 1940 for purposes of carryover to 1941.

10. EXCESS PROFITS CREDIT BASED ON INCOME, SEC. 713.— ADJUSTMENT FOR NET CAPITAL ADDITION OR REDUCTION AS DEFINED IN SUBSEC. (g).— Held, that in adjusting excess profits credit under section 713(a)(1)(A), (B), and (C) and for purposes of the capital reduction under section 713(g)(4), the respondent properly reduced the taxable year's earnings and profits available for distribution by the amount of accrued taxes for that year in determining the amount of petitioner's distributions not out of earnings and profits. ABC Brewing Corp., 20 T.C. 515, followed. Held, further, that respondent failed to establish error in not prorating available current earnings to each quarterly dividend distribution for purposes of the capital reduction for each year. Held, further, that respondent erroneously computed the amount of the capital reduction under section 713(g)(4) by failing to include therein the current year's distributions not out of earnings and profits for the year 1940 for carryover purposes and the taxable years 1941 and 1942, and also the cumulative effect of such errors on the computations of the capital reduction for 1943, 1944, and 1945.

11. ADJUSTMENT OF EXCESS PROFITS CREDIT FOR 1943, 1944, AND 1945 DESPITE BAR OF STATUTE OF LIMITATION.— Held, that petitioner's excess profits credit for 1943, 1944, and 1945 must be recomputed to reflect the corrected capital reduction under section 713(g)(4) in redetermining petitioner's excess profits tax liability for those years for purpose of redetermination herein as to whether any overpayments actually exist for those years. Lewis v. Reynolds, 284 U.S. 281, followed.

This proceeding involves the petitioner's appeal for redetermination of the respondent's partial disallowance of its applications for excess profits tax relief under section 722, I.R.C. 1939,¹ and related claims for refunds for the calendar years 1941 to 1945, inclusive. The year 1940 is also involved for purposes of excess profits credit carryover.

The respondent in his statutory notice determined that petitioner qualified for relief under section 722(b)(1) and (b)(4), and further determined a constructive average base period net income (CABPNI) resulting in overassessments for the years involved. The petitioner herein seeks a CABPNI substantially in excess of that determined by respondent, based upon certain alleged errors in respondent's reconstruction and his partial disallowance of certain claims for relief under section 722(b)(4).

This proceeding also involves the respondent's numerous affirmative allegations of error in his statutory notice which are denied by petitioner. Respondent alleges error in his partial allowance of section 722 relief and determination of overassessments on the ground that he failed to make certain so-called contra-adjustments which would cancel out the adjustments previously allowed in his reconstruction of a CABPNI and thereby preclude any section 722 relief and eliminate the overassessments determined in the statutory notice. Respondent further alleges errors in his determination of petitioner's

[40 T.C. 599]

excess profits tax liability for the years 1941 to 1945, inclusive, and affirmatively asserts deficiencies for those years.

The petitioner's excess profits tax liability and the overassessments as determined in the statutory notice for the years 1941 to 1945, inclusive, and also the excess profits tax deficiencies affirmatively asserted herein for those years are as follows:

+-------------------+
                ¦EXCESS PROFITS TAX ¦
                +-------------------¦
                ¦ ¦ ¦ ¦ ¦
                +----+----+----+----¦
                ¦ ¦ ¦ ¦ ¦
                +-------------------+
                

Year Liability Overassessment Deficiency
                1941 $606,909.24 $94,394.88 $130,670.56
                1942 1,266,017.21 3,590.13 94,550.90
                1943 470,491.86 47,740.06 18,081.60
                1944 19,779.91 52,594.72 26,212.31
                1945 988,478.56 54,187.68 33,274.69
                

The following major and subsidiary questions are presented for our determination as to which the first four major questions and subsidiary questions thereunder arise from petitioner's allegations that respondent erred in failing to reconstruct a fair and just amount representing normal earnings to be used as a CABPNI on the ground that he failed to allow certain additional adjustments in his reconstruction and the remaining major and subsidiary questions arise from the respondent's affirmative allegations of error in his statutory notice:

1. Whether respondent erred in failing to allow for substantial reductions in interest expense and debt discount and expense.

2. Whether respondent, having allowed reconstruction for cost savings resulting from more efficient electric generating facilities completed during the base period, erred in failing to allow for cost savings computed on the same basis for facilities completed after December 31, 1939, and committed for prior to January 1, 1940.

3. Whether respondent erred in failing to eliminate abnormal depreciation deductions in the base period years under respondent's E.P.C. 6.

4. Whether respondent erred in failing to reconstruct for an increased level of sales and earnings under the 2-year pushback rule:

A. For changes in capacity for producing electric energy (1) completed during the base period, and (2) completed after December 31, 1939, and committed for prior to January 1, 1940, and

B. For base period extensions of rural distribution lines to furnish additional electric service and for further extensions which would have been made if all the base period changes in the character of the business had been made 2 years earlier.

5. Whether in the statutory notice respondent erroneously determined the above-stated overassessments resulting, except in part for

[40 T.C. 600]

1941, from the erroneous partial allowance of relief under section 722 on the ground that he failed to make contra-adjustments which would preclude the allowance of relief and more specifically that he erred:

A. In failing to make Contra-adjustments for increased insurance, property taxes, and depreciation which would be constructively incurred on the additional facilities completed in the base period, and also for increased interest and amortization of dept discount and expense on new capital required to finance such additional facilities.

B. In failing to make adjustment for increased welfare and pension expenses incurred after 1937.

C. In failing to make adjustment for constructive loss of earnings in the base period arising from distributions in that period other than out of earnings and profits.

D. In erroneously allowing petitioner an unused excess profits credit carryover, based on constructive earnings under section 722, from the year 1940 to the year 1941.

E. In erroneously characterizing the Stamford Interchange Agreement as making available 15,000 kilowatt capacity.

6. Whether, in computing petitioner's excess profits tax liability for the year 1941, the respondent's statutory notice erroneously determined that there was an unused excess profits credit carryover from the year 1940 in the amount of $257,021.36.

7. Whether the petitioner is estopped from claiming an adjustment under section 722 for elimination of alleged abnormal depreciation deductions in the base period years.

8. Whether respondent...