Portland General Electric Company v. United States

• Decision Date: 26 September 1960
• Docket Number: Civ. No. 9657.
• Citation: 189 F. Supp. 290
• Parties: PORTLAND GENERAL ELECTRIC COMPANY, an Oregon corporation, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Oregon

189 F. Supp. 290

PORTLAND GENERAL ELECTRIC COMPANY, an Oregon corporation, Plaintiff, v. UNITED STATES of America, Defendant.

Civ. No. 9657.

United States District Court D. Oregon.

September 26, 1960.

COPYRIGHT MATERIAL OMITTED

Clarence D. Phillips and Alfred H. Stoloff, Phillips, Coughlin, Buell & Phillips, Portland, Or., for plaintiff.

C. E. Luckey, U. S. Atty., and Edward J. Georgeff, Asst. U. S. Atty., Portland, Or., for defendant.

EAST, Justice.

This action was instituted by Portland General Electric Company, an Oregon utilities corporation having its principal place of business in Portland within this District (PGE), to recover from the United States of America an alleged overpayment of income taxes for the period February 2, 1948, to December 31, 1948, and the calendar years of 1949 through 1953, in the asserted aggregate amount of $1,575,989.86, plus interest. PGE is an investor-held public utility engaged in the generation, transmission and metropolitan Portland-area distribution of its own and other-generated electric energy, and has been in existence in its present corporate stockholder form since February 2, 1948. PGE's predecessors in ownership and interest have existed as Oregon public utilities since well before the turn of the century. PGE in the conduct of its business had acquired and was operating during the material times a substantial plant consisting of steam and hydro-electric generation equipment, modern electricity transmission and distribution systems of towers, fixtures, poles, conductors, transformers, streetlighting equipment, metering devices and kindred properties.

Since about the year 1909 PGE's predecessors, and, since its corporate inception, PGE itself, have been subject to control and full regulation by the Public Utilities Commissioner of Oregon (Utilities Commissioner)¹ and the Federal Power Commission. PGE and its predecessors have been at all times material to this matter in full compliance with all rules and regulations of said regulatory bodies.

The main dispute between PGE and the Defendant, acting through its Commissioner of Internal Revenue (Commissioner), arises from their respective determinations for income tax purposes of the amount of depreciation or the "reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence)"² (Annual Accrual) of PGE's depreciable properties during the years in question. The Commissioner disallowed Annual Accruals, as developed and determined through the procedures and method of depreciation utilized by PGE, and in turn redetermined the amounts of the Annual Accrual under his procedures and method of depreciation, resulting in the assessment and payment of the asserted overpayment. PGE contends:

(a) That its utilized procedures and method of depreciation were based upon factual and practical internal experience and knowledge and the Annual Accruals resulting are reasonably allowable under the Internal Revenue Code and all pertinent regulations of the Treasury, and in turn

(b) That the practices and method of depreciation utilized by the Commissioner are based upon extrinsic and assumed factors and his resulting Annual Accruals are therefore arbitrary and unreasonable.³

Jurisdiction

This Court has jurisdiction of the parties and dispute pursuant to Title 28 U.S. C.A. § 1346.

Issues To Be Resolved

PGE at trial time waived all of its pretrial contentions of unlawful assessment, except for those matters dealing with depreciation allowance. For convenience, we will allow topical titles to the remaining issues, as follows:

(a) "Useful Lives of PGE's Propperties,"

(b) "The Annual Accrual Thereon,"

(c) "Depreciation Reserve," and

(d) "Salvage."

The resolve of this narrowed dispute lies in ascertaining the full scope and purpose of the provisions for the allowance of a reasonable allowance or depreciation deduction from a taxpayer's gross income as permitted by § 23(l).

We approach this resolve with the admonition that:

"Taxation is an intensely practical matter and deals with realities. * * *,"

and further that

"In administering the income tax laws common sense interpretation and ordinary business standards should be followed." Kern v. Granquist, D.C.Or., 185 F.Supp. 769, 772, J. Kilkenny.

