Mayfair Minerals, Inc. v. Comm'r of Internal Revenue, Docket No. 5409-68.
| Decision Date | 15 April 1971 |
| Docket Number | Docket No. 5409-68. |
| Citation | 56 T.C. 82 |
| Parties | MAYFAIR MINERALS, INC., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
56 T.C. 82
MAYFAIR MINERALS, INC., PETITIONER
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Docket No. 5409-68.
United States Tax Court
Filed April 15, 1971.
[56 T.C. 82]
R. B. Cannon, for the petitioner.
Arthur B. Bleecher and Dennis J. Carlin, for the respondent.
For 4 years (1957 through 1960) while contesting an FPC order disapproving a rate increase, petitioner deducted as accrued liabilities the amounts of refunds which it would have been required to make if the FPC order had not been rescinded in a later year (1961). Held, petitioner realized taxable income in the year in which the FPC order was rescinded; petitioner was estopped, because of its conduct, to deny that the deductions of accrued liabilities for the earlier years were properly claimed.
FEATHERSTON, Judge:Respondent determined a deficiency in petitioner's Federal income tax for its taxable year ending September 30, 1961, in the amount of $785,736.90, and for its taxable year ending September 30, 1963, in the amount of $59,998.63. The only issue presented for decision is whether petitioner realized taxable income in its fiscal year ending September 30, 1961, when it canceled an account payable representing contingent liabilities for customer refunds erroneously deducted as accrued liabilities for its fiscal years ending September 30, 1957, through September 30, 1960.1
Mayfair Minerals, Inc. (hereinafter petitioner), is a corporation chartered under the laws of Texas which had its principal office at McAllen, Tex., at the time its petition was filed. It employed the accrual method of accounting and a fiscal year ending September 30.2 For the years in controversy, petitioner filed its income tax returns with the district director of internal revenue, Austin, Tex.
Prior to 1954, petitioner was engaged, through Delhi-Taylor Oil Corp., in producing natural gas and selling it to pipeline corporations. The gas sales involved in this proceeding were all made to Trunkline Gas Co. (hereinafter Trunkline).
Petitioner and Trunkline negotiated a new contract, effective November 30, 1954, in which the rate to be paid for gas was increased from approximately 7 1/2 to 12 cents per thousand cubic feet, MCF. They then applied to the Federal Power Commission (hereinafter
[56 T.C. 83]
FPC) for approval of the new 12-cent rate. The FPC declined to approve the rate increase, and, on December 29, 1954, suspended it. On March 1, 1955, petitioner filed with the FPC an agreement to refund to Trunkline any difference between 12 cents per MCF and such rate as the FPC might eventually approve, plus 6-percent interest thereon. Thereafter, petitioner collected from Trunkline and reported on its returns as depletable income the full 12 cents per MCF for the gas which it sold.
By an order dated September 30, 1957, the FPC disallowed the increase in price and ordered petitioner to refund the amount collected in excess of 7 1/2 cents per MCF. The amount of the refund so ordered, including interest, was $2,023,756.88.
Petitioner filed a petition with the FPC for a rehearing, and the petition was denied on November 27, 1957. However, the FPC granted an application for a stay of its order, pending review by the Court of Appeals for the Fifth Circuit. Subsequently, upon a joint motion of the parties, the Court of Appeals remanded the case to the FPC for further consideration. Intermittent pleadings, investigations, and hearings followed, terminating in an order entered by the FPC on October 11, 1960. This order, in effect, approved the rate increase and became final on or about November 10, 1960.
