Gulf States Utilities Co. v. Comm'r of Internal Revenue

• Citation: 16 T.C. 1381
• Decision Date: 19 June 1951
• Docket Number: Docket No. 26172.
• Parties: GULF STATES UTILITIES COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: United States Tax Court

16 T.C. 1381

GULF STATES UTILITIES COMPANY, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 26172.

Tax Court of the United States.

Promulgated June 19, 1951.

William M. Rice, Esq., and Claude M. Houchins, Esq., for the petitioner.

J. Marvin Kelley, Esq., for the respondent.

1. During its base period petitioner made 17 monthly payments of $8,000 each in order to operate for a 17-month period under the terms of a new contract rather than under the terms of an old contract with Standard Oil. Petitioner claimed the payments as an abnormal deduction as contemplated by section 711(b)(1)(J), I.R.C. Held, petitioner failed to establish that the abnormality was not a consequence of an increase in its gross income during the base period or a decrease in the amount of some other deduction in its base period and was not a consequence of a change at any time in the type, manner of operation, size, or condition of the business engaged in by the taxpayer. Under the rule of section 711(b)(1)(K)(ii) the abnormality is not to be disallowed in computing petitioner's base period net income for the excess profits tax credit.

2. Petitioner incurred an abnormal amount of documentary stamp taxes during the base period year 1939 in connection with the refunding of its long term bonds before maturity at a lower rate of interest. Petitioner claimed the tax as an abnormal deduction as contemplated by section 711(b)(1)(J)(ii), I.R.C. Held, the deduction was abnormal in amount under the provisions of section 711(b)(1)(J)(ii) and petitioner has proved the negatives required by section 711(b)(1)(K)(ii) and the abnormal deduction should be disallowed in computing petitioner's base period net income for the excess profits tax credit.

3. Upon the evidence, held, petitioner was not contesting its Louisiana income tax and respondent erred in computing the amount of petitioner's deduction for State of Louisiana income tax for the years 1944 and 1945.

The taxes in controversy in this proceeding are excess profits taxes for the calendar years 1942, 1943, 1944, and 1945. Petitioner contests the following determination of its tax liability as made by the respondent in the deficiency notice:

+---------------------------------+
                ¦Excess Profits Tax Liability     ¦
                +---------------------------------¦
                ¦Year  ¦Overassessment¦Deficiency ¦
                +------+--------------+-----------¦
                ¦1942  ¦$31,734.47    ¦           ¦
                +------+--------------+-----------¦
                ¦1943  ¦              ¦$95,969.16 ¦
                +------+--------------+-----------¦
                ¦1944  ¦              ¦121,907.28 ¦
                +------+--------------+-----------¦
                ¦1945  ¦              ¦124,313.16 ¦
                +------+--------------+-----------¦
                ¦Totals¦$31,734.47    ¦$342,189.60¦
                +---------------------------------+
                

The issues arise in part from the notice of deficiency of the Commissioner dated September 29, 1949, as provided under section 732, I.R.C., in which respondent wrote:

After careful consideration of your claims for relief (Form 843) under section 711(b)(1)(J) of the Internal Revenue Code, filed for the year 1942, it has been determined that your claims for relief filed on March 4, 1946 and June 14, 1946 should be disallowed and that your claim for relief filed June 23, 1947 should be allowed in part. In accordance with the provisions of sections 272 and 732 of the Internal Revenue Code, notice is hereby given of the deficiencies mentioned, and of the disallowance of the claims for refund asserted in your claims for relief (Form 843), filed on March 4, 1946 and June 14, 1946, and of the disallowance in part of the claim for refund asserted in your claim for relief (Form 843), filed on June 23, 1947.

The Commissioner further states in the deficiency notice as follows:

In the determination of your excess profits tax credit and, more particularly, the average base period net income, deductions for the payments made by you in order to secure the cancellation of a contract and for Federal and State stamp taxes have not been disallowed in the absence of evidence establishing that the abnormality or excess is not a consequence of an increase in your gross income in the base period or a decrease in the amount of some other deduction in the base period and in not a consequence of a change at any time in the type, manner of operation, size, or condition of the business in which you are engaged.

