PPL Corp. v. Comm'r of Internal Revenue, 25393–07.

Citation135 T.C. No. 8,135 T.C. 176
Decision Date28 July 2010
Docket NumberNo. 25393–07.,25393–07.
PartiesPPL CORPORATION & Subsidiaries, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
CourtUnited States Tax Court

OPINION TEXT STARTS HERE

P's subsidiary (S) is an operating electric utility engaged in the generation, transmission, and distribution of electricity. It provides various lighting services (e.g., street lighting) for public and private entities. Street light assets include the light fixtures, hardware to mount the fixtures, various types of poles, and wires. The parties dispute the length in years of the recovery period that S must use to calculate its annual depreciation deduction for street light assets.

Held: Street light assets are neither assets used in the distribution of electricity for sale nor land improvements. Thus, street light assets do not fall within asset class 49.14, Electric Utility Transmission and Distribution Plant (with a recovery period of 20 years), or asset class 00.3, Land Improvements (with a recovery period of 15 years), specified in Rev. Proc. 87–56, 1987–2 C.B. 674. Rather, street light assets are property without a class life, classified as “7–year property” (with a recovery period of 7 years) pursuant to sec. 168(e)(3)(C)(ii), I.R.C. (1997).

Richard E. May, Mark B. Bierbower, and Timothy L. Jacobs, for petitioner.

Melissa D. Arndt, Allan E. Lang, Michael C. Prindible, and R. Scott Shieldes, for respondent.

HALPERN, Judge:

PPL Corp. (petitioner) is the common parent of an affiliated group of corporations (the group or affiliated group) making a consolidated return of income. By notice of deficiency (the notice), respondent determined a deficiency of $10,196,874 in the group's Federal income tax for its 1997 taxable (calendar) year and also denied a claim for refund of $786,804. The issues for decision are whether respondent properly (1) denied the claim for the refund, which is related to the creditability of the United Kingdom (U.K.) windfall tax paid by petitioner's indirect U.K. subsidiary, (2) included as dividend income a distribution that petitioner received from the same indirect U.K. subsidiary, but which, within a few days, the subsidiary rescinded and petitioner repaid, and (3) denied depreciation deductions that petitioner's U.S. subsidiary claimed for street and area lighting assets (the street light issue). We shall address the third issue in this report. A forthcoming report will address the first two issues.

Unless otherwise stated, all section references are to the Internal Revenue Code in effect for 1997, and all Rule references are to the Tax Court Rules of Practice and Procedure.

FINDINGS OF FACT
Stipulations

The parties have entered into a first, second, and third stipulation of facts. The facts stipulated are so found. The stipulations, with accompanying exhibits, are incorporated herein by this reference.

Petitioner's Business

Petitioner is a Pennsylvania corporation that was known during 1997 as PP & L Resources, Inc. It is a global energy company. Through its subsidiaries, it produces electricity, sells wholesale and retail electricity, and delivers electricity to customers. It provides energy services in the United States (in the Mid–Atlantic and Northeast) and in the United Kingdom.

PP & L

During 1997, Pennsylvania Power & Light Co., also a Pennsylvania corporation, was petitioner's direct subsidiary. On September 12, 1997, Pennsylvania Power & Light Co. changed its name to PP & L, Inc. (Hereinafter, we shall refer to that corporation, both before and after it changed its name, as PP & L.) During 1997, PP & L was the operating electric utility company for the affiliated group and was engaged in the generation, transmission, and distribution of electricity. During that year, PP & L was petitioner's principal subsidiary, with approximately 96 percent of the assets of petitioner's affiliated group.

Electricity Basics: Concepts and Definitions

Electricity is the flow of electric current. The rate of that flow is measured in amperes (or amps). The pressure that causes electricity to flow (voltage) is measured in volts. Resistance to the flow of electricity is measured in ohms.

The combination of electromotive force (volts) and current (amperes) is the rate of work being done, measured in watts. One thousand watts are a kilowatt. If the rate of work is one kilowatt and that rate lasts an hour, then one kilowatt-hour of work is completed. The quantity of electricity used is commonly measured in kilowatt-hours.

The Delivery of Electricity

There are three distinct stages in delivering electricity: generation, transmission, and distribution. Generation is the process of producing electricity. Transmission is the process of moving high voltage electricity from power plants to distribution substations. Distribution is the process of moving lower voltage electricity from distribution substations to customers.

Distribution begins at the distribution substation, where transformers decrease the voltage of the incoming electricity. The outgoing electricity flows through primary distribution lines to distribution transformers, which further reduce its voltage. The electricity then flows through secondary distribution lines to service drops, street and highway lights, nonroadway lights, and traffic signals. A service drop is the connection between a secondary distribution line and a customer. A meter at the end of the service drop measures the electricity the customer uses, typically in kilowatt-hours.

