Oklahoma Gas and Electric Company v. United States
| Decision Date | 18 August 1972 |
| Docket Number | No. 71-1742.,71-1742. |
| Citation | 464 F.2d 1188 |
| Parties | OKLAHOMA GAS AND ELECTRIC COMPANY, Appellee, v. UNITED STATES of America, Appellant. |
| Court | U.S. Court of Appeals — Tenth Circuit |
Richard Farber, Atty., Tax Div., Dept. of Justice (Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks and Bennet N. Hollander, Attys., Tax Div., Dept. of Justice, and William R. Burkett, U. S. Atty., of counsel, with him on the brief), for appellant.
Richard G. Taft, Oklahoma City, Okl. (Gordon F. Rainey, of Rainey, Welch, Wallace, Ross & Cooper, Gary F. Fuller and Dee A. Replogle, Jr., of McAtee, Taft, Cates, Mark, Bond & Rucks, Oklahoma City, Okl., and H. Duane Stratton, Oklahoma City, Okl., of counsel, with him on the brief), for appellee.
Before LEWIS, Chief Judge, and SETH and McWILLIAMS, Circuit Judges.
Oklahoma Gas & Electric Company (taxpayer) brought this action for mitigation under 26 U.S.C. §§ 1311-1315 to treat as fully deductible business expenses expenditures for sales and use taxes which were capitalized rather than deducted.
Taxpayer was required by the Federal Power Commission System of Accounts to capitalize sales and use taxes paid on materials used in its construction projects. Not only did taxpayer so capitalize these expenditures on its books, but it also treated the taxes as capital expenditures for federal income tax purposes. In 1957, taxpayer changed accounting firms, and upon the advice of the new firm decided to deduct the taxes paid on materials for construction projects commenced in 1957 and later years.
Taxpayer had not filed with the Commissioner an election to capitalize as contemplated by 26 U.S.C.A. (I.R.C. 1939) § 24(a) (7), and later by 26 U.S. C. § 266 and regulations thereunder. In 1957 taxpayer began to deduct these expenses and the fact that these expenses are properly deductible is not challenged by the Government in this action.
Taxpayer brought a previous action for a refund based on expense deductions not taken for the sales taxes, but was limited to the years 1954 to 1956 by the statute of limitations. In that action, Oklahoma Gas & Electric Co. v. United States, 289 F.Supp. 98 (W.D. Okl.), taxpayer was allowed a refund for deductions not taken for 1954-1956. The Government did not then assert that taxpayer had changed its method of accounting and acknowledged that the taxes were deductible as expenses. The Government was however allowed a setoff to the extent the sales taxes were included in the depreciable base, not only for the years 1954-1956, but also for the years 1943-1953 as well. The court allowed this setoff because no election had been filed under section 24(a) of the 1939 Internal Revenue Code. The result of that decision was that, of the $790,803 in sales and use taxes capitalized by taxpayer from 1943 to 1953, $700,606, representing the undepreciated portion of such taxes at the beginning of 1954, will be lost to taxpayer as an expense or as part of the depreciable base unless other relief is available.
Since taxpayer is barred from bringing an action for a refund by the statute of limitations, it brought this action for refund for the years 1943 through 1953 under the mitigation provisions of the Internal Revenue Code of 1954, 26 U.S. C. §§ 1311-1315, seeking a refund computed by using an expense deduction of the sales taxes. The parties stipulated that in this action the requirements for the application of the mitigation provisions have been met by the taxpayer. Thus unless sections 446 and 481 of the Code are here effective the taxpayer should prevail.
Of the mitigation provisions we have affirmed the District Court in its following statement:
"The purpose of the mitigation sections is to correct tax inequities where the statute of limitations, if controlling, would serve to create a double taxation or double escape from taxation to the unjust hardship or benefit of either the taxpayer or the government." G-B, Inc. v. United States, 302 F.Supp. 851, 854 (D.C.Colo.), aff\'d per curiam 422 F.2d 1035 (10th Cir.)
The Government contends that 26 U. S.C. §§ 1311-1315 are inapplicable or, in the alternative, that taxpayer's recovery should be limited to the amount allowed as a setoff in the prior litigation. As a basis for its claim that 26 U.S.C. §§ 1311-1315 are inapplicable, the Government asserts the following propositions: (1) taxpayer has changed its "method of accounting" by electing to deduct rather than capitalize these expenses in computing its taxable income; (2) this change was initiated by the taxpayer; (3) therefore, taxpayer had a remedy under 26 U.S.C. § 481; (4) an action under section 481 is now barred by the applicable statute of limitations, and (5) the action under section 481 was taxpayer's sole and exclusive remedy.
The trial court held in this action that taxpayer had not changed its method of accounting, therefore, 26 U. S.C. § 481 was inapplicable, and that taxpayer had a remedy under 26 U.S.C. §§ 1311-1315. Oklahoma Gas & Electric Co. v. United States, 333 F.Supp. 1178 (W.D.Okl.). We affirm this holding of the trial court.
26 U.S.C. § 481 applies to adjustments which become necessary when a taxpayer changes its "method of accounting." The Government asserts that in 1957 when taxpayer began deducting those sales and use taxes in computing its taxable income, it thereby changed its "method of accounting" under 26 U.S.C. § 446. Taxpayer also asserts that it still capitalizes these expenditures on its own books as required by the Federal Power Commission and, therefore, it has not changed its "method of accounting."
The general rule, of course, is that "taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books." 26 U.S.C. § 446(a). The "method of accounting" used by taxpayer with respect to these expenditures is that of capitalization as required by the Federal Power Commission System of Accounts. This does not mean, however, that taxpayer must also capitalize them in computing its taxable income.
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