By appropriate assignments of error the following issues are raised:

1. Whether or not certain obligations accrued and paid to Standard Oil Company by the petitioner pursuant to the terms of a contract dated September 15, 1937, amounting in the aggregate to $8,000 for the year 1938, and $96,000 for the year 1939 should be disallowed in the computation of petitioner's base period net income under the provisions of section 711(b)(1)(J)(i), I.R.C. 2. Whether or not United States and State of Texas documentary stamp taxes amounting to $23,582.84 and paid in 1939 by petitioner in connection with refunding its long term debt should be disallowed in the computation of petitioner's base period net income under the provisions of section 711(b)(1)(J)(ii), I.R.C.

3. What amounts of Louisiana state income tax are to be accrued and allowed petitioner as a deduction in computing its Federal income and excess profits taxes for the taxable years 1944 and 1945. In support of this issue the petition states, among other things, as follows:

(2) That in the determination of petitioner's adjusted excess profits net income for each of the years 1944 and 1945, the correct amount of State of Louisiana income tax accruable should be deducted, the amount thereof to be computed on a basis including—

(a) amortization of emergency facilities over a period of sixty months beginning, in the case of each such emergency facility, with the month following that in which it was completed, and

(b) a proper portion of petitioner's Federal income and excess profits taxes for each such year, as the said Federal taxes may be determined in this proceeding—

and producing deductions exceeding those allowed by the Commissioner in his 90-day letter by $40.002.49 for the taxable year 1944 and $25,668.03 for the taxable year 1945.

FINDINGS OF FACT.

Most of the facts have been stipulated and are adopted as our findings of fact. We state below such of these facts as we deem necessary to an understanding of the issues to be decided.

Petitioner is a corporation organized in 1925 under the laws of Texas with its principal office at Beaumont, Texas. Petitioner is a public utility engaged in the business of furnishing steam, electricity, gas, ice, and water.

For each calendar year petitioner filed its tax returns on the accrual basis with the collector of internal revenue for the first district of Texas. Petitioner elected to compute its excess profits tax credit based on its income in base years under the provisions of sections 711-713, I.R.C.

Issue 1— Payments to Standard Oil Company of Louisiana.

In August 1938, petitioner took over all the assets and assumed all the liabilities of its wholly-owned subsidiary, Louisiana Steam Generating Corporation (a Louisiana corporation formerly named Louisiana Steam Products, Inc.), and caused this subsidiary to be dissolved. Among the assets thus acquired by petitioner were: two contracts, one dated October 15, 1929 (hereinafter called the Old Contract), and another dated September 15, 1937 (hereinafter called the New Contract), covering the sale of steam and electric energy required by Standard Oil of Louisiana in the operation of its Baton Rouge refinery; certain contracts covering the purchase of natural gas from Interstate Natural Gas Company; and a contract covering the sale of steam and electric energy required by Ethyl Gasoline Corporation in the operation of its chemical plant. In the liquidation of its subsidiary, petitioner also acquired a plant at Baton Rouge, Louisiana, which was of a special type primarily designed to supply steam and electric energy required in the operation of Standard Oil's refinery and to use by-products of Standard Oil's refinery. The retention of Standard Oil as a customer was essential to the operation of the aforesaid plant without prohibitive loss.

Regular deliveries of steam were commenced under the Old Contract on May 1, 1930. By its terms, the Old Contract was to continue at least until May 1, 1940, and thereafter unless and until one of the parties gave the other 2 years' written notice of cancellation and termination. As originally executed, the Old Contract provided that the quantity of steam required to be delivered to Standard Oil could not exceed 840,000 pounds of steam in any one hour. By an amendment to the contract dated December 29, 1936, the maximum hourly demand was reduced by such amounts of steam as might need be appropriated to fulfill requirements of Ethyl Gasoline Corporation and as did not exceed 70,000 pounds per hour.

Early in 1937, Standard Oil indicated that it was contemplating an increase in its facilities, that its requirements of steam and electricity would be increased and that it was considering the construction of facilities to generate its own steam and electricity. Under the terms of the existing contract Standard Oil, or the petitioner, was required to give written notice by May 1, 1938, if either desired not to continue the Old Contract beyond May 1, 1940. No such notice was given by either party to the contract.

As a result of negotiations the New Contract was executed on September 29, 1937. The New Contract provided that its terms should begin December 1, 1938 (with certain provisos) and terminate on May 1, 1950. Article III of the New Contract provided:

Termination of Present Contract

It is understood and agreed that the existing contract between Generating Corporation and Oil Company dated October 15, 1929, as amended and modified by the contract dated December 29, 1936, shall remain in full force and effect until December 1, 1938, and thereafter...