The "useful life of the plant" yardstick theory of the intent of Congress was expressed succinctly by Mr. Justice Brandeis in United States v. Ludey, 274 U.S. 295, 300-301, 47 S.Ct. 608, 610, 71 L.Ed. 1054:

"The depreciation charge permitted as a deduction from the gross income in determining the taxable income of a business for any year represents the reduction, during the year, of the capital assets through wear and tear of the plant used. The amount of the allowance for depreciation (Annual Accrual) is the sum which should be set aside for the taxable year, in order that, at the end of the useful life of the plant italics supplied in the business, the aggregate of the sums set aside will (with the salvage value) suffice to provide an amount equal to the original cost. The theory underlying this allowance for depreciation is that by using up the plant, a gradual sale is made of it. The depreciation charges is the measure of the cost of the part which has been sold."

This language of Mr. Justice Brandeis has just been utilized to point up the necessity of computing the Annual Accrual upon the "useful lives" of property as experienced within the business utilizing it. Massey Motors, Inc. v. United States, 364 U.S. 92, 80 S.Ct. 1411, 1424, 4 L.Ed. 2d 1603.

The Commissioner rightfully suggests that the Annual Accrual to be charged off during the useful life of the property must be amortized over that life "either in equal annual installments (straightline) or in accordance with any other recognized trade practice." Treasury Regulations 111, § 29.23(l)-5; 118, § 39.23 (l)-5.

As will be seen, PGE agrees with this premise. However, the difficulty arises through the divergent procedures utilized by the Commissioner and PGE, respectively, in determining:

(a) The useful lives of PGE's depreciable property, and

(b) The Annual accrual thereon.

As an aid to public utilities in meeting the requirements of the regulations, comprehensive studies of acceptable methods of depreciation have been made, three of which will be of interest to us in this resolve, "straight-line," "sinking-fund," and "retirement" methods.⁴

Here it is noted that there is no dispute between the parties as to the "cost basis" of PGE"s depreciable properties to be recovered by depreciation allowances, except for two minor items regarding:

(a) "Costs of Rights of Way," and

(b) "Contributions in Aid of Construction,"⁵

which will be dealt with in connection with depreciation reserve.

Useful Lives Of PGE's Properties

PGE computes the Annual Accrual on the basis of the useful lives of component groups of its properties, as established and determined in an order of the Utilities Commissioner issued in 1938.⁶ The Commissioner, on the other hand, allowed an Annual Accrual equal to 2.8% of PGE's depreciable property. These reconstructed "average lives" were developed by George V. Robinson, an engineer agent for the Internal Revenue Service, from a study of data and records furnished him by PGE during the years 1956-7. The Commissioner's resulting determinations were made by utilizing a hindsight "turn over" accounting method evaluated through the agent's inspection of PGE's records, his knowledge of PGE's depreciable properties and properties of other utilities examined by him.⁷

The Commissioner presented similar testimony at the trial.⁸

PGE says its method was to depreciate its depreciable properties in equal annual installments over the useful lives of the component groups thereof in accordance with the straight-line method authorized by the Commissioner—Regulation 111, § 29.23(l)-5. Further, that this procedure and method permits it to recover the cost of its depreciable property as that property is consumed over its reasonably forecast useful life, all according to pattern established by past experience (straight-line unit summation method). The Commissioner contends that PGE is permitted only to recover the cost of its depreciable properties under his reconstructed "average life" method of units placed in a group of similar properties (straight-line average life method). Consequently, it appears that when PGE speaks of useful lives it means useful lives of its depreciable properties broken down into component groups and measured by actual past retirement experience (unit summation procedure), and when the Commissioner speaks of useful lives he means the reconstructed average life of all property within a functional group (group procedure).⁹

PGE says that its depreciable properties may be classified into three main categories:

(a) The first category includes the Mass Property Accounts, each consisting of many units, all having the same function but having different probable lives. Samples of such property accounts are wood poles, overhead lines of distribution, etc. They comprise approximately 82% of PGE's property.

(b) The second category consists of the Reservoirs, Dams and Waterway Accounts, having specific life expectancies which can be identified in advance.

(c) The third category consists of the Structures and Improvements Accounts. Here each major building consists of the structural shell of relatively long life, within and to which is attached a variety of shortlived items—lighting, plumbing fixtures, partitions, and such. This account represents a mixture or grouping of the first and second categories of properties, either of which is worthless without the other.

It appears from PGE's Mass Properties that the experience has been that a large number of similar items installed in any one year (called a "Vintage") will be retired fairly soon after installation, some will be in service longer, and some will reach a fairly...