Consumers Power Company v. United States

• Decision Date: 19 March 1969
• Docket Number: Civ. No. 25586.
• Citation: 299 F. Supp. 1180
• Parties: CONSUMERS POWER COMPANY, a corporation, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Western District of Michigan

299 F. Supp. 1180

CONSUMERS POWER COMPANY, a corporation, Plaintiff, v. UNITED STATES of America, Defendant.

Civ. No. 25586.

United States District Court E. D. Michigan, S. D.

March 19, 1969.

Badgley, Domke, Morrison, McVicker & Marcoux by Clifford H. Domke, William O. Allen, Jackson, Mich., for plaintiff.

Richard C. Pugh, Acting Asst. Atty. Gen., Mitchell Rogovin, Asst. Atty. Gen., David A. Wilson, Jr., Donald R. Anderson, Attys., Dept. of Justice, Washington, D. C., Lawrence Gubow, U. S. Atty., Milton Trumbauer, Asst. U. S. Atty., Detroit, Mich., for defendant.

OPINION

THORNTON, District Judge.

Plaintiff brings this action for refund of Federal Income Taxes paid by it for the years 1954 through 1957. The amount sought to be refunded is $1,213,483.06, plus interest. During the years involved herein plaintiff was (and still is for that matter) a public utility engaged in the production, generation, transmission and distribution of electrical energy, and the production, purchase, transmission and distribution of natural gas. It was, and is subject to the jurisdiction of the Michigan Public Service Commission.

The parties hereto have stipulated to the necessary jurisdictional facts and this Court has jurisdiction herein. The parties have also stipulated that if plaintiff is successful herein they will make the computation of the amounts to be recovered.

The case has been presented to the Court on a Stipulation of Facts, a Supplemental Stipulation of Facts, testimony adduced at the trial and exhibits submitted with the stipulations and those introduced at the trial. The Court also has the benefit of a series of briefs submitted by the parties seriatim. Plaintiff requests findings of fact by the Court in addition to those contained in the stipulations. A copy of the Stipulation of Facts and the Supplemental Stipulation of Facts is appended to this Opinion.

At issue for the Court's determination are three grounds of alleged overpayment of tax by plaintiff for the four years in question. We will deal with each of the grounds separately. They represent distinct areas. We will refer to them in the same manner as the parties have done — Advertising Expense, Death Benefit and Depreciation — bearing in mind that as to all three, defendant has disallowed or refused to allow deductions in whole or in part to which plaintiff claims it is entitled. Defendant's position is that there has been no overpayment by plaintiff — that plaintiff is not entitled to the additional deductions claimed by it, and that the partial disallowance of certain advertising expenses was correct.

ADVERTISING EXPENSE

For the four taxable years in question plaintiff deducted as "ordinary and necessary expenses * * *" (26 U.S.C.A. § 162(a)) amounts paid by it to the New York Advertising Agency, N. W. Ayer and Son, Inc., to be used by it in the Electrical Companies' Advertising Program (ECAP).

The basis of the partial disallowance by the Internal Revenue Service of the amounts so paid is found in the Treasury Regulations on Income Tax (1954 Code), § 1.162-15(d). This section was superseded, but not changed, in 1965, for taxable years beginning before January 1, 1963 by § 1.162.20 (26 CFR § 1.162-20). The operative language is:

"Expenditures * * * for the promotion or defeat of legislation * * or for carrying on propaganda (including advertising) related to any of the foregoing purposes are not deductible from gross income. * * * the cost of advertising to promote or defeat legislation or to influence the public with respect to the desirability or undesirability of proposed legislation is not deductible as a business expense, even though the legislation may directly affect the taxpayer's business. * * expenditures for institutional or `good will' advertising which keeps the taxpayer's name before the public are generally deductible as ordinary and necessary business expenses provided the expenditures are related to the patronage the taxpayer might reasonably expect in the future. * * * expenditures for advertising which present views on economic, financial, social, or other subjects of a general nature but which do not involve the promotion or defeat of legislation * * or propaganda (including advertising) related to any of the foregoing purposes are deductible if they otherwise meet the requirements of the regulations under Section 162. * * * Expenditures for the promotion or the defeat of legislation include, but shall not be limited to, expenditures for the purpose of attempting to influence members of a legislative body directly or indirectly, by urging or encouraging the public to contact such members for the purpose of proposing, supporting, or opposing legislation * * *."