Street Light Assets

During 1997, and at other relevant times, PP & L provided street and highway lighting (street lighting) and nonroadway lighting (area lighting) for public and private entities. We refer to the equipment used to provide street and area lighting as street light assets. Street light assets include the light fixtures (luminaires); the mast arms or brackets (used to mount the luminaires on wood poles or other structures); aluminum, steel, and fiberglass poles; and wires.

Luminaires are generally mounted on (1) wood poles (which might also support secondary distribution lines, service drops, and distribution transformers attached to primary distribution lines), (2) aluminum, steel, or boulevard fiberglass poles connected underground to distribution transformers, (3) nonboulevard fiberglass poles, and (4) buildings, bridges, tunnels, and underpasses.1 Wood poles are part of the distribution system.

Street light assets convert electricity into light and can be disconnected from the distribution system without affecting any other part of that system.

In 1997, PP & L charged for street and area lighting services but did not actively market or advertise those services.

Tax Accounting

In December 1997, PP & L filed Form 3115, Application for Change in Accounting Method, making an automatic method change under Rev. Proc. 96–31, 1996–1 C.B. 714. In that Form 3115, PP & L reclassified its street light assets, removing them from asset class 49.14, Electric Utility Transmission and Distribution Plant, and classifying them as property without a class life. See Rev. Proc. 87–56, 1987–2 C.B. 674, 675, 685.2 As a result of that reclassification, for PP & L's street light assets placed in service before 1997, petitioner claimed a negative adjustment to its 1997 taxable income under section 481(a) of $18,606,135. Consistent with that reclassification, PP & L classified street light assets it placed in service in 1997 as property without a class life.

In the notice, respondent disallowed both the $18,606,135 negative adjustment to petitioner's 1997 taxable income and $1,476,120 of tax depreciation for 1997 attributable to the classification of PP & L's street light assets as property without a class life rather than as property described in asset class 49.14.

OPINION
I. Introduction

The parties dispute the length in years of the recovery period that petitioner must use to calculate its annual depreciation deductions for street light assets. Respondent argues that the proper recovery period for those assets is 20 years; in the alternative, he argues that it is 15 years. Petitioner argues that it is 7 years. We agree with petitioner.

II. Statutory and Administrative Provisions

Section 167(a) permits as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear, and obsolescence of property used in a trade or business. For tangible property, section 168(a) provides that the depreciation deduction of section 167(a) is determined by using the applicable depreciation method, recovery period, and convention.

Only the applicable recovery period is in issue. Under section 168(c) and (e), the classification of tangible property determines its recovery period. Section 168(i)(1) defines “class life” as that “which would be applicable with respect to any property as of January 1, 1986, under subsection (m) of section 167. Repealed in 1990, section 167(m) provided for depreciation according to “the class life prescribed by the Secretary which reasonably reflects the anticipated useful life of that class property to the industry or other group.” Essentially, section 167(m) codified the Asset Depreciation Range system described in section 1.167(a)–11, Income Tax Regs., and in particular the system of asset guideline classes and periods (sometimes, class lives) found therein. See H. Rept. 92–533, at 30–35 (1971), 1972–1 C.B. 498, 514–516; S. Rept. 92–437, at 45–52 (1971), 1972–1 C.B. 559, 584–588.

Section 167(m) confirmed the Secretary's authority to prescribe class lives. Accordingly, section 1.167(a)11(b)(4)(ii), Income Tax Regs., states: “Asset guideline classes and periods * * * [will] be established, supplemented, and revised * * *, and will be published in the Internal Revenue Bulletin.” The regulation refers to Rev. Proc. 72–10, 1972–1 C.B. 721, as setting forth the applicable “asset guideline classes”. See sec. 1.167(a)–11(b)(4)(ii), Income Tax Regs. Rev. Proc. 72–10, supra, was the first of several...

To continue reading

Request your trial
1 cases
  • PPL Corp. & Subs. v. Commissioner, Docket No. 25393-07.
    • United States
    • United States Tax Court
    • July 28, 2010
    ...135 T.C. 176PPL CORPORATION & SUBSIDIARIES, Petitioner,v.COMMISSIONER OF INTERNAL REVENUE, Respondent.Docket No. Richard E. May, Mark B. Bierbower, and Timothy L. Jacobs, for petitioner. Melissa D. Arndt, Allan E. Lang, Michael C. Prindible, and R. Scott Shieldes, for respondent. HALPERN, J......

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT