Detroit Edison Co v. Commissioner of Internal Revenue, 675

Citation319 U.S. 98,87 L.Ed. 1286,63 S.Ct. 902
Decision Date03 May 1943
Docket NumberNo. 675,675
PartiesDETROIT EDISON CO. v. COMMISSIONER OF INTERNAL REVENUE
CourtUnited States Supreme Court

Mr. Norris Darrell, of New York City, for petitioner.

Mr. Arnold Raum, of Washington, D.C., for respondent.

Mr. Justice JACKSON delivered the opinion of the Court.

The petitioner, The Detroit Edison Company, engages in the generation of electric energy and its distribution to the public in and near Detroit. It receives many applications for service which in its opinion would require an investment in extension of its facilities greater than prospective revenues therefrom would warrant. In such cases it undertakes to render the service if the applicant will pay the estimated cost of the necessary construction. This is done by contract of which there are five variations, some of which provide for refunds of part of the customers' cost if additional customers come in to share it, or if revenues exceed estimates. With these provisions we are not concerned, since the controversy here relates only to payments that never were, or which by the contracts have ceased to be, refundable. The amounts of the cus- tomers' payments are fixed by an estimate of the cost; they never exceed, and sometimes fall short of actual cost, but are not adjusted because of the difference between estimates and realization.

The Company constructs the facilities which become its property, and adds the full cost to its appropriate property accounts without deduction for the customer payment. It claims as a base for computing its depreciation the investment for which the Company is then reimbursed. Customers' payments are not appropriated to the particular construction nor earmarked for it, but go into the Company's general working funds. During the period that a payment is subject to refund it is carried in a suspense account; but if it is not subject to refund, or when the refund period is past, the unrefunded and unrefundable balances are transferred to surplus through an account designated as 'Contributions for Extensions.'

During 1936 and 1937, the years in question, the Company added to its surplus from such sources $36,065.81 and $47, 500.67 respectively. The Commissioner eliminated from the depreciable property of the Company that portion of the cost equivalent to the unrefunded and unrefundable balances of the deposits. These eliminations, amounting to upwards of $1,160,000 in each year, resulted in disallowing depreciation deductions from income of $40,273.11 for 1936 and $41,786.26 for 1937, and in deficiencies which the Company contested. The Board of Tax Appeals sustained the Commissioner and the Circuit Court of Appeals affirmed.1 Because the decision appeared to conflict with principles followed in another circuit,2 we granted certiorari.

A deduction from gross income on account of depreciation is permitted by § 23(1) of the applicable Revenue Act in these terms: 'A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.'3 For the basis we are referred by § 23(n) to § 114 of the Act which refers us again to § 113(b), 26 U.S.C.A. Int.Rev.Acts, pages 865, 866, thereof which provides an 'adjusted basis' for gain or loss but which again refers us to § 113(a), 26 U.S.C.A. Int.Rev.Acts, p. 859, for the basis upon which adjustment is to be made. The sum of these is that the basis of depreciation allowance 'shall be the cost of such property' § 113(a) making 'proper adjustment' in respect of the property 'for expenditures, receipts, losses, or other items, properly chargeable to capital account,' § 113(b)(1)(A), except in case of certain gifts, transfers as paid-in surplus, or contributions to capital, § 113(a)(2), (8)(B), which exceptions we will later consider.

It will be seen that the rule applicable to most business property of a cost basis properly adjusted leaves many problems of depreciation accounting to be answered by sound and fair tax administration. The end and purpose of it all is to approximate and reflect the financial consequences to the taxpayer of the subtle effects of time and use on the value of his capital assets. For this purpose it is sound accounting practice annually to accrue as to each...

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173 cases
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    ... ... 's demand for interest on a 1948 agreement with the Internal Revenue Service. In Part VII we respond to plaintiff's plea ... connected with a certain agreement with the Commissioner concerning freight "cutbacks" or rate refunds, discussed ... E. g., United States v. Consolidated Edison Co., 366 U.S. 380, 385, n. 5, 81 S.Ct. 1326, 6 L.Ed.2d 356 ... remaining arguments of the parties are based on Detroit Edison Co. v. Commissioner, 319 U.S. 98, 63 S.Ct. 902, 87 ... ...
  • United States v. Cocke
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    ...423. To take depreciation a taxpayer must also have an investment or basis in the equipment. Detroit Edison Co. v. Commissioner of Internal Revenue, 1943, 319 U.S. 98, 63 S.Ct. 902, 87 L.Ed. 1286; United States v. Georgia Railroad and Banking Co., 5 Cir. 1965, 348 F.2d 278, 288 (fn. 25 and ......
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    ...13 14, 29 S.Ct. 148, 152, 53 L.Ed. 371 (1909), and that this Court's decisions, e.g., Detroit Edison Co. v. Commissioner of Internal Revenue, 319 U.S. 98, 101, 63 S.Ct. 902, 903, 87 L.Ed.2d 1286 (1943), endorse a theory of replacement through 'a fund to restore the property.' 477 F.2d, at 6......
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    ...See: Brown Shoe Co. v. Commissioner, 339 U.S. 583, 591, 70 S.Ct. 820, 94 L.Ed. 1081 (1950); Detroit Edison Co. v. Commissioner, 319 U.S. 98, 102-103, 63 S.Ct. 902, 87 L.Ed. 1286 (1943); cf. Edwards v. Cuba Railroad, 268 U.S. 628, 632-633, 45 S.Ct. 614, 69 L.Ed. 1124 (1925). And these criter......
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3 books & journal articles
  • Accounting for government grants.
    • United States
    • The Tax Adviser Vol. 41 No. 6, June 2010
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