During the period from March 1, 1955, through September 30, 1960, while petitioner was contesting the FPC's disapproval of the rate increase but selling its gas at the increased rate, it made the following liability accruals on its books, charging them to an account payable:
+-----------------------------------------------+
¦Year ¦Net total for year ¦Accumulated total ¦
+------+--------------------+-------------------¦
¦ ¦ ¦ ¦
+------+--------------------+-------------------¦
¦1955 ¦$468,580.51 ¦$468,580.50 ¦
+------+--------------------+-------------------¦
¦1956 ¦797,397.25 ¦1,265,977.75 ¦
+------+--------------------+-------------------¦
¦1957 ¦757,779.13 ¦2,023,756.88 ¦
+------+--------------------+-------------------¦
¦1958 ¦776,719.81 ¦2,800,476.69 ¦
+------+--------------------+-------------------¦
¦1959 ¦755,068.07 ¦3,555,544.76 ¦
+------+--------------------+-------------------¦
¦1960 ¦719,581.39 ¦4,275,126.15 ¦
+-----------------------------------------------+
On its income tax return for 1957, the year in which the FPC ordered the refund, petitioner deducted an item listed on a schedule of ‘Income and Deductions' and a ‘Refund as ordered by FPC.’ The amount deducted ($2,023,756.88) was the amount shown on the above table as the ‘Accumulated total’ for that year. On its returns for the following years, 1958, 1959, and 1960, petitioner deducted the amounts shown on the above tables as ‘Net total for year.’ These items were labeled as ‘Refund as ordered by FPC.‘ in the 1958 return, and as ‘Refund as order by the FPC,‘ in the 1959 and 1960 returns. None of these accrued liabilities were ever paid.
[56 T.C. 84]
From the time it became apparent that petitioner would not be required to refund the amounts attributable to the rate increase, the treatment to be accorded these items for income tax purposes was a matter of discussion among petitioner's officers and tax advisers. Three possible courses of action were considered: (1) Filing amended returns for 1957 through 1960, recomputing the income for each year without the benefit of the accrued liabilities and paying the resulting tax; (2) reporting the full amount of $4,275,126.15 as income for 1961; and (3) doing neither (1) nor (2), but making an entry in Schedule M, part of the 1961 return, reflecting that the previously accrued liabilities had been canceled.
A senior tax partner in the Houston office of a national accounting firm, after consulting with a senior tax partner in the New York office or that firm, advised petitioner that the amount of the canceled liability should be reported as income in petitioner's return for 1961.
Petitioner's own tax adviser disagreed with the advice of the accounting firm. Under date of December 6, 1961, he addressed a letter to petitioner's president, containing an analysis of possible courses of action. The letter advised that petitioner (1) should not file amended returns for 1957 through 1960, (2) should not include the $4,275,126.15 in 1961 taxable income, but (3) should file a return for 1961, making a ‘disclosure’ of the recision of the FPC order in Schedule M of the return. The letter further stated that, in the opinion of the writer, section 1.461-1(a)(3), Income Tax Regs., relating to amended returns, is ‘invalid, merely precatory, or both.’
Pursuant to the recommendation of its tax adviser, petitioner consulted an attorney in private practice. In a letter dated December 15, 1961, the attorney advised that ‘the net taxable income of Mayfair Minerals, Inc. for its fiscal year ended September 30, 1961 was not affected in any way by the recision by FPC of its 1957 order directing the payment of refunds,‘ adding:
May I suggest that, in my view, a proper manner of communicating the recision of the order of the FPC to the Internal Revenue Service would be through the medium of Schedule M of the 1961 income tax return in which Schedule the restoration to surplus of all accrued accounts payable based on the original FPC order should be shown with the explanation in substance that the amounts were restored to surplus because of the recision of the original order of the FPC.
Petitioner did not file amended income tax returns for 1957 through 1960, and did not report for 1961 any income as a result of the cancellation of its contingent liability to make rate refunds to Trunkline. At the direction of its tax adviser, Schedule M of petitioner's income tax return for 1961 contained the following:
[56 T.C. 85]
+-----------------------------------------------------------------------------+
¦Net change in surplus: ¦ ¦ ¦ ¦
+------------------------------------+-------------+-------------+------------¦
¦Increases: ¦ ¦ ¦ ¦
+----------------------------------------------------------------+------------¦
¦Taxable income before net operating loss deduction and special ¦ ¦
+----------------------------------------------------------------+------------¦
¦deductions (loss) ¦ ¦ ¦($45,161.36)¦
+------------------------------------+-------------+-------------+------------¦
¦Other: ¦ ¦ ¦ ¦
+------------------------------------+-------------+-------------+------------¦
¦Depletion allowable for tax purposes¦ ¦ ¦622,503.34 ¦...To continue reading
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