It is obvious from reading the foregoing that non-deductible is correlative with advertising directed toward the "promotion or defeat of legislation." It is not correlative with advertising expressing views on economic, financial or social subjects, per se. Copies of the advertising in controversy are contained in Stipulation Exhibits A through D, as to the magazine media. Also at issue are some television commercials for the year 1955.

In support of its position that the ECAP advertising was legislatively oriented, defendant urges that certain biennial national opinion surveys are revealing of the true motivation of the ECAP. These have been conducted by Opinion Research Corporation, Princeton, New Jersey, directed as to topic by ECAP and N. W. Ayer and Son, Inc. They had as their purpose the measurement of attitudes and changes in attitude of the public toward the private electrical utilities industry and toward the governmental operation of electrical power. Some of the topics bore such headings as "Attitudes Toward Government Ownership," "Socialism," the "TVA and Dixson-Yates," "Atomic Energy and Electricity." While the contents of these surveys may have served as guidelines for ECAP, the yardstick for use here is the language, and its import, contained in the advertising, the expense for which is sought to be deducted by plaintiff as a necessary and business expense. The regulation refers to "expenditures * * * for the promotion or defeat of legislation * * * or for carrying on propaganda (including advertising) related to any of the foregoing purposes * * *." It also refers to "the cost of advertising to promote or defeat legislation or to influence the public with respect to the desirability or undesirability of proposed legislation * * *." The advertising itself must be judged. No matter what the intent of its promulgation may have been, if it is clear of the regulatory prohibition we cannot brand it violative. No matter how criminal a man's intent may be, if he in fact commits no crime a conviction based on his intent cannot be sustained. Although we have made a cursory examination of the surveys submitted as exhibits herein we have preferred to base our judgment here on the advertisements themselves. The expenditures then for which deductions are sought to be allowed were paid to ECAP, and in turn by it to Ayer for the production of certain advertising. Was this advertising in furtherance of promotion or defeat of legislation? Did it constitute propaganda related to such purpose?

We have reviewed the eleven "disallowed" advertisements contained in Stipulation Exhibit A (ECAP ADVERTISING 1954), the nine "disallowed" advertisements and seven "disallowed" television commercials contained in Stipulation Exhibit B (ECAP ADVERTISING 1955), the ten "disallowed" advertisements contained in Stipulation Exhibit C (ECAP ADVERTISING 1956) and the nine "disallowed" advertisements contained in Stipulation Exhibit D (ECAP ADVERTISING 1957). A fair reading of these, both individually and collectively, compels the conclusion that they belong to the nondeductible category within the purview of § 1.162-20. Repeated reading of the advertisements only serves to reinforce this conclusion. The impact of the adroitly worded presentations seems to us to come within the ambit of non-deductibility under § 1.162-20. In order to gain an appreciation of the gist of the advertisements it is necessary to read each advertisement in toto. We will, therefore, append hereto copies of three of the "disallowed" advertisements selected on the basis as to what strikes us as presenting a fair range from least purposeful to those most purposeful. Plaintiff suggests that "if by some stretch of imagination there is any merit to the Defendant's position, that the Plaintiff is prohibited from deducting all of the costs of advertisements which relate to government-operated utilities, it is inequitable and unfair to penalize the Plaintiff to the extent of disallowing the deduction of the cost of the entire advertisement, merely because in the mind of the Defendant a single sentence relates to government-operated utilities. If any amount is to be disallowed, and we submit that no amount should be disallowed, the disallowance should be limited to total linage or total wordage which relates to government-operated utilities."

We think that the suggestion, if followed, would do violence to the purpose and intent of the regulation. A "cutting and pasting" job if contemplated by the regulation needs to be spelled out. No such procedure is spelled out in § 1.162-20 nor implied therein.

We should not fail to comment on the cases cited by plaintiff in its brief. It relies heavily on Commissioner of Internal Revenue v. Tellier, 383 U.S. 687, 86 S.Ct. 1118, 16 L.Ed.2d 185 (1966). In Tellier the taxpayer sought to deduct as an "ordinary and necessary expense" legal expenses in the amount of $22,964.20 incurred in his unsuccessful defense of a criminal prosecution. The taxpayer's business was underwriting the public sale of stock offerings and purchasing securities for resale to customers. He was prosecuted for violating the fraud section of the Securities Act of 1933 and the mail fraud statute. The Court,...